The AuditNet®Guides

ACCRUED EXPENSES
AUDIT PROGRAM

AuditNet® 2013
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Audit Program WP Ref.:

Prepared by:
Date:
(a) Accrued Expenses
Reviewed by
Date
Client:
Period:
Subject: Accrued Expenses

Amount in Rs.
Account balances:

Classes of transactions:

S. No. Audit Objectives Assertions Risk Assessment

IR CR ROSM
To ensure that accrued expenses
represent valid claims by suppliers Existence,
against goods delivered or services Rights &
rendered to the entity. Obligations

To ensure that all goods and

services received by the entity have
been accounted for in the books of
the company on a timely basis. Completeness
To ensure that liability is recorded
at the correct amount. Valuation

To ensure that payables have been

presented, classified and disclosed
in the financial statements in
accordance with the requirements
of applicable financial reporting
framework i.e. Companies
Ordinance, 1984 and applicable
International Financial Reporting Presentation &
Standards. Disclosure
S. No. Audit Procedures Objective Done by W. P.
Ref.

Test of Controls

Select purchase transactions over

the period under audit and ensure
the following controls have existed
during the period:

Purchase orders are approved at an Only authorized

appropriate level. purchases are
made

Purchase orders are serially All purchase

numbered. orders are
entered into the
records

Entries are made only on the basis Credit to accrued

of approved Goods Received Notes expenses
(GRN). represent goods
actually received

Entry to accrued expense account is All entries to

authorized at appropriate level and Accrued
supported by appropriate expenses are
calculations. authorized

Suppliers’ invoices are checked for Accrued

calculation and casting by a person expenses are
independent of the purchase recorded in the
department appropriate
amount

Price charged by the supplier is Accrued

verified for appropriateness, for e.g. expenses are
by agreeing the rates charged to recorded at the
approved price lists or quotations. appropriate
amount
An independent person compares Accrued
the purchase orders, goods received expenses have
notes and suppliers invoices for been booked at
consistency. appropriate
amount and
represent valid
claims by third
party

Suppliers’ statements are obtained Accrued

and reconciled to accounting expenses are
records on a regular basis accurately
recorded
S. No. Audit Procedures Done by W. P.
Ref.

Credit notes are checked for Credit Notes

correctness of calculation by a issued are
person independent of the preparer. properly
calculated and
recorded at
appropriate
amount

Credit notes have been entered in Credit Notes are

the same period to which the recorded in an
purchases relate. appropriate
period

Analytical Procedures

1. Compare accrued expenses to prior periods and budgets

seeking explanations for unusual items and significant
variances.

2. Review monthly movement of accrued expenses in

order to identify any inconsistency particularly towards
the period end.

3. Analyze the turnover of trade creditor – ratio of

creditors to total operating costs and compare to prior
periods and budgets, seeking explanations for unusual
items and significant variances.

4. Review the ratio of individual expense accounts to

sales or other appropriate base.

5. Review the accrued expense, purchases or expense

ledgers to identify whether there are any significant
purchases or expenses towards the period end. Check
that these have been accounted for in the correct
period.
S. No. Audit Procedures Done by W. P.
Ref.

Test of Details

1. TEST THE PROPRIETY OF ACCRUED

EXPENSE ACCOUNTING POLICIES AND
PROCEDURES

A. Review the information in prior-year working

papers and/or inquire concerning the nature of
each significant accrued expense account and the
policies and procedures used to account for them.

B. Inquire as to the reasons for significant changes in

accrued expense balances since the prior year.

C. Determine that the accounting policies and

procedures for identifying when liabilities should
be recorded are appropriate and applied
consistently.

D. In the course of performing the following

procedures in this Program, consider whether
audit evidence we examine supports our
understanding of accrued expense accounting
policies and procedures and their propriety.

2. TEST ACCRUED EXPENSES BALANCES

A. Perform Procedure 1, Steps B to D, in the Model

Audit Program for Payables. For selected
subsequent cash disbursements or unpaid invoices
that indicate liabilities incurred but not recorded
as accounts payable in the audit period, ascertain
that they were recorded in an appropriate accrued
expense account.
S. No. Audit Procedures Done by W. P.
Ref.

B. Inquire and/or review information in prior-year

working papers concerning the nature of recorded
accrued expenses. Inquire and consider other
available evidence, if any, that unrecorded or
under-recorded liabilities exist. Consider the
following sources of evidence, among others, as
applicable: prior-year balances of accrued
expense accounts; prior and current-year
balances of related expense accounts; minutes of
meetings of the board of directors; discussions
with internal legal counsel; responses to letters of
inquiry to independent legal counsel; employee
benefit plans (e.g., pension, medical, vacation,
deferred compensation) and reports from
actuaries, insurance companies, etc.; subsequent
payroll records; significant contracts for services
performed in the audit period.

C. Make a selection of the significant accrued

expenses noted while performing Steps A and B
(including any that appear to exist but are
unrecorded or under-recorded).

1. For selected accruals that are based primarily

on known data (i.e., that are not accounting
estimates), examine documents supporting
the amounts accrued (e.g., service contracts
or invoices, subsequent payroll records,
property tax statements).

2. For selected accruals that are accounting

estimates (e.g., liabilities for certain
employee benefits plans and legal
contingencies):

2.1 Evaluate the reasonableness of the

methods and assumptions management
used to make the estimates.
2.2 If management's methods and
assumptions were reasonable, test the
data and assumptions underlying the
estimates, and re-compute the
estimates.
S. No. Audit Procedures Done by W. P.
Ref.

