Definition:
The Balance sheet audit approach is a kind of audit approach that executes by the auditor in the situation that auditors perform most of their testing on the items in the balance sheet rather than items or transactions in the income statement.
An auditor applies the balance sheet audit approach based on the concept that the items in the income statement are closely related to the items in the balance sheet.
The audit approach is the strategy or methodology that auditors use to audit financial statements. Before deciding which approach should use in the audit engagement, the auditor needs to perform understand the client nature of the business, the business environment, and internal control over financial reporting.
By acquiring this information, the auditor could assess where the risks of material misstatements could be and what kind of audit procedures fit with those kinds of financial statements.
Breakdown:
Financial statements assertions are an important principle that management used to prepare financial statements. Those financial statements’ assertions are links to each other.
For example, if you look into balance sheet assertions or account balance assertions: Existence, Right and Obligation, Completeness, Valuation, and allocation, you will see that these asserts link to certain income statements assertions.
That means if the assertions in the account balance are correctly accounted for in the balance sheet, the income statement assertion is also assumed to correctly account for.
This is the main principle behind the balance sheet audit approach.
Put it simply, this approach auditor performs most of their testing on the items or balance in the balance sheet. Some items in the income statement might be selected for testing in the part of the balance sheet approach.
The balance sheet approach is not normally used by auditors except the entity is just established and not many transactions occurred during the year of financial statements. For a company with many transactions, risks based approach is the most selected audit.
