Para 2.1 of the "Preface to the Statements on Standard Auditing Practices" issued by the Institute of Chartered Accountants of India states that the "main function of the APC is to review the existing auditing practices in India and to develop Statements on Standard Auditing Practices (SAPs) so that these may be issued by the Council of the Institute." Para 2.4 of the Preface states that the "APC will issue Guidance Notes on the issues arising from the SAPs wherever necessary."

The Auditing Practices Committee has also taken up the task of reviewing the Statements on auditing matters issued prior to the formation of the Committee. It is intended to issue, in due course of time, SAPs or Guidance Notes, as appropriate, on the matters covered by such Statements which would then stand withdrawn. Accordingly, with the issuance of this Guidance Note on Audit of Expenses, paragraphs 11.2‑11.8 of Chapter 11 of the Statement on Auditing Practices, titled 'Profit and Loss Account', shall stand withdrawn. In due course of time, the entire Statement on Auditing Practices shall be withdrawn. The following is the text of the Guidance Note on "Audit of Expenses" issued by the Auditing Practices Committee of the Council of the Institute of Chartered Accountants of India. This Guidance Note should be read in conjunction with the Statements on Standard Auditing Practices issued by the Institute.

INTRODUCTION

1. An expense is a cost relating to the operations of an accounting period or to the revenue earned during the period or the benefits of which do not extend beyond that period. The expression "cost" means the amount of expenditure incurred on or attributable to a specified article, product or activity.

2. Expenses are recognised by the following approaches:

(a) Identification with revenue transactions

Costs directly associated with the revenue recognised during the relevant period are considered as expenses and are charged to income for the period.

(b) Identification with a period of time

In many cases, although some costs may have con­nection with the revenue for the period, the relation­ship is so indirect that it is impracticable to attempt to establish it. However, there is a clear identification with a period of time.1 Such costs are regarded as 'period costs' and are expensed in the relevant period, e.g, salaries, telephone, travelling, deprecia­tion on office building, normal interest, etc. Similarly, the costs the benefits of which do not clearly extend beyond the accounting period are also charged as expenses.

3. The following features of expenses affect the nature, timing and extent of the related audit procedures:

(a) In the case of most items of expenses, documentary evidence originating from third parties is available.

(b) The nature and relative significance of various items of expenses usually differ from one enterprise to another, depending primarily on the nature of opera­tions carried out by them. For example, in the case of most manufacturing enterprises, the principal items of expenses would include the cost of raw materials consumed, labour cost and other conversion costs. On the other hand in the case of a trading enterprise, the principal items of expenses would generally be the cost of goods sold. In the case of an enterprise supplying, providing, maintaining and operating any services, the principal items of expense would include personnel and professional expenses, office maintenance, etc.

(c) The amount of some expenses has a logical relation­ship with certain other financial statement items while the amount of some other expenses does not have such a relationship. For example, in an enterprise where the production process is standardised, the consumption of raw materials (and, therefore, the cost of raw materials consumed) has a logical rela­tionship with the quantum of output. Similarly, the proportion of various constituents of cost of production is expected to remain more or less constant in the absence of known conditions to the contrary. Likewise, proportion of the amount of interest for a period to the amount of loans outstanding during the period is expected to vary within certain specific Em­its. On the other hand, the expenditure on research and development often has little relationship with other items in the financial statements.

(d) The amount of some items of expenses (e.g., gratuity, taxes, bonus, etc.) is significantly affected by applica­ble laws.

4. In an audit, the auditor employs appropriate procedures to obtain reasonable assurance about various assertions (see SAP 5, Audit Evidence). In carrying out an audit of expenses, the auditor is particularly concerned with obtain­ing sufficient appropriate audit evidence to corroborate the management's assertions regarding the following:

Occurrence that recorded expenses arose from   transactions or events which took place during the relevant period and pertain to the entity.
Completeness that there are no unrecorded expenses.
Measurement that expenses are recorded in the      proper amounts and are allocated to the proper period.
Presentation and Disclosure that expenses are disclosed, classified, and described in accordance with recognised accounting policies and practices and relevant statutory require merits, if any.

