ACC415

Advanced Auditing

Fall 2023

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Chapter 15
Auditing the
Financing/Investing
Process: Long-Term
Liabilities,
Stockholders′ Equity,
and Income
Statement Accounts

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 LO# 12

Auditing Income Statement

Accounts
Revenue is often one of the largest accounting in
the financial statements and it is an important driver
of a company’s operating results.
Revenue is typically deemed to be a significant
account and generally must be specifically
considered due to:
1. Complex accounting standards
2. Need for estimation
3. High fraud risk
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 LO# 12

Auditing Income Statement

Accounts
The audit of income statement accounts depends
on the extent of work conducted on the entity’s
control system and balance sheet accounts.
Substantive procedures on selected income
statement accounts include:
• The results of testing controls for the various business
processes.
• The results of the detailed tests of balance sheet accounts
and the related income statement accounts.
• Performance of substantive analytical procedures on income
statement accounts.
• Detailed tests of selected income statement accounts.
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 LO# 12

Assessing Control Risk for

Business Processes
Audit findings related to the revenue process are
relevant, since proper controls over that process
provide evidence on the sales, accounts receivable,
allowance for uncollectible accounts and sales
returns and allowances accounts.

Audit findings related to the purchasing process are

relevant, since proper controls over that process
provide evidence on most of the expense accounts.

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 LO# 12

Direct Tests of Balance

Sheet Accounts
Income statement accounts are normally audited in the
course of auditing the related balance sheet accounts.

Balance Sheet Account Audited Related Income Statement Account

Accounts receivable/allowance for
Bad-debt expense
uncollectible accounts
Notes receivable/ investments/
Interest income
accrued interest receivable
Depreciation expense, gain/losses on sales
PP&E/accumulated depreciation
or retirement of assets
Prepaid insurance Insurance expense
Long-term debt/accrued interest
Interest expense
payable

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 LO# 12

Substantive Analytical
Procedures
Extensive use may be made of analytical procedures
in the audit of revenue and expense accounts.

Common size Percentage

income statement income statement
for current and for current and
previous years. previous years.

Trend and ratio

analysis.
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 LO# 12

Tests of Selected Account

Balances
The auditor may wish to examine key revenue and
expense accounts in some detail. Usually, the
auditor verifies the transactions in the account by
examining the supporting documentation. Accounts
audited in this manner may be related to income tax
reporting and include legal and audit expense, travel
and entertainment, charitable contributions, and
other income and expense.

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End of Chapter 15

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