Audit Procedure for Borrowings


To perform effective and sufficient testing on borrowings is not only focus on control testing but also focus on control validation by selecting some supporting document for vouching.

The auditor could use different methods and amounts of sample to be vouched based on the risk assessment result. There is a good start for understanding the overall picture of borrowings testing before going detail to its audit procedures.

Understanding its control, assertions and possible risk is a good start for all auditors to design effective audit procedures.

Understanding Control:

Before specifically go to the understanding control of borrowings, the position of the borrowing which presented in the balance sheet, a part of the financial statement is really important for accountants when preparing financial statements for their company.

Borrowing is a fund which the company gets it from other related corporate companies or financial institutions to operate their business.

In short, borrowing is referred to as a liability that one company owes to other related corporate companies or financial institutions to run their business.

Borrowing listing must be prepared to keep tracking of the movement of its balances. In the borrowing listing, the audit could get information such as sources of those borrowings and ending balances of the current borrowed amount which presented in the financial statements as mention above.

Borrowing is a significant area that auditors must be focusing on. Deeply understanding of its control is required to perform by an experienced auditor.


  • Completeness: Completeness is one of the assertions that auditors should be focused on. To ensure the completeness of the borrowings in the balance sheet, the auditor has to obtain borrowing listing to reconcile with trial balance (TB). If there is variance, under/overestimated might be occurred and further reconciliation must be performed.
  • Existence: There are the risks that the borrowings presented in the balance sheet might not have existed. The auditor should perform checking on the borrowing contract by selecting some transactions in the borrowing listing.
  • Accuracy: This assertion is concerning the actual amount of the borrowing which presented in the balance sheet as well as in the borrowings listing. It means that amounts and other data relating to transactions have been recorded at the correct amounts. For instance, the amount appearing in the borrowing contract is reflected in the actual borrowing amount from the lender.
  • Presentation and disclosure: This assertion is concerning the disclosure of significant information that matters to other users of the financial statements. That information includes accounting manual, term, and condition of borrowings as well as its interest payment to the lenders.

Common Risks Related to Borrowings audit:

Audit risks related to borrowings are different based on auditor understanding of its control, the nature of the borrowings and also the time constrain that allows the auditor to perform the audit. The following are the risks that normally come up when performing an audit on the borrowings;

  • The significant variance of borrowing reconciliation which management could not explain to the auditor. In this case, the auditor needs to ensure that the variance is explained with the proper acceptable explanation.
  • The discrepancy between balance per recording and its supporting document: It is important for the auditor to perform a test of detail by selecting some sample of borrowing transactions to check. It is a risk that impacts audit opinion.
  • Borrowing contract is loss during the auditing period: To achieve the audit testing on the borrowings, vouching on borrowing contract is required. In case that the contract is a loss, the audit could not ensure that the borrowing has existed and accurate. Another audit documentation and justification is required.

Audit Procedures:

  • Reconcile the borrowings listing to the general ledger and trial balance: The auditor should obtain the Company’s borrowings listing and financial statements for the period of auditing as well as relevant period. Before working on the listing of the borrowings, the auditor should make sure that the listing and the TB are reconciled.
  • Obtained movement of the borrowings during the period: The auditor should obtain the movement of borrowings and re-perform to make sure its movement is correctly performed.
  • Perform testing on the movement of the borrowing is important for the auditor to ensure the balance of the borrowing is tight to its supporting document. Meant that, the audit should test the addition of the borrowings during the audited period as well as payment of the borrowing to lenders by obtained its supporting documents for vouching.
  • Sending borrowing confirmation is also an important part for the auditor to ensure the ending balance, interest rate, and maturity date as well as to achieve the audit’s assertions.

Written by San Chancrersna


The cost of goods sold testing is conducted at the same time as inventory testing is carried out for purposes of the balance sheet. The cost of goods components can broadly be categorized into two major components.

Firstly, the auditor is supposed to determine the overall amount of inventory sold.

If the auditor has been able to test the amount of inventory that is readily available on hand, in addition to the amount that was available initially, the amount can be calculated by simple addition.

Furthermore, the auditor is also required to calculate the inventory sold on a unit basis. This is mainly completed from making selections from a listing of the items sold by the company on a per-unit basis.

