Some Frauds and Errors That Can Occur When Auditing Expense Items

Account 635-“Financial expenses”

The costs of financial operations.

Losses on disposal of short-term investments.

Actual foreign exchange losses incurred.

Loss incurred on sale of foreign currency.

Provision for decline in securities investment value.

Land transfer and rental costs

Infrastructure is identified as consumption.

Reversal of provision for diminution in value of securities investments. At the end of the accounting period, all financial expenses and losses incurred during the period are transferred to determine business results.
Total Debt Incurrence	Total generated Yes

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e. Other costs

Other expenses are losses resulting from events or transactions separate from the normal operations of the business; they may also be expenses that were omitted from previous years.

Other costs incurred include liquidation and sale costs; fines for breach of economic contracts; costs due to accounting errors or omissions when recording in accounting books;...; other costs.

Account 811-“Other expenses”

Other expenses incurred. Unusual losses.

The remaining value of the liquidated fixed assets

sale, assignment

At the end of the accounting period, transfer all other expenses incurred during the period to account 911 - "Determining business results". business"
Total Debt Incurrence	Total generated Yes

2.1.3.2. Characteristics of cost items

Costs are closely related to items on the balance sheet, so a small deviation in one item can affect another and vice versa.

Since most of the items are related to costs, this is an item that is very susceptible to errors.

Selling expenses and administrative expenses are two expenses that account for a large proportion of a company's production and business costs, and are related to profit indicators, corporate income tax, cash expenditures, and several other indicators on the financial statements. On the other hand, selling expenses and administrative expenses include many items, so checking these two expenses is quite complicated.

For many businesses, especially manufacturing and trading businesses providing products and services, financial costs are very new and uncommon. For many businesses, financial operating costs are mainly interest expenses, while transactions related to securities investment, joint ventures and associations are rare. Therefore, when encountering the above cases and the costs related to them, the possibility of errors is very high. In addition, the calculation and evaluation of these costs are also quite complicated and new. Internal control over these expenses is often not paid attention to, leading to errors not being prevented, detected and handled promptly.

Other expenses do not arise much, due to their unusual and new nature, making them difficult to handle and manage, and easily leading to risks. These expenses often arise at the end of the accounting year. However, these transactions can arise suddenly, with changes and differences between years, making comparison and reconciliation difficult. In addition, to account for other expense transactions, it is necessary to have full documents and necessary evidence. Collecting documents can be difficult. Similar to financial expenses, internal control over other expenses is often overlooked, leading to undetected errors, affecting many indicators in the business performance report and the balance sheet.

2.1.3.3. Objectives of auditing cost items

Incurrence : Recorded cost items must actually arise in reality and belong to the unit.

Complete : All incurred expenses are fully recorded.

Accurate recording: Costs are calculated accurately and consistently between the detailed ledger and the general ledger, and costs must be recorded in the correct accounting period.

Evaluation: Expenses are properly evaluated.

Presentation and disclosure: Expenses are properly presented and fully disclosed.

2.1.4. Cost item audit process

2.1.4.1. Research and evaluation of internal control system

a. Learn about the Internal Control System

- To gain a full understanding of all the control procedures of the unit established to control the cost items that the unit applies. The auditor can apply some supporting tools such as: narrative tables, flow charts, questionnaires.

- For small businesses, auditors often prepare a report. For large businesses or units with relatively complex internal control systems, auditors should use a questionnaire on internal control combined with a flow chart to ensure that important issues are not overlooked.

b. Preliminary assessment of control risk

- Based on the initial understanding of internal control, the auditor will conduct a preliminary assessment of control risk at an appropriate level.

- The auditor can only assess the control risk for a given assertion at less than the maximum level when there is sufficient basis to conclude that the control procedures related to that assertion are effectively designed and applied consistently in practice. In this case, the auditor will design and perform control tests to demonstrate his conclusion about control risk. Conversely, if the control risk is assessed at the maximum level or cannot be reduced in practice, the auditor will not perform control tests but will immediately perform substantive tests.

c. Design and perform control tests

* For selling expenses and business management expenses

Auditors can apply audit procedures such as document inspection, observation, interview, etc. to survey internal control over sales costs and business management costs to draw conclusions about the appropriate level of audit risk, as a basis for detailed inspection of sales costs and business management costs. When surveying these two types of costs, auditors often combine with a survey of depreciation costs.

Fixed assets, survey of salary costs and salary deductions, survey of material costs, survey of money, ... in other processes.

* For financial costs

- Auditors need to survey and research to know the extent of effectiveness of the unit's control over financial costs in order to estimate the risks of this item and determine the scope of basic surveys.

- When assessing internal control, auditors need to assess the effectiveness of the units' control functions. Auditors need to conduct other procedures such as interviews, discussions, direct observations, or document research to assess the completeness, rigor, and continuous effectiveness of internal control over financial operating costs. At the same time, survey to assess the operation of internal control regulations with transactions related to financial operating costs.

* For other costs

The content, order and procedures for surveying and evaluating internal control over other expense items are basically similar to those for financial operating expenses. However, when determining the content and basis for surveying over other expense items, auditors need to pay attention to the specific characteristics of this item.

d. Reassess control risk and design substantive tests

After performing the above tests, the auditor will reassess the control risk level to conduct appropriate basic tests.

2.1.4.2. Perform basic tests

a. Analytical procedures

Analytical procedures that may be used in the audit of cost items include:

- Overall assessment of cost items by the auditor making a comparison table between the current period's and the previous period's business performance report, combined with industry average data, thereby making an overall assessment of the change in costs and the change in the proportion of costs to sales revenue and service provision. Significant differences need to be investigated and the reasons explained.

