As the GYF Assurance & Advisory (A&A) Group continues its 2026 busy season, final fieldwork is underway for our year‑end audit engagements. In this phase, auditors gather the evidence needed to support the balances, activity and disclosures presented in the financial statements – ultimately, forming the basis for the audit opinion to be issued in the coming months.
This article is part of a new series designed to explore and explain key areas of the audit process. This post focuses on expenses.
What Are Expenses?
Expenses are presented in the income statement and classified into one of three categories:
- Cost of goods sold or cost of sales/revenues – Presentation will depend upon the nature of the company’s operations; however, these are the costs that are directly related to providing the service or product that generates revenues for the company.
- Operating expenses – This category of expenses is sometimes referred to as “selling, general and administrative expenses” in the income statement. These are the costs that are incurred in operations of the organization, but do not directly relate to the manufacture and sale of goods or to the direct service being provided to customers.
- Other non-operating expenses – These are costs that do not directly relate to operations and are presented separately from income from operations. These expenses would generally related to interest expense, losses on investing activities or disposal of assets, impairment losses, foreign currency transaction losses, and other non-operating expenses.
Why Do We Audit Expenses?
A core purpose of an audit is to provide independent assurance that the financial statements are fairly presented, in all material respects. Expenses play a key role in this process because misstated expenses directly impact reported profitability and equity (and likely have a corresponding impact on the balance sheet presented).
The primary assertions typically tested for expenses include:
- Existence/Occurrence
- Cutoff
- Completeness
- Accuracy and valuation
How Do Auditors Test Expenses?
In order to test and evaluate the reasonableness of expenses, auditors typically perform the following procedures:
- Analytical testing
- Develop expectations for expenses based upon management approved budgets, comparison to prior years, operational reports, or inquiries of management
- Compare reported results to the expectations developed by the audit team
- Assess the reasonableness of any variances from the expected results
- Utilization of company or industry specific ratio analysis
- Reconciliation – certain expenses such as rent, insurance costs, and service agreements can be tested in total by agreeing expenses to contracts with third parties
- Payroll-specific procedures:
- Review a reconciliation of the year-to-date payroll report from the third-party payroll provider to the reported payroll expenses in the financial statements
- Perform detail testing of payroll records and pay rates for selected employees
- Confirmation of expenses with third parties (such as confirmation of interest expense with lenders)
- Corroboration of expense activity based upon other testwork performed in other audit areas (for example, agreeing depreciation expense to depreciation records provided during the testing of fixed assets)
- Detail testing of a sample of expense transactions or categories based upon auditor sample sizes
- Review of general journal entries prepared by management during the period under audit for reasonableness
What Information Will the Auditor Typically Request?
In order to complete the audit procedures for expenses, an auditor may request:
- Internal financial statements
- Year-to-date budget approved by management for the period under audit
- Operational reports (units produced/sold, services provided, divisional or market-specific reports)
- Vendor listing or vendor Masterfile
- Vendor contracts
- Payroll reports from third party payroll providers
- Reconciliations or details for material accounts
- General ledger detail
- Selected vendor invoices and payment support
- Report of general journal entries for the period under audit
Key Takeaways
Auditing expenses is just one component of the broader audit process, but it plays a critical role in supporting the overall audit opinion. Understanding the purpose behind these procedures (and the information the auditors may request) helps ensure a smoother, more efficient audit for all parties involved. Please reach out to GYF to learn more about the audit process or to discuss the specific needs of your organization.
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