The Audit Procedures for Expenses: Practical Guides to Audit Expenses

In this article, we will cover the audit procedures for expenses. This includes the objective, key assertions as well as the specific audit procedures for the audit of expenses.

Audit of expenses is necessary to perform by testing various assertions including cut-off, completeness, accuracy and occurrence. Auditors should evaluate company expenditures to ensure they were necessary and in line with the company’s internal policies. The auditor will need to obtain sufficient appropriate audit evidence and the audit procedure will vary by client depending on the nature of the business. The auditors will design audit procedures depending on the level of risks involved in the targeted transactions.

Objective of Expenses Audit

The objective of the expenses audit is to ascertain efficiency in internal control, check the reasonableness of expenses, ensure accuracy and proper documentation. In the expense audit more attention is required in the completeness assertion because lack of completeness will lead to the understatement of expenses that results in the overstatement of profit.

Key Assertions of Expenses Audit

Key assertions for expense audit are described below:

Occurrence

Auditor should assess that all expenses that have been recorded actually occurred as there is a risk that the recorded expense may not occurred.

Completeness

Completeness is ensuring that the reported expense balance includes all expense transactions occurring during the period. Typically completeness testing is performed to ensure that there are no missing transactions in the accounting records.

Classification

Auditors need to check all expense transactions are classified in accordance with applicable accounting standards.

Cut Off

Cut Off assertion is ensuring that expenses are recorded in the correct accounting period.

Accuracy

Accuracy is checking that expenses are recorded at the correct amounts.

Key Audit Procedures for Expenses

In order to easily understand about each types of audit procedure, we will group all those audit procedures into categories as per the relevant assertions as below:

Please note that in one audit procedure can ensure one or more audit assertions. Therefore, you probably see the same audit procedure for each group of assertions in this section.

In addition, in the section we use the combination of both analytical procedures and detail testing procedures or substantive audit procedures. The control testing will not be covered in this article. W commonly perform the audit of expenses in conjunction with the audit of accounts payable.

Under this assertion, the auditor performs the audit procedures to ensure and confirm occurrence of expenses. Below are the audit procedures that auditors may carry out to ensure this assertion.

• Auditor should check the reasonability of expenses to ensure the expenses that occurred are necessary.
• It is required to check the occurrence of expenses by selecting a sample of recorded expense transactions and tracing the transactions to supplier invoice and goods received note to ensure the expense was recorded when the goods were received.
• For the selected sample of vouchers, auditor shall perform the inspection the supporting documentation to ensure that there is proper authorization of the purchase orders.
• For remuneration or payroll, auditor shall agree the individual payroll or remuneration to personnel record including the employment agreement. In addition, in case, there is part-time or hour-based jobs, auditor shall agree to the record of hours worked.
• Auditor shall conduct a physical meeting or interview with selected employees/workers to confirm the existence of employee on the payroll. In addition, auditor can perform the inspection on personnel and tax record as well as attending the wages payout where applicable. Confirmation from mangers may also be carried out as well to confirm the existence of employees or workers.
• For benefits related section, auditor shall agree such benefits on the payroll to supporting correspondence or documents.

2. Completeness

• The first step is auditors should evaluate how closely paid expenses follow internal controls. Companies have many types of internal controls and written contracts for expenses that auditors should check to ensure if there is any misuse of the process of paying expenses.
• Auditors shall reperform the casting of payroll records to ensure the accuracy and completeness of such payroll expense.
• They shall also need to agree the net salary or wage from the payroll to cash book or bank statement.
• Auditors shall perform the analytical procedure or sometimes called proof-in-total on the payroll. This is done by comparing to the figures in the management accounts or draft financial statements to assess the reasonableness of such payroll.

3. Classification

Under this assertion, the auditor performs the audit procedures to ensure and confirm classification of expenses. Below is the audit procedures that auditors may carry out to ensure this assertion.

Auditors should check correct classification of expenses is done in the accounting records. It is very common that classification mistakes can happen because many organizations classify operating expenses as capital expenses. So auditors are required to ensure no such mistake is done as it will impact the overall reliability of the financial statement.

