Origin of cost audit&financial statement of audit

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INTRODUCTION:
Cost Audit is the verification of the cost accounts and of the adherence to the cost accounting
plan. That is, it not only involves the examination of cost accounts but also the fact that plan
prepared in this connection has been duly executed. The Indian Companies Act has made
provisions to perform cost audit to certain categories of companies engaged in the production
processing, manufacturing and mining activities under section 209 and 233 B. It has however
not been made compulsory for all the companies. The duties and powers of the Auditor are set
out under section 227 of the said Act. Cost Auditor will not submit his report to the members
of the company but will have to submit to the Company Law Board.
Cost audit is an examination of cost accounting records and verification of the facts to
ascertain that the cost of the product under reference has been arrived at in accordance with
principles of Cost Accounting and evaluation of adequacy of proper Cost Accounting Records
and their maintenance. The cost audit is performed by an independent, professionally
qualified Cost and Management Accountant or Chartered Accountant. Cost audit is carried out
to evaluate cost performance of the entity for which Cost Accounting Records have been
prescribed by the Securities and Exchange Commission of Pakistan (SECP). The Cost
Auditor, therefore, carries out such tests and makes such inquiries which enable him to give a
professional, independent, unprejudiced opinion on the cost performance of the entity, as
reflected in the cost information provided in the schedules and annexure which are prepared
by the entity in accordance with the cost accounting records maintained.
A financial audit is conducted to provide an opinion whether financial statements (the
information being verified) are stated in accordance with specified criteria. Normally, the
criteria are international accounting standards, although auditors may conduct audits of
financial statements prepared using the cash basis or some other basis of accounting
appropriate for the organization. In providing an opinion whether financial statements are
fairly stated in accordance with accounting standards, the audit or gathers evidence to
determine whether the statements contain material errors or other misstatements
The audit opinion is intended to provide reasonable assurance, but not absolute assurance, that
the financial statements are presented fairly, in all material respects, and/or give a true and fair
view in accordance with the financial reporting framework. The purpose of an audit is to
provide an objective independent examination of the financial statements, which increases the
value and credibility of the financial statements produced by management, thus increase user
confidence in the financial statement, reduce investor risk and consequently reduce the cost of
capital of the preparer of the financial statements.
In accordance with the US GAAP, auditors must release an opinion of the overall financial
statements in the auditor's report. Auditors can release three types of statements other than an
unqualified/unmodified opinion. The unqualified auditor's opinion is the opinion that the
financial statements are presented fairly. A qualified opinion is that the financial statements
are presented fairly in all material respects in accordance with US GAAP, except for a
material misstatement that does not however pervasively affect the user's ability to rely on the
financial statements. A qualified opinion can also be issued for a scope limitation that is of
limited significance. Further the auditor can instead issue a disclaimer, because there is

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insufficient and appropriate evidence to form an opinion or because of lack of independence.
In a disclaimer the auditor explains the reasons for withholding an opinion and explicitly
indicates that no opinion is expressed. Finally, an adverse audit opinion issued when the
financial statements do not present fairly due to departure from US GAAP and the departure
materially affects the financial statements overall. In an adverse auditor's report the auditor
must explain the nature and size of the misstatement and must state the opinion that the
financial statements do not present fairly in accordance with US GAAP.
Financial audits are typically performed by firms of practicing accountants who are experts in
financial reporting. The financial audit is one of many assurance functions provided by
accounting firms. Many organizations separately employ or hire internal auditors, who do not
attest to financial reports but focus mainly on the internal controls of the organization.
External auditors may choose to place limited reliance on the work of internal auditors.
Auditing promotes transparency and accuracy in the financial disclosures made by an
organization, therefore would likely to reduce of such corporations to concealunscrupulous
dealings.
Internationally, the International Standards on Auditing (ISA) issued by the International
Auditing and Assurance Standards Board (IAASB) is considered as the benchmark for audit
process. Almost all jurisdictions require auditors to follow the ISA or a local variation of the
ISA.
DEFINITION:
Cost Audit may be defined as "the verification of cost records and accounts and a check on the
adherence to the prescribed cost accounting procedures and the continuing relevance of such
procedures."
A financial statement audit is the examination of an entity's financial statements and
accompanying disclosures by an independent auditor. The result of this examination is a
report by the auditor, attesting to the fairness of presentation of the financial statements and
related disclosures
ORIGIN OF COST AUDIT& FINANCIAL STATEMENT AUDIT:
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 firms were given contracts by the
Government of India on “cost plus” basis and the Government started verifying and
investigating the cost structure of such firms.

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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 man’s goods and essential services. Power, electricity and other inputs
were provided at concessional rates. Liberal finances were provided by the banks and other
financial 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 benefits.
The high prices were often justified on the basis of higher indigenous cost of production. Thus
the government felt the need for price controls. The investigations of Dalmia-Jain group of
companies further brought out the need for more effective audit. Thus “cost audit” gained
recognition, both as an effective tool of cost-control in the hands of management to control
costs and produce at competitive rates and also as a monitoring mechanism on behalf of other
stakeholders including the consumer and the government. Cost Audit as a tool in the hands of
Management enabled them to identify the inefficiencies. It acts as a review of the activities of
the various cost centers of the company and points out the avoidable wastages and losses. The
expertise and experience of the Cost Auditor helps them in knowing the exact areas having the
scope for cost control and cost reduction through inter-firm comparison with standard
industrial norms or peers in the industry. Government in turn ensured that the consumers are
able to obtain their requirements at a fair price and do not pay for the inefficiency of
manufacturers.
Consequently, the Companies Act, 1956 was amended in the year 1965 to incorporate the
provisions relating to the maintenance of Cost Accounting Records and Cost Audit. These
amendments were made on the basis of recommendations from the Vivian Bose Commission,
Dutta Commission and the Shastri Committee.
A financial audit is conducted to provide an opinion whether financial statements (the
information being verified) are stated in accordance with specified criteria. Normally, the
criteria are international accounting standards, although auditors may conduct audits of
financial statements prepared using the cash basis or some other basis of accounting
appropriate for the organization. In providing an opinion whether financial statements are
fairly stated in accordance with accounting standards, the auditor gathers evidence to
determine whether the statements contain material errors or other misstatements.[1]
The audit opinion is intended to provide reasonable assurance, but not absolute assurance, that
the financial statements are presented fairly, in all material respects, and/or give a true and
fair view in accordance with the financial reporting framework. The purpose of an audit is to
provide an objective independent examination of the financial statements, which increases the
value and credibility of the financial statements produced by management, thus increase user
confidence in the financial statement, reduce investor risk and consequently reduce the cost of
capital of the preparer of the financial statements.

