This lesson covers the core techniques applied by auditors to examine books and records, including analytical review, investigative approaches, records examination, and third-party verification.

• Analytical Review: An analytical review of financial statements and returns as filed is often completed during preliminary stages of the audit. Ratios, such as gross profit and inventory turnover ratios, are used to test accuracy. Unusual variances are noted and addressed during interviews and additional audit procedures developed where necessary .

• Investigative Approach: Auditors are encouraged to use an investigative approach using information obtained through observation, discussion, and documents. Requires judgment, imagination, and using information outside the accounting records to perform the audit. Field examinations gather information on significant events such as backdoor trade, disguised transactions, and shift of investments .

• Records Examination: Main approaches to detect false accounting include examination of books and documents conducted at the taxpayer’s business office, counterpart examinations, and examination of savings and deposit accounts. Examples include cross-checking purchase and sales invoices, cross-checking declared sales with money deposited into bank accounts, and checking appointment or order books with sales invoices .

• Third-Party Information/Counterpart Examinations: Information obtained during the course of an audit from third parties to verify taxpayer income. Sources include: financial institutions, public companies’ interest and dividends data, government social benefit payments, employer salary and wages information, and matching foreign source income .

• Use of Indirect Methods to Verify Income: Indirect methods of verification and re-calculations of profits are essential tools to bring audits to effective conclusion, especially where records are inadequate .