4. Cut-Off

• It is necessary to check expenses are recoded in a timely manner to ensure they have been incurred in the existing year. Because a wide time gap will make the reasonableness of expenses difficult.
• It is necessary for the auditor to perform cut-off test for expenses to check they were recorded in the correct accounting period because cut-off assertion bears similar risk as completeness assertion because management may have the intention of delaying expenses to the next period to make the profit figure better. For example, auditor can perform cut-off test by reviewing expense transactions ten days before year-end and ten days after year-end. They can check the supporting documents of those selected transactions to ensure they were recorded in the proper accounting period.

5. Accuracy

Under this assertion, the auditor performs the audit procedures to ensure and confirm accuracy of expenses. Below are the audit procedures that auditors may carry out to ensure this assertion.

• The auditor will select a sample of expense invoices to check the accuracy and proper documentation of those expenses. The auditor will check the source documents like contracts, invoices and signatures. They will compare the documents against the amounts that has been paid to find any error or discrepancy. This can be done by performing the recalculation to see if there is any mathematical inaccuracy for the selected samples. This procedure is required to ensure that the amounts on the source documents are true.
• For payroll, auditor shall reperform or recasting the calculation and pay attention to any deduction or addition of the payroll. In addition, for the deduction or addition, auditor shall confirm the validity of such deduction or addition by agreeing to the relevant supporting documents.

• For the selected sample of purchase invoices, auditor shall inspect such documents and agree the amount to the amount has been posted into the general ledger (GL) to ensure that the amount is correct recorded.
• Another procedure is to check whether the vendor exists in real business. An important factor is expenses might be overstated by companies to reduce profits for tax purposes. So audit procedure is required to ensure that vendor actually exists in business database.
• Perform the analytical procedure and compare the administrative expense line by line to previous years as well as to the budget. If there is any significant discrepancies, investigate accordingly to identify the reason of such differences. Auditor can also enquire from management to have the explanation on such differences.
• Auditor shall enquire management to see if there are any unsettled claim or obligation that arise before the end of the year. If there are such thing incurred, provision shall be provided for in the financial statements. Commonly, this section can be included in the management representation letter.
• Obtain the accruals and prepayment listing client. Then perform the recalculation to gain reasonable evidence that the revenues or expenses arising from such accruals and prepayment are not overstated or understated.
• Perform the analytical procedure and compare the gross profit margin of the current year to previous years. The comparison should also be done against the budget as well. Investigate for any material differences or unexpected fluctuations.
• Obtain the directors’ emolument from clients. All directors shall sign off on each of the directors’ emoluments. This emolument shall contain the split of salaries, bonuses, benefits, pension contribution as well as other emoluments. The purpose of obtaining the directors’ emoluments is to make sure that the disclosure of directors’ emoluments is complete, accurate and in accordance with any applicable accounting standard or regulation.

• Short-term employee benefits: This includes salaries, wages, social security contributions, paid annual leave and paid sick leave, profit-sharing and bonuses as well as other non-monetary benefits
• Post-employee benefits: This includes the pension fund, other retirement benefits and post-employment life insurance or medical care.
• Other long-term employee benefits: This includes long-service benefits as well as deferred compensation where applicable.
• Termination benefits
• Share-based payments if any

1. Auditor shall agree such emoluments to the disclosure of the draft financial statements or management accounts that were prepared by clients. In addition, auditor shall compare the directors’ emoluments to previous year as well to see any fluctuation for example if any of the directors has left the office.
2. The auditor shall review the contract of each director and cross check with the directors’ emoluments. In addition, auditor shall also agree to the payroll listing as well to ensure the accuracy of the directors’ emoluments.
3. Obtain any minutes of meeting and review to see if there is any evidence or decision on the bonus, fees or any other emoluments that were not disclosed.
4. Auditor shall review the cash book or bank statement to see if there is any unusual payments that relates to the undisclosed directors’ emoluments.

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