L13 Notes_Part_7 - © W.R Knechel Why audit the B/S rather...

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© W.R. Knechel Why audit the B/S rather than the I/S? Why focus on balance sheet account A/R instead of Sales? - 1. Few B/S accounts; numerous expense account (8000 expense accounts at Union Oil) - 2. If B/S END and B/S BEG are accurate => NI is correct. Magic equation: - Beg. Bal. + Addn’s – Subtractions = End. Bal. Stocks v. Flows Equation: - End Bal – Beg Bal = Addn’s –Subtractions Since they are equal verifying one side proves the credibility of the balance of the other side. Consequently, we needn’t audit both sides but can emphasize one and do less testing of the other.
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Unformatted text preview: © W.R. Knechel Why audit the B/S rather than the I/S? The income statement might have some misclassifications (Repairs and Main --> B/S) How important are IS misclassifications? 3. Will next year's B/S be correct? 4. Overstatements of Sales will show up in AR. 5. Easier to audit, fewer transactions in ending balance © W.R. Knechel Direction of Tests for Sales Completeness start Existence start Customer order Shipping document Duplicate sales invoice Sales journal General journal Accounts receivable master file =...
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L13 Notes_Part_7 - © W.R Knechel Why audit the B/S rather...

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