Cost Audit

Cost Audit Concept

1. Welcome

2. Cost Audit Prepared by Dr. Sushil B. Bansode

3. Meaning A cost audit is a systematic examination of the cost accounts and records of a company or organization. It ensure that the cost of its products or services has been classified and computed accurately. Also, consistent cost accounting principles and techniques laid down by relevant regulations and guidelines are used. Cost Audit comprises of the following: (a) Verification of the cost accounting records for the accuracy of the cost accounts, cost reports, cost statements, and cost data and (b) Examination of these records to ensure that they adhere to the cost accounting principles, plans, procedures, and objectives. Definitions According to  Smith and Day , a cost audit involves "detailed checking of the costing system, techniques, and accounts to verify their correctness and to ensure adherence to the objective of cost accounting .“ In the words of  R. W. Dobson , "cost audit is the verification of the correctness of cost accounts and of the adherence to the cost accountancy plans."

4. Objectives Verifying the accuracy of the cost data: The cost auditor examines a company’s cost accounts and records to ensure that the reported cost data is accurate, reliable, and free from material misstatements. Enhancing cost control: It helps a company identify areas where it can improve its cost control processes. Therefore, it results in cost savings and improved profitability. Identifying inefficiencies: It helps identify areas where a company may be incurring unnecessary costs or where it can improve its production processes to reduce costs. Ensuring compliance with regulations: A company complies with relevant regulations and guidelines, such as those laid down by governmental agencies or professional bodies. Improving decision making: It provides management with a better understanding of the company’s cost structure. Moreover, it help them to make more informed decisions about cost-related matters.

5. Scope The scope of cost audit has two important aspects: Propriety audit Efficiency audit 1. Propriety Audit This aspect of a cost audit is concerned with the actions and plans of management that affect the finance and expenditure of the business concern.Under this aspect, the cost auditor is required to ensure that an item of expenditure is sanctioned or approved by the proper authority. It is done with the help of documents and vouchers. In addition, the cost auditor must ensure that the item of expenditure is proper and reasonable on the grounds of propriety. Thus, the cost auditor has to report: Whether or not the planned expenditure can yield optimal results Whether or not the size or channels of investment were designed to produce the best results Whether the return on investment in certain channels could be improved by another plan of action 2. Efficiency Audit This aspect of a cost audit focuses on performance evaluation.In particular, it covers the verification of the facts (i.e., that the expenditure has been incurred according to the plan and the results obtained have also been produced according to the plan). The efficiency aspect of a cost audit involves examining the plan prepared in the form of budgets (financial and functional) and the comparison of the actual performance with the budgeted performance. The reasons for any variance are also analyzed. Thus, the efficiency audit ensures that: Every dollar invested in capital or other areas yields the optimal return Investment in different spheres of the business is balanced to yield the optimal results Therefore, the cost auditor plays the role both of a consultant and a financial adviser. They assist the chief executive of the business in judging the soundness of the financial plans and performance by coordinating the results of the actions of various department leaders.

6. Functions Cost Audit is mainly a preventive measure for guidance of management in policy and decision. There are two functions of Cost Audit: i. Protective Functions ii. Constrictive Functions Protective functions include detecting errors, errors of omission, commission and verifying the cost accounts with cost accounting principles. Constructive functions of cost audit are known as proprietary audit in which auditor’s acts as an advisory body to the owner of the company. The functions of auditors will include: T o verify the return on Capital Employed To verify the money invested.

7. Benefits of Cost Audit Improved cost control – Cost audits can help to identify areas where costs can be reduced or controlled more effectively, leading to improved financial performance. Enhanced decision-making – Cost audits provide valuable information that can inform decision-making and help organizations to make more informed choices about their operations. Improved efficiency  – Cost audits can highlight inefficiencies and areas for improvement, leading to more streamlined operations and increased productivity . Compliance  – Cost audits can help organizations to ensure compliance with financial regulations and standards . Improved stakeholder relations  – Cost audits can improve transparency and demonstrate good financial management, leading to improved relations with stakeholders such as shareholders and investors .

