COST Audit Body Final

7/29/2019 COST Audit Body Final

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Introduction

Cost Audit is the process of ascertaining whether the production, marketing and sales

processes as well as other aspects of a business are managed in the most cost effective

way. This is essentially an Internal Audit and is done as a tool for optimising

management efficiency. The most important benefit is the location of unseen leaks in

revenues or unproductive or under- productive employment of resources

It is mandatory if the Business is under scrutiny by a financial institution or regulator on

the basis of complaints of mismanagement.

Always it is desirable to have a Cost audit done periodically, to prevent the situation

getting out of control, and to help the management to take prompt action where necessary

Cost audit and its Objects Posted by Vikash in April 30th .In simple words the term cost

audit means a systematic and accurate verification of the cost accounts and records and

checking of adherence to the objectives of the cost accounting.

As per ICWA London cost audit is the verification of the correctness of cost accounts and

of the adherence to the cost accounting plan.

In cost audit auditor has to perform the following duties

1. Examine the correctness of the cost records maintained by the concern and

2. To report as to whether the cost accounting plans have been adhered to or not.Cost

audit is done to keep the cost per unit to the minimum.


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Object of cost audit Following are the basic object of cost audit

1. To verify the correctness of the cost accounting records.

2. To find out whether the principles of cost accountancy have been fully and correctly

applied in maintaining cost records.

3. To search for the deficiencies in the cost record system of the company.

4. To attain efficiency in cost accounting systems and procedures.


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COST AUDITORS REPORT

This report has to be submitted to the Central Government under S. 233-B (4) and not to

the Registrar as it may contain

Confidential and secret matters, which if disclosed, may prove to be harmful to the

company. The Cost Auditor has to

send copy of the report also to the company concerned but not to the members. If the cost

auditors report contains any reservation or qualification, the company must furnish

necessary information thereof to the Government within the thirty days of the receipt of

such a report. In spite of this fact that his remuneration is paid by the company he is not

responsible to the company. His position is just like that of a special auditor appointed

under Section 233A.

To enable the cost auditor to submit his report to the Central Government within the

prescribed time, i.e., within the 120 days from the closing of the financial year of the

company to which the cost audit report relates, Cost Audit (Report)Rules, 1971, lay down

that every officer of the company must make it available to the cost auditor records,

statements, books of account and every paper required for the audit, within 90 days from

the end of the company. The report should be clear, concise, and precise.

For the guidance of the Cost Auditor, we lay down in broad lines a few points which

must be incorporated in the report :


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1. If the machines and labour remained idle during the year because of the shortage

of raw materials

2. If a large quantity of raw materials were stocked and which remained unutilized

for a long time and thus looking up of the working capital of the company.

3. He should state whether the cost records maintained by the company were

adequate for the purpose of audit.

4. He should state whether the broad policy laid down by the management was

faithfully followed.

5. The report should concentrate more on the cost of production, comparative

profitability and operating efficiency of different lines in which the company is

engaged rather than the routine statistical or financial information

6. He should state if there has been a rise in the cost of production as compared with

the previous year. He should analyse the causes of such a rise which might have

been due to lapses or negligence on the part of the management, e.g., He should

clearly state as to where the fault lies

7. The report should state if there has been any wastage during the process of

manufacture and how could it be avoided.

8. He should also mentioned the areas in which it is possible to reduce the cost of

production.

9. He should state whether or not the cost statement reveals a true and fair view of

the production.


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The Cost Audit is a new concept in India. No definite duties of the Cost Auditor have

been laid down by the companies Act except that he has to submit his report to the

Central Government and the company concerned. Neither the Institute of Cost or

Working Accountants of India has given any guidelines in this respect.

In any case, it seems proper, that the Cost Auditor should not hesitate to mention in

his report if the management has been at fault which has resulted in a loss to the company

or to the cost of production has gone up. But before he submits his report, he must go

through the relative facts and scrutinize them again to find whether the criticism by him

is based on correct facts.


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COST AUDIT (Report) RULES, 1968 as amended in 1969 &1974

1. The cost auditor has to submit his report to the Central Govrnment in the form

prescribed by the Cost Audit (Report) Rules, 1971, &a pro forma of which is given

later on.

2. He shall also forward a copy of the report at the same time to the company within 120

days from the end of the companys financial year to which the cost audit report

relates.