However, in addition to these basic calculations, the auditor is supposed to have a procedure designed to ensure that he can give a true and fair view regarding the overall policies that are in place.

In order to determine the audit procedure for the cost of goods sold, there are a couple of things that should be taken into account.

These issues are concerning the overall procedures that are likely to be followed to ensure that there are no issues that might mitigate the auditor from giving a proper judgment.

When it comes to the cost of goods sold, the auditor has a number of responsibilities and factors that should ideally be taken into account.

First and foremost, they should ensure that there are internal controls sufficiently present over inventories and cost of goods sold.

In the same manner, it is also important to consider the basis for determination for the existence of inventories and the occurrence of transactions that majorly affect the cost of goods sold. The major component for the cost of sales is mainly inventory counting.

It is really important to ensure that inventory-related measures are properly taken care of, essentially because of the tantamount importance, it has, not only on the Income Statement but also on the Balance Sheet.

There are a number of procedures that can be used by the auditor pertaining to the Cost of Goods Sold. These audit procedures are given below:

  • Cutoff analysis. This requires auditors to examine the relevant procedures to ensure that the physical inventory count is for the relevant period only. This also includes a process for halting any further receiving into the warehouse or shipments from it at the time of the physical inventory count, so that additional inventory items are already excluded.
  • Observe the physical inventory count. Counting inventory can also be one of the most integral parts of the accounting process for many companies. In this regard, the auditors want to be fully aware of the procedures that are used to count the inventory. This requires them to discuss the counting procedure with the accountants, observe the accounting process, and apply random sampling to check for any inconsistencies.
  • Reconcile the inventory count to the general ledger. Auditors also ensure that they are able to trace the valuation that is compiled from the physical inventory count to the company’s general ledger, to verify that the counted balance was carried forward into the company’s accounting records.
  • Test high-value items. In the case where there are items in the inventory that are of unusually high dollar value, the auditors are most likely supposed to spend some extra time to count them physically in inventory. Therefore, this can ensure that they are valued in a correct manner, and subsequently, trace them into the valuation report that carries forward into the inventory balance in the general ledger.
  • Test item costs. When deciding on the audit procedure, it is also fundamentally important to ensure that the purchased costs in your accounting records are physically traceable. This can then be compared with supplier invoices to the costs listed in your inventory valuation.
  • Test for lower of cost or market. Cost of Sales involves inventory mainly, it is important to have all the relevant values correctly. Therefore, this requires the auditors to follow the lower of cost or market rule. It should be ensured that inventory items are recorded at lower of cost or net realizable value.
  • Direct labor analysis. In the case of manufacturing companies, it should be ensured that if direct labor is included in the cost of inventory, then the auditors will want to trace the labor charged during the production process on time cards or labor routings to the cost of the inventory. This amount should be taken into consideration in order to fully evaluate the overall costs that have been charged under this particular head.

Therefore, in addition to these specific assertions and procedures pertaining to the cost of sales, it is also important fundamentally important to ensure that the other basic assertions are fully taken into account.

These assertions include the following: Accuracy, Completeness, Cut-Offs, Right and Obligations, and Understandability.

Overall, the audit procedures that are designed by auditors keeping in mind the overall presentation and calculation behind the cost of sales is an increasingly integral part, because of the fact that it is something that is often misrepresented or miscalculated by accountants.

Traceability of items in the cost of sales is often a tiring process, which also requires physical verification.

Therefore, the overall chances of error surrounding this particular head are often high.

In this regard, all the procedures that should ideally be designed must include all the relevant elements, which can mitigate the overall chances of fraud or misrepresentation in the Income Statement.

Having said that, it is also really important to realize that the audit procedure for every audit assignment will differ from client to client.

Despite a basic blueprint that can be followed (as mentioned above), there will still be additional factors that should be taken into account depending on the nature of the work itself, and the scope of items that are included in calculating the cost of sales for the respective organization.


Audit Procedure of Operating Expenses

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 procedure normally design 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 to design 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 that procedure 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 that 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.

Classification Testing

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.

Completeness Testing

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.

Audit Procedures for Employee Benefits

Employee Benefits

Employee benefits have been characterized by the Bureau of Labor Statistics as any type of aberrant or non-monetary remuneration paid to a worker.

These might be legally necessary or guideline, as are business commitments to Social Security or medicinal services benefits, or they might be optional, for example, commitments to retirement investment funds or took care of time.

