Auditing Revenue and Expenses
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Revenue and expenses drive a company's bottom line, which makes them a high-priority area in any audit — and a well-tested topic on the AUD section of the CPA exam. Three procedures do most of the work: sales cut-off testing, expense analysis, and variance analysis.
What is sales cut-off testing?
Sales cut-off testing verifies the cut-off assertion — that revenue is recognized in the correct accounting period. It typically involves reviewing shipping and sales documents to confirm exactly when a sale should have been recorded.
Example: You're auditing a car dealership that reports a massive spike in revenue at the end of the fiscal year. Examining shipping documents, sales invoices, and the general ledger, you find that several sales were recorded in December, but the cars weren't actually shipped until January. That's a cut-off error — those sales belong in the next accounting period.
What is expense analysis?
Expense analysis examines whether expenses are correctly classified, allocated, and recorded — targeting the accuracy and classification assertions. It typically involves tracing transactions back to source documents and confirming they were properly authorized.
Example: You're auditing a software company and notice office supply expenses have doubled year over year. Sampling invoices and payment records, you find the company misclassified software licensing fees as office supplies. That needs correcting so the financial statements accurately reflect the nature of the expense.
What is variance analysis?
Variance analysis compares current figures to historical data or budgets to flag anything that needs a closer look — targeting the completeness and valuation assertions. It's one of the most common analytical procedures in an audit.
Example: You're auditing a restaurant and notice food costs as a percentage of revenue dropped substantially from the prior year. Digging in, you learn the restaurant switched to a cheaper supplier but never updated its standard cost rates. The variance needs to be investigated to confirm the lower costs are legitimate, not a recording error.
Each procedure catches a different kind of problem. Cut-off testing asks "was this recorded in the right period?" Expense analysis asks "was this classified correctly?" Variance analysis asks "does this number make sense compared to what came before?"
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 90 on AUD. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.