Auditing Establishment Expenses | Steps Involved | Vouching

What is establishment expenses?

Establishment expenses refer to the costs incurred in setting up a new business or organization, such as legal fees, office equipment, furniture, and marketing expenses. These expenses are typically incurred at the beginning of a business’s life cycle and are necessary to get the business up and running.

Auditing establishment expenses involves verifying that these costs are reasonable, accurately recorded, and comply with applicable accounting standards and tax laws. The auditor must review supporting documentation, evaluate internal controls, consider related-party transactions, and assess the accuracy of estimates and assumptions used in recording establishment expenses. Any significant findings or issues must be documented and communicated to the client along with recommendations for corrective action if necessary.

Steps involved in auditing establishment expenses

To audit establishment expenses, the auditor typically performs the following steps:

1. Obtain an understanding of the business or organization and its operations.

2. Obtain a list of establishment expenses from the client and review it for completeness and accuracy.

3. Test a sample of establishment expenses to verify that they were incurred for a valid business purpose and that the amount is reasonable.

4. Review supporting documentation, such as invoices and receipts, to ensure that the expenses were properly authorized, recorded, and paid.

5. Verify that the expenses were classified correctly in the financial statements and that they comply with accounting standards and tax laws.

6. Identify any unusual or significant expenses and discuss them with the client to understand the nature of the expenses and ensure that they are properly recorded.

7. Document the audit procedures performed and any significant findings or issues. The auditor should also consider the client’s internal controls over establishment expenses, including policies and procedures for approving and recording expenses, and assess the effectiveness of these controls in preventing and detecting errors and fraud.

8. Establish clear communication with the client to understand the nature of the expenses and obtain all necessary documentation for the audit.

9. Consider any related-party transactions and evaluate their appropriateness and compliance with accounting standards and tax laws.

10. Assess the accuracy of any estimates used in recording establishment expenses, such as depreciation of fixed assets.

11. Evaluate the reasonableness of any assumptions used in recording establishment expenses, such as the useful life of fixed assets or the amortization period of intangible assets.

12. Consider the impact of any changes in accounting policies or standards on the recording of establishment expenses.

13. Verify that any advances or prepayments for establishment expenses are properly recorded and accounted for.

14. Consider the impact of any foreign currency transactions or translations on the recording of establishment expenses.

15. Evaluate the completeness and accuracy of any accruals or provisions for establishment expenses, such as warranties or contingencies.

16. Assess the appropriateness of any capitalization of establishment expenses and ensure compliance with accounting standards and tax laws.

17. Document any significant findings or issues and communicate them to the client in a timely and clear manner, along with recommendations for corrective action, if necessary.

Vouching in Establishment Expenses Auditing

Vouching is an important procedure in auditing establishment expenses. It involves selecting a sample of establishment expense transactions and verifying that they are supported by appropriate documentation such as invoices, receipts, purchase orders, and contracts. The auditor should also verify that the expenses were properly authorized and recorded.

For example, when auditing legal fees incurred during the establishment of a new business, the auditor may select a sample of legal expense transactions and verify that they were incurred for valid business purposes. The auditor may also review the legal services agreement, time records, and billing invoices to ensure that the fees were properly authorized, recorded, and paid.

Similarly, when auditing office equipment expenses, the auditor may select a sample of transactions and verify that the equipment was necessary for the business and was acquired at a reasonable cost. The auditor may also review purchase orders, delivery receipts, and payment invoices to ensure that the equipment was properly authorized, recorded, and paid.

Vouching provides evidence that establishment expenses were actually incurred, properly authorized, and accurately recorded. It helps the auditor to detect any errors or irregularities in the recording of establishment expenses and to ensure compliance with applicable accounting standards and tax laws.

Vouchers to be vouched in auditing establishment expenses

In auditing establishment expenses, the auditor should vouch for the following types of vouchers:

1. Invoices

These are documents issued by a supplier of goods or services to the business, indicating the amount due for those goods or services. The auditor should verify that the invoices are accurate, complete, and properly recorded in the financial statements.

2. Receipts

These are documents issued by the business to the supplier of goods or services, indicating that payment has been made. The auditor should verify that the receipts match the invoices and that the payments were properly authorized and recorded.

3. Purchase orders

These are documents issued by the business to the supplier, indicating the items or services to be purchased, the quantity, and the price. The auditor should verify that the purchase orders were properly authorized and that the goods or services were received and properly recorded.

4. Contracts

These are legal agreements between the business and a supplier or vendor. The auditor should verify that the contracts are properly authorized, that the terms and conditions are reasonable and comply with applicable laws and regulations, and that any payments made under the contract are properly recorded.

5. Payment vouchers

These are documents that authorize payment for goods or services. The auditor should verify that the payment vouchers are properly authorized and that the payments were properly recorded.

By vouching these vouchers, the auditor can ensure that establishment expenses are properly supported by appropriate documentation and that they are accurately recorded in the financial statements. This helps to ensure compliance with applicable accounting standards and tax laws and provides assurance to stakeholders that the business’s establishment expenses have been properly audited.