Associations offer benefits to their employees since they advance employment fulfillment and motivate laborer steadfastness, which, thus, can prompt better money related execution. They are given by associations notwithstanding compensation to make an aggressive bundle for the potential worker.

Benefits can be very significant. Restorative protection alone can cost a few hundred dollars every month. That is the reason it’s essential to think about benefits as a feature of your complete remuneration.

Ensure you comprehend which ones you will get. Offering benefits to your workers is significant in light of the fact that it gives them you are put resources into their general wellbeing, however their future. A strong worker benefits bundle can pull in and hold ability. Benefits can assist you with separating your business from rivals.

Benefits keep on advancing. For instance, numerous businesses offer an expanding cluster of choices that give laborers more prominent adaptability in offsetting work with different aspects of life. Family-accommodating strategies, (for example, working from home) and profession related benefits, (for example, instructive help) are only a couple of the contributions from contemporary bosses.

However, giving more elevated levels of benefits includes some significant downfalls. Over the previous decade, the adjustment in benefits costs has outpaced the adjustment in the expense of wages and pay rates. This is inferable, to some extent, to the expanded expense of medicinal services benefits.

Additionally, benefits are not equally spread among the workforce; a few laborers are almost certain than others to approach benefits. All-day laborers, for instance, have more prominent access to benefits than do low maintenance laborers, and laborers in enormous foundations normally have more noteworthy access to benefits than do those in little foundations.

Laborers who have a place with a trade guild likewise are bound to be offered benefits than the individuals who are in occupations in which laborers are not unionized.

In addition, approaching an advantage doesn’t really imply that laborers decide to get that advantage. It basically implies that the business makes the advantage accessible.

Legal Requirements

In the event that you’ve at any point earned a check, you’ve most likely seen that a portion of your cash is taken out for things other than charges. Where does this cash go? A portion of these findings goes toward paying for lawfully required benefits.

For instance, the two managers and employees must add to two obligatory social protection programs: Social Security and Medicare. Government disability, the biggest segment of legitimately required benefits, gives budgetary help to laborers and their families when laborers resign, bite the dust, or become incapacitated.

Medicare gives human services help to more established specialists and to individuals with long haul inabilities. Commitments to these projects are part equally among employees and businesses.

The employees’ segment is taken straightforwardly from their checks as a duty, regularly alluded to and noted on pay stubs as Federal Insurance Contributions Act or Old Age, Survivors, and incapacity protection for Social Security findings and as Medicare emergency clinic protection for Medicare derivations.

Businesses’ and workers’ commitments are saved to a money related establishment and afterward moved to the Internal Revenue Service. Other lawfully required benefits incorporate Federal and State joblessness protection and, in many States, laborers’ pay.

Managers add to the Federal-State Unemployment Insurance Program, which gives money related help to laborers who lose their positions through no issue of their own; at any rate, three States expect workers to make commitments, as well.

In many States, bosses additionally should add to State laborers’ remuneration programs, which give budgetary help to individuals who can’t fill in because of a work environment damage or sickness.

Medical Coverage

Restorative protection takes care of the expenses of doctor and specialist charges, medical clinic rooms, and physician endorsed drugs. Dental and optical consideration may be offered as a component of a general benefits bundle. It might be offered as independent pieces or not secured by any means. Inclusion can some of the time incorporate the employee’s family (wards).

Bosses, as a rule, pay all or part of the premium for employee medicinal protection. Regularly employees pay a level of the month to month cost. The expense of protection through a business. Most plans give inclusion to visits to essential care doctors and pros, hospitalization, and crisis care. Elective restorative care, wellbeing, remedy, vision, and dental care inclusion will fluctuate by the arrangement and manager.

Managers are required to give human services to employees who work at any rate of 30 hours out of every week. Some low maintenance laborers are secured by boss plans, yet many are not secured. A few businesses give a motivating force to employees to quit their arrangement.

Dental Care Plan Coverage

Organizations with dental consideration benefits offer protection that helps pay a part of the expense for dental treatment and care. Contingent upon the organization’s arrangement for dental care benefits, dental inclusion incorporates a scope of medicines and strategies. Most protection plans spread the fundamental strategies, for example, routine teeth cleaning like clockwork.

