Auditing Employee Benefits – Risks, Assertions, And Procedures

Overview

During the course of the audit, auditors need to ensure that they are able to cover proper ground pertaining to all the elements that are included in the financial statements. This might include various different expenses that are disclosed by the organizations in their financial statements. From the perspective of the auditor, it tends to be an uphill task to ensure that all the relevant expenses are properly audited to ensure that financial statements are a depiction of the actual position of the company.

When it comes to expenses, payroll expenses, as well as payroll-related expenses, are supposed to be properly audited by companies in order to ensure that these have been properly stated by the organization. Employee benefit-related expenses, for one, tend to be one of the most primitive expenses that need to be factored in by the auditors.

Employee Benefits can be defined as those expenses that are disbursed to the employees of the company over and above their salaries. This is mainly offered to employees as motivation, so that they are appreciated for their efforts by the company, and they get their due right of appreciation. However, employee benefits can be both, cash-based, and non-cash-based. Regardless of the category of employee benefits followed by the company, it is important to audit them in a proper manner.

Risks Associated with Auditing Employee Benefits

The overall risks associated with auditing employee benefits are considerably high. This is primarily because of the fact that the inherent risk is high, and there is a greater chance for fraud and embezzlement, similar to the risk exposure of any other payroll expense. However, the risks associated with employee benefits can be broadly categorized into two parts that are given below:

  • Detection Risk: Detection Risk can be defined as the risk that the amount for employee benefits was materially misstated, and yet it was unable to be pointed out and subsequently rectified by the auditors. The detection risk when it comes to employee benefits is mediocre to high.
  • Risk of Material Misstatement: The risk of material misstatement is a combination of two risks that are faced by companies. They are named as inherent risk and control risk. The inherent risk pertaining to employee benefits is considerably high. This is because it might be difficult for the auditor to get a background explanation of the employee benefits, and the desired packages that have been chosen by the organization to be distributed amongst the employees. In the same manner, control risk is also higher in employee benefits because more often than not, a weak internal control might be the reason for a faltered policy, and there might be no way to discover that, per se.
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Therefore, the overall risk associated with auditing employee benefits is considerably high. However, this risk can be marginally maintained and controlled via effective managerial policies. These policies mainly lie in the realms of ensuring that there are proper audit procedures designed that can factor in all the audit assertions, in order to gather the much needed substantial evidence based on which reasonable assurance can be extended on a particular matter, which in this case is Employee Benefits.

Audit Assertions involved in Auditing Employee Benefits

The audit assertions that are involved when auditing employee benefits are enlisted below:

Subsequent explanation of these assertions are given below:

  • Existence: This particular assertion states the fact that the employee benefits that have been mentioned on the balance sheet actually exist. These must be tangible benefits that are actually extended to the employees in the form of whatever coverage the employee benefit plan entails.
  • Cut-Off: As per the assertion of Cut-Off, only those employee benefits should be mentioned on the financial statements that are relevant to the current year. Any benefits that have been disbursed in the previous years should not be included in the current year unless there is an adjusting entry that needs to be recorded.
  • Accuracy: Employee benefits should be recorded accurately in the financial statement, with no errors in calculation.
  • Classification: Employee benefits and salaries are classified as two separate things. They should be kept separate in order to ensure that the users of the financial statements can know the amount that has been extended in the form of employee benefits, as well as the amount that has been disbursed in the form of salaries.
  • Presentation and Disclosure: Proper disclosure should be made in the financial statements pertaining to the employee benefits, as well as salaries that are made. They should be disclosed separately in the financial statements.
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Audit Procedures used when auditing Employee Benefits

Audit procedures in order to test the audit assertions are based on two elements: Analytical Procedures as well as Substantive Audit Testing.

Subsequent explanation for both is given below:

Analytical Procedures

Analytical Procedures are conducted in the initial parts of the audit testing in order to determine the need in which audit testing has to be subsequently carried out. Therefore, it involves sampling from a population that helps the auditor to assess the level of rigor that needs to be inculcated in the substantive audit testing. When designing analytical procedures, the following needs to be done:

Subsequent explanation for these steps in analytical procedures is given below:

  • Analytical Review: Employee benefits tend to be normal for almost all businesses. In this initial step, the auditors are supposed to assess the employee benefits, in terms of the monetary value that is extended to the employees.   
  • Inquiry: Other than the information that is provided by the organization, the auditors are also supposed to review the employees at random, in order to ensure that they have, in actuality, received those benefits as denoted by the company on the financial statements.
  • Observation: Industry trends tend to be really crucial in assessing if the organization is on the right track pertaining to their offering to their employees. In the case of a high material discrepancy, they are required to further inspect the cause.  
  • Inspection: This inspection is mainly carried out by checking for contracts, and comparing them with other options that are available. The main premise here is to check if there is any fraud or any kickbacks involved.
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However, the efficacy, as well as the results derived from these steps do not mitigate the importance of substantive audit testing.

Substantive Audit Testing

Substantive Audit Testing is supposed to be carried out in order for auditors to test the audit assertions so that they can check for the overall accuracy of the presented disclosures. These audit assertions, as well as their substantive tests is given below:

Audit AssertionSubstantive Testing
ExistenceIn order to check for existence, it is important to check contracts, as well as disbursement proofs. This can be done by verifying payment slips (in case of a third party vendor).
Cut-OffIt is important to ensure that only current year employee benefits are provided. This needs to be reconfirmed with the pay-slips of employees, as well as the checking accounts of the organization being audited.
AccuracyAccuracy needs to be tested by ensuring that there have been no mathematical errors or totaling errors. Therefore, it needs to be recalculated by auditors, in order to mitigate any chance of material misstatement.
ClassificationThe classification assertion is tested along with the assertion of Presentation and Disclosure by verifying that employee benefits are properly categorized in a proper manner, without any overlap between salaries and employee benefits. Subsequent disclosures about third-party vendors, if any, should also be made in the financial statements.
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