8. Limitations of Cost Audit Cost  – Cost audits can be expensive, particularly if they involve extensive data collection and analysis . Time-consuming  – Cost audits can be time-consuming, requiring significant resources and disrupting normal business operations . Complexity  – Cost audits can be complex, requiring specialized knowledge and expertise to conduct effectively . Resistance to change  – Cost audits may identify changes that need to be made, but implementing those changes may be met with resistance from employees or other stakeholders . Confidentiality concerns  – Cost audits may involve the review of sensitive financial information, raising concerns about confidentiality and data protection.

9. Appointment of Cost auditor According to section 148(3) of Companies Act 2013, cost audit shall be conducted by Cost Accountant in Practice who shall be appointed by the Board on such remuneration as determined by the members in such a manner as may be prescribed. No person appointed under section 139 as an auditor of the Company shall be appointed for conducting the audit of cost records Rule 14 of Companies (Audit and Auditor) Rules, 2014– For purpose of section 148(3), in case of Companies which are required to constitute Audit Committees, the Board shall appoint a Individual who is a Cost accountant in practice or firm of cost Accountant in practice, as cost Auditor on recommendation of Audit Committee who shall also recommend the remuneration of Cost Auditor. The remuneration recommended by Audit Committee shall be Considered and approved by Board of Directors and ratified subsequently by Shareholders In case of other Companies which are not required to Constitute Audit Committee, the Board shall appoint an individual who is a Cost Accountant in practice or a Firm of cost Accountant in Practice as Cost auditor and remuneration of such Cost Auditor shall be ratified by Shareholders subsequently. Point to be noted: The Cost Auditor proposed to be appointed is required to give Letter of Consent to the Board of Directors The Company shall inform the Cost auditor about his appointment and file a notice of appointment with Central Government within a period of 30 days of the Board Meeting in which such appointment is made or within a period of 180 days of the commencement of financial year WHICHEVER IS EARLIER, through electronic mode in Form CRA 2 . An casual vacancy in the office of Cost Auditor, whether due to resignation, death or removal shall be filed by the Board of Directors within 30 days from date of occurrence of such vacancy and company shall inform Central government in same form CRA 2 within 30 days of appointment of Cost Auditor

10. Qualifications & Disqualifications of Cost Auditor Qualifications for a Cost Auditor Any person who is a practicing cost accountant, as per the Cost and Works Accountants Act Any person who is a practicing charted accountant, according to the Charted Accountants Act Member of the Institute of Chartered Accountants Fellow with 10 years of standing Disqualifications A person cannot be appointed who, according to the Companies Act 1956, is not a competent cost auditor  Any person who is appointed as the auditor of a company cannot be appointed as the cost auditor of the same company Any person who becomes incompetent after their appointment as cost auditor should stop working in the role immediately

11. Rights of Cost Auditor A cost auditor has the same rights in relation to an audit conducted by him under Section 233-B as an auditor of a company under Section 227(1 ). The company is obliged to make available to the cost auditor within 90 days of the close of the financial year all such cost accounting books, records, statements and papers as are required by the cost auditor for performing his work . Rights of Cost Auditors He has a right of access at all times to the books of accounts and vouchers of the company. He has a right to get such information and explanations from the officers of the company as he may think necessary for the performance of his duties as an auditor. He has a right to get all facilities and assistance from the company to perform his duties as an auditor. The company and every officer, in default of not providing the accounts, vouchers, information, explanations etc. to the auditor, shall be punishable with fine . The cost auditor has the right to get the remuneration for his work and this remuneration is decided by the Board of Directors with the approval of the Central Government.

12. Duties & Responsibilities of Cost Auditor The duties and responsibilities of a Cost Auditor have not been clearly given in the Companies Act. The cost auditor is also required to perform the duties as are expected from auditors in general. He is liable to the Company if he does not perform his duties properly or is guilty of negligence. He also owes a legal responsibility to third parties who might have been misled by his audit certificate and acted in reliance thereon . He should maintain his working papers as an evidence of his having carried out his duties. He should not disclose any confidential information which he might have acquired in the course of his work and should not use such information for personal gain or gain of a third party. He is responsible   to answer any query required by the Central Government on a scrutiny of the cost audit report submitted by him. He is criminally liable for falsification of books. If he is found guilty of falsification, he shall be punishable with imprisonment for a term which extends to seven years and he shall also be liable to fine in addition.

