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Auditing and Ethics · Audit of Items of Financial Statements

Audit of Expenses: Employee Benefits and Other Expenses

Updated 4 October 2026 · Fact-checked

Audit of expenses means collecting evidence that expenses recorded are real, authorised, correctly measured, in the right period, properly classified and complete. You vouch entries to documents, test controls, apply analytical procedures, and check cut-off, accruals and disclosure. Wages and salaries need extra checks for ghost employees.

Understand Audit of Expenses: Employee Benefits and Other Expenses

An expense is a cost used up or incurred in earning revenue during the year. Auditing expenses is mainly about two risks. Expenses may be overstated (fictitious or personal items, wrong period) or understated (unrecorded liabilities, missing accruals). Management often wants lower profit for tax reasons or higher profit for lenders, so you test both directions.

Vouching means examining the documents behind an entry: invoice, order, goods received note, payment proof, approval. It mainly tests occurrence, accuracy and authorisation. Verification is broader: confirming that the item is correctly recorded, measured, classified and disclosed.

For purchases, you check that goods were ordered, received, invoiced at the agreed price and recorded in the right period. Key documents are the purchase order, goods received note, supplier invoice and supplier statement. Cut-off is important: goods received before year-end must be in purchases and payables, and those received after must not be.

For wages and salaries, the main risks are ghost workers, wrong rates, unauthorised overtime and unrecorded deductions. You test the payroll against attendance records, appointment letters, approved pay rates and HR records. You also check statutory deductions such as TDS, provident fund and ESI, and whether they were paid on time.

Employee benefits include short-term benefits (bonus, leave encashment payable within twelve months), post-employment benefits (gratuity, pension, provident fund) and other long-term benefits. Accounting follows AS 15 (Employee Benefits). Defined benefit obligations need an actuarial valuation, so the auditor relies on the actuary's work after evaluating competence and the reasonableness of assumptions. For other expenses such as rent, repairs, insurance, power, travel and professional fees, you vouch to documents, check for capital items wrongly expensed, check prepaid and outstanding amounts, and review related-party and personal items.

Key rules to remember

Purchases (derived figure)
Purchases = Cost of goods sold + Closing stock − Opening stock
Use for an analytical check of recorded purchases. Estimate cost of goods sold from sales and the expected gross profit margin (Cost of goods sold = Sales − expected gross profit), then compare the derived purchases with the recorded figure.
Expense for the year (accrual check)
Expense = Cash paid + Outstanding at end − Outstanding at start + Prepaid at start − Prepaid at end
Use to test whether rent, insurance and similar items are recorded on an accrual basis.
Net pay recomputation
Net pay = Gross pay − Statutory deductions − Other authorised deductions
Recompute this for a sample of employees and agree totals to payroll control accounts.
Vouching approach
Entry → Voucher → Authorisation → Payment → Correct period and head
Trace each sampled entry through all five points to cover the main assertions.

How to solve Audit of Expenses: Employee Benefits and Other Expenses questions

Use this method for any question on auditing an expense head.

  1. 1Identify the expense and its main risks: overstatement, understatement, wrong period, wrong classification or fraud.
  2. 2Link the risks to assertions such as occurrence, completeness, accuracy, cut-off and classification.
  3. 3Understand and test internal controls: approval, segregation of duties, authorisation limits, and payroll controls.
  4. 4List the vouching documents for that expense, such as order, GRN, invoice, payment proof, attendance record or appointment letter.
  5. 5Add substantive tests: analytical procedures, cut-off tests, recomputation, and checks of outstanding and prepaid amounts.
  6. 6Check statutory compliance and disclosure, such as TDS, PF, ESI, AS 15 and Schedule III presentation.
  7. 7Conclude with the likely misstatements and what you would do if you find them, such as extending samples or reporting to management.

Quickest way: Risk, documents, tests, conclusion

When to use it: Use this when you have limited time in the written paper or need to eliminate MCQ options.

  1. For MCQs, pick the option that gives the most reliable evidence. External documents beat internal ones, and physical or independent evidence beats oral statements.
  2. For MCQs on wages, ghost employees point to checking against HR records and attendance, and to surprise payment of wages.
  3. For MCQs on the direction of testing, remember that for completeness you trace from the source to the books, and for occurrence you trace from the books to the document.
  4. For written answers, write short headed points: objective, documents, procedures, cut-off, compliance and disclosure. Each valid procedure earns a step mark.
  5. Tie each procedure to the facts in the question, such as a cash payroll or a seasonal workforce, instead of giving a general list.

Common mistakes in Audit of Expenses: Employee Benefits and Other Expenses

  • Treating vouching and verification as the same thing.

    Both involve checking records, so they look alike.

    Fix: Say that vouching examines documents behind transactions, and verification confirms existence, valuation and presentation of items. Use the right term in the answer.

  • Ignoring cut-off when auditing purchases and expenses.

    Students focus on documents and forget the period.

    Fix: Always check goods received notes and invoices near year-end, and review payments made after year-end for unrecorded liabilities.

  • Missing ghost employees in payroll answers.

    Students list only calculation checks.

    Fix: Add checks of payroll against appointment records, attendance and bank credit details, and observe or test the payment of wages.

