I. ACCOUNTING DOCUMENT
– Material Request
– Purchase Request
– Quotation
– Purchase order
– Sale order
– Contract with supplier and customer
– Delivery note
– Goods received note
– Invoice
– Credit note
– Debit note
– Payment request
– Official receipt
– Payment voucher
– Bank statement
II. GENERAL AUDIT PROCEDURES FOR EXPENSES
A financial audit is a chance for your business to double-check your books for accuracy and proper documentation of expenses.
When reviewing company expenses, auditors evaluate expenditures to make sure they were necessary and in line with internal policies. Expenses can be anything the company paid money for in return for income – rent, invoiced expenses like the cost of supplies and reimbursable expenses such as travel charges incurred by an employee.
Internal Expense Controls
Companies have many types of internal controls related to expenses. Some invoices may require certain levels of signatures, and others may require a written contract. One of the first steps in an audit is to evaluate paid expenses against how closely they follow the internal controls.
Reasonableness of Expenses Check
A reasonableness check involves checking expenses to see if they are in line with what is considered ordinary. For example, an invoice of $30 for a small box of pencils would not be reasonable. An additional reasonableness step is to make sure that only expenses that are necessary are incurred.
Timely Expense Processing
Expenses must be being received in a timely manner. The last thing a company wants is for expenses to be turned in for something that occurred a year or two ago. A wide time gap makes it harder for companies to make sure the expenses are legitimate and reasonable. The older the invoice, the harder it is to ensure it is legitimate.
Accuracy and Documentation
Auditors will often randomly select invoices and ask to see all the original paperwork, including contracts if they exist, invoices and signatures. They compare all the original documentation against the amounts paid to find mistakes.
Vendor Legitimacy Verification
A final check is to ensure that all vendors exist and are real businesses. One of the ways fraudulent transactions occur is for an employee to set up a nonexistent vendor and submit made-up bills.
Unusual expense
A report showing unusual expense allocation (by size or account) should be produced and reviewed by a responsible official. Expenses should be compared to budget and previous years.
Comparing the relationship
The auditor may expect greater consistency in comparing the relationship of gross profit to sales from one period to another than in comparing discretionary expenses, such as admin or advertising.
Examining related accounts in conjunction with each other. Often revenue and expense accounts are related to accounts in the statement of financial position and comparisons should be made to ensure relationships are reasonable.
III. AUDIT MEASURES
When assessing expenses, the auditor not only considers the company’s internal standards but also processes three general questions for every expense. These questions reveal inappropriate expense claims or other problems with purchases and procurement.
1. Is it timely?
Expense reports from employees usually have submission dates, whether it’s week’s end or month’s end. Reports submitted substantially beyond these deadlines mean that not only is there extra expense incurred for the current period, but previous reports are inaccurate. Old invoices are hard to verify, because the materials or goods covered may be long through a production cycle.
2. Is it reasonable?
The reasonability measure often depends on the nature of the business and even of the department. Sales staff frequently claim travel and entertainment costs, while production focuses on raw materials, and administration tends to expense office supplies.
3. Is it accurate?
The auditor considers not only an expense total but unit quantities and costs as well.
Example
Two bottles of pure drinking water cost 4,500 KHR, is it reasonable?
IV. AUDIT PROCEDURES IN RELATION TO PURCHASES, OTHER EXPENSES AND WAGES COSTS
Although the table above includes details of some procedures which give evidence over items in the statement of profit or loss, the following are procedures specifically related to the audit of purchases and other expenses:
a) Inspect a sample of purchase invoices to ensure they agree to the amount posted to the general ledger.
b) Compare expenses making up administrative expenses to the prior year charge and to expectations on a line by line basis. Where differences from expectations are discovered they should be investigated.
c) Inquire of management whether there are any unsettled claims or obligations arising before the year end and ensure these are provided for (to give evidence over the completeness of the charge in the related expense category in the statement of profit or loss)
d) Recalculate accruals and prepayments to gain evidence that other expenses are not over or understated.
e) Compare gross profit margin with the previous year, the gross margin per the budget and expectations. Investigate any unexpected fluctuations.
One expense that may make up a significant proportion of expenses is the wages cost included in statement of profit or loss. It is important you know procedures that can be used when auditing this area.
a) Reconcile the gross costs on the payroll to the wages cost in the financial statements.
b) Reperform casts of payroll records to confirm completeness and accuracy of costs used as a basis for the journals to the financial statements
c) Confirm payment of net pay per payroll records to cheque or bank transfer summary.
d) Inspect payroll for unusual items and investigate them further by discussion with management.
e) Perform proof-in-total (analytical procedures) on payroll by multiplying estimated average wage (using last year’s figures plus expected increases) by average number of employees (therefore incorporating starters and leavers) and compare to figure in draft financial statements to assess reasonableness.
f) Reperform calculations of statutory deductions to establish whether valid deductions have been included in the payroll expense.
Practical Question
You are part of the audit team auditing the financial statements of Sweep Co, a small office supplies business, for the year ended 31 March 20X9. The company employed the following staff at the start of the financial year: 7 office and warehouse managers, 20 warehouse staff and 25 office staff.
The pay ranges for each category of staff is shown below:
Office and warehouse managers: $35-$50k per year
Warehouse and office staff: $18-$25k per year
You have been asked to audit the wages and salaries expense for the year. All staff were given a 4% pay rise in the year, backdated to the start of the year. One of the office managers left the company half-way through the year. Two new members of warehouse staff and three new members of office staff joined halfway through the year.
The expense for the year is shown in the draft statement of profit or loss as $1,249,450.
Required
Using analytical procedures, perform a proof in total on the wages and salaries expense for the year.
Answer
Source :
1.BPP University, F8 and FAU
2.Kaplan, Inc., F8 and FAU