13. Cost Audit Report According to section 148(5) of Companies Act 2013, Read with Rule 6(4), a cost auditor is required to submit his cost audit report along with his/ her qualifications, reservations, observations or suggestions if any in form CRA 3 to Board of Directors of the Company within 180 days from closure of financial year to which the report relates. For financial year ending 31st March 2016, Cost Audit report has to be submitted within 180 days from 31st March 2016 According to section 148(6) of Companies Act 2013, Read with Rule 6(6) of Companies Cost records and Audit Rules), every Company to whom Cost Auditor submits his Cost Audit Report shall, within a period of 30 days from date of receipt of cost audit report, furnish with Central Government such report with full information and explanation on every reservation or qualification in form CRA 4. Cost audit report is required to be filed in XBRL format. I f after Considering the Cost Audit report referred under section 148 and information and explanation furnished by Company under section 148(6), the Central Government is of opinion that further information or explanation is necessary, it may call for such information and explanation and Company shall furnish the same within such time as may be specified by the Government .

14. Cost audit programme Cost audit programme is a coordination of the work to be done, the work distributed among the audit staff and the time within which the assignment has to be completed. The cost auditor has to submit his report to the central government with a copy to the company under audit. His programme must have a systematic plan of action so that it is finished within a stipulated time and at a minimum cost. It should include the following verification’s: The policies which are followed by the company are in the interest of the company. The cost accounts should be maintained as per the provisions of the act. The management has been efficient to generate sufficient profits for the company. The audit methodology applied while performing the audit. The audit opinion is based on the facts supported by proper examination of the relative records . The points which need special attention in the course of cost audit are: Date of commencement of commercial production. Cost accounting system is in existence and it is adequate. Cost of major raw materials consumed both in terms of quantity and value. Incentive schemes with particular references for increasing the productivity. Method of depreciation adopted by the company. Significant variations in the expenditure incurred against overheads as compared with the previous two years. Any other feature affecting the production .

15. Government System of Audit Government Audit includes financial statement audit performed under Government Auditing Standards on entities such as local body, state government, non profit organization, department of higher education etc. The Comptroller and Auditor General of India (CAG), who is the head of the Supreme Audit Institution of India (SAI) derives his duties and powers mainly from Articles 149 to 151 of the Constitution of India and the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971. Under the provisions of the Constitution of India and the Act, the CAG is the sole auditor of the accounts of the Central (Union) Government and the State Governments. CAG is also responsible for the audit of local bodies (i.e. Panchayati Raj institutions and urban local bodies) under the provisions of some of the State Acts and provides technical and administrative guidance for accounting and audit functions in all States as per orders issued by Ministry of Finance, Government of India. The reports of the CAG relating to the accounts of the Union and the States are submitted to the President/Governor of the State for being laid before the Parliament/State Legislature. The CAG is also responsible for ensuring a uniform policy of accounting and audit in the Government sector as a whole. The Act authorizes the CAG to lay down for the guidance of the Government departments, the general principles of Government accounting and the broad principles in regard to audit of receipts and expenditure. The mandate of CAG includes audit of :  Receipts and expenditure from the Consolidated Fund of India and of the State and Union Territories. Transactions relating to the Contingency Funds and Public Accounts. Trading , manufacturing, profit and loss accounts and balance sheets, and other subsidiary accounts kept in any Government department. Accounts of stores and stock kept in Government offices or departments. Government companies as per the provisions of the Companies Act, 1956. Corporations established by or under laws made by Parliament in accordance with the provisions of the respective legislation. Authorities and bodies substantially financed from the Consolidated Funds. Any Body or Authority even though not substantially financed from the Consolidated Fund, the audit of which may be entrusted to SAI. Grants and loans given by Government to Bodies and Authorities for specific purposes. Panchayati Raj Institutions and Urban Local Bodies.

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