AUDIT OF EXPENDITURES

AND DISBURSEMENTS
CYCLE
CHAPTER 3
 WHY DO WE AUDIT
EXPENDITURE AND
DISBURSEMENT CYCLE?
 EXPENDITURE
VS
DIBURSEMENT CYCLE
EXPENDITURE AND DISBURSEMENT CYCLE
• It involves the acquisition of goods and services and
payment for such goods and services.
Expenditure:
• Capital Expenditure – assets
e.g. equipment
• Revenue Expenditure – expenses
e.g. rent expenses
• It involves cash payment.
The chapter on audit of cash lists and discusses applicable audit procedures,
audit program, audit objectives, internal control, internal control
questionnaires applicable to cash receipts and cash disbursement.
In the audit of the accounting cycles and the different balance sheet
accounts, the auditor has audited most of the income statement
accounts like:
• Bad Debts Expense and interest income in the audit of accounts,
notes receivable and allowance for bad debts.
• Depreciation Expense, depletion expenses, amortization expense
in the audit of property, plant, equipment and intangible assets
and the valuation accounts, accumulated depreciation and
amortization.
• Interest Expense in the audit of liabilities.
VOUCHING SCHEDULE
• The audit of the revenue cycle accomplished the
objectives in the audit of SALES whereas the audit of
the inventories and conversion cycle met the
objectives in the audit of COST OF SALES. Sales and
Cost of Sales are two major items in the income
statement. Towards the end of the examination of the
balance sheet accounts and the accounting cycles
there may be a few more accounts that the auditor
would want to examine. For these accounts, the
auditor may do vouching schedules for expense
accounts.
AUDIT OBJECTIVES
PAYROLL
Compliance Audit Objectives
To ascertain:
Existence of internal controls
Client’s compliance with internal
controls
Effectiveness of internal controls
Substantive Audit Objectives To prove financial statement
To ascertain: assertions as to:
Payment to “bona fide” employees Existence rights and obligations
Accuracy of payroll computations Measurement
Compliance with labor code, Rights and obligations
collective bargaining agreements
(CBAs) and the requirements of
government regulatory agencies
Proper cut – off of payroll Completeness occurrence
transactions
That payroll transactions are Measurement valuation
accounted for in accordance with
PFRS
That the payroll related accounts are Presentation and disclosure
properly presented in the financial
statements
AUDIT OBJECTIVES
EXPENSES
Compliance Audit Objectives
To ascertain:
Existence of internal controls
Client’s compliance with internal
controls
Effectiveness of internal controls
Substantive Audit Objectives To prove financial statement
To ascertain: assertions as to:
Payment and recognition of Existence rights and obligations
legitimate and reasonable
expenses
Compliance with contractual Rights and obligations
agreements and government
regulatory requirements
Proper cut – off expenses Completeness occurrence
That expenses are accounted for Measurement valuation
in accordance with PFRS
That the expenses and related Presentation and disclosure
accounts are properly presented
in the financial statements
AUDIT OF PAYROLL
• It consists of examination of payments to employees for
services rendered and the accrual of unpaid compensation. It
also includes the audit of employees’ obligation to withhold
in behalf of SSS, BIR. PhilHealth, ECC, other government
regulatory agencies and other non – government unit. The
audit of payroll could have been substantially covered in the
audit of cash disbursement cycle and in the audit of
conversion cycle. Direct and indirect labors are major
components of cost of goods manufactured. Errors in direct
labor and indirect labor may significantly lead to
misstatements of the cost of goods manufactured with effects
on cost of goods sold and finally on net income and
inventory balances.
SUBSTANTIVE TESTS OF PAYROLL INCLUDE:
• Examine sample timecards.
• Test unauthorized timecards.
• Trace a sample of timecards to the payroll register.
• Test postings to the payroll register for a sample of payroll slips or ATM
remittances.
• Recompute the mathematical accuracy of payroll register.
• Verify classification of charges for payroll.
• Test withholding from payroll.
• Test remittances to BIR, SSS, PhilHealth, ECC, etc.
• Search for unrecorded salaries, wages and benefits.
• Test compliance with reporting requirements to BIR, SSS, PhilHealth.
• Obtain information on retirement benefits, review laws on retirement and see to it
that client is in compliance with the law and the GAAP requirements.
• Tie up commissions and bonuses with sales and income.
 The payroll functions consist of personelling, supervision,
timekeeping, payroll processing, payroll payments and
recording in the accounting books. The payroll record consist
of individual employee record commonly called F201, time
cards, payroll registers, authorization forms, withholding
reports, pay slips. Financial statements accounts affected by
payroll transactions are cash, inventory, direct labor, indirect
labor, selling expenses, administrative expenses, prepaid
expenses, accrued expenses, payable to BIR, SSS, PhilHealth
and other government regulatory agencies.
FRAUDS ON PAYROLL
• Payments to “ghosts” or nonexistent employees.
• Padding of payroll.
• Unauthorized payments for salaries and wages.
• Payments for unauthorized vacation and sick leaves.
• Withholding from payroll are not emitted to SSS, HDMF, PhilHealth
and other authorized principals.
• Manipulation of accounting records to cover up noncompliance with
laws, rules and regulations on wages.
• Connivance between employees and payroll clerk on overstatement of
payroll.
ADJUSTMENTS FOR PREPAID EXPENSES AND DEFERRED CHARGES
Two of the most common subjects of the auditor’s adjustments
are prepaid expenses and deferred charges. Prepaid expenses are
those absorbed into expenses in the following accounting period.
They are classified as current assets, whereas deferred charges
become expenses after the next accounting period. When expenses
or cost applicable to future periods are charged to current
operations, the effect is an understatement of current year’s income
and assets and the overstatement of the succeeding year’s or year’s
profit. Wherever the amounts involved are material, adjustment
should be made to defer the cost of expenses. The auditor is
concerned with the proper matching of cost or expense against
revenues. In the audit of cash disbursement and other transactions
leading to prepayments and the deferred charges, the auditor has
to verify their authorization and propriety. Another audit
consideration is the consistent application of the PFRS.
 The common methods of allocation for prepaid expenses
and deferred charges are: (1) time basis, (2) revenue basis
and (3) inventory basis. Among the expenses allocated on
time basis are insurance, rent, taxes, interest, bond discount,
bond premiums, rearrangement cost, long – term contract
cost. Those allocated on revenue basis are advertising and
promotions, commissions and royalties. Supplies are
deferred on inventory basis. When there is uncertainty in
the future benefits, the best course of action is to charge off
the expenditure against the current operation.
AUDIT PROCEDURES FOR PREPAID EXPENSES AND
DEFERED CHARGES
• Obtain schedule from client
• Examine supporting documents like insurance policies,
lease contracts, promissory notes, tax official receipts.
• Vouch payment.
• Compute expired and unexpired cost.
• Where applicable, confirm balances.
• Count supplies inventory.
• Verify amortizations.
• Ascertain future benefits.