How to Audit Other Income?
Other income is the combination of income accounts that company generated besides the main business activities.
The income statement consists of two main groups of accounts which are revenue and expense. The total revenue and expense will arrive at the company net profit.
The main balance of the income arrives from the main business activities. It generates from the sale of goods or services and is presented at the top of the income statement.
Besides the main revenue, company may generate some other income that is not the main business activity. The other incomes can be the interest income, gain on the sale of fixed assets, foreign exchange gain, and so on.
The other incomes include a variety of transactions that happens beyond normal business activities. Some transactions are not the company’s expectations.
In a small company, other incomes may not be included in the auditor’s scope due to the immaterial amount. They include only the interest income from the saving account, exchange gain, and other smaller accounts.
However, some companies contain a huge balance of other income due to one transaction such as the disposal of fixed assets. It will create a big fluctuation which raises a red flag to the auditor.
It may be difficult to do the substantive analytical procedure as the transactions happen beyond the normal business. Auditors cannot build independent expectations as the transaction is unexpected.
It is more effective to use the substantive test of detail to validate the transaction. They can request the client for supporting documents to check against the transaction record.
Audit Assertion for Other Incomes
- Occurrence: The other income recorded on the income statement has to occur in the real world, it is not only happening on the recording. They are not related to cash collection as the accounting follows accrued basic.
- Cut-off: All the income statement items are recorded only when they happen in the year. The income from last year must not be included in the current year. It is the same as the income the following year.
- Completeness: The company has to record all the other income in the financial statement. Not even a single transaction is excluded from the recording.
- Accuracy: The company recording must be accurate with the supporting document and actual business transaction.
- Classification: The accounts that include other incomes must be reasonable.
Test of Detail for Other Incomes
- Occurrence: The other income balance is the total of many transactions which represent the real transaction.
To test the occurrence of other incomes may be a bit challenging as there are many accounts included in the other income section. Most of the time, auditors can request the detailed general ledger of the other incomes and trace it back to the supporting documents. The selection of transactions may depend on the targeted balance, risk base, or even sampling. It depends on the auditor’s judgment.
- Cut-off: The income statement line items must happen in the current period only.
During inspecting supporting documents, Auditors can double-check the date and compare it with the date on the general ledger. It can help to ensure if there is an error between the actual date and recording date. Auditors have to focus on the early and year-end transactions as it is the cut-off period.
- Completeness: All other incomes have to be included in the income statement.
It is very challenging for the auditors to test the completeness of other income line items. The accounts included in the other income will depend on the nature of business which requires deep understanding.
Auditor can use the prior year file as the benchmark to find accounts that are not included in current year. They also require to analyze the business nature as well, which can include the other source of income which should be included.
To ensure the completeness of each account under the other income section, will depend on the account’s nature. For example, the interest income from bank has to be consistent with bank balance. The exchange gain/loss will be aligned with other accounts on balance sheet. The revaluation gain will depend on the fixed assets as well.
- Accuracy: Auditor can rely on the supporting inspection to compare the balance on the general ledger and the actual document.
However, during the inspection, they have to be aware of supporting document quality. It is more reliable if the document produces by an external party such as a bank or customer. It is less qualified for internally generated documents such as journal vouchers. Some companies use such kinds of documents to support the recording. Yes, it can be used as the reference for recording transactions such as gain/loss on the exchange rate. But the auditors have to go beyond the document such as double-check the calculation to ensure accuracy.
- Classification: All the accounts included in other incomes have to be reviewed properly.
Auditors have reviewed the classification of accounts recorded in other income very carefully. Not all accounts are suitable in this section. Most companies use it to store many kinds of accounts and sometimes other accounts are mistaken put in this part. Moreover, it is the place where the company hide the unusual transactions. Auditor has to review them carefully, they have to use judgment to detect misstatement.