Selecting Appropriate Method for Examining IncomeIf your analysis indicates that the taxpayer’s books and records adequately reflect operations, then select audit procedures using the taxpayer’s books and records. Examples include:Trace specific items to receipts;Test sample of receipts to books and records;Use taxpayer’s mark-up to apply to expenditures per books;Test sample of taxpayer’s client accounts to receipts; andAnalyze adjusting entries and differences between books and return.If you analysis indicates that the taxpayer’s books and records do not reflect operations, then select audit procedures that will independently arrive at income. Examples include:Test taxpayer’s sales to industry standards using mark-up statistics of income;Use formal indirect methods of determining income (Source and Application of Funds, Bank Deposits and Cash Expenditures, Markup, Unit and Volume, Analysis, Net Worth);Verify income through third-party information (e.g., contact major clients); andTest taxpayer’s reported income against information from regulatory and licensing sources.