Auditing the income statement requires evaluating the accuracy, classification, and timing of revenue and expense records. The primary risk associated with revenue lines is overstatement (artificial inflation), while the primary risk for expense lines is understatement (omitting or delaying entries).
  ┌────────────────────────────────────────────────────────┐
  │              INCOME STATEMENT TESTING LINES            │
  └───────────────────────────┬────────────────────────────┘
                              ▼
  ┌────────────────────────────────────────────────────────┐
  │   REVENUE TRACING ──► Shipping Doc to Invoice Match    │
  │                       Verifies revenue completeness     │
  │   EXPENSE VOUCHING ──► Invoice to Shipping Doc Match   │
  │                        Verifies transaction existence   │
  └────────────────────────────────────────────────────────┘

Auditors address these risks by executing reciprocal testing workflows:
  • Tracing (Completeness Test): The auditor selects a sample of shipping documents or service delivery logs from early in the period and traces them forward to the sales journals and general ledger entries. This testing confirms that all executed transactions were recorded as revenue.
  • Vouching (Existence Test): The auditor selects a sample of expense entries from the general ledger and vouches them backward to supporting supplier invoices, purchase orders, and receiving reports. This confirms that all recorded expenses represent actual business transactions.
  • Cut-off Testing: Analyzing transactions processed during the final 14 days of the current financial year and the first 14 days of the new financial year to confirm entries were recorded in the correct accounting period.

 
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