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Unit 10: Audit of Financial Statements

10.3.3 Expense Review Notes

Pull ledger reports of the transactions in the expense accounts. Review the transaction detail
reports for each expense account to confirm that the expense totals on the income statement
report are accurate compared to the ledger activity. View the detail level in the ledger for the
individual transactions posted in the period to confirm that they were recorded properly. Check
the dates on the expenses to be sure that they apply to the period in question, and manually
verify the calculations by adding them up you to ensure that the recorded totals are correct.

10.3.4 Paper Audit Sampling

After completing a full audit of the income statement, select a few transactions from each
relevant account, such as a few credits posted to each revenue account and a few payments issued
from each expense account. Request the documentation of the transactions selected to complete
a sample audit of the account activity. The documentation in question would consist of check
stubs and invoices or paperwork filed to support journal entries. Check the calculations of the
invoices or the payment vouchers, and verify that the entries in the system match the
documentation.

Task Make a checklist with the help of an anonymous income statement of various steps
involved in performing income statement audit.

10.4 Valuation of Inventory

Stocks should be valued at lower of its cost or net realizable value. This has posted an imperative
audit work step to ascertain that the respective items are value at cost or net realizable value:
How do we ensure that the stocks are valued properly?
1. Randomly selected a certain number from inventory listing.
2. To find out the most recent sales/subsequent sales after year end.
3. From the invoices, noted down selling price
4. Compare the selling price to the actual cost of the sample.

5. Cost > Selling Price, valued at selling price Selling Price > Cost, valued at cost.

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Caution Each respective item has to be valued at cost or net realizable value.

Inventory Audit Procedures

If a company records its inventory as an asset, and it undergoes an annual audit, then the
auditors will be conducting an audit of inventory. Given the massive size of some inventories,
they may engage in quite a large number of inventory audit procedures before they are
comfortable that the valuation stated for the inventory asset is reasonable. Here are some of the
inventory audit procedures that auditors’ may follow:

1. Cutoff analysis: The auditors will examine procedures for halting any further receiving
into the warehouse or shipments from it at the time of the physical inventory count, so
that extraneous inventory items are excluded. They typically test the last few receiving

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