AUDITING PROCEDURES

ON EXPENSES
 1. Nature of expenses
2. Audit assertions
3. Key audit assertions

OUTLINE
4. Materiality and risk occurred
5. Audit evidence
6. Test of control
7. Substantive procedures
 NATURE OF EXPENSES
Expenses depict a decrease in economic
In financial statements, expenses are
benefits for the accounting period.
sometimes called general and
administrative expenses or operating
Expenses are in the form of outflows of
expenses.
assets or payments of operating liabilities
which results in a decrease in equity. This is
They are recorded only in the income
other than those relating to distributions to
statement (or called statement of
equity shareholders.
comprehensive income) in the expenses
section.
Expenses are reduced from the revenues in
order to arrive at the net profit for the
They are not shown in other statements
accounting period.
like balance sheets (or called statement
of financial position), statement of
Expenses include utilities, office supplies,
change in equity, or statement of cash
transportation, professional fees, consulting
flow.
fees, and insurance.
 AUDIT ASSERTIONS

Audit of expenses can be done by testing various audit assertions of completeness,

accuracy, occurrence, and cut-off.

Audit procedures are relevant to gathering appropriate audit evidence in order to make
a conclusion with regard to expenses.

The understatement of expenses will make look financial statements better than it is.

Therefore, the auditors shall primarily look at such cases of an understatement. In the
case of auditing expenses, the most important aspect is the completeness of records
in the income statement.
 AUDIT ASSERTIONS

The lack of strong internal controls will lead to an understatement of expenses.

This usually happens due to fraud committed by the internal staff.

Near the end of the reporting date, the management may try to delay incurring expenses in
order to avoid getting the expenses being reported.

They might do this by recording in the next accounting period and avoiding the current.

This is simply understating the profits and needs to be checked by the auditors.
 KEY AUDIT ASSERTIONS

The expenses that have been incurred are complete records and timely
Completeness
recorded up to date of reporting

The expenses have been differentiated as per the accrual system and
Cut-off
recorded in the proper accounting period.

Accuracy The expenses are recorded accurately for the amount

Occurrence The expenses have been actually incurred and related to the business.

The expenses have been properly classified as factory, administration,

Classification
and selling expenses if necessary.
 MATERIALITY AND RISK OCCURED

The primary risk of material misstatement is the risk that internal control may not able to
detect or prevent the issues related to procedures that are inherent.

It is the combination of both inherent risk and control risk.

The risk of being susceptible to misstatement due to the nature of the debt is the inherent
risk of the debt.

Control risk occurs when the internal control system of the auditee fails to prevent or
detect material misstatement in the debt.
 MATERIALITY AND RISK OCCURED

The primary inherent risk would be the understatement of expenses.

This would lead to over-reporting the profits in the current accounting period.

This happens when incentives are linked to profit or as a result of intense pressure
from within the company.

Take, for instance, branch managers are given a 5% incentive bonus as a percentage of
profit if a certain business is achieved.

In this case, the branch manager would try to overstate profit by underreporting the
profits due to the inherent structure of the incentive.
 AUDIT EVIDENCE

The varieties of inherent risks that may occur in the audit of expenses are as follows:

a. The expenses have been accrued, not recorded and not yet paid

b. The expenses are recorded as asset to understate the expenses and overstate the
asset. Take for an instance, installation of newly purchased machinery.

c. The general repairs and maintenance expenses are added to the cost of fixed assets.

d. Changing the accounting period to close books early. This has although happened very
rarely.

e. Breaking down the large expenses into smaller ones to avoid checks and cut-off
procedures employed by the auditors.
 AUDIT EVIDENCE

The varieties of control risks that may occur in the audit of expenses are as follows:

a. Dividing duties among various staffs to make purchases, receive goods and proper
accounting in the system.

b. Proper authorization on all expenses and payment

c. Matching the purchase invoice with amount of goods received along with transportation
invoice.

Take for example, in case no authorization control is employed, the risk that expenses
have been incurred for fictitious or personal purposes increases.
 TEST OF CONTROLS

Tests of controls are designed to obtain sufficient evidence to determine

whether controls over sales and receivables are functioning effectively

For example, vouching and tracing procedures are performed to evaluate the
controls over sales and receivables effectively ensure the occurrence and
completeness of sales and receivables transactions.

The tests of control involve testing of design

effectiveness and operating effectiveness
 SUBSTANTIVE PROCEDURES

In the case of expenses, substantive audit procedures would include substantive analytical
procedures and tests of details.

Analytical procedures mean gathering the audit evidence with respect to audit assertions. The
accounting trends, financial ratios, and relationships among data are analyzed in such a
procedure.

Following are some substantive audit procedures to be followed while auditing expenses:

a.Obtain all the supporting documents such as invoices, voucher slips, etc for the expense being
incurred
 SUBSTANTIVE PROCEDURES

b. Check whether proper authorization has been done with regard to expenses.

c. Verify that vendors exist through third party confirmation and making surprise
visits when goods are received and auditing goods received a note with the
physical purchase being received.

d. Ensure that proper classification has been made for expenses with respect to
revenue expenditure and capital expenditure.

e. Verify the related party expenses and ensure they are being reported with notes to
financial statements where necessary.
THANK YOU