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In accordance with the US GAAP, auditors must release an opinion of the overall financial
statements in the auditor's report. Auditors can release three types of statements other than an
unqualified/unmodified opinion. The unqualified auditor's opinion is the opinion that the
financial statements are presented fairly. A qualified opinion is that the financial statements
are presented fairly in all material respects in accordance with US GAAP, except for a
material misstatement that does not however pervasively affect the user's ability to rely on the
financial statements. A qualified opinion can also be issued for a scope limitation that is of
limited significance. Further the auditor can instead issue a disclaimer, because there is
insufficient and appropriate evidence to form an opinion or because of lack of independence.
In a disclaimer the auditor explains the reasons for withholding an opinion and explicitly
indicates that no opinion is expressed. Finally, an adverse audit opinion is issued when the
financial statements do not present fairly due to departure from US GAAP and the departure
materially affects the financial statements overall. In an adverse auditor's report the auditor
must explain the nature and size of the misstatement and must state the opinion that the
financial statements do not present fairly in accordance with US GAAP.
Financial audits are typically performed by firms of practicing accountants who are experts in
financial reporting. The financial audit is one of many assurance functions provided
by accounting firms. Many organizations separately employ or hire internal auditors, who do
not attest to financial reports but focus mainly on the internal controls of the
organization. External auditors may choose to place limited reliance on the work of internal
auditors. Auditing promotes transparency and accuracy in the financial disclosures made by
an organization, therefore would likely to reduce of such corporations to conceal unscrupulous
dealings.

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PURPOSE OF COST AUDIT&FINANCIAL AUDIT:
The purpose of Cost Audit is to examine whether the methods laid down for ascertaining costs
and other decisions are being properly implemented and whether the cost accounting plan is
being adhered to or not. The purposes can, therefore, be classified under two heads, namely:
(1) Protective
(2) Constructive
(1) Protective Purpose: Under protective purpose, it aims to examine that there is no undue
wastage or losses and costing system brings out the correct and realistic cost of production or
processing.
(2) Constructive Purpose: Cost Audit has a constructive purpose as well. Cost Audit plays a
constructive role by providing management of the company with information useful in
regulating production, choosing economical methods of operation, reducing operation costs
and reformulating plans etc. on the basis of his findings during the course of Cost Audit.
The objective of financial statements is to provide information about the financial position,
performance and changes in financial position of an enterprise that is useful to a wide range of
users in making economic decisions. Financial statements should be understandable, relevant,
reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly
related to an organization's financial position.
Financial statements are intended to be understandable by readers who have "a reasonable
knowledge of business and economic activities and accounting and who are willing to study
the information diligently." Financial statements may be used by users for different purposes:
Owners and managers require financial statements to make important business decisions that
affect its continued operations. Financial analysis is then performed on these statements to
provide management with a more detailed understanding of the figures. These statements are
also used as part of management's annual report to the stockholders.
Employees also need these reports in making collective bargaining agreements (CBA) with
the management, in the case of labor unions or for individuals in discussing their
compensation, promotion and rankings.
Prospective investors make use of financial statements to assess the viability of investing in a
business. Financial analyses are often used by investors and are prepared by professionals
(financial analysts), thus providing them with the basis for making investment decisions.
Financial institutions (banks and other lending companies) use them to decide whether to
grant a company with fresh working capital or extend debt securities (such as a long-
term bank loan or debentures) to finance expansion and other significant expenditures.

