How to Audit Business Expenses: A Step-by-Step Guide

Businesses incur several expenses daily. From inescapable expenses for manufacturing, marketing, inventory, and packaging, to seemingly frivolous yet equally important costs such as travel, fuel, and entertainment, all expenses are incurred by you or your employees with the sole intent of boosting the business. But are they really? Sometimes, fraudsters claim these business expenses to fund their personal expenses. Of course, some are legitimate oversights or errors made unintentionally by employees as well. While they might seem inconsequential at first, turning a blind eye to them for years on end could accumulate into heavy losses and lost opportunities for your business. Repeated and serious mistakes could also get you into trouble with the Canada Revenue Agency (CRA).

A business expense audit can save your company from such losses. Let’s find out how.

What Is a Business Expense Audit?

A Business Expense Audit is basically a detailed review of a business’s expenses and the policies related to such expenses. The objective of the audit is to verify the truth and validity of expenses made and claimed by employees, vendors, partners, and others associated with the business, to ascertain that no fraudulent activity is at play.

Why Do You Need to Audit Business Expenses?

Not all employees issue genuine receipts for expenses they actually incurred on behalf of the business. They may seek reimbursement for personal expenses by portraying them as business expenses. By slightly inflating bills or even handing fake bills to the accountant, some employees trick the company into paying for their personal expenses.

Neglecting such erroneous reimbursement claims makes the wrongdoers complacent, encouraging them to continue with their fraud. Over time, the size of these scams could escalate, creating financial troubles for you. Moreover, in the case of a CRA audit, you could be investigated for non-compliance with tax and GST laws. Instead, you can save yourself from all these hassles by conducting a thorough business expense audit at regular intervals.

How to Audit Business Expenses

A business expense audit does not mean digging into every expense. It means identifying any expenses or claims that may appear suspicious or fail to comply with your internal expense policy and guidelines. There are two main things you need to be clear about:

1. The purpose of the audit: Ask yourself why the audit is being conducted – is it to identify where you are spending more and cut down on expenses? Is it to enhance compliance? Or, is it to address a potential fraud threat? Depending on the purpose, you can decide how urgently you need the audit and how often.
2. What should be audited: These days, using automated AI tools to sieve through or monitor low-risk, low-value transactions makes auditing easier. However, high-risk, high-value transactions, or flagged transactions of particular interest need special attention and human intervention. The transactions will determine which tools will be required for the audit.

With the answers to these two questions clear in your mind, you can then appoint an external auditor to conduct the business expense audit.

Steps in Auditing Business Expense

To prepare for the audit, gather all relevant documentation, such as financial statements, ledgers, bank statements, expense reports, bills, invoices, and receipts. Also, study the company’s internal expense policy, approval workflows, and relevant laws and regulations to determine whether the audited transactions comply with the rules.

Once you are ready with your pre-prep, it’s now time to get cracking on the actual job.

Verify Documentation for Fake or Inflated Claims

One of the most common forms of fraud is inflated or fake reimbursement claims for expenses that were never incurred. Such fraud can be detected by verifying the validity of supporting documents, such as bills, receipts, vouchers, and invoices. In these documents, check names, signatures, and GSTIN numbers. Then check whether these expenses have been approved by the appropriate authorized personnel, per the company’s policy. Cross-check the purchase order with invoices, the corresponding ledger entries, bank account statements, and any other financial statements. Only if all these things are in place and verifiable can the transaction be considered genuine.

Check Business Expenses Comply with Tax and Regulatory Laws

Apart from compliance with the company’s internal expense policy, all expense claims should also be compliant with the Income Tax Act, GST Compliance, Companies Act, and any other legal requirements. It is the auditor’s responsibility to also verify that expenses are categorized in accordance with tax laws, with the necessary GST, TDS/TCS deductions, and deposits duly paid.

Ensure Expenses Comply with Internal Policies

A weak and vague internal expense policy is often the biggest cause of business expense fraud. If, while reviewing expenses, the auditor identifies similar errors across multiple transactions over a long period, it indicates loopholes in the internal policy that employees are exploiting.

In such cases, the auditor’s role is not only to check the expense for policy compliance, but also to guide the business owner on improving the expense policy. The internal policy must be easy to understand and should cover –

• What type of expenses can be claimed?
• The correct hierarchy for approval, processing, and recording of claims. Ideally, each of these tasks should be assigned to different people as an added layer of security, with high-value transactions needing approval from senior authorities.
• Maximum spending limits for travel, dinner, entertainment, and other business expenses.
• The formal claim procedure and the list of qualifying supporting documents for an expense. For automated processes, define which system or software will be used.
• Stipulated submission window for claims.

Analyze Expenses to Detect Anomalies in a Pattern

A growing business processes hundreds of transactions per week, making it humanly impossible to check each transaction for potential expense claim errors. When transaction volumes are high, the auditor uses analytical tools to identify anomalies in patterns, such as sudden spikes in expense amounts, to shortlist transactions. Comparing year-on-year expenses or department spending trends can help detect deviations and anomalies and identify cost-cutting opportunities. Also, comparing these observations and figures with industry benchmarks can help you understand how your business is faring and whether further improvements are required.

Check Transactions for Fraud

Fraudulent claims are very common among businesses. There are serious, well-planned claims made with the intent to commit fraud. For instance, duplicate payments (where the same invoice is used multiple times to make repeated claims), ghost vendors (invoices made in the name of vendors that do not exist), and misclassified personal expenses (wrongly claiming reimbursement for personal expenses).

A proper audit of such transactions can not only expose existing fraud but also deter potential fraudsters from committing such scams by increasing the risk of detection.

However, you don’t need to wait for fraud to happen to conduct an expense audit. A risk assessment to check whether your expense policy is robust and to fortify vulnerable spots or loopholes in it is a much better strategy than tracing fraud after it has occurred.

You can sample a single low-value transaction and a single high-value transaction. For instance, you can put an erroneous entertainment expense for reimbursement and see if your system catches the fraud. While regular expense audits and policy reviews are certainly helpful, what can really make a huge difference is training your employees to respect and follow the company’s norms for business expense claims.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with the Business Expense Audit

Talk to a professional accountant to understand how you can improve your internal policies and business expense management system. At Edelkoort Smethurst CPAs LLP, our accountants can provide services such as audit, policy framing, and setting up a business expenses reporting and monitoring system. To learn more about how Edelkoort Smethurst CPAs LLP in North Burlington can provide you with the best accounting services, contact us online or by telephone at 905-517-2297.