Cost Audit

COST AUDITCOST AUDITBy

Priya VRoll no: 34

DEFINITION

CIMA, London “ the verification of cost accounts and a check on the adherence to the cost accounting plan”

2 functions: Verify the cost accounts have

been properly maintained Check the adherence to the cost

accounting plan

Two aspects of Cost Audit:

• Propriety Audit

• Efficiency Audit or Performance Audit

OBJECTIVES

• Detection of errors and fraud• Helps in fixation of price• Ensuring optimum utilization of

resources• Proper method for Inventory

Valuation• Channelizing the resources on

most productive & profitable areas

FEATURES

• Cost Auditor- appoint by BOD• Cost Auditor- submit the audit

report, “ in triplicate” to the Central Govt. & Co.

• Copy of Cost Audit report has to be attached to Income Tax Return

• Statutory Cost Audit can be conducted only by a cost accountant holding a certificate- ICWA

• Financial Audit• Difference between Financial Audit

and Cost Audit• Management Audit• Difference between Management

Audit and Cost Audit

Submitted by,DEEPA.GROLL NO:11

Financial Audit

financial audit means the financial audit means the verification of the financial verification of the financial

statements of a legal entity. statements of a legal entity. The audit gives a reasonable The audit gives a reasonable assurance that the financial assurance that the financial

statements exhibits a true and statements exhibits a true and fair view of state of affairs of fair view of state of affairs of

the business.the business.

Financial Audit Cost Audit

Audit of financial account has been compulsory under companies Act 1956.

Cost Audit is not compulsory in all companies expect in certain specified companies which is notified by central government from time to time under sec 233 B.

The Financial Auditor is required to report whether the financial statement exhibits true and fair view of state of affairs of the business

Cost Auditor has to check the propriety of each item of expenditure and certify whether they have been incurred prudently or not.

Financial Auditor sees whether the expenses incurred are supported by proper vouchers

Cost Auditor ensure that the expenses incurred have been aimed at achieving better results.

Financial Auditor submit his report to the shareholders.

Cost Auditor reports to the Board of Directors

Financial Audit is mainly to check the arithmetical accuracy of different books of accounts.

Cost Auditor sees also whether suitable steps have been taken to reduce the cost of production

The work of Financial Auditor is in the office

The work of Cost Auditor is in the factory

Financial Audit is conducted every year in all companies

Cost Audit may be conducted only for a particular year and even for a specific jobs.

Financial Audit does not measure the real efficiency of an organization.

Cost Audit measure the efficiency of the organization , especially production processes.

Financial Auditor verifies whether the closing stock has been properly valued.

The Cost Auditor looks into the methods followed and the adequacy or otherwise of the stock to meet the requirements of the organization.

Financial Audit is a sort of postmortem audit

Cost Audit is forward looking with suggestion for future.

Management Audit

According to the American Institute of According to the American Institute of Management, “Management Auditing Management, “Management Auditing is a diagnostic appraisal process for is a diagnostic appraisal process for analyzing goals, plans, policies and analyzing goals, plans, policies and

activities in every phase of operation activities in every phase of operation to turnover unsuspected weaknesses to turnover unsuspected weaknesses and to develop ideas for improvement and to develop ideas for improvement

in areas that have escaped in areas that have escaped management attention”management attention”

Management Audit Cost Audit

It is a comprehensive critical review of all aspects of management processes

It is a verification of correctness of cost accounts and of the adherence to cost accounting plans.

The Management Audit is not a statutory requirement.

In certain industries Cost Audit is compulsory and a statutory requirement as per government notification

It is not a regular feature. Management may decide to go for management audit whenever need arise

It is a regular feature and is conducted every year.

The Management Auditor critically examines the policies and objectives of management and report on their sustainability

The Cost Auditor checks cost accounts only.

The management auditor need not possess any specific qualification. He must have knowledge and experience in the field of accountancy, management and financial administration.

The cost auditor must possess certain requisite qualification as per the provision of the companies act, 1956.

It covers wide areas of management’s activities and may be for more than one financial year.

The cost audit is conducted for every financial year separately.