Essential administrations would likewise incorporate fillings, crisis help with discomfort, root trenches, and dental crowns. At last, Major administrations can incorporate bridgework, intelligence teeth expulsion, false teeth, and other complex methodology. A few plans spread all practices, as orthodontic work notwithstanding fundamental dental care.

Incidental benefits and Perks

While these benefits are important and do hold money related worth, the employee’s pay continues as before, and the worker can’t “money in” or exchange the ideas for more significant compensation. Incidental benefits are not legally necessary and differ from boss to boss. Different sorts of benefits are not legally necessary yet are normally given to laborers. Since these benefits are intentional, businesses and workers have more noteworthy authority over them. The table on page 17 shows the absolute most normally offered benefits and the percent of laborers who approach them. The benefits in the table are depicted on the pages that pursue and incorporate medicinal services, life, and other protection; paid leave and retirement; and different benefits, for example, vocation related and family-accommodating projects.

Accounting Perspective

Adding to the trouble with finding a reasonable meaning of worker benefits is that universally, perspectives on “benefits” are altogether different than those in the United States. The International Accounting Standards Board characterizes employee benefits as “all types of thought given by a substance in return for administration rendered by workers or for the end of business”.

The IASB definition doesn’t look to separate the two parts of remuneration, in particular, wages and benefits; its motivation is to guarantee that all types of installments to employees are effectively represented as some type of pay thus the definition is essentially a comprehensive one.

Among industrialized countries, employee benefits may contrast both in degree and in kind, depending, to some extent, on how much the benefits are controlled or financed by governments. Medicinal services, for instance, are commonly regulated through one of three kinds of projects: a national wellbeing administration, a national medical coverage framework, or a multi-payer protection framework.

In the initial two, medicinal services are made good on thorough assessments and don’t go into the business relationship. In nations utilizing some type of the multi-payer framework, managers and employees add to human services costs. Note, however, that a couple of countries have “unadulterated” forms of these projects.

In a multi-payer country like the United States, the legislature may sponsor medicinal services costs for poor as well as older individuals. Different nations utilize a similar type of this framework where bosses help to finance the expense of medical coverage, the appropriation is an employee advantage and is viewed as one of the most significant of the benefits that businesses offer.

The appropriation can be a willful one or one that is required by some type of government guideline.

Audit Procedures:

When the audit strategy is being designed, a key preference is given to the judgments that shall be made, in order for the selection of the most effective and efficient audit procedures to be performed. This judgment process of the selection of effective auditing procedures is best done considering the following three factors of the audit:

  • Nature

The nature of the audit allows the auditor to choose from a variety of audit procedures. These methodologies incorporate review, perception, request, affirmation, recalculation, investigative techniques, and re-execution and might be utilized all through all phases of the review procedure.

  • Timing

The auditor tests resource adjusts “as of” the announcement of net resources accessible for benefits date. Nonetheless, once in a while data gave to the examiners to help adjusts is starting at a date other than the announcement of net resources date.

  • Extent

The auditor decides the degree of testing the person in question will perform. The important degree of a substantive review technique will regularly rely upon the materiality of the record, divulgence or exchanges; the surveyed danger of material misquote, and the vital level of confirmation from the system.

In order for the audit of the Employee benefits plan to be efficient and productive, the auditors shall consider some of the below-stated procedures to evaluate the information from the employee benefits plan as part of the audit process:

  • Discuss with trustees, plan administrator, or another appropriate representative of the plan, the scope of the audit. Determine whether the scope of the audit will be restricted (limited-scope audit).
  • Make inquiries of plan management concerning whether the arrangement’s budget summaries will be set up incongruity with for the most part acknowledged bookkeeping norms or with another exhaustive premise of bookkeeping.
  • Make inquiries of employee benefits plan management concerning investment assets held by outside custodians
  • Make inquiries of employee benefits plan management concerning who keeps up the arrangement’s bookkeeping records and members’ information
  • Make inquiries of employee benefits plan management concerning extent to which computer applications are used
  • Make inquiries of employee benefits plan management concerning preparation and use of interim financial statements
  • Make inquiries of employee benefits plan management concerning preparation and use of budget
  • Make inquiries of employee benefits plan management concerning the plan’s maintenance of a list of parties in interest
  • Make inquiries of employee benefits plan management concerning the benefit plan procedures for identifying reportable transactions