Expense audits don’t just analyze the actual amount a company spends on different types of expenses. They also assess whether the spending is in line with company policies. The audit process is usually tedious and time-consuming but doesn’t have to be. Tools that offer functionality such as spend controls, spend limits, and automatic receipt matching can help streamline it for you, saving you valuable time and sanity. Keep reading to learn more about expense audits, factors to check in an audit, and the best ways for you to automate your audits.
What is an expense audit?
An expense audit is a review and analysis of a company's expenses to determine if they are in line with company policy. In some cases all expenses are justified and nothing changes. In others, expense audits unearth inefficiencies and redundancies that can be cut back to increase a company’s profit margin.
Successful firms do this on a regular cycle, sometimes monthly, but typically every three to six months. An expense audit is part of a system of checks and balances that should be built into any company accounting system. They are not full financial audits, where debits and credits are analyzed for corporate reporting, but they do include an audit of expense reimbursements.
At first glance, the expense audit process seems simple. Make a list of all expenses and verify them with the corresponding receipts. Unfortunately, it’s often never that easy, especially if the company relies on manual expense management. That’s where automation, which we’ll discuss in more detail below, can make expense audit procedures more efficient.
What are the main goals of an expense audit?
Establishing policies and procedures for employee expenses and reimbursement is a good first step in controlling outflows, but it needs to be followed up with regular expense audits to make sure said policies and procedures are working. After all, most systems will break down if they’re not periodically monitored. The three main goals of an expense audit are as follows:
1. Identify and track expenses
The primary goal of an expense audit is to identify and track business expenses. If multiple employees are using their own funds for expenses and then submitting for reimbursement, this part of the process can get a bit tricky. The accuracy of the expense report audit is dependent upon the quality of reporting and the integrity of the reimbursement system.
2. Ensure expenses are aligned with company policies
Legitimate food and beverage expenses are difficult to verify, so many companies disallow them as part of their expense policy. Other firms allow expenses at only certain merchants or vendors. One of the goals of the expense auditor is to review those company policies and make sure that all reported expenses are in line with them.
3. Minimize risk and prevent fraud
You may have already surmised this after reading our first two points in this section. Tracking expenses and ensuring they are in line with company policies often uncover instances of fraud. Those cases show where the company is at risk, sometimes leading to modifications in policy or procedures. The auditor’s job is to report on risk and fraud, not make the changes.
The expense audit process
The expense audit process is very similar to balancing a checkbook. Many owners use their checkbooks for small business expense management, which makes the auditor’s job easy. With more complex business structures, there’s usually some type of expense management software in place that employees use to submit for reimbursement.
An auditor’s first step is to review expense reports. If the company is using a system that automates reports, that simplifies the process. However, if they use a manual system, the auditor needs to review reports from various sources, which is an incredibly time-consuming process. Invoices and receipts need to be matched to those reports, so the auditor’s job can get really complicated.
Once the matching portion of the process is complete, the auditor then needs to reconcile the results. If the sum of the numbers on receipts and invoices doesn’t match the total spent on expense reports, the auditor must discover the discrepancies and report them.
6 important factors to check during an expense audit
Expense audit procedures involve a series of steps that are repeated several times before the audit is complete. To ensure that nothing is missed, it’s best to create a checklist for quick reference. For each expense, the auditor will need to check the following:
1. Expense is listed in the correct period
Check the date on the expense transactions, the date on the receipt, and the time period during which the expense claim is submitted. This is particularly important at the beginning and end of the fiscal year. Overlapped expenses or those not paid before a particular cut-off date (such as the end of the year) may not be eligible for tax deductions, which could create an accounting problem.
2. Expense is accurate and matches receipts/invoices
Make sure the amount of the expense, amount of the reimbursement, and the line item on the receipt all match. This is an area where expense fraud is often detected, though in some cases, erroneous entries are unintentional. Detecting these errors is part of the audit process.
