How to test for proper classification of expenses?
It is important for an audit team to verify that expenses are properly classified in the financial statements. The expenses could be completely recorded in the financial statements, but what if the company records an invoice for materials to computer expenses.
The audit team should sample invoices and understand whether the expense category that the invoice was recorded to is reasonable.
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How to test for completeness of purchases or expenses?
The completeness assertion is critical for purchases/expenses as there is a risk that the company understates expenses in the financial statements so that profit can be overstated. To test for completeness, the audit team should sample purchase orders, receiving reports, and invoices and trace them to the purchase journal (the purchase journal should reconcile with […]
How to test for cutoff expenses?
Cutoff relates to whether the transaction is recorded in the proper accounting period. The audit team should select expenses or purchase transactions around the cutoff date and evaluate whether the transaction was recorded in the proper period based on the invoice date. For example, if the cutoff date is December 31, then the audit team […]
How to test the completeness assertion for expenses?
The primary concern for expenses is that the company has not recorded all expenses in the financial statements. By not recording certain expenses, the company can inflate profit. The audit team can trace invoices or cash disbursements to the general ledger (i.e. the search for unrecorded liabilities).