  • Treating all employee benefits as paid in cash and expensed on payment.

    Students forget accrual accounting for benefits.

    Fix: State that benefits like gratuity and leave encashment need provision under AS 15, and that actuarial valuation is used for defined benefit plans.

  • Not checking whether capital items were charged to expense.

    The expense head label is accepted without question.

    Fix: Review repairs, legal fees and similar heads for items that create an asset or enduring benefit and should be capitalised.

  • Giving generic answers with no link to the case facts.

    Students memorise lists.

    Fix: Pick the procedures that match the scenario and explain why each one answers the risk.

Worked examples

Example 1

While auditing wages of a manufacturing company that pays workers weekly in cash, state the audit procedures you would apply to detect ghost workers and wrong payments.

Show the solution
  1. Risk: fictitious employees, inflated hours, wrong rates and diversion of cash.
  2. Review internal controls: who prepares, checks and approves the payroll, and who handles the cash. Check that the duties are segregated.
  3. Compare the payroll with the approved employee list, appointment letters and approved rates. Check that every name has a valid record.
  4. Agree hours and overtime to attendance records or time cards, and check that overtime was approved.
  5. Recompute gross pay, deductions and net pay for a sample, and agree totals to the payroll summary and the ledger.
  6. Attend a wage payment on a surprise basis, if possible, and check that workers sign for their pay and that unclaimed wages are properly handled.
  7. Check that TDS, PF and ESI were deducted and deposited on time, and review post-year-end payments for unrecorded amounts.

Answer: The auditor tests controls, matches the payroll to HR and attendance records, recomputes pay, observes payment, and checks statutory compliance and cut-off. Together these detect ghost workers and wrong payments.

Example 2

During audit of purchases, you find that goods costing ₹4,80,000 were received on 2 April, but the supplier invoice is dated 28 March and the purchase was recorded in the current year ending 31 March. What is the issue and what is your conclusion?

Show the solution
  1. Identify the assertion: cut-off. Purchases and payables should include only goods received by year-end, where the risk and control have passed.
  2. Check the goods received note: the receipt date is 2 April, after the year-end.
  3. The invoice date does not decide the period. Receipt, with transfer of control, does. Check the shipping terms in case ownership passed earlier.
  4. If ownership passed only on receipt on 2 April, purchases and payables are overstated by ₹4,80,000. The effect on profit depends on how closing stock was determined, as the next two steps explain.
  5. If closing stock was taken from the physical count as at 31 March, the goods are not in it, because they were not on hand on that date and arrived only on 2 April. The purchase is recorded but the goods are not in closing stock, so cost of goods sold is overstated and profit is understated by ₹4,80,000. Removing the purchase and the payable corrects this, and profit rises by ₹4,80,000.
  6. If closing stock was taken from book records that already include these goods, the purchase error and the closing stock error offset, so profit is unaffected. Closing stock and payables are then both overstated by ₹4,80,000, and the stock records do not agree with the physical stock.
  7. Ask management to correct it. If the entry is not corrected, evaluate the misstatement against materiality and consider the effect on the audit opinion.

Answer: The purchase of ₹4,80,000 is a cut-off error, unless the terms show ownership passed by 31 March. It should be removed from the current year, which reduces purchases and payables by ₹4,80,000. If closing stock was taken from the physical count as at 31 March, the goods are not in it because they were not on hand on that date, so cost of goods sold is overstated and profit is understated by ₹4,80,000 until the purchase is removed. If closing stock was taken from book records that include the goods, profit is unaffected, but closing stock and payables are overstated by ₹4,80,000. If it remains uncorrected, the auditor evaluates it against materiality.

Exam tips

  • Link procedures to the assertion they test, such as occurrence for vouching and completeness for unrecorded liabilities.
  • For payroll questions, always include ghost employees, authorisation, deductions and the payment of wages.
  • In employee benefit questions, mention AS 15, accruals and the use of an actuary's work.
  • Use short headed points in the written paper, because each separate procedure can earn a mark.
  • Do not give a section number or a figure unless you are certain of it.

Practice questions from Audit of Items of Financial Statements

Audit of Expenses: Employee Benefits and Other Expenses in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Audit of Expenses: Employee Benefits and Other Expenses: frequently asked questions

What is the difference between vouching and verification?

Vouching is checking the documents that support recorded transactions, mainly to confirm occurrence and authorisation. Verification is wider and confirms that an item exists, is correctly valued, and is properly presented. Vouching usually applies to income and expense entries, and verification to assets and liabilities.

How do I vouch wages and salaries?

Agree the payroll to appointment letters, approved pay rates, attendance records and bank or cash payment proof. Recompute gross pay, deductions and net pay for a sample. Also check the statutory deposits and test for ghost employees.

Which accounting standard applies to employee benefit expenses?

AS 15 (Employee Benefits) applies at CA Intermediate level. It covers short-term, post-employment and other long-term benefits. The auditor checks that the provision and disclosure follow it.

Why is cut-off important in the audit of purchases and expenses?

Because an expense or purchase recorded in the wrong period changes profit and liabilities. The auditor checks documents around year-end, and payments after year-end, to find unrecorded or misdated items.