3. Expense is complete
There are three parts to every expense: the expense itself, the receipt, and the reimbursement. The expense is not valid until all three have been processed. Check each expense carefully to make sure it’s complete before approving it in the expense audit.
4. Expense is correctly categorized
This is a mistake that employees often make when submitting expense reports. Check the expense category and make sure it matches up with how company financials are done.
5. Expense is business-related
Taking the family out to dinner is not a business-related expense, even if you own the company. Buying personal electronics doesn’t qualify either. But travel expenses like plane tickets, airport meals, and other business travel spendings are. Check each expense and ensure that it can be justified as a company or travel expense reimbursement. Ask for an explanation if the purpose is unclear. Make sure to have financial statements and supporting documentation to prove that the reason for the cost is business-related and not a misstatement. Tax auditors will disallow personal expenses.
6. Vendor is verified
Receipts can be manufactured on a home computer. Confirm that the submitted expenses you’re getting are legitimate and come from verified vendors. If your company has controls in place that limit where employees can shop, confirm that a preferred vendor is vouching for the expense.
4 company issues that can cause problems during an expense audit
There is a strong argument in favor of eliminating expense reports due to the internal accounting problems they can cause. The downsides of expense reports include employee error, potential issues with IRS audits, and the cost of regular expense audits. Businesses can avoid some of these problems by addressing the following:
Lack of a clear expense policy
Every business should have an expense policy. Not having a policy in place can be the underlying cause of many external and internal audit issues. If your business doesn’t have an expense policy, create one. If one is already in place, review it and clarify any areas that are too ambiguous to improve policy compliance.
Lack of expense controls
Expense controls eliminate many of the issues we’ve covered in the previous sections. Implementing spending limits, restricting employee spending to certain vendors, and using business charge cards are just a few of the ways to do this. Ironically, adding expense controls streamlines the expense process. We’ll go into that further below.
Disorganized or incomplete documentation
When multiple parties are submitting expense reports, there’s no uniform system in place for the auditor to work with. Some employees will be organized and thorough, but you can be certain there will be a few who submit incomplete documentation. This slows down expense auditors and drives up costs for business owners.
Time-consuming redundancies
How many hands does the expense pass through before it gets to the finance team? There are redundancies in that system that are time-consuming and increase costs. Streamlined, automated systems which are controlled by the company eliminate the inherent redundancies in an employee-initiated expense reimbursement process.
How to automate and streamline expense audits
Now that you’re aware of potential expense audit issues, let’s talk about solutions. Embracing expense management automation removes the cost of teaching employees and supervisors how to audit expenses, as well as the potential for human error. You’ll need a system, like Ramp, that can streamline your expense audit workflow by automating expenses, reimbursement, and expense reporting:
Give all employees a company card with built-in expense & category controls
Instead of asking employees to use their personal credit card and submit for expense reimbursements, give them a company charge card with built-in expense and category controls. You’ll have complete control over expense reporting, reimbursements, and receipt organization.
Create a digital expense policy
Expense policies don’t benefit you if none of your employees can see them. Generate an expense policy that’s accessible to all and can be modified at any time as the company evolves. The digital approach also removes the need for paper documentation, a cost-saving and environmentally responsible company action.
Automatically categorize expenses in real-time
Categorizing receipts is one of the areas of concern for expense auditors and a task that employees often struggle with. Look for a solution that automatically categorizes receipts in real-time and produces reports that are segmented properly for audits or quick financial reviews. Businesses don’t need to wait until the end of the period to access them.
Digitize & match all receipts and invoices
Anyone who’s ever chased down a paper receipt to validate an expense will appreciate this feature. Digitizing receipts and archiving them eliminates any questions on whether the expense is legitimate. Your system should also match those receipts to invoices, so auditors and accountants don’t need to. That’s a time and money saver for your business.
Ramp offers all the functionality you need to start automating your expense audits today. Visit Ramp.com to learn more.
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