Audit procedures are mainly used by auditors in order to determine the overall quality of the financial information that is provided by their clients, subsequently resulting in the expression of an auditor’s opinion.
As far as company expense reviews are concerned, it can be seen that auditors are supposed to evaluate the expenditures in order to make sure they were necessary and in line with internal policies.
The exact procedures used will vary by client, depending on the nature of the business, audit risks, and the audit assertions that the auditors want to prove.
How to Design the Audit Procedure?
Audit procedures are normally designed by auditors based on the characteristic of target transactions or event risks that associate and the approach that auditor respond to those risks.
Risk assessment contributes significantly to auditors designing the right audit procedures.
Right audit procedures do not only help the auditor to perform their work more effectively but also contribute to the auditor in minimizing audit risks (detection risk).
When designing the audit procedure, the auditor must make sure that all of those procedures contain and address three important things.
- The assertion that auditor want to confirm
- Procedure to test that assertion
- Reason to perform the procedure
After performing a risk assessment, the auditor will be identified the risks that they think might happen to financial statements.
For example, the auditor might things the inventories that reporting in the financial statement might not exist. In this case, existence is the assertion that the auditor wants to test.
Therefore, inventories observation is the procedure that should be included in the inventories’ audit procedure.
The way how to perform, the number of inventories to be observed needs to be stated clearly to make sure that the auditor in charge of this cycle could understand.
However, there are several general classifications of audit procedures:
Controls Over Internal Expense
As far as internal controls are concerned, it can be seen that companies have many types of internal controls related to expenses. Some of the 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. This is basically to ensure that the expenses have actually occurred in reality.
Reasonableness of Expenses Check
This is to ensure that the expenses that have been declared can be considered ordinary.
For example, an invoice of $100 for a small box of stapler pins would not be considered reasonable and will likely raise a red flag. Therefore, it is an audit procedure to ensure that only expenses that are necessary are incurred.
However, as far as this particular expense is concerned, it can be seen that the reasonability measure often depends on the nature of the business and even of the department.
Timely Expense Processing
Timeliness of the transactions is also an additional procedure that must be accounted for. This involves checking for the expenses to ensure that they have been incurred in the existing year or not.
In the case of a wide time gap makes it harder for companies to make sure the expenses are legitimate and reasonable. The main auditing procedure in this regard is the time factor, and the relevant year in context.
Accuracy and Documentation
This audit procedure is mainly about amounts and other data relating to transactions and events have been recorded at the correct amounts. This means that the amount appearing in the source documents is true and real.
The relevant audit procedure in this regard is about auditors randomly selecting invoices and asking to see all the original paperwork. This may also include contracts if they exist, invoices and signatures.
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.
This is also an increasingly important factor because a lot of expenses might be overstated in order to reduce the profits for purposes of tax. Therefore, it is an audit procedure to ensure that these aspects have been properly covered.
Another Audit Procedure regarding operating expenses is to ensure the correct classification of the operating expenses. Audit procedures are used to decide whether transactions were classified correctly in the accounting records.
Classification is a really important part, especially when it comes to operating expenses because of the fact that a lot of organizations end up classifying operating expenses as capital expenditures and vice versa.
Therefore, there is a need to ensure that no such activity is carried out which might impact the overall credibility and reliability of the financial statement itself.
Audit procedures can test to see if any transactions are missing from the accounting records.
For example, the client’s bank statements could be perused to see if any payments to suppliers were not recorded in the books, or if cash receipts from customers were not recorded.
The main idea behind this is to ensure that all the expenses have been completely recorded, and not adjusted to impact the financial statements in any manner.
The audit procedures that have been mentioned earlier are quite subjective from client to client. This is primarily because of the reason that with different nature of businesses, different operating expenses are incurred.
Therefore, it makes sense to assess the overall situation contingent on the line of business of the client himself.
Furthermore, it should also be taken into account that the main audit procedures (accuracy, reasonable, etc.) will stay consistent regardless of the nature of the business.
However, this does not mean that the overall list is exhaustive.
In fact, there are several other factors that need to be incorporated as part of the audit procedures varying from situation to situation.