3. The company &every officer of the company shall make available to the cost auditor

within 90 days from the end of the financial year of such cost accounting records ,

costing statements & other books & papers that would be required for conducting the

cost audit &render any assistance required by the cost auditor so as to enable him to

complete the audit & send his report within 120 days.

4. In default by any cost auditor, he is punishable with fine which may extend to rupees

five hundred.

5. In this report, he shall mention inter alia, the following points:-

(a) Whether proper records of fixed assets, in detail are maintained.

(b) Whether these assets have been physically verified by the management, & if

any discrepancies were found, whether such discrepancies had been properly

dealt with in the books of account.

(c) Whether the assets had been revaluation during the course of the year & if so,

the basic revaluation should be indicated, etc.


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FORM OF THE REPORT

I..., having been appointed as auditor under S. 233B of the Companies

Act, 1956 (hereafter referred to a Cost Auditor) of .Co. Ltd., (hereafter referred to as

the Company ) having examined the books of accounts prescribed under clause (d) of

sub-section (1) of S. 209 of the said Act & other relative for the year ended

.19.relating to maintained by the company & report subject to my comments under

the heading Auditors observations & conclusions contained in the Annexe to this report

, that

(a) I have obtained all the information & explanation which to the best of my

knowledge & belief were necessary for the

purpose of this audit;

(b) Proper accounting records required under clause (d) of subsection (1) of S. 209 of

Companies Act, 1956, have not been kept by the company;

(c) Proper returns adequate for the purpose of my cost audit have not been received

from branches not visited by me;

(d) The said book & records give/do not give the information required by the

Companies Act, 1956, in the manner as required; &


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(e) in my opinion the companys cost accounting records have/have not been properly

kept so to give a true & fair view of the cost of production, processing,

manufacturing or mining activities, as the case may be, & marketing of product

under reference.

The matters contained in the Annexure to this report forms part of this report

which is also subject to my observations made therein.

Dated this..day of.19..at


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Difference between Cost Audit & Financial Audit

The basic nature of audit is checking and it holds good for both the cost audit as well as

the financial audit. However following are the points of difference between these two

audits:

1. Compulsory nature: Financial audit is compulsory for all the companies registered

under companies act, 1956.Cost audit is not compulsory for all the companies. Only in

the case of manufacturing or mining companies they have been specifically asked by the

central government to maintain cost accounts under section 209 and get those accounts

audited under section 233b.

2.Purpose :The purpose of the financial audit is to report on the profit and loss account

and balance sheet as to whether they show true and fair view of the business or not.The

purpose of the cost audit is to certify that whether the expenditure incurred on the

production of items has been incurred prudently or not.

3. Expression of opinion: The financial auditor has to comment upon the accuracy of the

transactions recorded and the cost auditor has to comment upon the correctness and wise

ness of the decisions taken in production of items.

4. Instance: Financial audit is conducted at the instance of the shareholders. Cost audit is

done at the requirement of third parties like government, industrial organizations etc.

5. Appointment :Financial audit is appointed normally by the shareholders in the general

meeting whereas the board of directors with the previous approval of the central

government appoints a cost auditor.


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6. Recurrence :Financial audit is conducted every year whereas a cost audit may be done

in the year in which it is required by the government or any other agency.

7. Stock: In financial audit auditor has to check the exact value of closing stock for the

purpose of balance sheet, whereas in the cost audit the auditor has to check the adequacy

of the stock keeping in view of the needs of the concern.

8. Report :In the financial audit the report is submitted to the management to be laid in

the general meeting of the shareholders, the report of the cost auditor is submitted to the

company and also to the central government within 180 days from the end of the

company financial year to which the cost audit.


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History

TEOCOs industry-leading experts will audit your invoices comparing rates, inventory,

and usage with other source data to identify and recover additional savings and share

findings for ongoing returns.

Our Cost Auditing Customers Average 10-15% Savings on Monthly Telecom Costs

Last year alone, we saved over $56 million for our customers. In 2008 our expert team

audited over $400 million in invoices per month and expects to double that in 2009.

TEOCO offers contingency-based audit services that are specifically designed to identify

and recover costs quickly and efficiently. We are paid for our services only after

bringing value to your organization.

TEOCOs U.S. domestic audit expertise covers cost structures such as wire line, wireless,

local, resale, IXC, wireless resale, UNE, and retail.

