Audit Procedures For General And Administrative Expenses
Reviewing general and administrative expenses is important for an audit as it allows for a comprehensive assessment of the organization’s financial health. These expenses are listed on the income statement below the cost of goods sold (COGS). They are typically divided into fixed and variable components. Fixed expenses are incurred regardless of production or sales levels, while the variable portion can be reduced by management.
It is important for auditors to recognize the different types of G&A expenses that may be incurred by the organization in order to accurately assess the financial health of the company. Auditors must identify the source of the expenses, determine whether they are properly classified, and ensure that they are reasonable in nature. They must also evaluate the accuracy of the reported expenses and ensure that they are in accordance with Generally Accepted Accounting Principles (GAAP).
Additionally, auditors must ensure that the expenses are recorded properly in the financial statements and that they are properly disclosed in the notes to the financial statements. Auditors must also be aware of any potential related party transactions and ensure that there are no conflicts of interest. Additionally, they should consider the risk of fraud when evaluating G&A expenses.
By performing these audit procedures, auditors can ensure that the financial statements provide a fair and accurate representation of the organization’s financial health.
Audit Risk
Examining the risk associated with misclassification, improper accrual, incorrect period recording, inadequate support, overstatement, and understatement of expenses can impact the presentation of such expenses in financial statements.
Auditing procedures for general and administrative expenses involve a risk assessment that considers financial, operational, compliance, and legal risk. Auditors must evaluate internal controls and review transactions to determine whether they are properly classified and recorded. Furthermore, auditors must review the support for general and administrative expenses to ensure accuracy and completeness.
In addition, auditors must consider the possibility of fraud or other intentional misstatements. The auditor should also review the appropriateness of accruals and the reasonableness of expenses. Finally, the auditor should also analyze the trend of expenses to ensure that they are in line with industry standards and the expectations of management.
A successful audit requires the auditor to consider all the applicable risks to ensure that the presentation of general and administrative expenses is accurate and free from material misstatements.
Audit Assertion
Analyzing the accuracy and completeness of financial statements requires careful consideration of the potential misstatement and fraud risks associated with general and administrative expenses.
An audit assertion is a statement that is used to assess whether financial statements are free from material misstatement. The auditor must evaluate whether the occurrence, completeness, accuracy, classification, cut-off, and valuation assertions are fairly stated in the financial statements.
The occurrence assertion is used to ensure that all G&A expenses incurred during the period are recorded in the financial statements.
The completeness assertion is used to assess whether all G&A expenses have been included in the financial statements.
The accuracy assertion is used to determine whether amounts of G&A expenses are correctly calculated.
The classification assertion is used to make sure that G&A expenses are classified correctly as operating expenses.
The cut-off assertion is used to ensure that G&A expenses are recorded in the correct accounting period.
Finally, the valuation assertion is used to check that amounts of G&A expenses are recorded at the correct values.
Audit assertions provide the framework for the auditors to evaluate the reliability of the financial statements. The assertions are tested through the observation of documents, comparison of data, and the confirmation of information with independent sources.
Internal Control
Ensuring the reliability of financial statements requires the evaluation of internal control procedures for recording general and administrative expenses. This can involve:
- A detailed review of the internal controls in place
- A walkthrough of the process used for recording G&A expenses
- An assessment of the effectiveness of the internal controls
- Selecting a sample of G&A expenses for testing
- Evaluation of the results to determine the effectiveness of the controls
The internal control procedures should be adequate enough to detect, prevent, and correct any errors or irregularities that may arise. This is an important step in preparing accurate and reliable financial statements.
Furthermore, internal controls should be regularly monitored and updated to ensure they remain effective. Such measures will help to reduce the risk of fraud and ensure compliance with applicable regulations.
Management should also be aware of the internal control procedures in place and regularly review the results of tests to ensure they are operating as designed.
Audit Procedure
Evaluating the accuracy and compliance of general and administrative expenses requires a thorough audit procedure.
Auditors must compare expenses to prior year, industry averages, and budget expectations. To gain an understanding of the nature and purpose of expenses, inquiries should be made with management and relevant personnel.
Furthermore, auditors must review supporting documentation to ensure proper recording and classification. Tests of expense transactions must be done to verify accuracy and compliance with policies and procedures.
Auditors must also re-evaluate estimates related to expenses to determine reasonableness and evidence support. Subsidiary records must be reviewed to ensure accurate recording and compliance.
In some cases, physical inventory or inspection of premises may be necessary to gather evidence on the nature and accuracy of expenses.
Through a comprehensive audit procedure, auditors can ensure accuracy and compliance of general and administrative expenses.
Conclusion
The auditing of general and administrative expenses requires a sound understanding of audit risk and audit assertions.
It is essential to establish adequate internal control procedures and audit procedures to ensure that such expenses are accurately reported and recorded.
Ultimately, it is the responsibility of the auditor to assess the risk of misstatement and implement appropriate audit procedures to detect and prevent any errors from occurring.
Through a thorough audit process, the auditor can provide reasonable assurance that the financial statements are free from material misstatements and accurately reflect the true financial position of the company.