Auditing Expense Management Assessing Policies and Detecting Fraudulent Activities

Auditing expense management is a critical aspect of maintaining financial integrity within any organization.

Explore with PKC,  the key steps and considerations of expense auditing in India, based on our decades of audit experience. 

What is Auditing Expense Management? 

Auditing Expense Management refers to an in depth review and analysis of an organization’s financial transactions, policies, and practices related to expenses. 

The goal is to track every single expense—travel, salaries, rent, bills, and vendor payments—and make sure it’s real, allowed under Indian tax laws, and properly recorded.

In India, businesses must follow strict rules under the Income Tax Act, the Companies Act, and GST laws. So, auditing expenses is not just about saving money—it’s about staying legal.

Most companies in India do expense audits monthly, quarterly, or at the end of the financial year.

Advantages of Regularly Auditing Expenses

• Enhanced Financial Integrity: Ensures accurate reporting of expenses and strengthens transparency.
• Fraud Prevention: Detects fraudulent activities early to minimize financial losses.
• Improved Compliance: Reduces risks associated with non-compliance to local laws and internal policies.
• Cost Optimization: Identifies areas for reducing unnecessary expenditures.
• Employee Accountability: Encourages employees to adhere to company policies regarding expense submissions.

Key Components of Expense Auditing in India

Documentation & Record Verification

It is essential to prevent fake or inflated claims and ensure compliance with tax laws.

• Invoice/Bill Validation: Ensure all expenses have valid supporting documents (bills, vouchers, receipts).
• Approval Hierarchy: Check if expenses are approved by authorized personnel as per company policy.
• Matching with Ledger Entries: Verify that recorded expenses match bank statements and accounting books.

Compliance with Tax & Regulatory Laws

Auditors verify if the expenses are compliant with the taxation and other relevant laws including:

• Income Tax Act, 1961
• TDS Compliance
• GST Compliance
• Companies Act, 2013

Fraud Detection & Prevention

Checks are done for- 

• Duplicate Payments: Same invoice claimed multiple times.
• Ghost Vendors/Employees: Fake entities created to siphon money.
• Personal Expenses Misclassified: (e.g., family trips claimed as business travel).
• Inflated Expenses: Unreasonably high bills (e.g., hotel stays, meals).

Internal Controls & Policy Adherence

This involves:

• Segregation of Duties: Different people should approve, process, and record expenses.
• Spending Limits: Check if expenses comply with company policies (e.g., travel, entertainment caps).
• Automated Workflows: Use ERP systems (Tally, SAP) or expense management tools (Zoho Expense, Happay).

Analytical Review & Benchmarking

The main activities conducted here include:

• Trend Analysis: Compare expenses YoY to detect anomalies.
• Department-wise Spending: Identify cost-saving opportunities.
• Industry Benchmarking: Check if expenses align with sector norms (e.g., IT vs. Manufacturing).

Digital & AI-Driven Audits

The right tools can make a huge impact on audit effectiveness. Some upcoming tools used are:

• AI & Data Analytics: Detects patterns (e.g., duplicate invoices, unusual vendor payments)
• Blockchain for Transparency: Some firms use blockchain to track expense approvals.
• OCR (Optical Character Recognition): Automates invoice data extraction.

How to Set Up an Effective Expense Management Audit Process?

Review Expense Policies and Procedures:

Ensure that the organization has well-defined and documented expense policies.

Review the policies to ensure they are clear, comprehensive, and aligned with industry best practices.

Confirm that policies cover all aspects of expense management, including reimbursement procedures, allowable expenses, and approval processes.

Risk Assessment:

Conduct a risk assessment to identify potential areas of vulnerability to fraud or errors.

Consider the nature of the industry, the size of the organization, and historical patterns of expense-related issues.

Work closely with your auditor or trusted audit service provider PKC Management Consulting to conduct a risk assessment tailored to the organization’s industry and specific operational context.

Transaction Sampling:

Select a representative sample of transactions for review. This can be done using statistical sampling methods or based on risk assessment findings.

Examine both high and low-value transactions to ensure a comprehensive overview.

Documentation Review:

Verify that all expense transactions are adequately documented with receipts, invoices, and other supporting documents.

Ensure that expenses are properly coded and categorized.

Approval Processes:

Confirm that all expenses have been approved by the appropriate personnel according to the established hierarchy.

Evaluate the effectiveness of the approval process for expenses.

Data Analytics:

Analyze expense data over time to identify any unusual spikes or deviations from the norm.

Use data analytics tools to identify patterns, abnormal expenses, or trends that may indicate fraudulent activities or errors.

Expenses Review Report:

Evaluate the accuracy of expense reports by comparing them to supporting documentation.

Verify that expenses claimed align with the organization’s policies.

