You are on page 1of 10

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
against goods delivered or services Existence, 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 Presentation &
Reporting 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 numbered. All purchase


orders are entered
into the records

Entries are made only on the basis of Credit to accrued


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

Entry to accrued expense account is All entries to


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

Suppliers invoices are checked for Accrued expenses


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

Price charged by the supplier is Accrued expenses


verified for appropriateness, for e.g. by are recorded at the
agreeing the rates charged to approved appropriate
price lists or quotations. amount

An independent person compares the Accrued expenses


purchase orders, goods received notes have been booked
and suppliers invoices for consistency. at appropriate
amount and
represent valid
claims by third
party

Suppliers statements are obtained and Accrued expenses


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

Credit notes are checked for Credit Notes


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

Credit notes have been entered in the Credit Notes are


same period to which the purchases recorded in an
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. Analyse 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.