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Unit 10: Audit of Financial Statements
10.7.1 Gather Evidence Notes
The auditor’s client, or the auditee, provides the auditor with a detailed listing of items included
in fixed asset accounts. The detailed list, or a depreciation schedule, includes a description of the
asset, the original cost, method of depreciation, depreciable life and prior and current years’
depreciation expense. The auditor reviews the list for reasonableness and determines if the
account balance on the financial statements matches the depreciation schedule.
10.7.2 Perform Analytics
Analytical procedures encompass the investigation of identified fluctuations and relationships
that are inconsistent with other relevant information or deviate significantly from predicted
amounts. For instance, auditors compare the current year account balance to the prior year balance
and determine if the difference is reasonable. A financial statement ratio, such as “depreciation
expense as a percentage of fixed assets,” is also considered an analytic. The auditor tracks ratios for
a period of three to five years and evaluates ratios that produce unexpected variances.
10.7.3 Review Documentation
Review invoices to determine the client correctly recorded acquisition costs and dispositions of
assets. To test existence of fixed assets, the auditor selects a sample of items and matches the
detail on the invoice to the detail on the client’s depreciation schedule. While reviewing invoices,
or vouching, the auditor checks the date of purchase, the description of the asset and other costs
incurred to place the asset in service. In addition, an auditor reviews gain and loss accounts to
determine if dispositions are correctly recorded.
10.7.4 Inquiry and Observation
The auditor asks the client about the location of fixed assets and any changes in value of existing
assets. The client’s response helps the auditor determine which fixed assets he selects to physically
observe. While observing an asset, the auditor determines that the asset exists and that the
asset’s condition is comparable to the remaining life listed on the depreciation schedule.
10.7.5 Recalculation
Recalculation consists of checking the mathematical accuracy of documents and records. The
auditor selects a sample of items from the fixed asset listing and recalculates prior and current
depreciation expense. The auditor determines if the amounts are accurate and records any
necessary adjustments.
Self Assessment
Fill in the blanks:
4. Auditing starts with the income section by confirming that the total revenue amount is
equal to the sum of the ....................
5. Owner’s equity is the difference between the .....................
6. Stocks should be valued at.....................
7. Auditor should test check the share application forms and vouches their respective entries
in the ....................
8. The fixed asset balance, which deals with assets that can’t easily be converted into cash, is
a common .................. on an entity’s financial statements.
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