TEOCOs International expertise covers cost structures in Canada as well as international

vendors in countries such as Australia, Benelux, France, Germany, Italy, the Nordics,

South Africa, Spain, and Singapore.

TEOCO's audit services offer you:

Short-term results cash infusion from back credits on disputes

Long-term results including going-forward cost reduction, review of your audit

process, supporting Sarbanes-Oxley compliance, and providing program

recommendations

Our proven audit methodology includes:


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Data Gathering -TEOCO gathers and loads invoices, contract and tariff rates, circuit

inventory, call detail records, and standard industry data into our software applications to

support auditing and reporting

Rate Analysis- our team analyzes tariffs and client contracts to identify relevant audit

and savings opportunities

Invoice Auditing - leveraging our software applications and expertise, we conduct

complex audits on fixed (circuit) and event-based charges (usage) to enable the maximum

amount of credit recovery for your organization

Dispute Filing- we file disputes only after consistent, senior-level, review to ensure high

quality disputes are submitted to vendors

Credit Recognition - we work with your vendors to negotiate and reconcile credits. We

also provide this as a stand-alone offering.

Key Features:

Resources will be specifically dedicated to your account

Processes and audits will be customized to your process and business needs

We can assist you with the operations visibility required by Sarbanes-Oxley through

increased emphasis on process and controls

Outsource operations are SAS70 Type II certified

Outsource services are backed by service level agreements (SLAs)

TEOCO Management regularly reviews the progress of each engagement to ensure key

client success measures


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Credits from disputes found by our team far exceed the costs associated with the

engagement

Our full outsource services include:

Conversion of paper bills to electronic at a detail level

Electronic invoice loading and manual invoice entry

Invoice review, processing and payment file generation

Audit and analysis of telecom expense charges

Timely identification, filing and resolution of disputes

Complete reconciliation of credits and adjustments

Web-based financial and management reporting

Customized operations guide for the outsource engagement documenting all processes

related to the engagement.


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Cost Audit in Aviation Industry

The definition of cost audit by CIMA, London confines the term Cost Audit to

(i)verification of cost accounts and (ii)checking that cost accounting plan is adhered to.

The Institute of Cost and Works Accountants of India elaborates this concept as an audit

of efficiency, of minute details of expenditure, while the work is in progress and not a

postmortem examination. Financial audit is a fait accompli. Cost Audit is mainly a

preventive measure, a guide for management policy and decision in addition to being a

barometer of performance.thus, Institute of Cost and Works Accountants of India have

given wider perspective of cost audit. This definition puts emphasis on the evaluations

and the propriety (state of being correct in behavior and morals) of management actions,

decisions, executive policies and programmes.

Aviation

Aviation may be defined as the act of navigating an airship, airplane, helicopter and other

aircrafts. It may also be defined the activity or business of operating and flying aircraft. It

also includes air Route Navigational Services providing business organization. In a

nutshell, Aviation industry may comprise the airlines, airports and aircrafts & helicopters

manufacturing

Organizations.


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Importance of Cost Audit:

Audit of cost accounts in Indian has gained recognition both as an effective tool of

control in the hands of management and as a check on half of the shareholders, the

customers and the Government. As a tool of internal management, cost audit identifies

the weaknesses in the cost accounting system and discloses inefficiencies at all levels of

organisation. It acts as review of the activities of various departments and pinpoints

wastages and losses which can be avoided. In a way, cost audit is an audit of actual

performance. Cost Audit is also necessary from the point of view of the consumers and

the Government. An audit of the cost structure of an industry can help the government in

deciding whether Aviation may be defined as the act of navigating an airship, aeroplane,

helicopter and other aircrafts. It may also be defined as the activity or business of

operating and flying aircraft. Such an important industry needs to be brought under

statutory cost accounting and cost audit both for public interest and competitive cost

managementior not tariff protection should beextended to it. Similarly, in order to fix

proper prices on cost basis, the Government may rely upon theaudited cost statements.

This audit may also help in curbing profiteering in case of scarce goods. Again, cost

audit would be useful in bringing out inefficiencies or fraudulent intentions

of a management. Audited cost statement may also be sued by associations of various

industries to compile standard costs against which individuals firms may compare their

actual cost figures. In many audited cost statements may be useful to authorities in

levying tax or duty based on the cost of finished products. In case of cost plus contracts,


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it is imperative that cost records are properly examined. The government of India may

also

feel the need for cost audit in the aviation industry. In the context airport industry where

airport charges like RNFC, TNLC, LPH, X-ray Baggage charges and PSF is decided by

International Civil Aviation Organisation (ICAO). The ICAO decides these tariffs on

cost basis after deliberation with International Air Transport Association (IATA).

