1.0 IDENTIFY ACCOUNTS THAT REQUIRE FURTHER AUDIT ASSURANCE
1.1 Identify income statement accounts that require further audit assurance by considering:
Audit tests of related asset and liability accounts,
The results of analytical procedures (e.g., annual fluctuation analysis and comparative analyses of income statement accounts), and
The reasonableness of income statement accounts based on knowledge of the division and its business.
In deciding on the appropriate audit procedures for income statement
accounts the auditor should assess the risk of error and fraud in those
accounts. Relevant considerations include information gathered or
updated about the division, including the adequacy of the division's
accounting records and procedures; the nature of the account balance;
key performance indicators; management information identified when
assessing the control environment; and conclusions reached when assessing
other aspects of the control environment.
The auditor should bear in mind that the assessment of the risk of error
and fraud in these accounts is addressed primarily by audit procedures
directed at the balance sheet accounts and analytical procedures. For
example, assurance is obtained about the completeness of revenues by
auditing trade accounts receivable and identifying and testing
completeness controls; assurance is obtained about depreciation and
possibly repairs and maintenance expenses by auditing property, plant and
equipment and related accounts; assurance is obtained about interest
expense by auditing notes payable and related accounts. The risks that
remain within the income statement relate to a material misclassification
within the accounts and to fraud. It is normally sufficient to perform
analytical procedures to address these risks. If those procedures do not
provide the necessary assurance, the auditor may need to examine evidence
in support of the account balance by performing tests of details.
It may also be appropriate to examine evidence in support of the account
balance for other reasons, such as:
Statutory or regulatory requirements, or
To obtain information useful in identifying other risks.
2.0 PERFORM ANALYTICAL PROCEDURES
For those accounts requiring further assurance, perform analytical
procedures at a more detailed level, combined, where appropriate,
with analysis and tests of items in the account balance. The
procedures should be limited to those necessary to provide the
particular audit assurance sought.