Effective Methods for Testing Operating Expenses (Opex)
I’m looking for procedures to effectively test expenses that have been incurred and paid to both external professionals and internal staff, which are categorized as operating expenses. Do you have any suggestions or best practices?
Thank you in advance for your help!
One response
Testing operating expenses (Opex) thoroughly is crucial for ensuring that the financial statements accurately reflect the entity’s financial position. Here are some procedures you might consider for testing professional expenses:
Obtain invoices from third-party professionals and internal departments that have incurred expenses. Verify that the invoices are properly approved and supported by contracts or engagement letters.
Cut-off Testing:
Verify that expenses are recorded in the correct Accounting period. Review invoices received shortly after period-end to ensure they are recorded in the right period, and check if there are any significant expenses that could have been omitted.
Sampling:
Select a representative sample of operating expenses for detailed testing. Ensure that your sample includes a mix of high-value, low-value, and unusual transactions to gain a diverse perspective.
Comparison with Budgets:
Compare actual expenses to budgeted amounts to identify any discrepancies. Investigate any variances to understand the nature of the differences and assess their validity.
Trends and Analytical Procedures:
Perform analytical procedures by looking at trends in operating expenses over several periods. Analyze fluctuations and unexpected changes, and inquire about the reasons behind them.
Related Party Transactions:
Identify any related party transactions and ensure that they are disclosed appropriately. Review the terms of these transactions to check for compliance with applicable Accounting standards.
Confirmation Directly with Service Providers:
In certain cases, you can send confirmations to third-party service providers to verify amounts billed and the services performed.
Interviews and Knowledge Checks:
Conduct interviews with department heads to understand the nature of the professional services received and their necessity for the business operations.
Reconciliation:
Reconcile the operating expenses to the general ledger to ensure that all transactions are accurately recorded.
Policy Compliance:
By applying a combination of these procedures, you can gain a comprehensive understanding and validation of the operating expenses incurred by the entity. Good luck with your testing!