Testing a principal-versus-agent revenue judgement means testing whether the entity controls the specified good or service before it is transferred to the customer — the single question Ind AS 115 asks — and using the standard's listed indicators as corroborating evidence for that control conclusion, not as a free-standing scorecard to be totted up on its own. An entity that controls the good or service before transfer is the principal and recognises revenue gross; one that arranges for another party to provide it is the agent and recognises only its fee or commission, net.
Why the control test, not the indicators, should drive the conclusion
It is common practice to run through the indicators — who is primarily responsible for fulfilment, who bears inventory risk, who has discretion in setting the price — and count how many point each way. Ind AS 115 is explicit that these are indicators of control, not independent criteria, and a majority count of indicators pointing one way does not override a clear answer on the underlying control question itself. Testing should start from control and use the indicators to support or challenge that conclusion, not substitute for it.
The testing sequence
- 01Identify the specified good or service actually promised to the customerFor a marketplace or platform, this is often not the underlying product at all but the service of arranging for another party to provide it — getting this identification wrong at the outset predetermines the wrong answer to everything that follows.
- 02Test whether the entity obtains control of the good or service before transferObtain and inspect: does the entity take title at any point, even momentarily; does it have the ability to direct the use of the good before the customer receives it; does it combine the good or service with others to create the combined output the customer actually receives.
- 03Test the primary-responsibility-for-fulfilment indicator against the actual contract and customer-facing termsWho the customer's warranty or complaint runs against in practice, not just on paper — a platform that handles customer complaints and issues refunds directly, regardless of what the terms of service say about the underlying seller's responsibility, is acting more like a principal in substance.
- 04Test the inventory risk indicatorDoes the entity hold inventory risk before the good is transferred to the customer, or after transfer in connection with a right of return — evidence here includes who bears the loss on unsold stock and who absorbs the cost of damaged or returned goods.
- 05Test the price discretion indicatorCan the entity set the price the customer pays, within commercial limits, or is the price set by the underlying supplier with the entity entitled only to a fixed percentage or fee.
- 06Weigh the indicators against the control conclusion, not instead of itDocument which indicators point toward principal, which point toward agent, and explicitly state how that evidence supports or complicates the primary control conclusion reached in the earlier step, rather than presenting an indicator count as the whole analysis.
- 07Recompute the revenue and cost of sales, or the net commission, consistent with the conclusionGross presentation carries the full transaction value through revenue and cost of sales; net presentation recognises only the fee or margin retained. Confirm the general ledger entries for the population under test are consistent with whichever conclusion was reached, not a mix of both depending on the transaction.
| Signal | Points toward principal | Points toward agent |
|---|---|---|
| Responsibility for fulfilment | Entity resolves complaints and issues refunds directly | Underlying supplier bears responsibility, visible to the customer |
| Inventory risk | Entity bears loss on unsold or returned stock | No inventory risk before or after transfer |
| Price discretion | Entity sets the customer-facing price | Price is fixed by the supplier; entity earns a defined fee |
| Control before transfer | Entity can redirect or combine the good before the customer receives it | Entity only arranges the transaction between two other parties |
Terms of service that describe the entity as a mere intermediary carry little weight if the entity's actual conduct with customers — issuing refunds unilaterally, guaranteeing delivery, absorbing losses on cancelled orders — behaves like a principal. Substance over the written terms is the test here, and it is worth corroborating with actual customer-facing evidence, not just the standard contract template.
How we think about this
Checking whether gross or net presentation was applied consistently to the ledger entries for a given conclusion is mechanical. Reaching the control conclusion itself — and resisting the pull to just count indicators — is a judgement about who actually stands behind the transaction, and it is the auditor's judgement to make, informed by evidence, not settled by a scorecard.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Revenue, receivables & cut-offE-commerce marketplace audit: commission revenue, COD and returnsA marketplace doesn't carry the inventory, so the audit moves to where the real exposure is: whether revenue is gross or net, COD settlement reconciliation, and the returns provision.
- Revenue, receivables & cut-offAuditing Ind AS 115 — testing the five-step revenue recognition modelInd AS 115 doesn't ask when revenue is earned — it asks when control of a distinct good or service transfers, and each of the five steps changes that answer.
- Revenue, receivables & cut-offInsurance broker and agent audit: commission income and IRDAI touchpointsCommission rates aren't whatever the intermediary and insurer agree to. IRDAI caps them by product, and the audit has to check the structure against those caps, not just recompute the commission earned.
- Revenue, receivables & cut-offMutual fund distributor audit: trail commission revenue recognitionTrail commission isn't a flat fee. It moves with AUM every single day, and recognising it correctly means building an accrual that tracks that movement, not booking the AMC's monthly payout as the year's income.
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