How to Audit Expenses: A Step-by-Step Process

Expense auditing involves a systematic review of financial transactions to verify their accuracy, legitimacy, and adherence to established guidelines. This process ensures recorded expenditures align with internal company policies and external regulatory requirements. By examining expenses, organizations maintain financial integrity and identify potential errors or non-compliance.

Beyond verification, auditing expenses aims to safeguard financial health. This examination helps detect and prevent issues such as inaccurate reporting, unauthorized spending, or fraudulent activities. It provides a clear picture of how funds are utilized and fosters accountability.

Establishing the Scope and Gathering Information

Before an expense audit, define its scope by determining what expenses will be examined. This decision can be influenced by factors like business size, specific risk areas, or particular concerns. For instance, an audit might focus on all expenses within a fiscal quarter, or be limited to certain types of expenditures, such as travel and entertainment costs.

Once the scope is established, identify and collect all necessary documentation. Essential documents include original receipts, invoices from vendors, and detailed expense reports. Further documentation includes bank and credit card statements, which provide external verification. General ledger entries offer a comprehensive record, and company expense policies outline rules and limits. Records of approval, demonstrating authorized expenses, are also collected.

The process of gathering this information varies by system. Many businesses access data from accounting software or enterprise resource planning (ERP) systems. Others may request physical documents from departments or employees, then organize them for review. Decisions are also made regarding the volume of expenses to be audited. Depending on objectives and resources, one might audit every single expense or utilize a sampling method. Organizing the collected information logically, perhaps by date, category, or individual, streamlines the review process.

Conducting the Expense Review

With all necessary documentation gathered and organized, the review of expenses begins, following a systematic approach to ensure thoroughness. This involves examining each transaction against criteria to confirm its validity and compliance. Verification checks that each expense is legitimate and directly related to business operations. This often requires comparing the expense description with its supporting documentation, such as a receipt for office supplies. The Internal Revenue Service (IRS) defines deductible business expenses as “ordinary and necessary” for the trade or business.

Following verification, an authorization check confirms expenses were properly approved according to company policy. This involves reviewing approval records to ensure the individual authorizing the expense had the appropriate authority level. Many organizations establish a clear hierarchy for expense approvals, and deviations can indicate a control weakness. Documentation matching compares receipts and invoices directly with expense reports or general ledger entries. This comparison ensures accuracy in the recorded amount, date, and vendor information, and confirms documentation completeness. Any discrepancies, such as an expense report claiming a different amount than the corresponding receipt, require further investigation.

Categorization review ensures expenses are classified correctly within the accounting system. Proper categorization is important for accurate financial reporting and tax purposes, as different expense types may be treated differently under tax laws. For example, travel expenses are deductible, while certain meal expenses are only partially deductible, requiring careful separation. Identifying duplicate expenses prevents multiple reimbursements for a single transaction. This can involve comparing expense dates, amounts, and vendors across different reports or accounting periods. Advanced accounting software often includes features to flag potential duplicates, but manual review remains important for detecting more subtle instances.

Finally, compliance with company policies and relevant regulations is assessed for each expense. This includes confirming adherence to spending limits, preferred vendors, or specific guidelines for certain types of expenses, such as gifts or entertainment. For instance, the IRS requires detailed substantiation for certain expenses, including the amount, time, place, and business purpose, and for entertainment and gift expenses, the business relationship of the person involved.

Analyzing Findings and Documenting Results

After the comprehensive expense review, analyze the findings and thoroughly document the results. This stage focuses on understanding what was discovered and preparing to communicate insights. The objective is to identify and categorize issues, quantify their impact, and create a clear record of the audit’s conclusions. Identifying discrepancies involves recognizing various types of issues uncovered during the review. These can range from minor administrative errors, such as missing documentation, to more significant concerns like incorrect amounts or calculations on expense reports. Common issues include unapproved expenses, non-adherence to company policies, potential duplicate payments, or misclassified expenses.

Once identified, findings are quantified and summarized to provide a clear overview of their financial impact. This involves tabulating the number and type of issues discovered, such as total unauthorized expenses or the aggregate value of misclassified items. Categorizing these issues helps reveal patterns or recurring problems, indicating areas needing improved controls or clearer policies. Documenting the audit trail ensures a complete and defensible record of the audit’s work. This includes maintaining detailed audit checklists, working papers showing calculations and rationale, and evidence of specific discrepancies like problematic receipts.

The final output is an audit report or a summary of findings, which consolidates all information. An audit report includes an executive summary highlighting significant findings and their implications. It also details the scope and methodology used for the audit. The main body outlines key findings, such as total unapproved expenses or missing receipts. The report also includes recommendations for improvement, offering actionable steps to address identified issues. These might suggest tightening approval processes, implementing better record-keeping practices, or revising existing expense policies to prevent similar problems in the future.