9 Expenses & Other Incomes

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    AUDITING:

    Incomes & Expenses

    Prof. Dr Safdar A. Butt

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    Scope of Incomes & Expenses

    Expenses

    Purchases covered under trading activities

    Minor expenses covered under cashtransactions

    Other expenses will be covered in this lecture

    Revenue

    Sales covered under trading activities

    Other incomes will be covered in this lecture

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    Expenses

    Wages and salaries

    Insurance premiums

    Utilities and rent

    Commissions

    Interest expense & bank charges

    Bad debts

    Depreciation

    Directors remuneration

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    Wages & Salaries:

    Internal Control Measures

    Separate Personnel Department to handle allemployee matters and keep all related records.

    Human Resource Manual with procedure for:

    hiring, fixing pay rates and other benefits, etc.

    Dismissals, retirements,

    Authority levels for various HR related activities

    All approvals and decisions must always be inwriting, particularly hiring, overtime, change ofpay rate, etc.

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    Wages & Salaries:

    Internal Control Measures 2

    Record of performance, piece rate or timebasis, must be maintained and dulychecked/verified by responsible officials

    All overtime must be authorized before itis worked.

    Payroll preparation staff should be

    separate from cash and factory workers. Regular independent comparison between

    payroll and personnel departments records

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    Actual Payment of Wages:

    Internal Control Measures

    As far as possible, salaries should be paidthrough the bank.

    Strict security for withdrawal of cash from

    bank. Exact quantities of notes to be drawn for

    placing in wage packet.

    Payment against signature and identity Laid down procedure for unclaimed wages

    Surprise checks

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    Auditing Wages & Salaries

    Select a few employees and check their recordsin HR Dept and Payroll in depth, verifying thathiring, fixing/changes of pay rate, normal/overtime worked, actual payment are all properlyauthorized.

    Take payroll for a particular period, say onemonth or week, and audit it in depth, tracingevery entry to source and authority there-of.

    Compare signatures on wages sheet withspecimen held in HR department.

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    Auditing Rent Expense

    Get a list of all leased properties: Property, Landlord and Rent details

    Check the lease documents: Due authority to enter into the lease Rate and frequency of rent payment Responsibility for other payments like taxes, rates Is the property truly being used for business? Seek direct confirmation from a few.

    Verify actual payments: payment vouchers, paidcheques, authorization for the payments, traceto ledger.

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    Auditing Utilities

    Get a list of all contracts for utilities likeelectricity, phones, water, gas, etc.

    Verify if the contracts are:

    Properly authorized

    Relevant to business purpose.

    Test check a number of payments for eachutility, tracing them to bills, contracts,cash book and nominal ledger.

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    Insurance Premiums

    Get a list of all insurance policies, or InsuranceRegister of the company.

    Test check a few policies:

    Relevance and adequacy to needs Premium rates and amounts

    Seek direct confirmation where appropriate

    Test check some actual payments:

    Re-compute premiums and No Claim Discounts Payment voucher, paid cheques, authorization

    Trace to cash book and nominal ledger

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    Commissions

    Get a list of all agreements under which acompany is required to pay commission.

    Test check a few agreements:

    Relevance and adequacy to needs Commission basis, rates and amounts

    Seek direct confirmation where appropriate

    Test check some actual payments:

    Re-compute commission as provided in the contract Payment voucher, paid cheques, authorization

    Trace to cash book and nominal ledger

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    Interest Expense & Bank Charges

    Get a list of all loan agreements.

    Test check a few agreements:

    Relevance and adequacy to needs

    Interest rates, payment frequency and amounts

    Seek direct confirmation where appropriate

    Test check some actual payments:

    Re-compute interest / bank charges Payment voucher, paid cheques, direct debit

    Trace to bank statement, cash book and ledger

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    Bad Debt Written Off

    Since these are relatively few in number,but quite important, audit on total checkbasis.

    Check the procedure for write offs and itsadequacy.

    For each write off:

    Written approval from authorized officers

    Trace to debtors ledger and nominal ledger

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    Directors Remuneration

    Legal aspects: only per A & M of Assn

    Authorization comes from shareholdersmeetings, or minutes of Board of Directorsmeeting.

    Actual payment is audited like any otherexpense.

    Reporting in the annual accounts.

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    Depreciation Expense

    Get Fixed Assets Schedule

    Check if depreciation rates and basis ofcalculation are reasonable

    Check movements in assets during the year

    In respect of actual depreciation booked:

    Re-compute the expense and provisions

    Verify authorization

    Trace to fixed assets and nominal ledgers.

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    Other Incomes

    Rent Income

    Investment Income

    Interest Income Commissions

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    Rent Income:

    Internal Control Measures

    Where a company has substantial rentincome, proper internal control is needed.

    All rent agreements in writing

    Rent register should be maintained

    Procedure for follow up on late receipts,

    responsibility, penalties, etc. Regular inspection of rented out premises

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    Auditing Rent Income

    Review all rent agreements

    Audit rent register, comparing individualentries with rent agreements

    Relate total income for each property toperiod let.

    Investigate reasonableness of un-let

    periods. Trace actual receipts to cash book and

    nominal ledger.

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    Auditing Investment Income

    Check investment register.

    Choose some investments and audit in depth:

    Re-compute incomes

    Verify basis of computation and its reasonableness Trace actual receipts to cash book and nominal

    ledger.

    Verify accruals for earned income.

    Seek direct confirmation where appropriate

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    Auditing Interest Income

    Get a list of all deposits related documents.

    Verify the reasonableness of interest rates andbasis of computation.

    For actual receipts: re-compute the amount

    Trace it from cash book to nominal ledger

    Check accruals for income in arrears, seekingdirect confirmation where appropriate.

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    Thank you

    Dr Safdar A Butt