THE EFFECTS OF READING THE GENERAL LEDGER ON PAYROLL AND OTHER EXPENSES
One of the most pervasive analytical procedures is reading, or scanning, the general ledger account activity. Whether done manually, or with the assistance of data extraction software, this analytical procedure is discussed in professional standards, SAS Nos. 106 (AU-C 500) and 109 (AU-C 315).
This procedure is usually performed by looking for (1) unusual amounts or postings, (2) transactions or general journal entries greater than the lower limit for individually significant items, (3) checks or disbursements to be used in support tests, and (4) other unusual matters. Documentation of the procedure should include the parameters of the test, the exceptions the test revealed and the resolution of the exceptions in a spreadsheet, memo or other working paper.
Many auditors customarily perform this procedure but fail to consider its affect on their audit strategy. After unusual matters are satisfactorily investigated and any errors are corrected by proposed journal entries, the auditor has obtained significant, substantive evidence that relevant assertions for many account balances are reasonable. The evidence obtained from this risk assessment procedure should enable the auditor to reduce the assessed level of risk of material misstatement and, therefore, the extent of evidence desired from detailed tests of balances, particularly for selling, general and administrative and other expenses.
OTHER ANALYTICAL PROCEDURES THAT REDUCE TESTS OF BALANCES FOR PAYROLL AND OTHER EXPENSES
Auditing standards require analytical procedures be used during the planning and review phases of an audit engagement. Analytical procedures performed during an engagement also contribute substantive evidence to enable auditors to evaluate financial statement assertions for payroll and operating expenses.
I have prepared an illustrative Small Audits Analytical Procedures Program that is available upon request through the Contact Us tab on my website. The following table illustrates the payroll and expense accounts affected by the analytical procedures in other major audit areas.
|ANALYTICAL PROCEDURE||SUBSTANTIVE EVIDENCE PRODUCED FOR EXPENSES|
|1. Highly effective predictive and corroborative analytical procedures during planning.||1. Reasonableness tests may be performed for depreciation, interest expense and payroll taxes. Comparison of all expense account balances with prior years.|
|2. Allowance for doubtful accounts.||2. Bad debt expense.|
|3. Inventories.||3. Purchases and costs of goods sold.|
|4. Investments.||4. Impairment losses.|
|5. Prepaid insurance.||5. Insurance expense.|
|6. Fixed assets.||6. Depreciation, amortization, repairs and maintenance, rents, supplies, small tools.|
|7. Accounts payable.||7. Purchases and all expense accounts.|
|8. Payroll and sales tax liabilities.||8. Payroll and sales tax expenses.|
|9. Notes payable and long-term debt.||9. Interest expense.|
More information on performing auditing procedures is available in my Basic Staff Training Series via live and on-demand webcasts which can be obtained by clicking the applicable box on the left side of my homepage, www.cpafirmsupport.com.