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RELEVANCE OF COST AUDIT&FINANCIAL STATEMENTS AUDIT:
In the initial years, Cost Audit was taken merely as a tool for ‘price control mechanism’ for
consumer and infrastructure industries in India. The main objective of Cost Audit when
statutorily introduced under the provisions of Companies Act, 1956 was to meet the
Government requirements for regulating the price mechanism in core industries like Cement,
Sugar, Textiles and consumer industries like Vanaspati, Formulations and Automobiles. The
objective was to provide an authentic data to the Government to regulate the demand and
supply in the country through a price control mechanism.
The liberalization of the economy and consequential globalization has further enhanced the
need for authentic data. Therefore, the Cost Audit Report Rules have been amended from time
to time to ensure that the comprehensive authentic information is available in the format
required. The basic structure of the cost audit was laid down by the Cost Audit (Report)
Rules, 1968 as prescribed under the relevant provisions of Companies Act, 1956. They were
superceded by the Cost Audit (Report) Rules 1996, which were notified vide GSR 511(E)
dated 5.1.1996. These Cost Audit (Report) Rules 1996 were also subsequently superceded by
the Cost Audit Report Rules 2001, which were notified vide GSR 294(E) dated 27.12.2001
The necessity for and utility of properly documented information is more keenly felt now than
ever before. In most parts of the world, free competition co-exists with appropriate rules and
regulations to ensure free trade and absence of unfair practices. Therefore, in the present
competitive scenario of globalization, the Cost Audit Reports have assumed greater
importance and significance being the important source of reliable and authentic feedback to
the government and its various departments and agencies. It may be clarified here that the
Cost Audit Reports do not only contain merely the cost details, but are full of information
related to all aspects of business organization which, if harnessed properly can provide a
comprehensive analysis about the company, the industry and the economy as a whole. The
Cost Audit Report serves as an effective tool of information in the hands of directors on the
Board ensuring good corporate governance.
In an environment of increasing foreign trade under WTO regime, dumping of products at
very low prices have become a serious issue in the international trade. This dumping of
products, often well below the cost price, if not properly countered may harm the indigenous
industry. The cost records and the cost audit report play a very critical role in defense of local
industry to substantiate their fair approach against any allegation of dumping. Similarly, when
dumping allegations are levied against the exports by the Indian companies to any foreign
company, the Cost Audit Reports can provide the valuable feedback to protect the interest of
Indian companies.
The practice of selling below cost to ward off competition attracts the penal provisions of the
Competition Law. This necessitates the availability of authentic cost details of the products
marketed by industry and business houses to determine normative pricing or fair pricing. In
fact, Competition Law to be effective against any anti-competition activity presupposes the
availability of reliable and authentic cost data.
The transfer pricing issue has gained considerable momentum in international scenario. Cost
Audit Report Rules 2001 include the provisions to take care of this aspect in right perspective.

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The fundamentals of transfer pricing are based on “arm’s length” throughout the world. The
cost details form the very basis of determining arm’s length transfer pricing policy of any
country. An audited cost records and the resultant Cost Audit Report becomes a major source
of information, which can be effectively used by both Indirect and Direct Tax Authorities.
The Central Excise Authorities also use Cost Audit Reports for verifying claim of the
companies relating to ex-factory prices of the excisable goods especially in the case of inter-
unit transfers.
The Tariff Commission relies on authenticity of the cost audit reports and makes use of these
reports extensively in fixation of tariffs for the products covered under Cost Accounting
Records Rules. The Cost Audit Reports are also made use of by the respective administrative
Ministries of Government of India for fixation of administrative prices and working out
subsidy, etc. Fertilizer Industry Coordination Committee (FICC) under the Department of
Fertilizers and the Directorate of Sugar under Ministry of Food use Cost Audit Reports
extensively in taking decision with respect to the Industries under their purview. The Cost
Audit Reports relating to Bulk Drugs and Formulations are used by the National
Pharmaceutical Pricing Authority for fixation of prices of various drugs and formulations
covered under the Drug Price Control Order, 1995.
FEATURES OF COST AUDIT&FINANCIAL STATEMENTS AUDIT:
The cost audit of the companies under the relevant provisions of the Companies Act, 1956 has
the following features:
Assessing compliance of the relevant cost accounting records rules as applicable to the
product under review;
Study of the costing system to assess whether it is adequate for the cost ascertainment of the
product under review;
Evaluation of the operating and other efficiencies of the organization under audit with special
reference to the product under review; to ensure the submission of necessary details required
under the Cost Audit Report Rules, 2001 as amended from time to time.Submission of Cost
Audit Report in the format prescribed.
Since cost audit is carried out under the various provisions of the Companies Act, 1956, a
thorough and comprehensive knowledge of the Indian Companies Act including various rules
prescribed there under and the circulars issued by the Ministry of Corporate Affairs is
essential for conducting an effective Cost Audit.
Financial statements are a structured representation of the financial position (Balance Sheet)
and financial performance (Income Statement) of an entity.
The objective of financial statements is to provide information about the financial position,
financial performance and cash flows of an entity that is useful to a wide range of users in
making economic decisions.

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Financial statements also show the results of management’s stewardship of the resources
entrusted to it. To meet thisobjective, financial statements provide information about an
entity’s:
According to the Institute of Cost and Management Accountants of England, cost audit
represents the verification of cost accounts and a check on the adherence to cost accounting
plan. Cost audit, therefore, comprises:
verification of the cost accounting records such as the accuracy of the cost accounts, cost
reports, cost statements, cost data and costing techniques, and
examination of these records to ensure that they adhere to the cost accounting principles,
plans, procedures and objectives.
It, therefore, means that the cost auditors attention and approach should be to see that the cost
accounting plan is in consonance with the objectives set by the organisation and the system of
accounting is geared towards the attainment of the objectives. A cost accounting system
designed to exercise control over cost may be different from the one if the objective is to fix
price. The cost auditor should examine whether the methods laid down for ascertaining
expenses as direct or indirect are cases in point. The cost auditor should also establish the
correctness or otherwise of the figures by the processes of vouching verification,
reconciliation etc.
The origin of the concept of cost audit could be traced to the Second World War period when
the practice of assigning cost plus contracts started. However, probably India is the only
country in the “free” world where cost audit is statutorily prescribed. Cost audit can offer
valuable assistance to the management in its decision making process since it ensures reliable
cost accounting data and information. The management will be in a position to know what
price is to be fixed for a product, whether the wastages are avoidable, whether to re-organise
purchase or sales or inventory systems to make the work more efficient and so on. Existence
of such a system of audit will also be of great use for maintaining internal control and internal
check and can be an advantageous even to the statutory financial auditor. Cost audit, apart
from having all the normal ingredients of audit namely vouching, verification etc. has within
its compass elements of efficiency audit.
WHAT IS COST AUDIT & FINANCIAL STATEMENTS AUDIT
A financial statement audit is the examination of an entity's financial statements and
accompanying disclosures by an independent auditor. The result of this examination is a
report by the auditor, attesting to the fairness of presentation of the financial statements and
related disclosures. The auditor's report must accompany the financial statements when they
are issued to the intended recipients.
The purpose of a financial statement audit is to add credibility to the reported financial
position and performance of a business. The Securities and Exchange Commission requires
that all entities that are publicly held must file annual reports with it that are audited.
Similarly, lenders typically require an audit of the financial statements of any entity to which