5. In view of the divergence in the nature of expenses incurred by different enterprises, it is not possible to describe the audit procedures applicable in carrying out an audit of expenses in all situations. This Guidance Note provides guidance on procedures to be employed in carrying out an audit of expenses which would be applicable in the case of most enterprises. It is recog­nised, however, that audit procedures different from or additional to those described in this Guidance Note may be necessary in a particular case depending upon its spe­cific facts and circumstances.

INTERNAL CONTROL EVALUATION

6. The auditor should study and evaluate the system of internal control relating to expenses, to determine the nature, timing and extent of his other audit procedures. ~He should particularly review the following aspects of internal control relating to expenses: 2

(a) The systems and procedures relating to incurring of expenses including authorisation procedures.

(b) Accounting procedures relating to recognition of expenses.

(c) Existence of periodic reports on actual performance vis a vis budgets and internal management reports, if any.

VERIFICATION

7. Verification of expenses may be carried out by employing the procedures, viz.,
(a) examination of records; and
(b) analytical procedures. The nature, timing and extent of substantive procedures to be performed is, however, a matter of professional judgment of the auditor which is based, inter alia, on the auditor's evaluation of the effec­tiveness of the related internal controls. The auditor should examine whether the basis of recognition of expenses by the entity is in accordance with the recog­nised accounting principles.

(a) Examination of Records

8. Examination of records and documents is one of the most important techniques of auditing. An auditor has to examine a large number of documents in the course of an audit since most transactions are supported only by doc­umentary evidence. The accounting systems of business enterprises are so designed that documentary evidence is created in respect of each transaction. The auditor should carry out an examination of the relevant records to satisfy himself about the validity, accuracy and other assertions with regard to various expenses incurred by the entity. The extent of such examination would depend on the auditor's evaluation of the efficacy of internal controls.

(b) Analytical Procedures

9. The auditor should conduct analytical procedures which involve analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or which deviate from predicted amounts.3

10. The following paragraphs describe the audit procedures applicable in respect of various items of expenses.

Goods and Raw Materials Consumed

11. The auditor's examination of the cost of goods, stores and materials consumed during the year would involve, interalia, examination of purchases of goods and materials made during the year as well as of purchase returns and of opening and closing inventories.

Purchases and Purchase Returns

12. The auditor should examine whether the entity has instituted adequate cut‑off procedures in relation to pur­chases and purchase returns. The objective of cut‑off procedures is to ensure that the transactions pertaining to a period are recorded in that period and not in a pre­ceding or subsequent period. The auditor should examine the efficacy of such procedures. The auditor can examine the selected receipt documents (such as goods received notes) pertaining to a few days immediately before the year‑end and verify that the related purchase invoices have been recorded as purchases of the current year. The auditor should pay particular attention to the cut‑off procedures relating to purchases, both indige­nous and imported, to determine whether these proce­dures ensure recognition of purchases at the time the sig­nificant risks and rewards of ownership of the related goods pass on to the entity.

13. The auditor should examine selected entries in the purchase journal with reference to the related purchase invoices, receipt records and other supporting docu­ments such as the purchase orders. The auditor should also trace the selected entries to the suppliers' account.

14. While examining purchase invoices, the auditor should examine whether subsidies, rebates, duty draw­backs or other, similar items have been properly accounted for. As per AS‑2, costs of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expen­diture directly attributable. to the acquisition. Trade dis­counts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase.

15. The auditor should also examine selected receipt records with reference to related purchase invoices and the purchase journal.

16. The auditor should examine selected entries of pur­chase returns with reference to the goods returned notes, debit notes and entries in the suppliers' accounts. Similarly, the auditor should examine selected debit notes with reference to purchase returns, goods returned ,notes, and entries in the suppliers' accounts.

