The structure of each expense account should be thoroughly scrutinised and the distribution of the total expense over different methods comprised in the period under audit. Where there are significant variations between different months, the cause thereof should be ascertained. At times, it may be found
that an expense account has a few credit entries. These may represent recovery of the share of common expenses from one or more participants, refund of rebate obtained from a supplier of an entry made to exclude the expense relating to the succeeding period. All these entries should be verified.
Some entities maintain an Outstanding Book, for keeping a record of expenses which were outstanding at the close of the year that have been paid in the succeeding years. From a reference to the entries therein, it is usually possible to have an explanation for the difference that there is an amount of expenditure paid out in the closing month as compared to that in the earlier months. The book is of much assistance also in the verification of the accuracy of the provision made for expenses which were outstanding at the close of the year. While verifying the adjustment of liabilities, outstanding at the close of year, it should be observed that the liabilities, a provision for which was made in earlier years, have been paid off during the year, and if any amount has not been paid, reasons thereof should be ascertained, as it may not all be payable. Where certain common expenses have been divided between two or more activities carried on by the same concern or between two sister concerns, it should be ascertained that the basis adopted for the
division is reasonable.

Where there has been a change in the basis of accounting, as compared to that in the previous year, the reasons thereof should be ascertained and if any item is shown in the Profit and Loss Account has been affected by any change in the basis of accounting, the amount of the difference should be shown
separately by way of a note. The different elements of cost (material, labour and manufacturing expenses) generally are known as direct expenses. Normally, there exists a direct relationship between the cost of each element and total cost of manufacture of the article. Therefore, where there has been a significant variation in the relationship the reasons thereof should be ascertained. It may be due to some of the expenses having been left out or having been included in excess. This could be ascertained on a verification of the entries relative to adjustments of different types of expenses. The causes of variation in the proportion of direct expenses usually can be readily ascertained but this is not practicable in the case of indirect expenses, for these often are the result of a variety of factors unconnected with manufacturing process. For instance, the change in indirect expenses may be the effect of the change in the rate of turnover or that in the structure of the management. Quite often office expenses increase with that in the rate of turnover, but they may not do so in proportion thereto. For example, if a business owned by a partnership is taken over by a company or machines are introduced to perform certain routine functions which were previously carried out manually, the cost of administration may increase. Small variations therein may also take place due to substitution of one form of expenditure by another either as a measure of economy or on consideration of good management. For example, a company may decide to raise a part of its working capital by issuing debentures and to pay off its overdraft account on which it was paying a higher rate of interest. The management may otherwise decide that local letters should be delivered by hand even though the cost of peon delivery is greater.

Normally, every increase in an expense is accompanied by that in income, e.g., an increase in selling commission, freight and packing charges is usually the outcome of an increase in sales. At times, however, an item of expense may not immediately result in revenue. For example, the trip of managing
director abroad to find a foreign market for the articles manufactured by the company may not start showing results until some time has passed.
The provision for liability that has been incurred, the amount whereof cannot be ascertained accurately, is generally made on the basis of an estimate. But where the existence of the liability is contested, the amount thereof is only disclosed as a contingent liability. Where, in the previous year, provision for an
item of expenditure was either not made or was short and the difference in the amount was subsequently paid and the amount of provision is material, the fact should be disclosed by the amount being shown below the line or the amount being shown separately in a bracket against the amount of expenditure of which it forms a part.

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