Balance Sheet Audit Approach

Balance Sheet Audit Approach is the process the auditor focus on the balance sheet items rather than the control testing and income statement. Auditors believe that if all the balance sheet accounts are correct, they only need to review some part of the revenue and expenses.

The auditors believe that the result of income statement is already present in the retained earnings on the balance sheet. So if they can ensure that the retained earnings are correct, it will not necessary to go through all items on the income statement.

For large corporations, there are thousands of transactions that happen every day. Most of them are the revenue and expense accounts which present on the income statement. It is almost impossible for the auditors to go through or even review the related document. Sometimes, there are no supporting documents for the transactions happen online. It is far different from the traditional company that auditors can review very easily.

Purpose of Balance Sheet Audit Approach:

Auditors use the balance sheet audit approach to ensure the following:

  • Assets really belong to the company: The auditors have to perform audit testing to prove that company owns the assets such as cash, accounts receivable, fixed assets, and other assets.
  • All assets are included in the company balance sheet. Most companies try to overstate the assets to meet certain criteria.
  • All liabilities are properly recorded on the balance sheet. Most companies tend to understate the liability to window-dressing the financial statements.
  • All equity components are recorded on the balance sheet. It is the result of income statement and it connects both reports.

The main assertions are for Balance Sheet

Auditors have to perform audit testing to ensure that all balance sheet line items are:

  • Completeness: All assets and liabilities must include in the balance sheet. Under any circumstance, the company must not eliminate assets or liabilities without proper reasons. The elimination must comply with accounting standards and the company must keep supporting documents for the auditor to review. Most companies intend to understate the liabilities and overstate the assets.
  • Existence: All the assets recorded on balance sheet must exist in real life. It is a fraud for company to record the assets which do not exist. Even if it is the intangible assets, the company can only record the existing assets.
  • Right and Obligation: The company must have the full right over the assets on balance sheet. It is the proof of ownership that company has over the assets. On the other hand, company has an obligation over the liabilities recorded on balance sheet. They have obligation to pay suppliers or stakeholders.
  • Accuracy and Valuation: The balance present on the balance sheet must be accurately present in the business transaction. The assets amount is reflect in the assets’ actual valuation.