17. In case of transactions between related parties, the auditor should pay special attention to nature and description of such transactions.4

18. The auditor should obtain a representation from the management to the effect that the entity has complied with the legal and regulatory requirements, if any. When the auditor becomes aware of non‑compliance, the audi­tor should obtain sufficient information to evaluate the Possible effect in the financial statements. The auditor should also consider communication/reporting of non­-compliance with the management including audit committee, users of financial statements and to regulatory authorities as may be appropriate.5

19. In respect of imports, the auditor should carryout the following procedures in addition to the usual audit pro­cedures applicable in respect of domestic purchases.

(a)   Besides examining the usual documents relating to purchases, the auditor should also examine such documents as bill of lading, custom documents, etc. which‑ are specific to import transactions.

(b)   The auditor should pay special attention to the terms of import relating to the incidence of charges Eke insurance and freight, i.e., whether the imports are on C.I.F. basis, or F.O.B. basis, or some other basis.

(c)   The auditor should examine that imports for which consideration is payable in a foreign currency are recorded at an appropriate amount in accordance with Accounting Standard (AS) 11, Accounting for the Effects of Changes in Foreign Exchange Rates.

20. In addition to the audit procedures discussed above, the following analytical procedures may often be helpful as a means of obtaining audit evidence regarding the var­ious assertions relating to purchases.

(a)   Comparison, item‑wise and location‑wise both quantity and value, of purchases for the current year/period with the corresponding figures for pre­vious years/periods.

(b)   Comparison of ratio of gross margin to sales for the current year/period with the corresponding figures for previous years/periods.

(c)   Comparison of ratio of purchase returns to Pur­chases for the current year/period with the corre­sponding figures for previous years/periods.

(d)   Product‑wise reconciliation of quantity sold during the year/period with opening stock, purchases/pro­duction and closing stock.

Apart from the above, the auditor may also work out quantitative ratios and reconciliations, e.g., he may relate the quantum of output to the quantum of input to judge its reasonableness. In case segment information is avail­able, the above procedures may be carried out for each segment.

21. The auditor should also verify payments subsequent to the date of the balance sheet to identify any purchases which have not been recorded in the books of account.

Wages and Salaries

22. The auditor should examine the entries in the pay­roll/wage sheets with reference to relevant records, e.g., employee's records maintained by the personnel depart­ment showing details of pay such as basic pay, allowances, annual increments, leaves availed, etc. Special attention may also be paid by auditor in respect of new employees joining the entity during the year. Similarly, the payroll may also be examined with refer­ence to the time records/attendance records and leave records maintained by the personnel department. The deductions made in respect of income‑tax, provident fund, Employees State' Insurance (ES1), welfare schemes, health schemes, etc. may be examined with ref­erence to the returns submitted to the authorities con­cerned and the receipts/acknowledgments issued by such authorities.

23. The auditor should examine whether any legal, regu­latory or contractual requirements having a bearing on the rate or amount of wages and salaries have been com­plied with. Similar considerations would also apply to payments made to a contractor for hire of labour. Such requirements would include, inter alia, the provisions of the Minimum Wages Act, 1948, agreement with the employees, award of competent authority and judicial rulings.

24. In the case of senior management officials, the audi­tor should pay particular attention to determining whether the salaries payable are as per the terms of con­tract with the employees concerned. Special require­ments of terms of contract such as granting stock options (as per schemes formulated by SEB1), availing leave encashment, total amount payable annually includ­ing ex‑gratia, etc. should be specifically looked into.

25. In the case of casual labour, besides carrying out the other audit procedures, the auditor should specifically examine the sanction of the competent authority for employment of such labour and ascertain whether such employees are retained as per the time rate or piece‑rate basis. In appropriate cases, the auditor may pay a sur­prise visit to the sites where the casual labour is employed to assess the correctness of the attendance records main­tained in respect of such labour. In cases where com­plete outsourcing of labour has been given to an outside agency, the term of agreement and compliance thereof would be examined.