IATA is a users Group of Airlines. If cost accounts and data are audited by some external

cost auditors, the reliability of these cost statement is enhanced, Recently, Government of

India has published the Cost Audit Report Rules, 2001 on December 27, 2001 which are

very important to understand as follows:

Cost Audit Report Rules, 2001 presents an opportunity for Management Audit in the

process of conducting Cost Audit. The very purpose of Cost Audit is now being fulfilled

although it could have been achieved 36 years ago during the inception of Statutory Cost

Audit. But in the past, twist in original statute snatched away the scope of Management

Audit. The main twist and delayed implementation of the scheme that snatched away the

benefits from companies was compulsory maintenance of cost records and cost audit

from the auditee companies. Only some companies were covered under the ambit of cost

audit under section 233 (B) which compulsorily maintains their cost records under

section 209 (1) (d) of Companies Act 1956. Service industries were not included initially

at all. But now cost audit has been extended in service sector also e.g. power, telecom and

study is already going on in healthcare industry. Day by day service sector industries are

being covered under the cost audit due to Indian economy is witnessing


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liberalization, privatisation and globalization.The bureau of Industrial Costs

and Prices (BICP) one of the premier research organisations ofgovernment of India has

undertaken a study on cost related tariff and submitted their report on power sector and

telecom. Similarly in aviation industry this job could be given to BICP, New Delhi along

with ICWAI, Calcutta .to give their reports containing various suggestions and

recommendations.

It is pertinent to mention that All Aeronautical airport charges are determined on cost

basis and submitted to Govts of India. GOI New Delhi after reviewing put up to ICAO

for vetting and due approval before its implementation. As it is already mentioned that

certain guidelines, which are prescribed by ICAO needs to follow for determining the

airport charges on cost basis data. And if those data is prepared regular and professional

manner whether by qualified cost and management accountant or other professional but if

those data and cost records got audited by either internal cost auditor or statutory cost

auditor, then Government of India. New Delhi would be better position

to negotiate with ICAO to get approved the airport charges. When cost audit would be

conducting under qualified practicing cost auditors firm then it definitely data which

would be provided will be authenticated, transparent, and more reliable to put up before

ICAO by Government of India. New Delhi and IATA would be more reliable on

audited cost records basis costing of Airport charges.It is pertinent to mention all airport

charges like RNFC, TNLC,LPH, X-ray Baggage charges and PSFis approved by ICAO

and after getting approval, these are come into

force invariably to domestic/international airport. All these airport charges are billed to

all airlines or air taxi operators without any discrimination and same rules and regulation


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for charging and recoveries of airport charges are applicable to national carrier or other

foreign airlines for landing as well as over flying India. It also is imperative to mention

that airport charges for international airport and domestic airport are decided separately

by ICAO after negotiation, discussion, persuasion and consultation with IATA which is

represent airlines at international level. But whatever tariff rate decided is applicable to

domestic carriers and international carriers including foreign carriers.

Internal audit of cost records:

Internal audit of cost records under the order is welcome feature

to (12/02) Prepare records on regular basis; Prepare them online as far as possible; Get

them authenticated by qualified personnel and above all;tUse the same cost information

advantageously on a continuing basis for determining the tariff (airport charges) on cost

basis; Use the same cost information advantageously on a continuing basis for improving

the companys performance; A cost records are of different nature compared to financial

records, getting them audited separately by qualified cost accounting professionals would

be useful to a

company.


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Objectives of Cost Audit

From the point of view of govt.:

1. To determine whether a particular unit requires protection and if such protection

has already been given to it, should it be removed or should it continue or

curtailed.

2. To assist the Tariff Board to consider the extension or removal of protection.

3. For the purpose of comparison of cost between two companies engaged in the

manufacture of identical goods to find uneconomic units and also to bring certain

industries under the mischief of sections 209 and 233-B of the companies act.

4. To find out the accuracy of the cost accounts to sec that only chargeable items are

debited to the cost accounts in the case of cost plus percentage contracts to be

entered into between the government and the manufacturers.

