Audit Procedures by Account: What to Test in Each Financial Statement Area

An audit program is a list of procedures matched to assertions and risks. The procedures below are the ones that appear in most private-company audit programs, grouped by account. They are a starting point. Under AU-C 330 the procedures you perform must respond to the assessed risks of material misstatement for each relevant assertion, so a low-risk account gets less work than a high-risk one, and an unusual risk gets work that is not on any standard list.

Use this page to check that a program covers the usual ground, and to see why each procedure is there. The assertions are explained in the audit assertions guide.

How to read the lists

Each account below lists the assertions most often at issue and the procedures that address them. Three conventions apply:

• Substantive procedures are tests of details or substantive analytical procedures. See substantive testing vs tests of controls.
• Some procedures are required whatever the risk. The auditor must test journal entries and other adjustments, review accounting estimates for bias, evaluate the business rationale of significant unusual transactions, and consider the presumed risk of fraud in revenue recognition. These come from AU-C 240 and AU-C 540.
• External evidence is preferred where it is available. AU-C 500 treats evidence from independent external sources as more reliable than evidence generated inside the entity.

Cash and bank accounts

Assertions: existence, completeness, rights, cutoff.

• Obtain bank confirmations for each account, including accounts closed during the year, and confirm loan balances and other arrangements at the same bank.
• Agree the bank reconciliation to the general ledger and the bank statement or confirmation; test reconciling items, outstanding checks and deposits in transit against subsequent clearing. See the bank reconciliation guide.
• Obtain a cutoff bank statement for the first days after year end to test outstanding items.
• Scan for unusual transfers between accounts near year end that could be kiting or window dressing.
• Consider a proof of cash where controls are weak. The proof of cash entry explains it.

Accounts receivable and allowance

Assertions: existence, rights, valuation, cutoff.

• Confirm balances with customers, or perform alternative procedures for non-responses, by vouching to shipping documents and subsequent receipts. AU-C 330 requires the auditor to consider whether external confirmation procedures should be performed as substantive procedures, and for receivables they usually are, because they produce external evidence. See audit confirmations.
• Test the aging report for accuracy and agree it to the ledger.
• Evaluate the allowance: management's method, the data used, subsequent collections and the history of write-offs. See the receivables aging and allowance guide and the aging and allowance calculator.
• Test sales and receipts cutoff. See cutoff testing.
• Review for related-party and unusually large or old balances.

Inventory

Assertions: existence, completeness, valuation, rights.

• Observe the physical count when inventory is material, perform test counts from the book to the floor and from the floor to the book, and record the last receiving and shipping documents for cutoff. See inventory observation.
• Test costs by tracing to vendor invoices or production cost records. See inventory costing.
• Test lower of cost and net realizable value, obsolescence and slow-moving reserves using sales after year end and aging.
• Roll the count forward or back to the balance sheet date if the count was on another date.
• Confirm or inspect inventory held by third parties.

Property, plant and equipment

Assertions: existence, rights, valuation, completeness of additions, presentation.

• Agree the fixed asset rollforward to the ledger; test additions to invoices and evidence of receipt, and test the capitalize-versus-expense decision. See PP&E capitalization and depreciation.
• Test disposals to proceeds and recompute gain or loss.
• Recompute depreciation and compare to the policy.
• Consider impairment indicators under ASC 360.
• Review repairs and maintenance expense for items that should have been capitalized, which tests completeness of additions.

Accounts payable and accrued liabilities

Assertions: completeness (the main risk), cutoff, existence, valuation.

• Perform the search for unrecorded liabilities: test subsequent disbursements and unpaid invoices received after year end.
• Obtain vendor statements and reconcile them to the payables ledger.
• Test the receiving-report cutoff.
• Test accrued expenses such as payroll, bonuses, interest, taxes and professional fees by recomputing or tracing to support.
• Inquire about legal matters and review the legal letter response for unrecorded contingencies. See loss contingencies.

Debt and equity

Assertions: existence, completeness, classification, disclosure.

• Confirm balances, terms and covenants with lenders; agree the debt schedule to the ledger.
• Recompute interest and the amortization of debt issuance costs.
• Evaluate covenant compliance at the balance sheet date and the effect on current versus noncurrent classification. See debt classification and covenants.
• Agree equity activity to the minutes, stock records and agreements; test distributions and any stock-based compensation. See stock compensation.

Revenue

Assertions: occurrence, accuracy, cutoff, classification.

• Understand the revenue streams and the contracts and test the application of ASC 606 to a sample. See the revenue recognition procedures guide and ASC 606.
• Vouch recorded sales to contracts, shipping or delivery evidence and subsequent cash receipts.
• Trace shipments to the ledger to test completeness.
• Test cutoff around year end, and credit memos and returns issued after year end.
• Perform analytical procedures on revenue by month, product and customer, and investigate unexpected patterns.
• Test journal entries to revenue, especially manual entries near period end.

Payroll and related accruals

Assertions: occurrence, accuracy, completeness, existence of employees.

• Agree payroll totals to payroll tax returns and the general ledger.
• Test a sample of payments to personnel files, approved rates and timekeeping records.
• Scan for terminated employees paid after termination and for duplicate or unusual payees.
• Test accrued payroll, vacation and bonus liabilities.

Income taxes

Assertions: valuation, completeness, presentation.

• Recompute the current and deferred provision, test the temporary differences and agree balances to returns and tax account statements. See ASC 740.
• Evaluate the valuation allowance and uncertain tax positions.

Procedures that cut across accounts

• Journal entry testing and review of unusual entries. See journal entry testing.
• Subsequent events review through the report date (AU-C 560).
• Going concern evaluation (AU-C 570).
• Related-party identification and testing (AU-C 550).
• Management representations (AU-C 580).

Worked example (illustrative): choosing procedures for receivables

A distributor has receivables of $3,200,000 against overall materiality of $90,000 and performance materiality of $65,000. The aging shows $410,000 over 90 days. Sales to one customer make up $1,100,000 of the balance.

• Existence risk is moderate because the customer base is stable, but the concentration raises it. The auditor confirms the largest customer's $1,100,000 and a sample from the rest.
• Valuation risk is higher because 12.8% of the balance is over 90 days ($410,000 ÷ $3,200,000). The auditor tests collections after year end for each of the larger old balances and evaluates the allowance method.
• Cutoff risk is tied to the revenue fraud risk, so the auditor adds the sales cutoff test described above.

The same account in a client with a short-turn retail business and no credit sales would need almost none of this. The risk assessment drives the work, not the account name.

Frequently asked questions

What are the standard audit procedures?

The procedures in AU-C 500 are inspection, observation, external confirmation, recalculation, reperformance, analytical procedures and inquiry. Each account list above is a combination of these.

Do I perform every procedure listed for every audit?

No. The nature, timing and extent of procedures respond to the assessed risks for each relevant assertion. Documented risk assessment is what justifies doing less on a low-risk account.

Which accounts are always tested?

The auditor tests journal entries, evaluates accounting estimates, considers the fraud risk in revenue recognition, and performs procedures for subsequent events, going concern, related parties and litigation regardless of account balances.

Where do I find a ready program?

Firms typically keep a library of programs by cycle. Examples include the cash program, the receivables and revenue program and the inventory program.

Sources

• AICPA, AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained
• AICPA, AU-C Section 500, Audit Evidence; AU-C Section 505, External Confirmations
• AICPA, AU-C Section 501, Audit Evidence: Specific Considerations for Selected Items
• AICPA, AU-C Section 240; AU-C Section 540; AU-C Section 550; AU-C Section 560; AU-C Section 570; AU-C Section 580

CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error