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they lend funds. Suppliers may also require audited financial statements before they will be
willing to extend trade credit (though usually only when the amount of requested credit is
substantial).
Audits have become increasingly common as the complexity of the two primary accounting
frameworks, Generally Accepted Accounting Principles and International Financial Reporting
Standards, have increased, and because there have been an ongoing series of disclosures of
fraudulent reporting by major companies.
Planning and risk assessment. Involves gaining an understanding of the business and the
business environment in which it operates, and using this information to assess whether there
may be risks that could impact the financial statements.
2. Internal controls testing. Involves the assessment of the effectiveness of an entity's suite of
controls, concentrating on such areas as proper authorization, the safeguarding of assets, and
the segregation of duties. This can involve an array of tests conducted on a sampling of
transactions to determine the degree of control effectiveness. A high level of effectiveness
allows the auditors to scale back some of their later audit procedures. If the controls are
ineffective (i.e., there is a high risk of material misstatement), then the auditors must use other
procedures to examine the financial statements. There are a variety of risk assessment
questionnaires available that can assist with internal controls testing.
Substantive procedures. Involves a broad array of procedures, of which a small sampling are:
Analysis. Conduct a ratio comparison with historical, forecasted, and industry results to spot
anomalies.
Cash. Review bank reconciliation, count on-hand cash, confirm restrictions on bank balances,
issue bank confirmations.
Marketable securities. Confirm securities, review subsequent transactions, verify market
value.
Accounts receivable. Confirm account balances, investigate subsequent collections, test year-
end sales and cutoff procedures.
Inventory. Observe the physical inventory count, obtain confirmation of inventories held at
other locations, test shipping and receiving cutoff procedures, examine paid supplier invoices,
test the computation of allocated overhead, review current production costs, trace compiled
inventory costs to the general ledger.
Fixed assets. Observe assets, review purchase and disposal authorizations, review lease
documents, examine appraisal reports, recalculate depreciation and amortization.
Accounts payable. Confirm accounts, test year-end cutoff.
Accrued expenses. Examine subsequent payments, compare balances to prior years,
recompute accruals.

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Debt. Confirm with lenders, review lease agreements, review references in board of directors
minutes.
Revenue. Examine documents supporting a selection of sales, review subsequent transactions,
recalculate percentage of completion computations, review the history of sales returns and
allowances.
Expenses. Examine documents supporting a selection of expenses, review subsequent
transactions, confirm unusual items with suppliers.
An audit is the most expensive of all the types of examination of financial statements. The
least expensive is a compilation, followed by a review. Due to its cost, many companies
attempt to downgrade to a review or compilation, though this is only an option if it is
acceptable to the report recipients. Publicly held entities must have their quarterly financial
statements reviewed, in addition to the annual audit.
Audits are more expensive for publicly-held firms, for auditors must adhere to the stricter
audit standards of the Public Company Accounting Oversight Board (PCAOB), and so will
pass their increased costs through to their clients
Cost Audit is a critical review undertaken to verify the correctness of Cost Accounts and to
check that cost accounting principles and planning have been efficiently followed. It is
noteworthy that India is the only country which has introduced statutory cost audit to regulate
about 45 vital industries of the country. Cost Audit has been defined by the Chartered Institute
of Management Accountants (CIMA) of Landon as “the verification of cost accounts and a
check on the adherence to the cost accounting plan.
(i) The objects of cost accounting with reference to which the cost accounting plan must have
been drawn up have to be kept in mind to see whether or not the plan itself and the figures
collected will lead to the achievement of the goal or objective set. For instance, if the
objective is to achieve maximum efficiency, the plan and the analysis of data will be different
from the case where the only objective is to fix prices.
(ii) It has to be examined whether the methods laid down for ascertaining costs and other
relevant decisions are being implemented. Treatment and determination of abnormal losses of
gains or treatment of certain expenses as direct or indirect are cases in point.
(iii) The correctness of the figures has to be vouched.
‘Statutory Cost Audit is a system of audit introduced by the Government of India for the
review examination and appraisal of the cost accounting record and added information
required to be maintained by specified industries’ (ICWA of India).
The concept of cost audit has been elaborated by ICWA as ‘an audit of efficiency of minute
details of expenditure, while the work is in progress and not a post mortem 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’.
Cost Audit can be called efficiency audit. It is evidenced by amendment in section 209 which
reads. ‘The object of the amendment of the section is to ensure specified company proper

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records relating to utilisation of material labour are available which would make efficiency
audit (cost- audit) possible’.
Management Auditing is the process of “auditing the quality of managers through appraising
them as individual managers and appraising the quality of the total system of managing in an
enterprise.” Thus management audit aims at assessing how managers perform different
functions of management, e.g., planning, coordinating, motivating, etc

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Difference betweenCostAudit and FinancialAudit
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.
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.
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.Cost audit is done at the requirement of third
parties like government, industrial organizations etc.
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.
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.
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.
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’s
financial year to which the cost audit.

