Learning Objectives LO1 Describe the balance sheet account groups that the major revenue and expense accounts are associated with, as well as the substantive analytical procedures applied to audit revenues and expenses. LO2 Outline the overall analytical procedures to be performed at the final stage of the audit, including analysis of the income statement, cash flow statement, financial statement presentation, and disclosures. LO3 Explain the purpose of lawyers’ letters and how they are used at the completion stage of an audit to identify any contingencies and claims. 1

Revenue and Expense Assertions 1. Revenue accounts represent all the valid transactions recorded correctly in the proper account, amount, and period. 2. The accounting for consignments and goods sold with rights of return is in conformity with accounting principles. 3. Expense accounts represent all the valid expense transactions recorded correctly in the proper account, amount, and period 4. Revenues, expenses, cost of goods sold, and extraordinary, unusual or infrequent transactions are adequately classified and disclosed. LO1 2

Audit of Revenue and Expense A number of the revenue and related topics were audited in whole or in part with other related account groups.  Working papers should show cross-reference indexing to the revenue and expense accounts in the trial balance.  Unaudited accounts will be evident. LO1 3

Revenue Accounts Audited in Other Processes Revenue and Related TopicsRelated Account Group Sales and sales returnsReceivables Lease revenuesCapital assets and receivables Franchise revenueReceivables, intangibles Dividends and interestReceivables, investments Gain/loss on asset disposalsFixed assets, investments Rental revenueReceivables and investments Royalty and license revenueReceivables and investments Long-term sales commitmentsRevenue and receivables Product line reportingRevenue and receivables Accounting policy disclosureRevenues and receivables LO1 4

Expense Accounts Audited in Other Processes ExpenseRelated Account Group Purchases, cost of goodsInventories Inventory valuation lossesInventories Warranty and guarantee expense Inventories and liabilities Royalty and license expenseInventories Marketing and product R&DInvestments and intangibles Investment value lossesInvestments and intangibles Rental property expensesInvestments and intangibles Amortization of intangiblesInvestments and intangibles Bad debt expenseReceivables LO1 5

Expenses Some minor expense accounts like office supplies or utilities will not be covered until the end of the audit.  Auditors usually apply analytical procedures to these accounts.  All miscellaneous accounts and clearing accounts with debit balances are analyzed.  Accounts with income tax implications are also analyzed carefully. LO1 6