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
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