auditing- cost audit

1. COST AUDIT
BY SALONI DHIMAN
15MCM7012

2. 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

3. 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.

4. 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

5. 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.

6. 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.

7. Forms of Cost Audit
1. 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.

8. 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.)

9. 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).

10. Qualifications of a Cost Auditor
Acc. 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.

11. 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.

12. 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.

13. 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.

14. Advantages of Cost Audit
Cost
Audit
For Producer/
Management
For
Shareholders/
Investors
For Society/
Consumers
For Government

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. References
 Auditing Principles and Practice, Ravinder Kumar and Virender
Sharma
 http://www.pioneercement.com/cost/0809/pclcost300609.pdf
 https://www.google.co.in/search?q=form+of+the+cost+audit+report
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