26. The auditor should obtain a list of employees who have retired or otherwise left the services of the entity during the period under audit and examine that they have not been included in the payroll.

27. In addition to the audit procedures discussed above, the following analytical procedures may often be helpful as a means of obtaining audit evidence regarding the var­ious assertions relating to wages and salaries:

(a)   comparison of wage bill for the year/period with the wage bill of previous years/periods;

(b)   comparison of the monthly wage and salaries of a month with other months during the year/period and with the corresponding month of the previous years/periods;

(c)   comparison of the wage* bill for each department/unit for the current year/period with the corresponding figures for previous years/peri­ods;

(d)   comparison of the ratio of wages and salaries to sales for the current year/period with the corresponding figures for the previous years/periods;

(e)   comparison of the ratio of wages and salaries to cost of production for the current year/period with the corresponding figures for previous years/periods;

(f)     comparison of the ratio of contribution towards provident fund to wages and salaries for the current year/period with the corresponding figures for pre­vious years/periods;

(g)   comparison of the ratio of contribution towards provident fund to wages and salaries for the current year/period with the rate(s) of contribution specified under the law governing provident fund;

(h)   comparison of the ratio of contribution towards ESI to wages and salaries for the current year/period with the corresponding figure for previous years/periods;

(i)      comparison of the ratio of contribution towards ESI to wages and salaries for the current year/period with the rate(s) of contribution specified under the law governing the ESI.

Bonus

28. In the case of provision for bonus, the auditor should examine whether the liability is provided for in accordance with the Payment of Bonus Act, 1965 and/or agreement with the employees or award of com­petent authority. Where the bonus actually paid is in excess of the amount required to be paid as per the pro­visions of the applicable law/agreement/award, the auditor should specifically examine the authority for the same (e.g., resolution of the board of directors in: the case of a company).

Retirement Benefits

29. The auditor should examine whether the entity is liable to pay any retirement benefits to its employees such as provident fund, superannuation/pension, gratu­ity, etc., whether in pursuance of requirements of any law and/or in terms of agreement with the employees6. If so, the auditor should examine whether the amount payable has been computed in accordance with the relevant legal and/or contractual requirements. In respect of gratuity/pension, the auditor should specifically examine whether the provision for accruing gratuity/pension liability has been made by the entity. The auditor should examine the adequacy of provision with reference to the actuarial certificate obtained by the entity7, in case the entity has not obtained such an actu­arial certificate, the auditor should examine that the method followed by it, say, group gratuity insurance scheme taken by the entity, for calculating the accrued liability for gratuity is rational.

Other Conversion Costs

30. The auditor should verify the other conversion costs (such as power and fuel, processing charges, etc.) with reference to the supporting documents and related agreements. In case the material is sent outside to third parties for processing, necessary charges including exis­tence of materials, wastage, etc. need to be ascertained and accounted for. In addition, the auditor may also compare the amount of expense on a particular item with the corresponding figure for previous years. Similarly, he may work out the ratios of different items of conver­sion costs to total cost of production for the current year and compare the same with the corresponding figures for previous years.

Establishment and General Administrative Expenses

31. The auditor should verify establishment expenses and general administrative expenses such as insurance, rent, rates, conveyance, travelling, telephone, entertain­ment, printing and stationery, general expenses, etc. with reference to the sanction of the competent authority, the supporting documents, related agreements and the rules and regulations followed by the entity. The auditor may also compare the amounts of these expenses with the corresponding figures for previous years. Similarly, he may work out the ratios of different items of expenses to sales for the current year and compare the same with the corresponding figures for previous years.

