The Institute of Cost and Works Accountants of India12, SUDDER STREET, KOLKATA - 700 016
COST AUDIT&
OPERATIONAL AUDIT
FINAL
GROUP - IVPAPER - 17
Published by:
Directorate of StudiesThe Institute of Cost and Works Accountants of India12, SUDDER STREET, KOLKATA - 700 016
Printed at : Repro India Limited,50/2, TTC MIDC Industrial Area, Mahape, Navi Mumbai - 400 710, India
Copyright of these Study Notes in reserved by the Institute of Cost and Works Accountants of India and prior permission from the Institute is necessary for reproduction of the whole or any part thereof.
First Edition : January 2008Second Edition : March 2009Reprint : June 2010
CONTENTS
Page No.
Study Note - 1
Basic of Cost Audit 1
1.1 Nature and Scope of Cost Audit 2
1.2 Provisions Under Companies Act Relating to Maintenance
of Cost Records and Cost Audit 10
1.3 Cost Auditor - Appoinment, Rights and Responsibilities 15
1.4 Planning and Structuring the Cost Audit 26
1.5 1.5.1 Appendix I - A 36
1.5.2 Appendix I - B 38
1.5.3 Appendix I - C 39
1.5.4 Appendix I - D 40
1.5.5 Appendix I - E 43
1.5.6 Appendix I - F 44
1.5.7 Appendix - II (A) 45
1.5.8 Appendix - II (B) 46
1.5.9 Appendix - II (C) 47
1.5.10 Appendix - II (D) 48
1.5.11 Appendix - II (E) 49
1.6 Specimen Question with Answer 50
1.7 Self-examanation Quaestion 52
Study Note - 2
Cost Audit Report Rules, 2001 53
2.1 Provision of Cost Audit Report Rules 2001 54
2.2 Cost Audit Report Rules, 2001 (With Authors Comments) 54
2.3 Form II - The Cost Audit Report 61
2.4 Annexure the Cost Audit Report 68
2.5 Proforma 112
Page No.
2.6 Review of Cost Audit Report by the Company Cost Audit Branch 116
2.7 Disposal of Cost Audit Reports by theCentral Government 118
2.8 Other End Users of Cost Audit Report 119
2.9 Disclosure of Information and Confi dentiality 120
2.10 Appendix I (Cost Audit Report Rules 2001) 121
2.11 Specien Question With Answer 154
2.12 Self Examination Question 162
Study Note - 3
Cost Accounting Record Rules 165
3.1 Procedure for Precription of Cost Accounting Record Rules 166
3.2 General Provision Under the Various Cost Accounting Record Rules 185
3.3 Cost Accounting Record (Telecommunication)Rules, 2002 233
3.4 Specimen Question With Answer 251
3.5 Self-examination Question 255
Study Note - 4
Cost Accounting Standards 257
4.1 Cost Accounting Standards - Backgrounds and History 258
4.2 Federal fi nancial Accounting Standards 264
4.3 Government Accounting standards Advisory Board in India 267
4.4 Cost Accounting Standard Board in India 268
4.5 Cost Accounting Standards 268
4.6 Cost Accounting standards vs Cost Accounting Record Rules 270
4.7 Compliance of Cost Accounting Standards 270
4.8 Preface Cost Accounting Standards Board 271
4.9 Cost Accounting Standard 1 : Classifi cation of Cost 274
4.10 Cost Accounting Standard 2: Capacity Determination 289
Page No.
4.11 Cost Accounting Standard 3 : Overheads 296
4.12 Cost Accounting Standard 4:
Cost of Production for Captive Consumption 310
4.13 Cost Accounting Standard 5:
Determination of Average (Equalized) Cost of Transportation 319
4.14 Draft Cost Accounting Standard 6:
Determination of Arms Length Price 329
4.15 Draft CAS - 7 347
4.16 Minstry of Finance and Company Affairs 362
4.17 Self-examination Question 363
Study Note - 5
Basics of Internal Audit and Opertional Audit 365
5.1 Concept of Internal Control 366
5.2 Origin of Internal Auditing 381
5.3 Operational Audit 388
5.4 Budgetary Control System 390
5.5 Capacity Utilization 392
5.6 Inventory Control 394
5.7 Management Informational System 396
5.8 Nature and Scope of Management Audit 397
5.9 Audit of Management Process and Functions 403
5.10 Specimen Question with Answer 416
5.11 Self Examination Question 423
Study Note - 6
Management Audit in different Function 427
6.1 Corporate Culture and Objectives 428
Page No.