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DIFFERENCE BETWEEN FINANCIAL AUDIT & COST AUDIT
FINANCIAL AUDIT COST AUDIT
FINANCIAL AUDIT IS MANDATORY
FOR ALL COMPANIES ACT,1956
ONLY IN CASE OF COMPANIES
INVOLVED INTO MANUFACTUREOR
MINING BUSINESS AND REQUIRED TO
MAINTAIN COST ACCOUNTS AS PER
SECTION 209
THE FINANCIAL AUDIT IS DONE TO
REPORT ON THE FINANCIAL
DATA,CONSISTING OF A STATEMENT
OF BALANCE SHEET AND PROFIT AND
LOSS TO ENSURE FAIRNESS OF
BUSINESS PERSPECTIVES
COST AUDIT IS DONE TO CERTIFY
AFTER CAREFUL EXAMINATION OR
CHECKING OF REPORTS ON
EXPENDITURE MADE ON PRODUCTION
OF INTENDED ITEMS
FINANCIAL AUDITOR IS APPOINTED
BY SHAREHOLDERS
COST AUDITOR IS APPOINTED BY
BOARD OF DIRECTORS WITH THE
PREIVOUS APPROVAL OF THE
CENTRAL GOVERNMENT
FINANCIAL AUDIT IS MANDATORY TO
BE CONDUCTED EVERY YEAR
COST AUDIT IS CONDUCTED IN A
YEAR IN WHICH AUDIT IS REQUIRED
BY THE GOVERNMENT
FINANCIAL AUDIT IS DONE OR
CONDUCTED AS PER THE DEMAND OF
SHAREHOLDERS
COST AUDIT IS DONE WHEN
GOVERNMENT OR INDUSTRIAL
ORGANISATION PROPOSES TO MAKE
AN AUDIT
FINANCIAL AUDITOR HAS TO CHECK
OR EXAMINE CAREFULLY AND IN
DETAIL THE EXACT VALUE OF
CLOSING STOCK FOR THE PURPOSE OF
BALANCE SHEET
IN COST,AUDIT THE AUDITOR HAS TO
SEE WHETHER THERE IS SUFFICENT
STOCK MAINTAINING IN ORDER TO
FULFIL THE NEEDS OF THE BUSINESS
CONCERN
FINANCIAL AUDITORS HAVE TO GIVE
THEIR REMARKS ABOUT THE EXACT
EXPENDITURES SHOWN ON THE
RECORD
THE COST AUDITORS HAVE TO GIVE
THEIR REMARKS ABOUT HOW
CORRECTLY OR WISELY THE
DECISIONS HAVE BEEN TAKEN IN
PRODUCTION OF ITEMS
THE FINANCIE AUDITOR SUBMITS THE
REPORTS IN ANNUAL GENERAL
MEETING ORGANISED BY
SHAREHOLDERS
COST AUDITOR SUBMITS THE
REPORTS TO THE COMPANY AND
CENTRAL GOVERNMENT WITHIN 180
DAYS FROM THE END OF THE
FINANCIAL YEAR

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OBJECTIVEOF COSTAUDIT&FINANCIAL STATEMENTAUDIT:
Cost Audit has both general and social objectives.
The general objectives can be described to include the following:
• Verification of cost accounts with a view to ascertaining that these have been properly
maintained and compiled according to the cost accounting system followed by the enterprise.
• Ensuring that the prescribed procedures of cost accounting records rules are duly adhered to.
• Detection of errors and fraud
• Verification of the cost of each “cost unit” and “cost center” to ensure that these have been
properly ascertained.
• Determination of inventory valuation.
• Facilitating the fixation of prices of goods and services.
• Periodical reconciliation between cost accounts and financial accounts.
• Ensuring optimum utilization of human, physical and financial resources of the enterprise.
• Detection and correction of abnormal loss of material and time.
• Inculcation of cost consciousness.
• Advising management, on the basis of inter-firm comparison of cost records, as regards the
areas where performance calls for improvement.
• Promoting corporate governance through various operational disclosures to the directors.
Among the social objectives of cost audit, the following deserve special mention:
• Facilitation in fixation of reasonable prices of goods and services produced by the enterprise.
• Improvement in productivity of human, physical and financial resources of the enterprise.
• Channelizing of the enterprise resources to most optimum, productive and profitable areas.
• Availability of audited cost data as regards contracts containing escalation clauses.
• Facilitation in settlement of bills in the case of cost-plus contracts entered into by the
Government.
. The purpose of this International Standard on Auditing (UK and Ireland) (ISA (UK and
Ireland)) is to establish standards and provide guidance on the objective and general principles
governing an audit of financial statements. 1-1. This ISA (UK and Ireland) uses the terms
‘those charged with governance’ and ‘management’. The term ‘governance’ describes the role
of persons entrusted with the supervision, control and direction of an entity. Ordinarily, those
charged with governance are accountable for ensuring that the entity achieves its objectives,

