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Operating Expenses

By Jesus Knight,2014-12-23 20:44
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Operating Expenses

CONTRIBUTED ON June 5, 2002 BY: JOY CELESTE (jcembudo@splashcorp.com)

     Customized Audit Work Program

    Operating Expenses

    Subsidiary/Department:

    Date:

AUDIT OBJECTIVES:

To determine whether:

1. Operating expenses represent all amounts incurred by the entity for period-type expenditures in the entity's

    operations and are properly recorded.

2. Operating expenses are properly described and classified and adequate disclosures with respect to these

    amounts have been made.

AUDIT PROCEDURES:

    WP Done Procedures By Date Comments Ref. Y/N?

1) ANALYTICAL PROCEDURESGENERAL

    a) Compare the balance of each significant operating

    expense account with the comparable balance for the

    preceding period and with the budgeted balance for

    the current period. Investigate significant or unusual

    fluctuations.

    b) Compare current-period relationships between

    accounts (e.g., total operating expenses as a

    percentage of sales, employer payroll tax expense as

    a percentage of payroll cost, etc.) with the

    comparable relationships for the prior period and

    with budgets. Investigate significant or unusual

    fluctuations.

    c) If data is available, make comparative operating

    expense calculations on a per unit basis (e.g.,

    shipping costs per unit of sale, rental expense or

    utility costs per square foot occupied, travel and

    entertainment or automobile expenses per employee,

    etc.). Investigate significant or unusual variations.

2) PAYROLL COSTS

    a) Compute and compare the average salary/rates for the

    current period with the average salary/rates for the

    preceding period and with budgeted amounts.

    Investigate significant or unusual fluctuations.

    b) Have the client prepare a comparative schedule

    showing the distribution among the accounts (or

    among groups of logically related accounts) of total

    employee compensation earned for the current and

    the preceding periods.

    i) Compare each significant amount distributed

    with comparable amounts for the preceding

    period and with budgeted amounts for the

    current period. Investigate significant or unusual

    fluctuations.

    c) Compare full-time equivalents and/or average payroll cost per full-time equivalent for the current period with comparable amounts for preceding periods. Investigate significant or unusual fluctuations.

    d) Compare the percentage change in total number of labor hours with the percentage change in payroll costs for the current period. Investigate significant or unusual fluctuations.

    e) Compare the number of hours worked and/or full-

    time equivalents to a particular facility's production/output or labor costs per unit of

    production. Investigate significant or unusual fluctuations.

    f) Have the client prepare a schedule showing employee compensation earned, payroll deductions and net pay by payroll period by category of payroll. Verify the clerical accuracy of the schedule and test it as

    follows:

    i) Reconcile the totals of this schedule to the

    summary of amounts distributed to the various

    general ledger accounts.

    ii) Investigate significant or unusual fluctuations in

    amounts between payroll periods during the

    current period. Consider whether they may be

    indicative of potential cut-off problems.

    iii) Trace selected amounts to the payroll register.

    Scope:( )

    g) Select a sample of employees from the payroll register and perform the following: Scope:( )

i) Inspect time cards or other records to support

    hours worked.

    ii) Inspect wage/salary authorizations or union

    agreements to support rates paid.

    iii) Inspect authorization forms or union agreements

    to support amounts withheld.

    iv) Inspect personnel files for appropriate

    documentation and evidence of the existence of

    the employees.

    v) Test the calculation of net pay and the clerical

    accuracy of payroll register cumulative amounts.

    h) Scan the payroll register for unusual amounts. Investigate and examine supporting critical forms and

documents ( ), if appropriate.

    i) Have the client prepare a comparative schedule of commission expense (or commission expense as a percentage of sales) by month, salesperson, product line, sales representative, geographic region or other meaningful basis.

    i) Reconcile the totals of this schedule to the

    general ledger accounts.

    ii) Investigate significant or unusual fluctuations in

    amounts (or percentages) between payroll

    periods during the current period.

    iii) Obtain a detailed calculation of commission

    expense by salesperson, product line, geographic

    region or other meaningful basis. Obtain support

    for sales figures, commission percentages and

    factors used in the calculation.

    j) Have the client prepare a schedule of bonus expense by employee. Trace bonuses to appropriate

    authorizations or examine supporting documentation for factors used in the bonus calculation.

    3) PAYROLL-RELATED COSTS

    a) Have the client prepare a comparative analysis of total fringe benefits. Test the analysis as follows:

i) Have the client reconcile the totals to the related

    general ledger accounts. Investigate significant

    reconciling items.

    ii) Compare current amounts with comparable

    amounts for the preceding period and with

    budgeted amounts for the current period.

    Investigate significant or unusual fluctuations.

    iii) Compute the ratios of material amounts of fringe

    benefits to the total compensation earned by

    covered employees or other data. Compare with

    the comparable ratios for the preceding period

    and investigate significant or unusual

    fluctuations.

    iv) Cross-reference pension expense to the test of

    the pension accrual in the audit of Accrued

    Liabilities.

v) Trace profit-sharing contributions and group

    insurance plans to appropriate authorizations.

    Recalculate amounts based on the terms of the

    plan, personnel records and/or employee

    earnings records.

    vi) Trace the costs of group insurance plans to

    invoices from the insurer and/or get confirmation

    from the insurance company.

    b) Obtain the client's trial balances of amounts accrued by employee related to vacation pay and holiday pay

    and test it as follows:

    i) Have the client reconcile the trial balance totals

    to the general ledger control accounts.

    ii) Test the accuracy of the footings of the trial

    balance.

    iii) Select a sample of employees and verify the

    client's accruals by reference to personnel

    records and employee earnings records. Scope:( )

    c) Obtain copies of tax returns for payroll taxes levied against the client and test them as follows:

    i) Reconcile amounts per the tax returns to the

    recorded expenses.

ii) Examine a selection of the returns for proper

    preparation, authorized signatures, etc. Scope:( )

    iii) Recalculate amounts shown on the returns.

    Scope:( )

iv) Examine evidence of payment of the taxes.

    4) OTHER OPERATING EXPENSES

    a) Review operating expense accounts to determine whether a yearend accrual is appropriate and, if so, determine whether it has been recorded. Cross-

    reference expense account balances to the appropriate analyses of balance sheet accounts (e.g., rent expense to accrued rent, etc.). Investigate material discrepancies.

    b) Have the client prepare a schedule listing significant expenditures in the following accounts:

; Repairs and maintenance. Scope:( )

; Professional fees. Scope:( )

; Travel and entertainment. Scope:( )

; Rents and royalties. Scope:( )

; Officers' salaries, directors' fees, etc. Scope:( )

; Contributions. Scope:( )

; Research and development. Scope:( )

    1. Scan supporting records or documents to ensure

    that all expenditures over the listing scope are

    properly included on the schedule.

    2. Examine critical forms and documents ( )

    supporting each material expenditure.

    3. Note whether repairs and maintenance

    expenditures should have been capitalized.

c) Select a sample of source documents (e.g., receiving

    reports, vendor invoices, etc.) relating to other

    operating expenses incurred during the period.

    Scope:( )

    1. Determine whether these transactions were

    properly recorded during the period by tracing

    amounts to the accounting records.

    5) ANSWER INTERNAL CONTROL QUESTIONNAIRES

    6) SUPERVISION, REVIEW AND CONCLUSIONS

a) Conclude responsive to the audit objectives.

    b) Prepare points regarding internal controls and other

    business matters.

c) Perform senior review and supervision.

d) Clear senior review points.

e) Clear manager review points.

     PERFORMED BY: REVIEWED BY:

    Audit Assistant Audit Supervisor

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