- Compare actual costs with estimated costs, costs of this period with costs of the previous period:

+ Establishing cost estimates is important for internal control. Through estimates, managers plan the expected cost levels that will occur in reality, thereby detecting actual cases with large differences from the forecast so that timely measures can be taken.

+ The budget table is also very useful for auditors in applying analytical procedures because it helps identify unusual fluctuations and find out the causes.

+ Auditors also compare current year figures with previous year figures for each expense item. Another method that can be applied is to compare monthly expenses between this period and the previous period. Auditors can also use graphs to easily detect months with unusual fluctuations.

+ In some cases, the auditor may compare with non-financial information.

- Investigate any significant or unusual differences. Any unusual differences discovered during the above analysis will be investigated by the auditor and the reasons will be explained. The investigation method is to go back to the accounting books and, if necessary, to check in detail on the relevant original documents.

b. Detailed testing

* For cost of goods sold item:

- Refer to the inventory audit section, compare the cost of goods sold with the estimated number based on the corresponding occurrences on inventory accounts and production costs collected during the year.

- Check the calculation of the warehouse price and compare the cost of goods sold (monthly, item by item) recorded between the general ledger and the report on import, export, and inventory of finished products, ensuring accuracy and consistency. Refer to the inventory audit section.

- Check the following transactions in detail: inventory adjustments based on actual inventory; inventory adjustments due to revaluation of provisions; sales expenses and management expenses directly allocated to cost of goods sold;

General expenses exceeding the norm are accounted for in the cost of goods sold; adjustments to reduce the cost of goods sold (if any).

- Check the presentation of cost of goods sold on the financial statements.

* For sales expenses and business management expenses:

- Prepare a detailed list of sales/business management expense items for each month of the year, evaluate the reasonableness of the presentation and compare the total expense with the General Ledger.

- Review expense items with unusual fluctuations during the year/period identified during the analysis process and on the General Ledger (large amounts, unusual transactions, downward adjustments, etc.), conduct checks on original documents to ensure that these expenses are real and properly classified, and evaluate the reasonableness of the recording.

- Evaluate the reasonableness of the criteria for allocating indirect costs that belong to both business management costs and sales and production costs and vice versa.

- Compare recorded expense items with other audit sections such as:

+ Selling expenses with: Salary expenses, raw material expenses, tool and equipment expenses, depreciation expenses, payable expenses, prepaid expenses,...

+ Business management costs with: Raw material costs, tool and equipment costs, depreciation costs, allocation costs, salary costs, union fees, social insurance, health insurance, unemployment allowance provisions, bad debt, reserve costs,...

- Build independent estimates for recurring, low-volatility or revenue-related expenses (rent, commissions, royalties, etc.; rentals, communication costs, etc.) and compare with recorded expenses, find out large differences (if any).

- Select the original document checking form for other sales/business management expense items: check invoices or payment requests from suppliers, attached calculation sheets, payment vouchers, bank payment documents along with other attached documents (expenditure approval by the Board of Directors, expenditure norms...).

- Compare the regulations of internal documents on spending norms with actual spending at the enterprise.

- Consider the reasonableness of related costs of a sensitive nature such as: fines, legal consulting costs, disputes, and litigation.

- Check the correctness of expenses: Compare the audit part of payable expenses and the cash part.

- Check the presentation of sales/administrative expenses on the financial statements to see if they are appropriate or not.

* For financial expense items:

- Collect a summary of financial operating expenses during the year and compare it with the General Ledger.

- For audited expense items: Refer to the audited sections performed (cash, financial investments, loans and debts, payable expenses).

- For exchange rate differences arising during the year: Select a sample of transactions to re-check the calculation method.

- For unrealized exchange rate differences: Refer to related sections (receivables, payables, loans, etc.), compare with recorded figures in the books and explain the differences, if any.

- Check samples to original documents for other financial operating expense transactions.

- Check the presentation of financial costs on the financial statements.

* For other expense items:

- Make a summary table of other expenses during the year, compare with the Ledger.

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- Check the actual occurrence of other cost transactions. KTV focuses on

check:

+ Decision on liquidation and sale of fixed assets approved by competent authority; receipt of money for sale and collection of money for liquidation and sale of fixed assets,...

+ Decisions of tax authorities, competent authorities related to tax fines, tax arrears, or other administrative fines,...

+ Financial statements, accounting books and documents of previous years regarding omissions or additional entries,...

- Then compare with the general ledger account 811 and the detailed ledger account 811 to check whether the recording ensures the full target.

- Check the calculation bases for other expenses to ensure reliability and reasonableness; check the calculation results to ensure accuracy. When deemed necessary, the auditor can recalculate for comparison or request the supplier to explain.

- Check the detailed documents of large and unusual expenses and evaluate the reasonableness of the calculation and classification to see if it is in accordance with the accounting regime?

- Check the appropriateness of other expenses with other income arising during the year (if any).

- Review and evaluate the presentation of other cost information on the financial statements for compliance with accounting regulations and consistency between the data on the financial statements and the unit's accounting data.

2.1.5. Some frauds and errors that may occur when auditing cost items

Costs are sensitive items, related to the business performance of the unit. Therefore, the occurrence of fraudulent errors is inevitable. Below are some errors and frauds that can occur during the audit of cost items:

Over-declaration or under-declaration of expenses leads to incorrect business performance: depending on the business characteristics and business situation of the client company, the client company tends to over-declaration or under-declaration of expenses. Normally, joint stock companies and listed companies tend to under-declaration of expenses to increase profits - to make their financial statements look better, while LLCs and foreign-invested companies tend to over-declaration of expenses to reduce profits with the aim of reducing corporate income tax expenses.

Recording expenses in the wrong year: Expenses incurred around the end of the fiscal year are often recorded in the wrong year. For example, expenses are in this year but the company only receives the invoice in the next year and