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and for the quality of its financial reporting and reporting to interested parties. Those charged
with governance include management only when they perform such functions. 1-2. In the UK
and Ireland, those charged with governance include the directors (executive and non-
executive) of a company or other body, the members of an audit committee where one exists,
the partners, proprietors, committee of management or trustees of other forms of entity, or
equivalent persons responsible for directing the entity’s affairs and preparing its financial
statements. 1-3. ‘Management’ comprises those persons who perform senior managerial
functions. 1-4. In the UK and Ireland, depending on the nature and circumstances of the
entity, management may include some or all of those charged with governance (e.g. executive
directo
• Pinpointing areas of inefficiency and mismanagement, if any for the benefit of shareholders,
consumers, etc., such that necessary corrective action could be taken in time.
The objective of an audit of financial statements is to enable the auditor to express an opinion
whether the financial statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework. The phrases used to express the auditor’s opinion
are “give a true and fair view” or “present fairly, in all material respects,” which are
equivalent terms.. The “applicable financial reporting framework” comprises those
requirements of accounting standards, law and regulations applicable to the entity that
determine the form and content of its financial statements. 3. Although the auditor’s opinion
enhances the credibility of the financial statements, the user cannot assume that the audit
opinion is an assurance as to the future viability of the entity nor the efficiency or
effectiveness with which management has conducted the affairs of the entity.
SCOPE OF COST AUDIT&FINANCIAL AUDIT:
Section 227(2) of the Companies Act, 1956, requires the auditor of a company to state
whether the accounts in his opinion give a true and fair view of the state of the company’s
affairs in the case of the balance sheet and of the profit or loss for its financial year in the case
of the profit and loss account. Therefore, statutory financial audit of a company conducted by
the Chartered Accountant is an essential annual feature of all the companies registered under
the provisions of Companies Act, 1956. The Board of Directors of every company has a
statutory obligation to place its audited annual accounts viz. Profit and Loss Account and
Balance Sheet before the shareholders in the Annual General Meeting, duly certified by a
Chartered Accountant appointed as an ‘Auditor’ under the provisions of Section 224 of the
Act. However, there is no corresponding statutory provision for compulsory annual audit of
cost accounts of a company covered under Section 209(1)(d) of the Companies Act or under
relevant Cost Accounting Records Rules.
One of the pre-requisites of cost audit is the maintenance of cost accounting records by the
company. Section 209(1)(d) makes it obligatory for a company pertaining to any class of
companies engaged in production, processing, manufacturing or mining to maintain such
particulars relating to utilization of material or labour or to other items of cost as may be
prescribed, if such class of companies is required by the Central Government to include such
particulars in the books of accounts. The rules provide that only those companies, which are

16. 16
covered under Section 209(1)(d) of the Companies Act and a specific Cost Audit Order has
been issued with reference to a specified product by the Cost Audit Branch of Ministry of
Corporate Affairs are required to get their cost accounts audited with respect to that specific
product. Moreover, Cost Audit Report is not placed before the shareholders during the Annual
General Meeting.
The Central Government prescribes the separate cost accounting records for each class of
companies i.e. companies manufacturing a particular class of product or activity like Cement,
Steel, Chemicals and Electricity etc. and these are called the Cost Accounting Records Rules
for that specific industry or class of companies. When cost accounting records/formats are
prescribed, they apply to those companies engaged in the manufacture of a particular product
or activity. In the case of companies engaged in production or processing of other products or
activities also in addition to production, processing or manufacture of the specified product,
the records will have to be maintained only for the manufacture of particular product for
which rules are issued and not necessary for other products. A company manufacturing bulk
drugs, formulation and watches need not necessarily maintain cost accounting records in
respect of watch making activity if no statutory rules are prescribed for watch making activity.
The detailed provisions relating to the manner of prescription of cost accounting records,
selection of the product, the contents of the rules and the list of products/industries covered by
the statutory rules under Section 209(1) (d) of the Companies Act have also been explained in
Study Notes 2 and 3. Thus Cost Audit u/s 233B does not embrace a particular activity of the
company unless a separate cost accounting record rule is already notified for that particular
activity under Section 209(1) (d) detailing the nature of cost accounting records to be
maintained.
The legal provisions relating to statutory cost audit are applicable only to companies
registered under the provisions of Companies Act, 1956. Therefore, cost audit is not
applicable to other enterprises like partnership, cooperative societies, etc. The Cost Audit is
conducted by a Cost Accountant in practice within the meaning of the Cost and Works
Accountants Act, 1959. The cost auditor is appointed by the Board of Directors of the
company with the previous approval of the Central Government. The report of cost auditor is
to rendered to the Central Government with a copy to the Company.
The term “scope of an audit” refers to the audit procedures deemed necessary in the
circumstances to achieve the objective of the audit. The audit procedures required to conduct
an audit in accordance with ISAs (UK and Ireland) should be determined by the auditor
having regard to the requirements of ISAs (UK and Ireland), relevant professional bodies,
legislation, regulations and, where appropriate, the terms of the audit engagement and
reporting requirements. 7a. The auditor may, in exceptional circumstances, judge it necessary
to depart from a basic principle or an essential procedure that is relevant in the circumstances
of the audit, in order to achieve the objective of the audit. In such a case, the auditor is not
precluded from representing compliance with ISAs (UK and Ireland), provided the departure
is appropriately documented as required by ISA (UK and Ireland) 230 (Revised), “Audit
Documentation.” 7-1. Although the basic principles of auditing are the same in the public and
the private sectors, the auditor of a public service body often has wider objectives and
additional duties and statutory responsibilities, laid down in legislation, directives or codes of
practice.

17. 17
PRINCIPLES OF COST AUDIT&FINANCIALAUDIT
1. Planning and Performing Cost Audit:
There are certain principles that the cost auditor has to observe in planning and performing the
cost audit. There are also principles that the cost auditor has to see are being observed by the
company he is auditing. On the one hand, the cost auditor has to safeguard his independence
and professional status in planning and performing the cost audit, ensuring quality and
standard of cost audit, as required by his professional body, the ICMAP, as well as by the
Companies Ordinance 1984, and the Companies (Audit of Cost Accounts) Rules 1998, and
other rules regulating his audit engagement and reporting. On the other hand, he has also to
see that the client unit operates within the legal framework provided for the industry,
maintaining cost accounting records, in accordance with the cost accounting records order
rules applicable to the industry.
2. Code of Ethics:
Cost Auditor should comply with the ì code of ethics for professional accountants. The
fundamental principles governing the professional responsibility of the Cost Auditors are
enumerated as follows:
a. independence;
b. integrity;
c. objectivity;
d. professional competence and due care;
e. confidentiality;
f. professional behaviour; and
g. technical standards.
3. Independence of Cost Auditor:
The independence of the cost auditor is largely covered by the Companies (Audit of Cost
Accounts) Rules 1998, under which a person who has or had specified relationships, which go
to mar his independence, cannot be appointed as a cost auditor.
4. Integrity and Objectivity:
Integrity implies not only honesty but fair dealings and truthfulness. The principle of
objectivity imposes the obligation on all professional accountants to be fair, intellectually
honest and free of conflict of interest. Financial involvement with the client effects
independence and may lead a reasonable observer to conclude that it has been impaired.
A professional cost and management accountant should be straightforward and honest in
rendering professional services as a cost auditor. He has neither any ulterior motives nor any
personal ends to serve. He should be fair and should not allow any prejudice or bias, conflict

