Nature of a balance sheet approach to the audit & implications for auditing the income statement * Obtain sufficient, competent, evidential matter for all balance sheet accounts * Note that if all balances are fairly stated, and the balance sheet balances, then Retained Earnings must be correct * If Retained Earnings is correct, then the Income Statement’s net income cannot be materially in error * Therefore, less work is done auditing the income statement
Income statement accounts typically audited (including sensitive accounts) and approaches used * Much greater use of analytical procedures
* Already have some evidence from tests of controls (e.g., revenues, payroll costs, etc.) * Scan for unusual transactions and vouch any unusual transactions found * Vouch sensitive accounts, including legal expense, travel expense, repairs and maintenance expense, miscellaneous revenues and miscellaneous expenses, etc. Relationship between B/S and I/S Accounts
Substantive procedures for auditing payroll.
*Accounting for contingent liabilities - - what are the GAAP rules. * * Loss contingencies should be reflected in the financial statement amounts when: * It is probable that a loss had been sustained before the balance sheet date * The amount of the loss can be reasonably estimated
* Loss contingencies should be disclosed in the notes to the financial statements when it is at least reasonably possible that a loss has been sustained * Loss contingencies need not be disclosed when the possibility of loss is remote Audit procedures for detecting contingencies.
1) 1.Review the minutes of directors' meetings to the date of completion of fieldwork. Important contracts, lawsuits, and dealings with subsidiaries are typical of matters discussed in board meetings that may involve loss contingencies. 2) Send letter of inquiry to client's lawyer
(a) a description (or...