Interest and Financial charges

32. The auditor should verify the amount of interest expense for the year with reference to the terms and con­ditions of relevant agreements. The auditor may also work out the ratio of interest expense for the year to aver­age interest‑bearing loans and advances outstanding during the year and compare it with the corresponding fig­ure for previous years and reconcile the same. The audi­tor should particularly examine that interest as well as other financing costs such as commitment fees on funds borrowed for a qualifying asset included in the gross book value of the asset to which they relate and have not been charged to the profit and loss account of the period in which they are incurred8. If the entity has paid any penal interest it should also be examined. Such interest should be disclosed as part of normal interest. The audi­tor should consider, having regard to the materiality, whether it requires separate disclosure.

Depreciation

33. The auditor should check the calculation of depreci­ation. The total depreciation arrived at should be com­pared with that of previous years to identify reasons for variations. The auditor should particularly examine whether the depreciation charge having regard to rate of depredation and method of depreciation followed con­sistently is adequate keeping in view the generally accepted bases of accounting for depreciation9. Alternatively, the auditor may consider qualifying his report. In case, assets have been revalued by entity during the year, the auditor should ensure that the deprecia­tion has been computed properly.

Research and Development Expenses

34. The auditor should verify various items of expenses incurred on research and development with reference to supporting documents and related agreements. For example, the cost of materials consumed for research and development may be verified with reference to such documents as purchase invoices, goods received notes, records relating to issue of materials, etc. The auditor should particularly examine whether the accounting pol­icy followed by the entity regarding treatment of research and development costs is in accordance with Accounting Standard (AS) 8, Accounting for Research and Development.

35. The auditor should examine whether the deferral meets the appropriate legal requirements, if any. If an accounting policy for deferral of research and develop­ments is adopted, it should be applied to all such projects which meet the criteria laid down for deferral under AS 8. The auditor should examine whether the criteria laid down in AS‑8 which previously justified the deferral of certain research and development costs no longer apply, the unamortised balance has been charged as an expense of the year. Similarly, the auditor should examine that where the criteria for deferral continue to be met but the amount of unamortised balance of the deferred research and development costs and other relevant costs exceed the expected future revenues/benefits related thereto, such excess has been charged as an expense immediately.

Repairs and Maintenance

36. The auditor should scrutinise the repairs and mainte­nance account to ascertain that new fixed assets and sub­stantial improvements to existing assets have not been included in repairs and maintenance. The auditor should exercise special care particularly in case large amounts charged to the profit and loss account.

Contingencies .

37. In respect of product warranties, service contracts, per­formance warranties, etc., the auditor should examine whether provisions have been made in accordance with Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date. The auditor should also examine the reasonableness of the basis adopted for quan­tifying the provision with reference to the relevant agree­ments and the assessment based on his past experience.

Taxes on Income

38. The auditor should examine that tax expense or tax saying has been properly computed and disclosed in the financial statements10. The tax expense for the period which comprises current tax and deferred tax is to be included in the determination of net profit or loss for the period under audit. In case of companies attracting minimum alternate tax, it has to be ensured that proper provision has been considered in the accounts. The auditor should examine that the deferred taxes have been recognised for all timing differences subject to consideration of prudence in respect of deferred tax assets as set out in Accounting Standard (AS) 22, Accounting for Taxes on Income. If there is a material depar­ture from the provisions of AS 22, the auditor should qualify his report.

39. In respect of assessments completed, revised or rec­tified during the year, the auditor should examine whether suitable adjustments have been made in respect of additional demands or refunds, as the case may be. The relevant orders received up to the time of audit should be considered and, on this basis, it should be examined whether adjustment is required in the financial statements.

40. If the entity disputes its liability in regard to demands raised, the auditor should examine whether there is a positive evidence or action on the part of the entity to show that it has not accepted the demand for payment of tax or duty, e.g., where it has gone into appeal under relevant provisions of the Income‑tax Act, 1961. Where an application for rectification of mistake has been made by the entity, the amount should be regarded as disputed. Where the demand notice/intimation for the payment of tax is for a certain amount and the dispute relates to only a part and not the whole of the amount, only such amount should be treated as disputed. A disputed tax liability may require a provision or suitable disclosure (see Accounting Standard 4, Contingencies and Events Occurring After the Balance Sheet Date). In determining whether a provision is required, the auditor should, among other proce­dures, make appropriate inquiries of management, review minutes of the meetings of the board of direc­tors and correspondence with the entity's lawyers, and obtain appropriate management representations.

