Reasonability Tests

By CPABC
Last Revision: 10/20/2016

One quick and effective method to determine whether a transaction stream requires further investigation is the reasonability test. This test requires understanding the relationship between two or more components such as a balance sheet amount and its corresponding income statement amount. In a review engagement, if the end result of the test appears reasonable a practitioner may choose to do no further analysis. There are several common items that could be tested for reasonability. They are:

Income Statement Item Corresponding Balance Sheet Item Reasonability Test

Interest or dividend income

Investments

Using average investment times average rate of return, compare to actual investment income earned.

Revenues & expenses involving GST

GST collected and paid

Compare GST rate times percentage of applicable revenues & expenses to actual net GST remitted or claimed as an ITC.

Interest expense on long term debt

Long term debt

Using average debt balance times average interest rate, compare to actual interest expense.

Salaries & wages

Not applicable

Reconcile salaries & wages to T4 period and compare results.

Employer’s portion of benefits expensed compared to salary expense

Not applicable

For each benefit type, apply applicable rate to salary expense and compare to benefit expense amount. E.g. Compare salary expense multiplied by CPP rate (adjusted for multiple calendar years if required) to CPP expensed.