Tests of Details for income Statement Accounts:
When the audit evidence obtained from analytical procedures and from tests of details of related balance sheet accounts do not reduce detection risk to an acceptably low level, direct tests of details of assertions pertaining to income statement accounts are necessary. An income statement audit can assist you separate arithmetical errors and ledger discrepancies or give you peace of mind before you file the income statement during closing.
This may be the case when:
- Inherent risk is high. This may occur in the case of assertions affected by no routine transactions and management’s judgments and estimates.
- Control risk is high. This situation may occur when (1) related internal controls for no routine and routine transactions are ineffective or (2) the auditor elects not to test internal controls.
- Analytical procedures reveal unusual relationships and unexpected fluctuations. These circumstances are explained in a preceding section.
The account requires analysis. An analysis is usually required for accounts that (1) require special disclosure in the income statement, (2) contain information needed in preparing tax returns and reports for regulatory agencies such as the SEC, and (3) have general account titles that suggest the Likelihood of misclassifications and errors.
Accounts requiring separate analysis generally include:
- Legal expense and professional fees.
- Maintenance and repairs.
- Travel and entertainment.
- Officers’ salaries and expenses.
- Taxes, licenses, and fees.
- Rents and royalties.
- Advertising etc.