18. 18
of interest or any other influence to override objectivity. Cost audit is to meet the management
ís and the Government ís need for credibility in cost information and cost accounting systems.
5. Professional Competence and Due Care:
A professional accountant should not project himself as having expertise or experience which
he does not possess. Attainment of professional competence requires a high standard of
general education followed by specific education, training and examination in professionally
relevant subjects and a period of work experience, with which all ICMAP members are
equipped. Professional competence requires to be maintained by a continuing awareness of
developments in the accountancy profession, including relevant national and international
pronouncements on accounting, auditing and other relevant regulations and statutory
requirements. The cost and management accountant has to maintain professional knowledge
and skill at a level required to ensure that a client or employer receives the advantage of
competent professional service, based on up-to-date developments in practice, legislation and
techniques.
6. Confidentiality:
A cost and management accountant should respect the confidentiality of information acquired
during the course of performing professional services and should not use or disclose any such
information without proper and specific authority or unless there is a legal or professional
right or duty to disclose. The duty of confidentiality continues even after the end of the
relationship between the cost auditor and the client or the cost and management accountant
and the employer.
7. Professional Behaviour:
A professional Cost and Management Accountant, being a member of the Institute of Cost and
Management Accountants of Pakistan, should act in a manner consistent with the good
reputation of the profession. He should meticulously avoid any such conduct or behaviour as
may cast an unfavourable aspersion on the profession. He has to ensure professional
behaviour while meeting his responsibilities to clients, third parties, other members of the cost
and management accounting profession, staff, employers and the general public.
8. Technical Standards:
A professional Cost and Management Accountant should carry out professional services in
accordance with the relevant technical and professional standards. A Cost and Management
Accountant has a duty to render professional services with care and skill, in accordance with
the instructions of the clients or employers, insofar as they are compatible with the
requirements of integrity, objectivity, and in the case of Cost and Management Accountants in
public practice, independence. Moreover, they have to conform to the technical and
professional standards laid down by the Institute of Cost and Management Accountants of
Pakistan, IFAC, IASC and the relevant laws, orders, rules and regulations.
9. Professional Code of Ethics:
A distinguishing mark of a profession is its acceptance of responsibilities to the society. The
Cost Auditor ís independence is to be judged by his clients, Government, employers,

19. 19
employees, investors in the business, the financial community and the consumers at large,
who all rely on the objectivity and integrity of the Cost and Management Accountant. This
reliance imposes a public interest responsibility on the professional cost and management
accountant.
10. Engagement on other occupation:
A professional accountant in public practice should not concurrently be engaged in any
business occupation and activity which might impair his integrity, objectivity or independence
or the good reputation of the profession. The code of professional ethics of the Institute of
Cost and Management Accountants must be carefully observed.
The auditor should comply with the Code of Ethics for Professional Accountants issued by the
International Federation of Accountants. Ethical principles governing the auditor’s
professional responsibilities are: (a) Independence; (b) Integrity; (c) Objectivity; (d)
Professional competence and due care; (e) Confidentiality; (f) Professional behavior; and (g)
Technical standards. 4-1. In the UK and Ireland the relevant ethical pronouncements with
which the auditor should comply are the APB’s Ethical Standards and the ethical
pronouncements relating to the work of auditors issued by the auditor’s relevant professional
body. 4-2. Auditors in the UK and Ireland are subject to ethical requirements from two
sources: the Ethical Standards established by APB concerning the integrity, objectivity and
independence of the auditor, and the ethical pronouncements established by the auditor’s
relevant professional body. The APB is not aware of any significant instances where the
relevant parts of the IFAC Code of Ethics are more restrictive than the Ethical Standards. 5.
The auditor should conduct an audit in accordance with ISAs (UK and Ireland). These contain
basic principles and essential procedures together with related guidance in the form of
explanatory and other material. 6. The auditor should plan and perform an audit with an
attitude of professional skepticism recognizing that circumstances may exist that cause the
financial statements to be materially misstated. An attitude of professional skepticism means
the auditor makes a critical assessment, with a questioning mind, of the validity of audit
evidence obtained and is alert to audit evidence that contradicts or brings into question the
reliability of documents or management representations. For example, an attitude of
professional skepticism is necessary throughout the audit process for the auditor to reduce the
risk of overlooking suspicious circumstances, of over ISA (UK and Ireland) 200 4
generalizing when drawing conclusions from audit observations, and of using faulty
assumptions in determining the nature, timing, and extent of the audit procedures and
evaluating the results thereof. In planning and performing an audit, the auditor neither
assumes that management is dishonest nor assumes unquestioned honesty. Accordingly,
representations from management are not a substitute for obtaining sufficient appropriate
audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.

20. 20
POWERS/RIGHTS OF AN AUDITOR (255)
i) Right of access to books of account and vouchers 255(1).
ii) Right to receive information and explanations.
iii) Right of access to books and papers of branch 255(2).
iv) Right to receive notices of general meetings and to attend those meetings.
v) Right to make representation where another person is being appointed as auditor. (253(3)).

