Key points
- Accrual completeness is the most common year-end finding on mid-tier engagements because testing for what isn't in the ledger requires different procedures than testing what is
- A missed €200,000 utility accrual drops straight to the bottom line. Missing accruals are harder to find than overstated ones because they leave no trail in the purchase ledger.
- The standard requires recognition when the economic event occurs ( IAS 1.27 ), not when cash moves. Most cut-off errors start here.
- Post-period invoice review is the single most effective completeness procedure, and the one most often skipped under time pressure
How it works
A German manufacturer closes its books on 31 December. The December electricity bill arrives in late January showing €14,200 of consumption against a meter read on 28 December. If the accrual wasn’t booked at year-end, profit is overstated by €14,200 and the January P&L carries a cost that doesn’t belong to it. That’s what accrued expenses exist to prevent. They’re about catching costs that happened before year-end but haven’t produced an invoice yet. The entity consumed the electricity, used the lawyer, earned the bonus obligation. The invoice hasn’t arrived. IAS 1.27 says recognise the cost in the period it occurred, not when the bill shows up. The entry debits the expense account and credits a current liability, usually labelled “accruals” on the balance sheet.
The amount is management’s best estimate. For some accruals this is mechanical: metered electricity consumption times the contracted rate. For others it requires judgment: how many hours has external counsel worked on the patent dispute? What percentage of the bonus pool is earned based on year-to-date results? The auditor evaluates the estimation method under ISA 540.13 (a). But the harder question isn’t whether the accruals that exist are correct. It’s whether the accruals that should exist are there at all.
This is where most teams struggle. Every other audit procedure tests what is in the ledger (occurrence, accuracy, valuation). Completeness testing for accruals requires testing what is NOT in the ledger. ISA 500 .A14 makes this distinction explicitly, but in our experience, teams apply occurrence-testing logic to completeness and miss the gap. Missing accruals leave no trail in the purchase ledger. You can’t find them by sampling what is recorded. You find them by looking at what arrived after year-end and asking whether it should have been accrued.
This becomes a judgment call when the entity has significant period-end activity in areas without clear contractual amounts: consulting engagements billed in arrears, performance bonuses dependent on final-year metrics, or utility costs where consumption data arrives weeks after the reporting date. The accounts payable confirmation catches what suppliers have billed. The post-period invoice review catches what they haven’t. The second procedure is the one most often skipped under time pressure. On smaller engagements, we’ve watched teams just roll it forward as SALY rather than refresh the post-period search, and that’s the file where the misstatement usually sits.
Worked example
Client: German engineering company, FY2025, revenue €28M, HGB reporter (with IFRS-aligned accrual policies). Hoffmann closes its books on 31 December 2025. Four accruals require recognition.
Identify unbilled obligations at 31 December
Hoffmann’s finance team reviews open purchase orders, service contracts with period-based billing, and employee benefit calculations. Four items surface: (a) €38,000 in unbilled legal fees for an ongoing patent dispute, (b) €14,200 in electricity consumed in December but billed quarterly in January, (c) €91,500 in employee bonuses earned under the 2025 incentive plan but payable in February 2026, and (d) €6,800 in audit fees for interim work performed in November.
Documentation note: record each accrual source, the contract or consumption evidence, and the basis for including each item per IAS 1.27 . For HGB, §252(1) Nr. 5 HGB mirrors the accrual requirement.
Estimate the amounts
Legal fees are based on the external counsel’s estimate of hours worked but not yet billed (142 hours at €268/hour). Electricity is estimated from meter readings and the contracted per-kWh rate. Bonuses are calculated from the board-approved incentive plan, applying actual FY2025 revenue and EBITDA against the plan thresholds. Audit fees are per the EP’s interim billing schedule.
Documentation note: for each accrual, record the estimation method, the source of the inputs (counsel letter, meter reading, board resolution, engagement letter), and the calculation. Reference ISA 540.13 (a) for the auditor’s evaluation of the estimation approach.