5. To curb the profiteering by the manufacturing concerns.

6. To reduce the cost of essential commodities.

7. To fix the selling price in order to protect the interest of the consumers.

8. To avoid waste and unnecessary expenditure by the manufacturers and thereby

reduce the cost of production to make available consumers goods at reduced rates.

9. To bring to light the fraudulent intentions of the management.

10. To decide whether excise duty should or should not be reduced or removed on the

finished goods.


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From the point of view of manufacturers:

1. To aid the management to regulate production.

2. To enable the management to choose economic methods of operations and thus

earn profits to satisfy the shareholders and the investing public.

3. To enable the management to reduce the working costs by avoiding wastes.

4. To enable the management to chalk out the future policy on the basis of the report

by the cost auditor especially in regard to labour, raw material, plant, etc., to

maximize production and reduce the cost of production.

5. Cost analysis furnishes useful information in respect of such important matters,

such as, gross margin, differential costs, replacement costs, etc.

6. To find the profitability of different units of the factory. In other words, the

system is a study of the productivity or measurement of efficiency of different

products manufactyred by the company.

7. To fix the price when tenders or quotations have to be sent, especially in times of

competition.

8. To give up the production of less economic units and pay more attention to the

more profitable lines of manufacture.

9. To see the efficiency of the cost procedure introduced to avoid leakage of

resources of the company, their thefts, fraud and negligence.

10. To test the efficiency of cost control techniques and to evaluate their advantages

to the enterprise.


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11. To test check the evaluation of inventory and work-in-progess at various stages of

completion especially at the close of the financial year.

12. To have internal control and check which may in their turn be helpful to the

financial auditor.


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Records of overhead charges

After having examined the relevant records relating to the materials and wages directly

applicable to each job, the cost auditor should now proceed to examine the overhead

expenses like power consumed, rent, salaries, etc., in order to ensure that they have been

correctly allocated to the jobs concerned. Overheads relating to manufacture,

administrative and selling and distribution activities should be distinguished from each

other as he has to certify that overhead charges have been properly and correctly

allocated to each job or unit.

1. He should inquire into the principles of allocation of overhead charges.

2. Whatever system of allocation of overhead charges is followed, he should see that

it is consistently followed. He should inquire the principle or basis on which the

overheads are allocated. He should satisfy himself that the principle or the basis of

allocation is fair and equitable.

3. In order to see the accuracy of the overhead charges and their allocation to

different jobs, the auditor should check a few items.

4. If the overhead expenses have not been allocated according to the principle laid

down or the actual indirect expenditure has exceeded the budget or the standard

expenditure significantly, he should make inquiry as to why there has been a

divergence. If he is not satisfied with the explanation, he should mention this fact

in his report.


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5. He should reconcile the total overhead expenses as per the different cost sheets

with the actual overhead expenses and if there is any difference or discrepancy, he

should make inquiry.

6. He should examine the method of apportioning factory costs to ensure that it is

equitable to different jobs according to the principles laid down by the

management.

7. He should see that the overhead expenditure is allocated between finished and

unfinished products according to the correct principles.


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Conclusion

It should also be borne in mind that cost accounting had long ceased to be cost

determination and had turned towards cost management. The subject of cost management

is the use of cost information for better efficiency, better performance and better

profitability. And that is the exact intent of the order of 2001:timeliness, appropriateness,

utility and transparent etc. It is for the cost and management accountant now to rise to the

occasion and assume their right role as Management Auditors. This is an occasion for

such appropriate role brought by statutory recognition if not de jure but de facto. On

the basis of above, it realized that cost audit needs to be made in Airlines, Helicopter

services, airports running business. It would not only draw inefficiency but also

competition would be increased and cost consciousness will come, which is urgent need

of hour in the present changed international environment i.e. Globalization,

Liberalization, Privatisation and information technology. It is also pertinent to

mention that now-a-days, aviation became business.


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Reference:

A Journal ManagementAccountant published by ICWAI.

Calcutta.Viman Path, Monthly Magazine from Airports Authority of India

New Delhi Journal of the Institute of Chartered Accountant of India New Delhi.

Contemporary Auditing by Shri Kamal Gupta published by Tata

McGraw-Hili Publishing.Cost Audit and Management Audit

Saxena and Vashist published by Sultan Chand & Sons.

Documents

COST Audit Body Final