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Submitted By: Nisha Roll. No.-1906 M.Com-II COST AUDIT Subject: Corp. Financial A/cing & Auditing

Cost Audit Full

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Page 1: Cost Audit Full

Submitted By: NishaRoll. No.-1906M.Com-II

COST AUDIT

Subject: Corp. Financial A/cing & Auditing

Page 2: Cost Audit Full

Concept

As its clear from the name Cost Audit is the Audit of cost, i.e. and costing methodologies followed by any production/ manufacturing organization.

It is the process of verification of cost accounts which includes all the aspects that add to the cost of production/ manufacturing/assembling of certain kinds of goods.

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Definition

According to I.C.W.A. ( Institute of cost and works accountant of India):

“ Cost audit is an audit of efficiency of minute details of expenditure while the work in progress, and not a post mortem examination”.

“Cost Audit is mainly a preventive measure, a guide for management policy and decision, in addition to being the barometer of performance.”

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Objectives of Cost Audit

1) To Detect Errors & Frauds

2) To verify the accuracy

3) To have a full control on working of costing Dept. of the Org.

4) To Reduce the detailed checking of the external auditor

5) Helps the mgt. to take correct and timely decision

6) Moral check on staff of cost accounting Dept.

7) To bring efficiency in cost a/cing systems & procedures

8) To bring efficiency in the use of material labour machines etc.

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Evolution

In India the evolution of cost audit can be traced from the era of the World War II. The government made a lot of purchases in order to fulfill the requirements of the armed forces.

The govt. was willing to purchase big lots of goods in low cost.

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Evolution Cont…

The Suppliers faced problem in quoting prices as the cost of variable inputs was fluctuating.

In order to resolve this issue the govt. started entering into a cost-plus contract with the suppliers.

Under this, the Govt. verified the cost incurred and then added up a certain percentage of total verified cost to get the amount payable by the government.

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Evolution Cont…

After Independence Govt. took steps to study the cost aspects of production and developed a system of control over the Prices by checking the authenticity of costs being showed.

This ensured fair price to consumer and fair remuneration to manufacturer.

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Principles of Cost Audit

1) Code of Ethics

2) Independence of Cost Audit

3) Integrity and Objectivity

4) Professional Competence

5) Confidentiality

6) Professional Behavior

7) Technical Standards

8) Professional Code of Ethics

9) Engagement of other occupation

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Performing Cost Audit

1. COST OF RAW MATERIAL;

The cost of raw materials, both in quantities and value, as given in the statements, should be verified.

In case the transport cost of raw materials is a significant element of

cost, as in the case of cement and sugar industry, the transport cost is determined separately. In case of imported raw materials, the various elements are: FOB value, ocean freight, insurance, custom duty, clearing/forwarding and inland freight.

Data for raw materials consumption have to be provided for the year

under audit, as well as for the previous two years, for comparison.

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2) Material Consumption

i. Material consumption is worked out by deducting closing inventories, from the receipts and adding opening balance.

ii. Consumption of materials should be carefully checked with the issues to production processes.

iii. Provisions of the cost accounting record rules should be kept in mind, as the rules also specify accounting requirements for raw materials and other direct and indirect materials.

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3) Wages And Salaries

The following particulars relating to wages and salaries be included in Cost Auditor's Report,

i.Direct Labor Cost On Production;ii.Indirect Employees Cost On Production;iii.Employees Cost On Administration;iv.Employees Cost On Selling And Distribution;v.Bonus To Workers And Employees;vi.Other Employees Cost, If Any (Including Taxes And Leviesvii.Total Employees CostAfter the ascertainment of cost is done it has to be then compared with previous year figures.

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4) Inventory Valuation

i. The various inventory cost formulas (LIFO, FIFO, HIFO), weighted average cost, base stock, specific identification, latest purchase price have different effect on costing and asset valuation.

ii. If an entity follows a formula which is different from the one generally followed by the industry, it should be specially commented upon by the cost auditor in his report.

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5) Depreciation

i. Cost accounting record order/rules require that record of all fixed assets, in respect of which depreciation is to be provided, shall be maintained.

ii. Depreciation is charged according to the depreciation policy of management, which may be on a straight line or reducing balance method, based on the useful life of the asset.

iii. Any basis adopted should be consistently followed. If any basis, other than the useful life of the asset, is followed, the impact of providing excess or less depreciation should be pointed out.

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(Vi) Allocation Of Overheads

The basis of allocation/apportionment of overhead cost to cost centers should be in accordance with the

i.Accepted principles of cost accounting.

ii.Quantification of services rendered by service departments to cost centers.

iii.On the basis of activities which are cost drivers.