There is no time limit for the submission of management audit report

A time limit has been fixed by the law for submission of cost audit report.

Amina NazneenAmina Nazneen

Roll no. 3Roll no. 3

ADVANTAGES TO MANAGEMENT

• Helps to control on different elements of cost

• Helps in decision making• Helps in reducing price• Get advice on day to day

activities• Helps in budgetary control

ADVANTAGES TO COST ACCOUNTANT

• Status will go high• Improve costing efficiency• Cost accounts can be reconciled

with financial accounts

ADVANTAGES TO SHARE HOLDERS

• To know the efficiency or inefficiency of management

• To know about the utilization of resources

• To know about the productivity of material, labour and machine

• Fair return on investment

ADVANTAGES TO GOVERNMENT AND

CONSUMERS• Ensures about the correctness of the

cost data in case of cost plus contracts• Correct cost data helps government in

fixing fair price of the products• Helps contractors in case of escalation

clause• Cost audit pinpoints the areas where

economy and efficiency can be achieved• Helps consumers to get goods at fair

price

Presented byPresented by

Parvathy.MParvathy.M

Roll No:33Roll No:33

• Technique used by a cost accountant in the performance of his job.

• Some of the techniques are;– vouching– Checking and ticking– Test checking–Working papers– Audit notes– Questionnaires

COST AUDIT TECHNIQUES

1. VOUCHING Inspection by the auditor of a

documentary evidence supporting and substantiating a transaction

2. CHECKING AND TICKING Check marks or tick marks are used for

calculations ,posting etc3. TEST CHECKING Auditor has to check a small part of

the work on the basis of random sampling.

4. WORKING PAPERS Working papers include copy of office

manual ,copies of important decisions and procedures etc.

5.AUDIT NOTES Auditor has to make a note in the

course of audit and he will seek clarifications from the officials.

6. QUESTIONNAIRES Auditor should make questionnaire

about important elements of cost.

1 .GOVERNMENT2. LABOUR TRIBUNALS3. TRADE ASSICIATIONS4. MANAGEMENT

IMPLEMENTING AUTHORITIES OF COST AUDIT

1 . GOVERNMENT Government may order for cost audit for the

following purpose 1. Fixation of fair prices of some basic

materials 2. Giving protection to certain industries. 3. In case of orders placed under cost

plus contract system with the private parties

4. When there are reason for prices are going up.

2. LABOUR TRIBUNALS Labour tribunal may order for conducting

cost audit for deciding workers claim for more wages.

3. TRADE ASSOCIATIONS Trade associations may order cost

audit of member companies to ascertain whether the costing procedure is being followed correctly.

4. MANAGEMENT Management may order for audit of

cost records to see that the costing data placed before the management is reliable.

Rejitha C RRejitha C RRoll no. 36Roll no. 36

• No standard pattern.

• Affected by: Nature of the

business. Size of the business. Attitude of the

management. Existing system.

• Specific to the unit concern.

• In detail.

• Areas included: Inventory of stores. Work-in-progress. Labour. Overheads. Selling, distribution

and administrative expenses.

Capital expenditure. Utilization of

capacity. Plant and

equipments.

Cost Auditor

• An auditor appointed to conduct an audit of cost records.

• An individual cost accountant or a firm of cost accountants with at least two partners.

Qualification of Cost auditor

• To be a cost accountant within the meaning of the Cost and Works Accountants Act, 1959.

• To hold a certificate of practice issued by the Institute of Cost and Works Accountants of India.

Disqualifications of cost auditor

• A person who has been appointed to audit the accounts of the company

• A body corporate.• An officer or employee of the company.• A person who is partner, or who is in

the employment of an officer or employee of the company.

• A person who is indebted to the company for an amount exceeding Rs.1,000.

Appointment of cost auditor

• Appointed by the Board of Directors with the previous approval of the central government .

• Validity – only for the year for which he has been appointed.

Disadvantages of Cost Audit

• Expensive luxury.• Secrecy in cost.• Duplication of work.• Shortage of cost

accountants.• Some accounts audited

once by financial auditors.