Record the adjusting entries
Debit legal expense €38,000 / credit accrued liabilities €38,000. Debit utility expense €14,200 / credit accrued liabilities €14,200. Debit staff costs €91,500 / credit accrued liabilities €91,500. Debit audit fee expense €6,800 / credit accrued liabilities €6,800. Total accrued liabilities recognised: €150,500.
Documentation note: record the journal entries with posting references. Classify all four as current liabilities (settlement expected within 12 months). Cross-reference to the accruals listing maintained by the entity. See adjusting entries for related mechanics.
Test completeness
The auditor performs a post-period invoice review, examining invoices received in January and February 2026 for services delivered before 31 December 2025. Two additional invoices totalling €4,300 (cleaning services and IT support) relate to December but were not accrued. The auditor evaluates whether the omission is material against performance materiality (PM).
Documentation note: document the post-period invoice sample, the cut-off date applied, the two exceptions identified, and the conclusion on materiality. Reference ISA 500 .A14 for completeness testing procedures.
Accruals of €150,500 are defensible because each estimate traces to an external source document, and the post-period review identified only €4,300 in unrecorded items (below the €12,000 clearly trivial threshold set at planning).
What reviewers and practitioners get wrong
- Relying on management’s accruals listing without independent procedures (FRC 2021/22 Audit Quality Inspection). The FRC found that auditors frequently accept the client’s accruals schedule at face value. The listing shows what management chose to accrue. It doesn’t show what management missed or chose not to accrue. In our experience, the post-period invoice review is the procedure that catches the real gaps, and it’s the one most often compressed when the file is running behind schedule. The reason is structural: post-period review requires waiting for January and February invoices to arrive, which conflicts with the pressure to close the file in March.
- Blanket reversal of PY accruals without accuracy check. Teams reverse all PY accruals in the opening period and move on. IAS 8.32 requires changes in estimates to be recognised prospectively. If last year’s bonus accrual was €91,500 and the actual payout was €72,000, the €19,500 difference should be investigated. Was the estimation method wrong, or did the bonus pool change? Silently absorbing the variance into current-year expenses is a completeness problem hiding in plain sight. We flag this on about one in four files we review.
Accrued expenses vs [prepaid expenses](/glossary/prepaid-expenses)
| Dimension | Accrued expenses | Prepaid expenses |
|---|---|---|
| Timing of cash vs benefit | Benefit consumed before cash is paid | Cash paid before benefit is consumed |
| Balance sheet classification | Current liability | Current asset |
| Direction of misstatement risk | Understated accruals overstate profit | Understated prepayments overstate expenses |
| Period-end action | Recognise a liability for the unpaid cost | Recognise an asset for the unused portion of the payment |
| Common examples | Unbilled utilities, earned but unpaid bonuses | Insurance premiums paid annually, rent paid in advance |
The distinction matters on every engagement because both are cut-off issues. An accrual omitted at year-end pushes an expense into the next period. A prepayment not deferred does the opposite, pulling a future-period cost into the current year. Auditors test both through cut-off procedures under ISA 500 , but the direction of the test differs: for accruals, look for unrecorded liabilities; for prepayments, look for costs that should have been deferred.
Related terms
Related tools
Related reading
Frequently asked questions
How do I test accrued expenses during the audit?
Perform a search for unrecorded liabilities by reviewing invoices received after the reporting date, examining open purchase orders at year-end, and comparing the current accruals listing to the prior year's actual invoices received. ISA 500.A14 requires the auditor to design procedures that address completeness separately from occurrence, because a missing accrual leaves no entry in the ledger to sample from.
What happens if accrued expenses are not recorded at year-end?
Omitting an accrual understates liabilities and overstates profit in the period. If the omission exceeds performance materiality, the auditor adds it to the summary of unadjusted misstatements and requests correction. ISA 450.5 requires the auditor to accumulate identified misstatements, and an uncorrected accrual flows into the evaluation of whether the financial statements as a whole are materially misstated.
Do accrued expenses apply to interim financial statements?
Yes. IAS 34.28 requires interim financial reports to apply the same accounting policies as annual statements, including the accrual basis. An entity that skips accruals at half-year and catches up at year-end misstates both the interim and annual results, because the expense belongs in the period when the service was consumed.