41. The auditor should obtain from the management a statement showing the status of pending tax matters. He should examine the statements to assess the adequacy of provisions made in respect of those matters in the con­text of their current status.

SPECIAL CONSIDERATIONS IN THE CASE OF A COMPANY

42. In the case of audit of a company, in addition to the procedures described above, the auditor should also carry out appropriate audit procedures in respect of mat­ters which are specifically required to be examined under the provisions of the Companies Act, 1956. Some of the illustrative procedures specifically applicable in the case of audit of a company are described below. It may be clarified that the following is not an exhaustive list of additional procedures to be carried out in the case of audit of expenses in the case of a company.

(a) The auditor should examine whether the managerial remuneration paid or payable by the company is within the limits laid own under section 198 and Schedule XIII to the Companies Act, 1956. The auditor should also examine whether the remuneration paid or payable to the directors of the company, including any managing or whole‑time director, has been determined by the Articles of Association of the company or by a resolution of the company passed in a general meeting. The auditor should also examine whether the remuneration of directors complies with the provisions of section 309 of the Companies Act, 1956. The auditor should further examine whether the computation of net profit for purposes of man­agerial remuneration is in accordance with sections 349 and 350 of the Companies Act, 1956.

(b) The auditor should examine whether the contributions, if any, made by the company to charitable and other funds not directly relating to the business of the company or the welfare of its employees comply with the provisions of section 293 of the Companies Act, 1956. According to this section, the board of directors of a public company cannot, except with the consent of the company in general meeting, con­tribute to charitable, and other funds not directly relating to the business of the company or the welfare of its employees, any amounts the aggregate of which will, in any financial year, exceed Rs.50,000 or 5 per cent of the average net profits of the company as determined in accordance with the provisions of sec­tion 349 and section 350 during the three financial years immediately preceding, whichever is greater. The auditor should examine whether the Memorandum of Association of the company empowers it to make contributions to charitable or other funds not directly relating to the business of the company or the welfare of its employees. If the objects clause in the Memorandum does not contain such authority, the company has no power to make such contributions.
 
The auditor should ask the management to prepare a schedule of contributions to various funds covered by section 293 made during the year, giving the names of the institutions to which contributions have been made, the amounts paid and the dates on which the contributions were approved by the board of directors. He should also ask the management to prepare a computation showing the limits of permissible con­tributions which can be made under this section.
 

(c) The auditor should examine whether political contri­butions made by the company are within the limit prescribed in section 293A of the Companies Act, 1956.11 Where the limit laid down under section 293A is adhered to and the facts are properly dis­closed, the auditor has no further duty. Where, how­ever, the facts regarding such contributions are not properly disclosed, the auditor should qualify his report and state the facts therein. Where the auditor has genuine doubt regarding the applicability of the Section, he should ensure that the fact is properly dis­closed in his audit report.
 
Where the auditor is satisfied that political contribu­tions have been made in excess of the limit pre­scribed in section 293A, he should bring this to the attention of the shareholders by qualifying his audit report and making a mention of the excess amount involved, if ascertainable.
 
The auditor should obtain a certificate from com­pany's board of directors to the effect that all amounts of contributions to political parties or for any political purpose to any person falling under the provisions of section 293A have been brought into the books of account of the company and that no amounts of such nature other than those so included in the books have been paid/given, directly or indirectly.

