Audit Procedures for General and Administrative Expenses: Risks, Assertions, and Procedures

Auditing of general and administrative expenses (G&A) is a critical aspect of financial statement audits. G&A expenses are typically one of the largest line items in an organization’s income statement and, as such, can have a significant impact on the overall financial performance of the organization.

The purpose of auditing G&A expenses is to provide assurance that these expenses are properly accounted for, properly disclosed, and correctly presented in the financial statements.

Accounting Treatment:

General and administrative expenses are typically accounted for as operating expenses in accordance with generally accepted accounting principles (GAAP).

These expenses include the costs associated with running the day-to-day operations of an organization, such as salaries and wages, office rent, utilities, and office supplies.

G&A expenses should be recorded in the period in which they are incurred and should be reported net of any reimbursement from third parties.

Audit Risks:

1. Misclassification of expenses: G&A expenses may be misclassified as capital expenditures, leading to incorrect presentation in the financial statements.
2. Improper accrual of expenses: G&A expenses may be recorded before they are incurred, leading to incorrect presentation of expenses in the financial statements.
3. Failure to record expenses in the correct period: G&A expenses may be recorded in the wrong period, leading to incorrect presentation of expenses in the financial statements.
4. Inadequate support for expenses: G&A expenses may be recorded without adequate support, leading to incorrect presentation of expenses in the financial statements.
5. Overstatement of expenses: G&A expenses may be overstated, leading to incorrect presentation of expenses in the financial statements.
6. Understatement of expenses: G&A expenses may be understated, leading to incorrect presentation of expenses in the financial statements.
7. Lack of disclosure: G&A expenses may not be properly disclosed in the financial statements, leading to incorrect presentation of expenses in the financial statements.
8. Improper allocation of expenses: G&A expenses may be improperly allocated among different cost centers, leading to incorrect presentation of expenses in the financial statements.
9. Lack of segregation of duties: The segregation of duties in the accounting for G&A expenses may be inadequate, leading to incorrect presentation of expenses in the financial statements.
10. Unauthorized disbursements: G&A expenses may be disbursed without proper authorization, leading to incorrect presentation of expenses in the financial statements.

Audit Assertions:

1. Occurrence: The G&A expenses recorded in the financial statements have actually been incurred.
2. Completeness: All G&A expenses incurred during the period have been recorded in the financial statements.
3. Accuracy: The amounts of G&A expenses recorded in the financial statements are accurate and correctly calculated.
4. Classification: The G&A expenses recorded in the financial statements are properly classified as operating expenses.
5. Cut-off: The G&A expenses recorded in the financial statements are recorded in the correct period.
6. Valuation: The amounts of G&A expenses recorded in the financial statements are recorded at the correct amounts.
7. Disclosure: The G&A expenses recorded in the financial statements are properly disclosed in accordance with GAAP.
8. Existence: The G&A expenses recorded in the financial statements actually exist and are supported by adequate documentation.

9. Rights and obligations: The organization has the right to receive the benefits associated with the G&A expenses recorded in the financial statements and has the obligation to pay for these expenses.
10. Presentation and disclosure: The G&A expenses recorded in the financial statements are properly presented and disclosed in accordance with GAAP.

Walkthrough Testing:

Walkthrough testing is a substantive audit procedure used to test the accuracy and completeness of G&A expenses recorded in the financial statements.

The purpose of walkthrough testing is to gain an understanding of the flow of transactions from the point of origin to their inclusion in the financial statements.

The auditor will perform the following steps in walkthrough testing:

1. Obtain an understanding of the business processes that result in the recording of G&A expenses.
2. Obtain an understanding of the controls in place to ensure that G&A expenses are recorded accurately and completely.
3. Trace a sample of G&A expenses from the source documents to their inclusion in the financial statements.
4. Test the accuracy of the calculation of G&A expenses.
5. Test the completeness of the recording of G&A expenses in the financial statements.

Test of Control:

Test of control is a type of substantive audit procedure used to test the effectiveness of the internal controls in place over the recording of G&A expenses.

The purpose of test of control is to determine whether the internal controls in place are effective in ensuring that G&A expenses are recorded accurately and completely.

The auditor will perform the following steps in test of control:

1. Obtain an understanding of the internal controls in place over the recording of G&A expenses.
2. Perform a walkthrough of the internal controls in place to assess their effectiveness.
3. Select a sample of G&A expenses and test the controls in place over the recording of these expenses.
4. Evaluate the results of the test of control to determine the effectiveness of the internal controls in place over the recording of G&A expenses.

Substantive Audit Procedures:

Substantive Audit Procedures are the set of audit tests performed by auditors to gather sufficient and appropriate evidence to support the audit opinion on an entity’s financial statements.

The purpose of substantive audit procedures is to provide the auditor with a reasonable basis for expressing an opinion on the financial statements. The substantive audit procedures for General and Administrative Expenses are as follows:

1. Analytical Review: Auditors analyze the trend of General and Administrative Expenses and compare the results with the prior year, industry averages, and budget expectations. This helps to identify any unusual or unexpected expenses that require further investigation.
2. Inquiry and Communication: Auditors perform an inquiry of the entity’s management and relevant personnel to gain an understanding of the nature and purpose of the General and Administrative Expenses. This may include reviewing the entity’s policies and procedures regarding the recording and classification of expenses.
3. Documentation Review: Auditors review supporting documentation for General and Administrative Expenses such as invoices, contracts, and receipts to ensure that expenses have been properly recorded and classified.
4. Tests of Details of Transactions: Auditors perform tests of details of transactions to verify that the expenses have been recorded accurately and in compliance with the entity’s policies and procedures. This may include testing a sample of expense transactions to ensure that the amounts recorded are accurate and supported by proper documentation.
5. Reperform: Auditors may reperform the entity’s calculations and assessments related to General and Administrative Expenses to ensure that the expenses have been recorded accurately and are supported by proper documentation.
6. Re-evaluation of Estimates: Auditors may re-evaluate the entity’s estimates related to General and Administrative Expenses, such as estimates of reserves for employee benefits or other accruals, to determine if the estimates are reasonable and supported by appropriate evidence.
7. Review of Subsidiary Records: Auditors may review the records of any subsidiary or related party that has incurred General and Administrative Expenses to ensure that these expenses have been recorded accurately and in compliance with the entity’s policies and procedures.
8. Observation and Inspection: Auditors may observe physical inventory or perform an inspection of the entity’s premises to gain evidence regarding the nature and accuracy of General and Administrative Expenses.
9. Data Analytics: Auditors may use data analytics to identify potential areas of risk and to perform more effective substantive procedures. For example, data analytics may be used to identify unusual patterns of expenses or to perform risk assessments related to General and Administrative Expenses.
10. Subsequent Events: Auditors consider subsequent events that occurred after the balance sheet date that may impact the accuracy and completeness of the General and Administrative Expenses reported in the financial statements.