INCOME AND EXPENDITURE

Income

There is a close relationship between income and revenue. In some cases,
income is associated with net income which connotes total revenue less
expenses. Revenue is sometimes associated with non-profit organisations while
income is associated with cash flow derived from business transactions. The
amount of money or its equivalent received during a period of time in exchange
for labour or services, from the sale of goods or property, or as profit from
financial investments may be regarded as income.
The International Accounting Standards Board (IASB) “Framework for the
Preparation and Presentation of Financial Statements” defines income as
“increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in
increases in equity, other than those relating to contributions from equity
participants.” The IASB definition of income encompasses both revenue and
gains.
The objective of substantive procedure for income is to confirm the assertions
made in the financial is correct, complete, and reported in accordance with the
International Accounting Standards and the Statement of Accounting Standards.
The following substantive procedures may be adopted in verifying income:
(a) Obtain schedules of the various classes of income reported in the
financial statement; and
(b) For each of the schedules obtained, carry out the following audit actions:

Sales of Goods

(a) Verify that, the entity has transferred to the purchaser the significant
risks and rewards of ownership of the goods;
(b) Verify that, the entity retains neither continuing managerial involvement
to the degree usually associated, with ownership nor effective control
over the goods sold;
(c) Verify that the amount has been measured reliably;
(d) Verify that it is probable that the economic benefits or service potential
associated with the transaction will flow to the entity; and
(e) Verify that the costs incurred or to be incurred in respect of the transaction
can be measured reliably.

Interest, Royalties and Dividends

The following substantive procedures may be used:
(a) Verify that it is probable that the economic benefits or service potential
associated with the transaction does flow to the entity;
(b) Verify that the amount of the income has been measured reliably;
(c) Verify that interest has been recognised on a time proportion basis that
takes into account the effective yield on the asset;
(d) Verify that royalties are recognised as they are earned in accordance
with the substance of the relevant agreement; and
(e) Verify that dividends or their equivalents are recognised when the
entity’s right to receive payment is established.

Disclosure

The requirement should include the following:
(a) Confirm consistency and proper disclosure of the accounting policies
adopted for the recognition of income including the methods adopted to
determine the stage of completion of transactions involving the rendering
of services;
(b) Verify that there is disclosure of the amount of each significant category
of income recognised during the period including income arising from:
(i) The rendering of services;
(ii) The sale of goods;
(iii) Interest; and
(iv) Royalties.
(c) Verify that there is disclosure of the amount of income arising from
exchanges of goods or services included in each significant category of
income.

Expenditure

Substantive procedures for expenditure aims at ensuring that assertions about
expenditure in financial statements are correct, properly recorded and properly
disclosed.
The following substantive procedures may be applied in the verification of
expenditure:
(a) Obtain schedules of all expenditure in their various classes;
(b) Obtain specimen signatures of officials mandated to authorise and
approve various classes of expenditure;
(c) Select a representative sample from each class of expenditure for detail
substantive testing;
(d) Verify that each expense is properly authorised and approved including
approval limits for each authorising official;
(e) Verify that expenditure are properly classified;
(f) Check calculations and additions for all invoices selected;
(g) Check that value for the expense is received by inspecting delivery
documents or performance reports;
(h) Check entries in expenditure register and verify that they are correctly
analysed;
(i) Check posting to the general ledger; and
(j) Trace expenditure total to the final accounts.

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