COST AUDITBY SALONI DHIMAN

15MCM7012

OUTLINE Meaning and Definition Cost Audit Features of Cost Audit Objectives of Cost Audit Forms of Cost Audit Statutory Provisions as regards Cost Audit Qualifications of a Cost Auditor Disqualifications of a Cost Auditor Advantages of Cost Audit Cost Audit Programme Form of the Cost Audit Report

Meaning of Cost Audit• It implies audit of cost records such as cost

accounts, cost reports, cost statements, cost data, costing techniques, etc.

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

Definition of Cost Audit• Cost Audit is the verification of the correctness of cost

accounts and a check on the adherence to the cost accounting plans.

- R. W. Dobson

• By the term Cost Audit is meant the detailed checking of the costing system, techniques and accounts to verify their correctness and to ensure adherence to the objective of cost accounting.

- Smith and Day

Features of Cost Audit• It is an audit of cost records.

• Its process involves verification of the cost of manufacture or production or processing of any item on the basis of cost records for material, labour and overheads as maintained by the enterprise.

• It is a specific and specialized activity and is conducted in addition to the audit of financial statements by the cost auditor.

• It is a supplementary form of audit and is mainly directed to production, manufacture, processing or mining companies.

Objectives of Cost Audit• To establish the correctness of cost records and accounts.• To ensure adherence to the cost accounting plan.• To serve as an effective tool of cost control.• To protect the interest of the consumers by ascertaining true cost and

fair selling price of the products manufactured.• To examine whether the cost statements present a true and fair view

of the cost information.• To check wastage of materials and labour.• To institute cost consciousness.

Forms of Cost Audit1. Propriety Audit

• It is an audit of administrative action and plans having financial implications for the enterprise.

• It has been defined as “audit of executive action and plans bearing on the finance and expenditure of the company”.

• It judges the soundness of managerial decisions and suggests the means to avoid the waste in expenditure.

• The audit of PSUs conducted by the Comptroller and Auditor General of India is more of a propriety audit than a financial audit.

2. Efficiency Audit

• It is mainly concerned with evaluation of plans and their results so as to ensure that they have been carried out efficiently.

• It involves comparison of actual performance with planned results and a thorough enquiry into the variances.

• The aim is to see that the capital invested in the business gives the optimum return and the available resources are allocated among different functions and departments in such a manner so as to give optimum results.

• It also examines the opportunities of a more profitable investment of money in another area.

Forms of Cost Audit (Contd.)

Statutory Provisions as Regards Cost Audit• Cost Audit was first time introduced in India in October 1965 through

Companies (Amendment) Act, 1965.

• The relevant sections in this regard are 209(1)(D) and 233B.

• Section 209(1)(D) deals with maintenance of cost accounts and records and is applicable to certain categories of companies, i.e., engaged in production, manufacturing, processing or mining activities.

• Section 233B deals with audit of cost records kept by the company under Section 209(1)(D).

Qualifications of a Cost AuditorAcc. to Section 233B(1), the following persons are declared qualified to

conduct cost audit.1. A cost accountant within the meaning of the Cost and Works

Accountants Act, 1959, who holds a certificate of practice issued by the Institute of Cost and Works Accountants of India (ICWAI). Further, Section 224(1B) of the Companies (Amendment) Act permits cost audit only by a whole time practising cost accountant. It is in that spirit, the cost accountant who is a whole time employee elsewhere, cannot also take up cost audit in some other organization in his spare time.

2. A firm whereof all the partners are whole time practising cost accountants within the meaning of Sections 6 and 7 of the Cost and Works Accountants Act, 1959.

Disqualifications of a Cost Auditor[Section 233B(5)]The following persons are declared disqualified to be appointed or

reappointed to conduct cost audit of a company.1. A body corporate.2. An officer or employee of the company.3. A person who is a partner, or who is in the employment of an officer

or employee of the company.4. A person who is indebted to the company or guaranteed for any

debt exceeding Rs. 1000.5. A person who is disqualified for the reasons cited above for

appointment as an auditor of a subsidiary or holding company of such company.

Disqualifications of a Cost Auditor (Contd.)6. A person who has been appointed to audit the financial statements

of some company under Section 224 of the Companies Act, 1956.7. A cost accountant who is in full-time employment elsewhere.

The above disqualifications are applicable to financial auditors also.

Appointment of Cost Auditor[Section 233B(2)]

• A cost auditor is appointed by the BOD of the company with the previous approval of the Central Government.

• But before an auditor is appointed the company must receive a cost audit order from the government.

Advantages of Cost Audit

Cost Audit

For Producer/

Management

For Shareholders/ Investors

For Society/

Consumers

For Governm

ent

Advantages of Cost Audit (Contd.)1. For Producer/ Mgt.• Detects errors and frauds and minimizes their chances of re-

occurrence.• Examines the adequacy of internal control system.• Checks the correctness of cost accounts and data.• Keeps a check on wastage of material and labour and minimizes

cost.• Fixes accountability for inefficiency or poor performance.• Identifies area of weakness.• Evaluates the advantages of cost control techniques to the

enterprise.

Advantages of Cost Audit (Contd.)2. For Shareholders/ Investors• Ensures effective utilization of resources and checks leakage of

resources.• Examines whether the industry is properly managed or not.• Measures the efficiency of process of production.• Ensures adequate returns to shareholders/ investors.

Advantages of Cost Audit (Contd.)3. For Society/ Consumers• Helps in determining the true cost of production and fair selling

price.• Measures the efficiency of level of production and its contribution

to economic development of the society.• Discloses inefficiency in all facets of management.

Advantages of Cost Audit (Contd.)4. For Government• Assists to see whether a particular unit or industry requires

government protection aid or subsidy.• Enforces fair trade practices.• Improves efficiency of industrial operations.• Regulates prices and profits.• Controls industrial sickness to some extent.• Determines whether the loans can be sanctioned to a particular

industrial unit for a better economic performance.

Cost Audit Programme• A cost audit programme is a systematic plan or course of action so as

to accomplish the audit work within the time frame and at optimum cost.

• The Companies Act does not contain any method or procedures to be followed while conducting cost audit.

• The only provision laid down by the Act in this regard is that under the directed circumstances, the cost auditor is required to submit his audit report to the Central Govt. and at the same time forward a copy thereof to the concerned company.

Cost Audit Programme (Contd.)Normally a cost audit programme comprises three basic elements:1. The work to be done.

2. Its proper distribution among the audit staff.

3. The time schedule to finish the task and submit the report thereof.

References Auditing Principles and Practice, Ravinder Kumar and Virender

Sharma http://www.pioneercement.com/cost/0809/pclcost300609.pdf https://

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