KnS School of Business Studies
Audit & Assurance
March 2019
AUDIT PROCEDURES FOR OPERATING EXPENSES
Test of details
1. 1.Select a sample of transactions from expense account and perform following procedures:
Check approval and authorization
Check supporting documents (e.g. acknowledge of receipts of services)
Check rates used are appropriate (based on market), appropriate tax deduction and
mathematical accuracy of invoices.
Check evidence of payments (e.g. copy of cheque, receiving signatures, and/or payments
from bank statement)
Ensure that the expense relates to the year and business.
2. Check allocation of payment between expense and prepayment
3. Ensure that period end accruals of expense include necessary items (e.g. Salaries accrual,
Accruals for utility bills, withholding tax payable, provision for warranty etc)
4. Perform omitted liabilities' test.
5. Perform cutoff test (i.e. from selected sample of transactions, check date of acknowledge of
receipts of services).
6. Scan expense account for any unusual debits/ credits to identify any misclassification.
AUDIT PROCEDURES FOR ACCURED EXPENSES.
Test of details
1. Ensure that period end accruals of expense includes necessary items (e.g. Salaries accrual,
Accruals for utility bills, withholding tax payable, provision for warranty etc)
2. Perform omitted liabilities' test.
3. Examine whether accrued liabilities have been paid subsequently.
4. Review documents to determine entity is legally obligated to pay the liability and obligation
recorded is as per authorized plans (e.g. Accrual of Bonus).
5. For a sample of accruals, recalculate the amount of the accrual to ensure the amount accrued
is correct.
CONTINGENCIES AND COMMITMENTS (LITIGATIONS AND CLAIMS)
To identify all contingencies and commitments, auditor should perform following procedures:
For general contingencies:
➢ Follow up contingencies reported in last year.
➢ Examine confirmations received from banks (for guarantees etc.)
➢ Review minutes of B.O.D meetings
For specific contingencies (litigations and claims):
➢ Discuss with management(also obtain written representation if necessary)
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Prepared By M. Sajid Kapadia (ACA, FCCA, APFA)
KnS School of Business Studies
Audit & Assurance
March 2019
➢ Communicate with external legal counsel (detail below)
➢ Check correspondence with specific customers
➢ For warranty claims, review:
o Terms and conditions of Sales contract.
o Past records of returns and claims
o Industry practice
o Evaluation of basis of provision
➢ Check status subsequent to reporting period
Communicate with external legal counsel:
Auditor may communicate with entity's external legal counsel in following manners:
1. Letter of inquiry (either general or specific) prepared by management and sent by the
auditor and 2. Direct meeting
Letter of general Inquiry:
A letter of general inquiry requests the entity's external legal counsel to inform the auditor of any
litigation and claims that the counsel is aware of, together with an assessment of the outcome of
the litigation and claims, and an estimate of the financial implications (e.g. costs involved).
Letter of specific Inquiry:
A letter of specific inquiry includes:
a) A list of litigation and claims;
b) Where available, management's assessment of the outcome of each of the identified
litigation and claims and its estimate of the financial implications, including costs
involved; and
c) A request that the entity's external legal counsel confirm the reasonableness of
management's assessments and provide the auditor with further information if the list is
considered by the entity's external legal counsel to be incomplete or incorrect.
(A letter of specific inquiry is sent if it is unlikely that external legal counsel will respond
appropriately to a letter of general inquiry e.g. where law or any professional body prohibits
response to such letter).
Direct Meeting:
In certain circumstances, the auditor also may judge it necessary to meet with the entity's external
counsel to discuss the likely outcome of the litigation or claims. This may be the case, for
example, where:
a) The auditor determines that the matter is a significant risk.
b) The matter is complex.
c) There is disagreement between management and the entity's external legal counsel.
Ordinarily, such meetings require management's permission and are held with a representative
of management in attendance.
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Prepared By M. Sajid Kapadia (ACA, FCCA, APFA)
KnS School of Business Studies
Audit & Assurance
March 2019
Debtor / A/c Receivable
Valuation
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Review after date cash receipts/ subsequent cash receipts and trace them back to closing
balance.
Review customer correspondence for any slow-moving balance to determine whether
there is any dispute or otherwise.
Inspect aged trial balance / aged receivable analysis to identify any slow moving
balances and determine whether any allowance or write off is required or not.
Completeness
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Compare current years debtors listing from prior year and discuss with management any
missing receivables or receivables that normally appear every year.
Agree the total of debtors control account to the party wise receivables listing & than to
the trial balance.
Select a sample of GDN's at or before year end and agree these to debtors control
account at the year end.
Rights & Obligations
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For a sample of debtors, agree the amount recorded to the original name of the customer
on sales agreement / contract.
Review loan agreements/ bank confirmation for any evidence that receivables have been
assigned as security against bank loan.
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Prepared By M. Sajid Kapadia (ACA, FCCA, APFA)