(Objective 19-5) You are the manager in the audit of Vernal Manufacturing Company and are turning your attention to the income statement accounts. The in-charge auditor assessed control risk for all cycles as low, supported by tests of controls. There are no major inherent risks affecting income and expense accounts. Accordingly, you decide that the major emphasis in auditing the income statement accounts will be to use analytical procedures. The client prepared a schedule of the key income statement accounts that compares the prior-year totals with the current year totals. The in-charge auditor completed the last column of the audit schedule, which includes explanations of variances obtained from discussions with client personnel. The audit schedule is included on page 650.
a. Examine the schedule prepared by the client and your staff and write a memorandum to the in-charge that includes criticisms and concerns about the audit procedures performed and questions for the in-charge auditor to resolve.
b. Evaluate the explanations for variances provided by client personnel. List any alternative explanation to those given.
c. Indicate which variances are of special significance to the audit and how you believe they should be responded to in terms of additional audit procedures.
Objective 19-5
Design and perform audit tests of income and expense accounts.
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