Audit of Prepaid Expenses

Prepaid expenses are costs that have been paid but that apply to future periods or to the production of future revenue. Examples include insurance, rent, taxes, patent, trademark and copyright. When designing the audit program the auditor should consider the nature of prepaid account balances and the risks associated with transactions flowing through the accounts. Also other assets that provide economic benefit for less than a year are classified as current assets and are called prepaid expenses. When preparing this program the auditor should consider and design audit procedures that address relevant presentation and disclosure requirements. The inherent risk associated with prepaid expenses is generally assessed as low because the accounts do not involve any complex or contentious accounting issues. In auditing, the objective is to obtain or prepare a comparative summary of prepaid expense balances, individual balances to the general ledger, income statement and previous audit's working papers. When testing prepaid expenses the auditor should perform procedures that are particularly responsive to accounting policies subject to management's judgments and estimates; for example, procedures that take account of allocations of an unusual nature such as advertising or royalty expenses. In this regard, the assessment of the control environment should be considered, particularly those aspects dealing with management's judgments and financial statement integrity. The only tests of the balance in the expense account that are ordinarily necessary include analytical procedures. This is the re-computation or the application of analytical procedures, which test calculation of balance at end of period and mathematical accuracy of the analysis.
Audit testing begins by obtaining a detail schedule of the prepaid insurance account:
a) Existence and