Insight into Operational and Administrative Expenses

Introduction to Operational and Administrative Expenses:

The expenses that are incurred by a business firm for its normal operations are called as operational expense. It is usually abbreviated as OPEX when the ongoing costs are for the product or business or system running presently. Such expenses are related to the activities that are indirectly associated with the goods and services production. The Operational Expense includes-

  • Office expenses includes:
  • Expenditures on Accounting
  • Insurance
  • Legal fees
  • Property tax
  • Rent and repairs of non-productive facilities
  • Depreciation of fixed assets assigned to non-productive areas
  • Sales and marketing expenses includes:
  • Cost of Advertising
  • Cost for Direct mailing
  • Cost for Entertainment
  • Sales brochures and pamphlets
  • Cost of Travel

The expenditure made as non-technical charges for the basic operation of the organization are the administrative expenses. For the success of the company these expenses are vital. These occur in order to increase the efficiency of the business. They are fixed in nature as they are the incurred as the foundation of all the operations in the company. Such expenses exist in the entity forever regardless of the sales made during a particular time period and are very hard to reduce. These include-

  • Security service
  • Courier services
  • Housekeeping service
  • Expenses for travelling
  • Reservations of hotel
  • Expenses on stationery items
  • Telephone lines
  • Expenses for canteen
  • Expenses for subscription
  • Professional expenses
  • Fax/ photocopy machines
  • Guest house

Audit Checklist for Operational and Administrative Expenses:

The operational and administrative expenses checklist includes the following points-

  • Documentation: The auditor while conducting Internal Audit Service has to ensure that the requisite documents are available-
  • Organization’s expense policy.
  • Purchase order, agreement, contract and letter of employment for expenses.
  • Register of purchases.
  • Attendance records.
  • In case of services imported, challans of the service tax paid.
  • Challan of PF and ESI.
  • Original copies of invoices.
  • Quality report of the provided services that are duly verified.
  • Actual quantity received by the stores in the material receipt of notes.
  • Entry records of the gate.
  • Legal Compliance: Ensuring the documentary proof for compliance of the operational and administrative expenses with the following-
  • Services tax paid under the reverse charge.
  • Documents showing exemptions from certain taxes.
  • Deducted amounts and paid TDS on the expenses.
  • Compliance with the provision provided in Section 188 of the Companies Act, 2013.
  • Reasonability of the services charges and expenses as per the Section 40A (2) of the Income Tax Act, 1961.
  • Payment of expenses as per section 43(B) of the Income Tax Act, 1961 before the Income Tax Return filing.
  • Compliance with the guidelines and notifications on wages, bonus and gratuity payments.
  • Authorization Matrix: The auditor is liable to ensure that documents like agreements, service procurement requisitions, attendance records, tender and quotation openings, service order, purchase order, credit and debit notes issued, etc. are properly authorized as per the checklist on operational and administrative expenses.
  • Compliance with Accounting Standards and Standards on Auditing: Ensure compliance with following Accounting Standard-
  • AS 1: Disclosure of Accounting Policies
  • AS 11: The Effects of Changes in Foreign Exchange Rates
  • AS 18: Related Party

Disclosures Ensure Compliance of following Auditing Standard (SAs)-

  • SA 550: Related Parties

Ensure Compliance of following Standard on Internal Audit (SIA)

  • SIA 18: Related Parties

The relevant and key aspects of audit of operational and administrative expenses are-

  • Evaluation of Internal control.
  • Representation of management.
  • Documentation.
  • Special considerations.
  • Examination of disclosures.
  • Presentation of disclosures.
  • Examination and verification of the analytical procedures and records.
  • Procedures and Controls: During the applicability of the checkpoints of the operational and administrative expenses, the auditor is required to verify the procedures and controls related to service procurement policies, requisition of internal services, quotations of the company, service orders, purchase orders, timely settlement of the employees accounts, etc.
  • Recording of Transactions: To assure that proper accounting entries related to the expenses, capital expenditure service procurements, value of service, applicable TDS, liable service tax, etc. has been recorded properly in books of accounts.
  • Quality and Good Governance: In order to have proper and good governance and better control in the entity, it is recommended that expense budget, actual arm’s length in the related transaction party, acquisition of services, controls over vendor development and cost reduction etc. must be available.
  • Reporting: Exceptional reports from the internal audit and the management’s point of view on pending requisitions, pending purchase orders, list of all the registered vendors, outstanding advances etc. can be really useful for the company.
  • Suggestions and recommendations, if any: The system and methods used while the operational and administrative expenses can be improved through the recommendations and suggestions made by the auditor. This can make the whole procedure systematic and transparent.

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    Author: Anil Agrawal
    EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.