Training & Awareness:

Promote awareness of the consequences of fraudulent activities and the importance of compliance.

Ensure that employees are adequately trained on expense policies and procedures.

Establish and communicate mechanisms for employees to report suspicious activities confidentially.

Encourage a culture that values integrity and ethical behavior.

Continuous Monitoring:

Implement continuous monitoring processes to detect irregularities in real-time.

Regularly update and adapt audit procedures to address emerging risks and changes in the organization. 

Best Practices for Expense Auditing

✅ Segregation of Duties: Split expense approval, processing, and recording among different teams to prevent fraud.

✅ Multi-Level Approvals: Require higher authority sign-offs for large expenses to curb overspending.

✅ Regular Policy Reviews: Update expense policies periodically to align with tax laws and business needs.

✅ Mandate Original Bills: Accept only GST-compliant invoices to validate claims and avoid tax penalties.

✅ Centralized Expense Repository: Store all receipts digitally for easy access during audits.

✅ No Proof, No Reimbursement: Strictly reject claims without valid supporting documents.

✅ Expense Management Software: Automate tracking and approvals with tools like Zoho Expense or SAP Concur.

✅ AI Fraud Detection: Use AI to flag duplicate bills, fake vendors, and unusual spending patterns.

✅ Real-Time Expense Tracking: Integrate corporate cards with accounting software for live monitoring.

✅ Monthly Internal Audits: Conduct regular checks on high-risk categories like travel and entertainment.

✅ Surprise Audits: Perform unannounced verifications to deter fraudulent behavior.

✅ Employee Training: Educate staff on compliance to prevent policy violations.

✅ Whistleblower Policy: Allow anonymous reporting of suspicious expense claims.

✅ Benchmark Spending: Compare costs with industry standards to identify savings.

✅ Cost-Saving Negotiations: Secure corporate discounts with vendors to reduce expenses.

PKC’s Sample Expense Audit Checklist

Pre-Audit Prep

• Collect all financial statements, ledgers, and expense reports
• Gather supporting documentation like invoices, bills, and receipts
• Review company expense policies and approval workflows
• Identify applicable regulatory requirements (Companies Act, Income Tax Act, GST laws)
• Prepare sampling methodology for detailed testing

GST Compliance

• Verify ITC claims
• Ensure proper categorization of expenses 
• Check reverse charge mechanism compliance where applicable
• Validate e-invoicing compliance for eligible transactions
• Review GST TDS/TCS deductions and deposits

Income Tax Verification

• Validate TDS deductions on applicable payments 
• Review expense disallowances under Section 40(a)
• Check compliance with Section 43B for timely payments
• Verify entertainment and travel expense limits under Section 37
• Ensure proper documentation for CSR expenses

Documentation Review

• Authenticate vendor invoices (GSTIN validation, invoice format)
• Match purchase orders with goods receipt notes and invoices
• Verify digital signatures on e-invoices
• Check for proper approval as per delegation of authority matrix
• Review supporting documentation for reimbursements

Payroll Expense Audit

• Verify PF, ESI, Professional Tax calculations and deposits
• Check computation of income tax for employees
• Review bonus and incentive payments against approved policies
• Validate leave encashment calculations
• Confirm proper documentation for perquisites and allowances

Travel & Entertainment Expenses

• Verify compliance with company T&E policy
• Check for required approvals on international travel
• Validate per diem allowances against policy limits
• Review supporting documentation for business purpose
• Check GST ITC claims on hotel and transportation expenses

Fixed Assets & Capital Expenses

• Verify capitalization policy compliance
• Check depreciation calculations as per Companies Act and Income Tax Act
• Review asset tagging and physical verification reports
• Validate authorization for asset disposals
• Check treatment of repairs vs. improvements

Vendor Payment Review

• Verify vendor master data accuracy
• Check for duplicate payments
• Review payment terms compliance
• Verify bank account details match with vendor records
• Check MSME vendor payment compliance (45-day payment rule)

Regulatory Compliance

• Verify compliance with FEMA for foreign currency transactions
• Check RBI compliance for cross-border payments
• Review related party transactions and transfer pricing documentation
• Verify compliance with Prevention of Money Laundering Act
• Check compliance with Companies Act for board approvals on significant expenses

Technology & System Controls

• Review user access rights to accounting/ERP systems
• Check automation controls for expense approvals
• Verify digital payment authorization matrix
• Review audit trails for expense modifications
• Check integration between expense management and accounting systems

Reporting & Follow-up

• Document audit findings and exceptions
• Quantify financial impact of non-compliance
• Recommend process improvements
• Prepare management action plan with timelines
• Schedule follow-up review for critical issues

Need help with an expense audit? Get in touch with our experts!