Auditing accruals and prepayments

How an audit team tests a client's year-end accruals and prepayments for completeness and accuracy, with a short programme and the traps to look for.

By Achekam · 11 October 2026 · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya

Accruals and prepayments rarely make a headline finding, which is exactly why they deserve attention. They are where a client can move profit between years with a single journal, where a busy bookkeeper forgets the electricity bill that arrives in the second week of the new year, and where last year's accrual quietly stays on the books alongside this year's invoice.

The balances are usually small individually and the work is not glamorous. But a disciplined approach catches errors that analytical review alone will miss. Here is how to audit accruals and prepayments at year end, with a test programme you can adapt.

What the balances represent

ACCA's explanation of year-end adjustments is the right starting point: unpaid expenses that relate to the period are shown as current liabilities, called accruals, and expenses paid in advance are shown as current assets, called prepayments. In both cases the charge to profit or loss is adjusted so that the period bears its own costs.

AccountingTools gives familiar examples of accruals: interest owed on a loan before the lender's invoice arrives, wages earned between the last pay date and the month end, goods delivered before the supplier's invoice arrives, and revenue for work completed but not yet billed. Prepayments are the mirror image: insurance, rent, licences and subscriptions paid before the period they cover.

The audit risk is asymmetric. A client wanting to flatter profit will under-accrue and over-prepay. A client wanting to smooth results may do the opposite. Know which way the pressure runs before you start.

Completeness: start outside the ledger

The main risk for accruals is that something is missing, and you cannot find what is missing by testing what is recorded. ACCA explains that a completeness test should start from the underlying documents and trace them to the ledger, to make sure none have been missed. For accruals, the documents are:

Invoices received after year end. Review the purchase ledger and payments for the first weeks of the new year, and identify any that relate to goods or services received before year end.
Recurring costs. List the costs the business incurs every month: rent, utilities, security, telephone, retainer fees, loan interest. Each should have twelve months' charge in the year, either invoiced or accrued.
Contracts and minutes. Board minutes, new leases and service agreements may reveal obligations nobody has invoiced.

Investopedia describes the usual month-end practice: book as many actual invoices as possible before closing the payables ledger, then analyse which invoices have not been recorded and accrue for them. Ask the client how it did this at year end, and test whether the analysis was complete. Our guide to the search for unrecorded liabilities covers the after-date review in more detail.

Estimates that differ from the later invoice

Investopedia notes that an accrued expense can be an estimate and may differ from the supplier's invoice that arrives later. That gives the auditor a ready-made test: compare each significant accrual with the invoice that eventually arrived.

Small differences in both directions suggest a reasonable estimating process.
Consistent over-accrual suggests a cushion being built.
Consistent under-accrual suggests profit being brought forward, or a process that misses costs.

Look back at last year as well. How did last year's accruals compare with the invoices that settled them? If the client's estimates were consistently wrong last year, the same method this year needs more challenge.

Missing reversals and double counting

Investopedia warns that every accrued expense must have a reversing entry; otherwise the company risks recording both the accrual and the actual invoice. This is one of the commonest errors in small-company books.

Test it directly:

Take last year's closing accruals listing.
For each item, find the reversal in the new year and the invoice that replaced it.
Look for accrual accounts whose balance has grown year on year, which often means old accruals were never released.

For prepayments, the risk is the reverse: a prepayment that should have been released to expense still sitting on the balance sheet. Investopedia describes the normal pattern, with a prepaid amount turned into expense through monthly adjusting entries as it is used up, for example one-twelfth of a year's insurance each month. Recalculate the closing prepayment from the invoice, the period covered and the days or months remaining.

Lead schedules and audit adjustments in Achekam

In Achekam, the engagement's lead schedules are built from the client's trial balance, so the accruals and prepayments lines carry figures that trace back to the trial balance lines behind them. Where testing shows an accrual is missing or overstated, staff record an audit adjustment against the line with a reason, and raise a finding from the working paper that is later closed or withdrawn.

A working paper can also carry a spreadsheet workbook whose figures refresh from the engagement's trial balance, with any figure it could not read listed rather than left blank. That suits an accruals recalculation: the closing balances update if the trial balance changes, and refreshing is refused on a locked file or on a paper under review, so a reviewed schedule does not shift underneath the reviewer. For posting agreed corrections, see year-end adjusting entries.

A short test programme

Accruals

Agree the accruals listing to the trial balance.
Review after-date invoices and payments for unrecorded liabilities.
Check each recurring cost has a full year's charge.
Compare significant accruals with the later invoice.
Confirm last year's accruals were reversed and not double counted.
Investigate accrual balances with no movement or no support.

Prepayments

Agree the prepayments listing to the trial balance.
Vouch significant items to invoices and confirm the period covered.
Recalculate the unexpired portion at year end.
Check that last year's prepayments were released.
Ask whether any service paid for in advance has been cancelled or will not be received.

Investopedia's explanation of accrued expenses covers the reversing-entry trap and examples of costs that are commonly accrued, and is a useful brief for junior staff.

For your next year-end, ask the client before fieldwork for its accruals and prepayments listings with the supporting invoices attached. A listing without support is usually where the adjustments are hiding.

General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.