2.3 If management's methods and

assumptions were not reasonable,
develop an independent range of
reasonable estimates and determine
whether management's estimates fall
within that range. (Note: The factors
that might be considered will vary
according to the nature of the
liabilities.)

3. For selected accruals with significant

balances in the prior year that no longer exist
or that have significantly lower balances in
the current year:

3.1 Assess whether the circumstances

requiring the accruals in the prior year
no longer exist or whether they warrant
reductions in the amounts accrued.

3.2 If the accounts consist of only one or

very few transactions (e.g., a prior-year
accrual for a legal liability), trace the
disposition of the liability (or partial
disposition) to supporting documents
(e.g., cancelled checks).

4. Evaluate results of the tests.

3. TEST PRESENTATION OF ACCRUED

EXPENSES

A. Determine that the following balances, if any, are

properly classified:

1. Debit balances in accrued expenses.

2. Non-current accrued expenses.

S. No. Audit Procedures Done by W. P.
Ref.

B. Determine that the following, if any, are properly

recorded, classified, and/or disclosed, as
appropriate:

1. Accrued expenses owed to related parties.

2. Loss contingencies.

3. Retirement plans.

4. Post retirement health care and life insurance

benefit plans.

5. Property taxes estimated with a substantial

measure of uncertainty.

6. Lease obligations.

4. TEST BALANCES DENOMINATED IN

FOREIGN CURRENCIES

A. Agree the closing exchange rate(s) used to

published records and test the translation
calculations.

5. TEST PRESENTATION OF RELATED-PARTY

BALANCES

A. Inquire and consider available evidence, if any, to

identify all related parties. Obtain a schedule of
related-party balances and determine that all
identified related parties with balances at year end
are included in the schedule. Trace the amounts in
the schedule to the trial balance.

B. Determine that the economic substance of the

related-party balances supports their recording.
C. Evaluate the reasonableness of presentation
and/or footnote disclosures of related-party
balances.

D. Consider requesting positive confirmation of

material balances with related parties.
S. No. Audit Procedures Done by W. P.
Ref.

6. TEST ACCOUNTING ESTIMATES FOR BIAS

A. Perform a retrospective review of significant

accounting estimates reflected in the financial
statements of the prior year to determine whether
management judgments and assumptions relating
to the estimates indicate a possible bias on the
part of management.

1. The significant accounting estimates selected for

testing should include those that are based on
highly sensitive assumptions or are otherwise
significantly affected by judgments made by
management.

2. Consider the results of this retrospective review in

evaluating the current-year estimates. If we
identify a possible bias on the part of management
in making prior-year accounting estimates, we
should evaluate whether circumstances producing
such a bias represent a risk of a material
misstatement due to fraud.

B. Consider whether differences between estimates

best supported by the audit evidence and the
estimates included in the financial statements,
even if they are individually reasonable, indicate a
possible bias on the part of the entity's
management. If so, reconsider estimates taken as
a whole.
S. No. Audit Procedures Done by W. P.
Ref.

7. TEST UNUSUAL ENTRIES RECORDED TO THE

GENERAL LEDGER

A. Investigate journal entries from sources that are

typically not associated with this account.

1. When selecting items to be tested, consider

(a) our assessment of the risk of material
misstatement due to fraud, (b) the
effectiveness of controls over the preparation
and posting of journal entries, (c) the entity's
financial reporting process and the nature of
the evidence that can be examined, (d) the
nature and complexity of the accounts, and
(e) the amount and number of such entries.
Because fraudulent journal entries often are
made at the end of a reporting period, our
testing ordinarily should focus on the journal
entries and other adjustments made at that
time. In addition, because material
misstatements in financial statements due to
fraud can occur throughout the period and
may involve extensive efforts to conceal
entries at the end of the reporting period, we
should consider whether there also is a need
to extend the testing of journal entries to
other periods within the period under audit.

B. Examine related accounting records and

determine whether the selected debit/credit is
valid, appropriate, and authorized. Determine
whether the selected entry was properly recorded
in the correct period and consider the possible
implications of such journal entries on internal
control.
S. No. Audit Procedures Done by W. P.
Ref.

C. Determine whether the entries exhibit

characteristics of inappropriate or unauthorized
journal entries such as (a) entries made to
unrelated, unusual, or seldom-used accounts or
business segments, (b) entries recorded at the end
of the period or as post-closing entries that have
little or no explanation or description, (c) entries
made either before or during the preparation of
the financial statements that do not have account
numbers, and (d) entries that contain round
numbers or a consistent ending number.

D. Evaluate the reasonableness of other adjustments

(e.g., entries posted directly to financial statement
drafts, consolidating adjustments, report
combinations, and reclassifications) made in the
preparation of the financial statements.

8. EVALUATE BUSINESS RATIONALE FOR

SIGNIFICANT UNUSUAL TRANSACTIONS

A. If we become aware of significant transactions

that are outside the normal course of business or
that otherwise appear to be unusual given our
understanding of the entity and its environment,
perform the following procedures:

1. Gain an understanding of the business

rationale for such significant unusual
transaction.

2. Consider whether the transactions involve

previously unidentified related parties or
parties that do not have the substance or the
financial strength to support the transaction
without assistance from the entity we are
auditing.
3. Determine whether that rationale (or the lack
thereof) suggests that the transactions may
have been entered into to engage in
fraudulent financial reporting.