6.2 Corporate Services Audit 433
6.3 Audit of Social Responsibility of Management
- Invironmental Polution Control 440
6.4 Audit checks of Different Functions 442
6.5 Corporate Divisions / department / functions 466
6.6 Corporate Governance and Audit Committe 472
6.7 Audit Committees and Corporate Governance 477
6.8 Confederation of Indian Industries (CII)
Code for Desirable Corporate Governance 480
6.9 Self-examination Question 500
Study Note - 7
Various Types of audit and Their Process 503
7.1 Due Diligence Audit 504
7.2 SOX Audit 505
7.3 Energy Audit 507
7.4 Productivity audit 511
7.5 Inventory Audit 513
7.6 VAT Audit 517
7.7 Computation of Tax Liability Under VAT 519
7.8 Special audit of Excise and Customs Records by cost Accountant 521
7.9 Audit When Goods are Manufacutred in Customs Bonded Warehouse 529
7.10 Legal Position of Special Audit Reports 531
7.11 Environment Audit 534
7.12 Relevant Provision Under the Indian Constituion 536
7.13 Powers of Environment Control Authorities (Extracts From
Environment (Protection) Act, 1986 537
7.14 Audit Under ERP Environment 538
7.15 Bank Audit 540
Page No.
7.16 Concurrent Audit 541
7.17 Central Excise Circular No. - 821/18/2005 Dated 07.11.2005 541
7.18 Extracts from Central Excise Act, 1944 543
7.19 Self-examination Question 544
Study Note - 8
Fields for Practicing Cost Accountants 547
8.1 Evaluation Cost and Management Accounting 548
8.2 Fields for Practising Cost Accountants 548
8.3 Other Services 558
8.4 World Trade Organisation (WTO) 561
8.5 Anti-dumping Processing - Introduction 565
8.6 Assessment and Quantifi cation of Losses Under Marine,
Fire and Accident Polocies 606
8.7 Specimen question with Answers 614
Study Note - 9
Professional Ethics 615
9.1 Professional Value and Ethics 616
9.2 Misconduct for Cost Accountants - Introductions 617
9.3 Constitution of Disciplinary Directorate, Board of Discipline
and Disciplinary Committee 618
9.4 Procedure of Enquring into Misconduct 620
9.5 Procedure for Filing Complaint 621
9.6 Penalties for Miscoduct 625
9.7 Board of Discpline 626
9.8 Disciplinary Committee 628
9.9 IFAC Guidelines for Professional Values and Ethics 630
9.10 Professional Behaviour 634
Page No.
9.11 Self Regulation Guidelines 651
9.12 Guidelines for Advrtisement by Cost Accountants in Practice 653
9.13 Specimen question With Answer 681
9.14 Self-examination Question 681
Study Note - 10
Auditing and Assurance Standards 683
10.1 Need for Oversight - an Introduction 684
10.2 Lack of Clarity in Accounting Statements 685
10.3 Assurance Services 685
10.4 The Cost and Assurance Standards Board (CAAB) 687
10.5 Quality Review Board (QRB) 688
10.6 Review Procedure to be Followed by the Quality Review Board 690
10.7 ICWAI as IFAC Member 690
10.8 Steps Taken by the International Auditing and Assurance Standards
Board (IAASB) to Improve the Clarity of its Standards (Clarity Project) 691
10.9 Appendix - A 693
10.10 Appendix - B 694
10.11 Appendix - C 697
10.12 Appendix - D 698
10.13 Appendix - E 701
Basics of Cost Audit
STUDY NOTE - 1
This Study Note includes:
Nature and Scope of Cost Audit
Provisions under Companies Act relating to maintenance of Cost Records and Cost Audit
Cost Auditor - Appointment, Rights and Responsibilities
Planning and structuring the Cost Audit
2
Basics of Cost Audit
1.1 Nature and Scope of Cost Audit
1.1.1 Origin of Cost Audit
1.1.1.1 Methods and techniques of cost accounting and audit of cost accounts in India can be traced back to the year 1925, when large number of fi rms were given contracts by the Government of India on cost plus basis and the Government started verifying and investigating the cost structure of such fi rms.
1.1.1.2 Need for large scale industrialization immediately after the independence required lot of concessions and facilities to the entrepreneurs to establish industrial undertakings for production of common mans goods and essential services. Power, electricity and other inputs were provided at concessional rates. Liberal fi nances were provided by the banks and other fi nancial institutions. Land was made available with all infrastructures. Transport facilities were also provided. However, there were only very few industrial groups and it was a suppliers market in almost all the areas. There were many bureaucratic hurdles in opening of new industries along with need for licenses and permits. Imports were mostly prohibitive due to scarce foreign exchange and very high rate of custom duties on imports. Therefore, consumers had very few choices and there were often complaints of excessive pricing, which encouraged smuggling and other malpractices like under-invoicing of imports to save custom duties or over-invoicing of exports to get higher export benefi ts. The high prices were often justifi ed on the basis of higher indigenous cost of production. Thus the government felt the need for price controls.
1.1.1.3 The investigations of Dalmia-Jain group of companies furt