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Types of Cost Audit

1.Cost Audit under Statute.

To maintain proper records regarding materials consumed, labour and other expenses under section 209 that are required to get their cost accounts audited.

-To ascertain the relationship of costs and prices.

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-To make accurate, relevant and prompt information to mgmt to assist in imp managerial decision.

2. Cost Audit to Assist Management

3.Cost Audit on behalf of Govt.-To ascertain correct cost of certain units.-To ascertain correct cost of contract given

to private firms under ‘cost plus’ basis.

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4. Cost Audit on behalf of Customer

-Cost audit may be conducted on behalf of the customer when he agrees to pay price for a certain product on ‘cost plus’ basis.

5. Cost Audit on behalf of Trade Association.

-To ascertain comparative profitability of its members.

-To determine min price to avoid cut throat competition among its members.

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Aspects Of Cost Audit

It has two important aspects:

1)Propriety Audit

2)Efficiency Audit

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1. Proprietory Audit

Cost audit as a basis of proprietary audit serves the following ;

Whether the expenditure is appropriate and not more than what the situation demands. Whether any personal benefit has accrued to the sanctioning authority as a result of this expenditure. Whether the expenditure has indeed served the purpose for which it has been incurred. Whether the prescribed rules and regulations have been duly followed.

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2. Efficiency Audit

 In identifying the areas of inefficiencies and weaknesses.

In determining the appropriate selling price of the commodity and services.

In determining appropriate cost of different products & services.

In ensuring the optimum utilization of the plant capacity.

In proper allocation and apportionment of overheads on the most equitable basis.

In creating an atmosphere, Cost conscience through out the organization.

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Advantages of Cost Audit

The important advantages of cost audit can be studied as under:

1)To the Management

2)To the Shareholders

3)To the Consumers

4)To the Government

5)To the Society

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1)To the Management

i.Control On Different Elements Of Cost

ii. Assessment Of Profitability

iii. Check On The Role Of Uneconomic Units

iv. It Helps In Reducing The Prices

v.Check On Cost Control Techniques

vi. Helpful In Budgetary Control & Standard Costing

vii. Fixing Responsibilities Of Specific Persons

viii. Proper Valuation Of Raw Material & Work- In-

Progress

ix. Helpful In Fixation Of Contract Price ( Tender Price)

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2) To the Shareholders

i. Guarantee Of The Proper Maintenance Of Records

ii. Fair Return On Investment

iii. Timely & Proper Information

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3) To the Consumers

i. It Helps In The Fixation Of Fair Prices

ii. Increase In The Standard Of Living

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4) To the Government

i. Improve working of uneconomic industrial units

ii. Guidance

iii. Helpful in providing cost statements & other relevant information

iv. It facilitates the settlement of trade disputes

v. Helps the ‘Tariff Board’

vi. Ceiling prices

vii. Cost plus contract

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5) To the Society

i. Provides guidelines to the industries for improving working

ii. Justification of price increase by increase in cost of production

iii. Reduces the prices

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The exemption from Cost Audit on year-to-year basis in the following situation :(i) Temporary Closure of the company/products.(ii) Negligible production activity.

Company having an authorized Capital

Amount of fees to be paid

A. Less than Rs.25 lakh

` 500

B. Rs.25 lakh or more but less than Rs.5crore

` 1000

C. Rs.5 crore or more ` 2,000

Exemption from Cost Audit

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Appropriate documents are required to be furnished along with application for exemption :

(i) True copy of complete Annual Report containing balance sheet and profit and loss account for the year for which exemption is being sought along with copies of the same pertaining to preceding two years.

(ii) An affidavit containing full facts of capacity utilization turnover and financial status of the company, duly signed by two Directors of the company and authenticated by a Notary Public.

(iii) A brief note/status report on steps taken by the management for revival of the said unit.

Cont..

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Criticism against cost audit

1) Unnecessary interference of government in the working of the companies

2) It leads to duplication of work

3) Expensive & luxury

4) Harm to the interests of the company

5) Unrealistic regulations

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Criticism (cont..)

6) Repeation

7) Shortage of cost accountants

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Finally ....

It is wrong to say that Govt. will interfere in the work of management rather it will help them with valuable informations. The role of cost auditor is constructive as he may recommend a number of improvements in the working of organization.

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Bibliography

Advanced Auditing and Professional Ethics, Volume-1, Board of Studies ,The Institute of Chartered Accountants of India (ICAI).

Basu S.K. Auditing – Principles and Techniques, Pearson Education, 2nd Edition 2007.

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Thanks..