Question

Give an example of how the audit of income statement accounts could be affected by results of audit work done in other areas of the audit.

Answer 1

The results of work done in other areas of the audit certainly affects the audit of income statement accounts. Stock audit is the best example to prove the point.

Stock audit is the physical verification of business unit's inventory assets. Stock audit is performed due to following reasons:-

• to identify the non moving stock, obsolete stock and scrap
• to reconcile and determine the difference between the stock as per books and physical stock

The discrepancies found on account of stock audit will affect the audit of income statement accounts as follows:-

• the identification of obsolete stock (cause of decline in the value of asset) will increase the "Cost of sales" recorded in the income statement and change in the Inventory position recorded in the balance sheet.
• the increase or decrease in the book stock after reconciliation with physical stock will increase or decrease the "Cost of sales" recorded in the income statement and change the Inventory position recorded in the balance sheet.

Note:- The result of the revenue audit conducted in the case of "Financial Institutions" will have the impact on the audit of income statement of such institutions.