Page 194 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes 10.2.4 Tests of Details

Auditors check whether financial statements are accurate by conducting detailed tests on
individual accounts, groups of accounts or financial statement sections. They focus on journal
entries, financial records, operating agreements and business estimates to confirm amounts
recorded in financial statements.

Example: An auditor reviews the firm’s legal reserves at year-end and notes a balance of
` 1.5 million. The auditor could ask the legal department to confirm and explain such figures.
Self Assessment

Fill in the blanks:

1. Analytical procedures for financial audit refer to
..............................................................................................................................................................
..............................................................................................................................................................
2. .............................. involves the assessment of the effectiveness of an entity’s suite of controls,
concentrating on such areas as proper authorization, the safeguarding of assets, and the
segregation of duties.
3. ..............................is the risk of loss from business partner defaults and is measured by
internal rating models.

10.3 Audit Procedures for Income Statements

Income statement audits are a routine part of closing financial books. Audits help to ensure the
accuracy of the accounting data used to compile the statements as well as the overall calculations.
An income statement audit can help isolate mathematical errors and ledger discrepancies or
give peace of mind before filing the income statement during closing.

10.3.1 Statement Calculations

The first step in auditing income statements is to verify the summary calculations. Auditing
starts with the income section, by confirming that the total revenue amount is equal to the sum
of the income lines. By repeating this process for the expense category as well, manually calculate
the difference between the revenue and expense numbers to verify the equity section, as owner’s
equity is simply the difference between the revenue and expenses.

10.3.2 Income Details

After determining that the calculations on the income statement itself are accurate, auditor
needs to review the detail that contributes to the figures. Then pull summary transaction reports
from the general ledger for each revenue account. Review the overall data on the summary
reports for accuracy. Run transaction-level reports for the accounts so that one can view the
details to confirm that the summary report figures are accurate. Each transaction-level report
shows what has posted to the account. Then, comparison is made for the transactions in the
ledger to the hard copy files, such as invoices or check stubs that support the journal entries, to
confirm that they were posted correctly.

188 LOVELY PROFESSIONAL UNIVERSITY