21. 21
ADVANTAGES OR USEFULNESS OF COST AUDIT:
Besides the chief merit of detecting and preventing errors and frauds as in the case of audit in
general, cost audit secures the following advantages to the management, shareholders and
Government.
I. Usefulness to the Management:
(1) It ensures effective internal control.
(2) It provides necessary information for prompt decision making.
(3) It facilitates inter firm comparison.
(4) It helps to increase the overall efficiency of productivity.
(5) Inefficiency can be eliminated by suitable corrective actions.
(6) Errors, omission, fraud and mistakes can be detected and prevented due to effective
auditing of Cost Accounts.
(7) It facilitates cost control and cost reduction.
(8) It creates cost consciousness among employer and employees.
(9) It assists in valuation of stock of materials, work in progress and finished goods.
(10) It ensures maximum utilization of available resources.
II. Usefulness to the Government:
(1) Cost Audit helps in fixing contract price in cost plus contract.
(2) Helps in fixing of selling price for essential commodities.
(3) Enables Government to focus attention on inefficient work.
(4) Enables Government to give protection to certain industries.
(5) Facilitates settlement of trade disputes.
(6) It imposes an automatic check on inflation.
III. Usefulness to the Shareholders:

22. 22
(1) It ensures more profit and high return to the shareholders.
(2) It creates an image of creditworthiness of the concern.
(3) It reflects a high degree of reliability to cost data.
(4) It ensures efficient management in utilization of plant and machinery, land and
building, worker and employees etc.
IV. Usefulness to the Society:
(1) Cost audit is often introduced for the purpose of fixation of price. The prices so fixed are
based on the correct costing data and so the consumers are saved from exploitation.
(2) Price increase by the industry is not allowed without proper justification as to increase in
cost of production; consumers are saved from unreasonable price hike.
(3) Cost Audit is also useful for the purpose of Cost Control; Cost reduction and proper
utilisation of scarce resources.
FINANCIAL AUDIT AND COST AUDIT:
Financial Audit:
(1) It is statutorily compulsory under Companies Act.
(2) It covers all the financial transactions recorded in financial books and financial records.
(3) It aims to examine that the business transactions have been recorded correctly.
(4) It is concerned with the past and historical in nature.
(5) Reporting the true and fair view of the company's earnings and state of affairs.
(6) Financial aspect of the accounts is a matter of concern.
(7) It is concerned with the scrutiny of reliability or otherwise of transactions.
Cost Audit

23. 23
(1) It is not compulsory except in certain cases as provided under section 233B.
(2) It covers only cost records and cost accounts.
(3) It aims to verification of cost accounts and ensures the plan prepared in this connection has
been duly executed.
(4) It concerned with forward looking approach.
(5) Cost Auditor is required to report to the management except statutory audit. Cost Audit
(6) Cost aspect of account is of main concern.
(7) It is concerned with the propriety and efficiency of the transactions.

24. 24
ANNEXURE TO THE COST AUDIT REPORT&FINANCIAL STATEMENT AUDIT
1. GENERAL INFORMATION:
1. CIN or GLN of the company:
2. Name of the company:
3. Registered office address:
4. Corporate office address:
5. E-mail address of the company:
6. Company’s financial year to which the Cost Audit Report relates:
7. Name, address, membership number and e-mail of the Cost Auditor(s):
8. SRN Number and date of Filing of Form 23C with the Central Government:
9. Date of Board of Directors’ meeting wherein the Annexure to the cost audit report were
approved:
10. No. of Audit Committee meetings held by the company, and attended by the Cost Auditor
during the (sic.)
Illustrations of Auditors' Reports on Financial Statements
1: An auditor's report for a company incorporated in Hong Kong and where the financial
statements are prepared in accordance with Hong Kong Financial Reporting Standards.
Illustration
2: An auditor's report for a company incorporated in Hong Kong and where the financial
statements are prepared in accordance with Hong Kong Small and Medium–sized Entity
Financial Reporting Standard. Illustration
3: An auditor's report for a company incorporated in Hong Kong submitting consolidated
financial statements and where the consolidated financial statements are prepared in
accordance with Hong Kong Financial Reporting Standards. Illustration
4: An auditor's report for a company incorporated overseas and reporting in Hong Kong.
Illustration
5: An auditor's report for a company incorporated in Hong Kong and where the financial
statements are prepared in accordance with Hong Kong Financial Reporting Standards for
Private Entities. Illustration

25. 25
6: An auditor's report for a company incorporated in Hong Kong submitting consolidated
financial statements and where the consolidated financial statements are prepared in
accordance with Hong Kong Financial Reporting Standards for Private Entities.

26. 26
CONCLUSION
Cost Audit represents the verification of cost accounts and check on the adherence to cost
accounting plan. Cost Audit ascertain the accuracy of cost accounting records to ensure that
they are in conformity with Cost Accounting principles, plans, procedures and objective
Cost audit report is an effort to simplify cost audit reports and make them less bulky.
Cost audit is an examination of cost accounting records and verification of the facts to
ascertain that the cost of the product under reference has been arrived at in accordance with
principles of Cost Accounting and evaluation of adequacy of proper Cost Accounting Records
and their maintenance.

27. 27
BIBLIOGRAPHY:
1. M. Com Part 1 Manan Prakashan Publications Advanced Cost Accounting by
Dr.Varsha Ainapure.
WEBILOGRPHY;
WWW.GOOGLE.COM
WWW.SLIDESHARE.COM
http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-C-
00700.pdf
http://app1.hkicpa.org.hk/ebook/HKSA_Members_Handbook_Master/volumeIII/hksa700cfd.
pdf