AUDITING:

Incomes & Expenses

Prof. Dr Safdar A. Butt

Scope of Incomes & Expenses

Expenses

Purchases covered under trading activities

Minor expenses covered under cash
transactions
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 Objectives

To ensure that payment is only to actual and

serving employees at authorized rates
Payment is computed in accordance with record
of work done, or time records.
Payroll is accurately prepared and authorized by
designated officials.
All statutory and other deductions are properly
made and paid over to appropriate parties.
Accurate record in appropriate books of
accounts.
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Wages & Salaries:

Internal Control Measures

Separate Personnel Department to handle all

employee 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 in

writing, particularly hiring, overtime, change of
pay rate, etc.
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Wages & Salaries:

Internal Control Measures 2

Record of performance, piece rate or time

basis, must be maintained and duly
checked/verified by responsible officials
All overtime must be authorized before it
is 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 paid

through 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 records

in HR Dept and Payroll in depth, verifying that
hiring, fixing/changes of pay rate, normal/over
time worked, actual payment are all properly
authorized.
Take payroll for a particular period, say one
month or week, and audit it in depth, tracing
every entry to source and authority there-of.
Compare signatures on wages sheet with
specimen held in HR department.
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Auditing Rent Expense

Get a list of all leased properties:

Check the lease documents:

Property, Landlord and Rent details

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, paid

cheques, authorization for the payments, trace
to ledger.
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Auditing Utilities

Get a list of all contracts for utilities like

electricity, phones, water, gas, etc.
Verify if the contracts are:

Properly authorized
Relevant to business purpose.

Test check a number of payments for each

utility, tracing them to bills, contracts,
cash book and nominal ledger.
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Insurance Premiums

Get a list of all insurance policies, or Insurance

Register 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 a

company 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 check
basis.
Check the procedure for write offs and its
adequacy.
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 shareholders
meetings, or minutes of Board of Directors
meeting.
Actual payment is audited like any other
expense.
Reporting in the annual accounts.

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Depreciation Expense

Get Fixed Assets Schedule

Check if depreciation rates and basis of

calculation 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 rent
income, 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 individual
entries with rent agreements
Relate total income for each property to
period 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 and
basis of computation.
For actual receipts:

re-compute the amount

Trace it from cash book to nominal ledger

Check accruals for income in arrears, seeking

direct confirmation where appropriate.

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Thank you
Dr Safdar A Butt

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