Question

As an auditor of a reputed company, explain how the Statement of retained earnings and Income Statement are audited.

Answer 1

1. How Statement of retained earnings are auidted?

GAAP principles are always kept as the guide by the auditor in auditing these statements.Firstly lets know that these are the common items that affect retained earnings:

• net income or loss,
• dividends, and
• prior-period adjustments.

An auditor would first start off with the check between the PY Ending retained earning and Beginning retained earning. This is the main check that needs to be done and the beginning balance should be the same as the ending balance from the prior year. If this is not the case, the Auditor would discuss the issue with the client or cross check the work papers that are already prepared and get to know the reason for the same.

The auditor also trace the net gain or loss adjustment to the client’s income statement.and verify cash or stock dividends.

2. How is Income Statement audited?

An income statement audit can help to isolate mathematical errors and ledger discrepancies.

• The Auditor confirms that the total revenue amount in the income sections is equal to the sum of all the income lines. The same procedure is also followed for the expense section.
• Once the above step is done, the auditor also confirms by calculate the difference between the revenue and expense numbers to verify the equity section (as owner's equity is simply the difference between the revenue and expenses).
• The auditor then confirms if all the Income and expense transactions are accurate and are as per the GAAP guidelines. This includes checking the dates of the expenses/ income incurred, viewing the ledger etc.
• Checks the calculations of the invoices or the payment vouchers and verify that the entries in the system match the documentation.