(d) The auditor should examine whether the contribu­tion, if any, to the National Defence Fund or any other fund approved by the Central Government for the purpose of national defence complies with the provisions of section 293J3 of the Companies Act, 1956.This section empowers the board of directors to make such contributions. It may be noted that unlike the contributions to charitable or other funds n or directly relating to the business of the company or to the welfare of its employees, contributions to National Defence Fund (or other similar funds) can be made by a company even where the Memorandum of Association of the company does not specifically empower it in this regard. The audi­tor should examine whether the total amount or amounts contributed by the company to the National Defence Fund (or other similar funds) during the year have been suitably disclosed in the profit and loss account.

(e) In respect of payments to sole-selling agents, the audi­tor should examine whether the provisions of sections 294,294A and 294AA have been complied with.

(f) The auditor should examine whether the provisions of section 297 have been complied with in appropri­ate cases. He should also examine compliance with the terms and conditions, if any, stipulated by the Central Government in its approval under the pro­viso to sub‑section (1) of section 297,

(g) In case any partner or relative of a director of the company, any firm in which such director, or relative of such director, is a partner, any private company of which such director is a director or member, or any director, or manager of such a private company, holds any office or place of profit under the company or under any subsidiary of the company, the auditor should examine whether the provisions of section 314 have been complied with.

(h) The auditor should examine whether any personal expenses have been charged to revenue account.12

(i) The auditor should examine whether the transaction of purchase of goods and materials and services, made in pursuance of contracts or arrangements entered in the register(s) maintained under section 301 of the Companies Act, 1956, as aggregating during the year to Rs.50,000 (Rupees Fifty Thousand) or more in respect of each party, have been made at prices which are reasonable having regard to prevailing market prices for such goods,, materials and services or the prices at which transaction for similar goods or service have been made with other parties. 13

(j) The auditor should examine whether any undisputed amounts payable in respect of income tax, wealth tax, sales tax, customs duty and excise duty were out­standing as at the last day of financial year concerned, for a period of more than six months from the date they became payable have been reported under MAOCARO, 1988.

EXAMINATION OF PRESENTATION AND DISCLOSURE

43. The auditor should satisfy himself that the expenses have been properly classified and disclosed in the finan­cial statements. Where the relevant statute lays down any disclosure requirements in this behalf, the auditor should examine whether the same have been complied with.

MANAGEMENT REPRESENTATION

44. The auditor should consider obtaining a manage­ment representation on expenses charged to the state­ment of profit or loss when other sufficient appropriate audit evidence cannot reasonably be expected to exist. 14

DOCUMENTATION

45. The auditor should maintain adequate working papers regarding audit of expenses. 15

 

1 Reference may be made in this regard to Guidance Note on Accrual Basis of Accounting.

2 The extent of review of internal controls would depend upon the facts and circumstances of each case. Reference may be made in this regard to the "Internal Control Questionnaire", issued by the Institute of Chartered Accountants of India in 1976 which contains, inter alia, an illustra­tive list of internal controls in relation to petty cash, cash and bank payments, salaries and wages And purchases.

3 Refer to SAP‑14, Analytical Procedures

4 Refer to AS‑1 8, Related Party Disclosures.

5 Refer to SAP‑21, Consideration of Laws and Regulations in an Audit of Financial Statements.

6 Attention is invited in this regard to AS 15, Accounting for Retirement Benefits in the Financial Statements of Employers.

7 Attention is also invited in this regard to SAP 9, Using the Work of an Expert.

8 Attention is invited AS‑16, Borrowing Costs.

9 Attention is also drawn to Accounting Standard (AS) 6, Depreciation Accounting.

10 Attention is drawn to Accounting Standard (AS) 22, Accounting for Taxes on Income.

11 Reference may be made in this regard to the Guidance Note on Section 293A.of the Companies Act and the Auditor.

12 Reference may be made in this regard to the Statement on the Manufacturing and Other Companies (Auditor's Report) Order, 1988.

13 Reference may be made in this regard to the Statement on the Manufacturing and Other Companies (Auditor's Report) Order, 1988.

14 Reference may be made in this regard to SAP 11, Representation by Management.

15 Reference may be made in this regard to SAP‑3, Documentation.