Cost-Audit

Q.1 What do you understand by cost audit? How it differs from financial audit?
Ans
In this highly competitive age, efforts are on to reduce cost and ensure optimum utilization of material labour, plant & machinery and full control on overheads. It is necessary to pre-plan cost and act according to the plan. Cost accounts are maintained for this purpose and this has necessitated audit of cost accounts also. Hence cost audit is verification of correctness of cost accounts and of the adherence to the cost accounting plan. During this, audit not only correctness of cost ascertained is to be examined but also see whether the cost is as per plan or not and if there are deviations, what are the reasons of such variances.

Difference between Cost & Financial Audit

Financial Audit on the other hand Cost Audit
1.Performed where financial accounts are maintained on the other hand Performed where cost accounts are maintained.
2.Object is to ascertain true & fair view of financial position. on the other hand Object is to certify cost per unit & determination of total cost correctly/accurately.
3.Checks expenses with relative documents/vouchers on the other hand Checks whether optimum results could be obtained or not from expenses incurred.
4.Auditor certifies correctness of profit arrived at on the other hand Auditor examines whether more profit could have been earned in the circumstances.
5.Auditor examines regularity, honesty etc. on the other hand He checks efficiency & propriety of expenses.
6.Done on behalf of share holders. on the other hand May be done on behalf of Govt. industrial tribunal regarding wages, customers to know that cost and margins are appropriate.

Two aspects of Cost Audit

1. Propriety audit: - It may be defined as audit of executive action and plans bearing on the finance and expenditure of the company. In it, auditor sees
- Whether expenses have been so planned so as to obtain optimum results.

- Whether optimum results could be obtained from planned expenditure
- Could profit be increased from the expenditure through alternative efforts?
2. Efficiency audit: - It is to ensure application of basic economic principles that resources will flow in to most remunerative channels. Under it, auditor would see whether:
- Optimum income is generated from every unit of money invested in capital or other spheres.
- Money has been invested in such a way to obtain optimum results.


Q.2 Explain in brief objectives/advantages of Cost Audit.
Ans
Objects depend upon on whose behalf cost audit has been undertaken. However, cost audit is done with following general objectives.
- To ascertain the correct cost per unit
- To examine accuracy of cost accounts
- To find out that procedure laid by the management for ascertain ment of cost is adequate or need changes.
- To find out that procedure laid down is helping in proper decision making pertaining to cost.
- To ascertain and ensure that there is no excess wastage in all three components of cost i.e.
- Material
- Labor
- Over heads
If this audit is efficiently done, it would be of great benefit to:
- Management & administration of the enterprise
- Investors in the sence that cost audit would ensure that money has been optimally initialized
- If also makes the work of financial auditor easy because in it valuation of stock as well as checking of expenses pertaining to material is done in great detail
Q.3 Explain brief scope of cost audit ?
Ans It includes checking of following items:(i) Material
- Checking of store ledger with material requisition note, material received, material returned, issue price of material.
- Entire procedure of material purchase, issue and stock record to be seen.
- Obsolete and damaged material to be checked.
- Wastage of material to be checked and ensure that it is within prescribed limits.
- Adequacy of stock of material to be seen.
- Whether minimum stock, ordering level, ordering quantity have been fixed and adhered to
- Physical verification of stock of material
(ii) Labour
- To see whether proper arrangements of recording labour days/hours
- Record of Pay Rolls to be checked with amount actually paid.
- Correct calculation of wages, overtime, bonus etc. is to be checked.
- Unpaid wages to be seen
- Internal check system about wages is proper.
- Checking of direct and indirect labour cost.
- Utilization of man power is optimum, no wastages is there in labour/days hours.
(iii) Overheads
- To see that abortion and apportionment of overheads is correctly done.
- Overheads are in consonance with production, they are not on higher side.
- They are as per standard fixed.
- Proper charging of overheads to a job is correct.
- There is no wastage in overheads
(iv) Plant & Machinery
- To see that plant & machinery was optimally utilized
- Plant & Machinery did not remain idle.
- Maintenance and repair was within limits.Main Functions of Cost Audit
- Planning of cost and sales
- Material control
- Labour control
- Control on overheads
- Utilisation of plant & machinery
- Control over sales and expenses relating to sales and distribution expenses


Q. 3 Narrate in brief Key annexure to the Cost audit report.
Ans
New Section 233 has been added for cost Audit under section 233 B, Govt. is empowered to decide type of companies where cost audit would be compulsory. This audit is generally done by cost Accountants within meaning of cost & work Accountants Act 1959. However, if adequate cost Accountants are not available, this audit can be allowed to be conducted by Chartered Accountant.
Appointment of cost Auditor shall be made by Board of Directors as per section 1B of section 224 Cost Auditor shall have same powers and duties as are available to a C.A. while conducting statutory audit.
Cost audit conducted under Indian Companies Act would be in addition to financial audit conducted under section 224. Cost auditor shall have same powers and responsibilities as are enjoyed by auditor under section 227. It would be the duty of company to provide all books and information required by cost auditor. The Central Govt. is also empowered to direct the company to circulate full or part of the cost under report in the AGM.
If a company makes default in complying provisions relating to cost audit, company attracts a fine up to Rs. 50,000. Further every officer of the company who is involved in default is like by to be punished with imprisonment which may extend up to 3 years or with a fine up to Rs. 50,000 or with both.
The report of cost Audit is to be submitted to the company Law Board. A copy of report is also given to the management of the Company for members. Cost Auditor has to submit audit report to Company Law Board 60 days before AGM of the company in the prescribed performa as provided in Cost Audit Report Rules. Performa of audit report has also been provided which need to be adhered to. Annexure to the Cost Audit Report
1. General – Name & address of the company, its location, year of audit, name and address of cost Auditor, location of factories, date of first commencement of business/manufacturing work, copy of Annual Report along with audited P & L & B/S.
2. Cost Accounting System – System of Cost Accounting in view of requirement of Cost Accounting Record Rules. The description of the system shall cover accounting of material, labour, overheads, depreciation allocation & apportionment of overheads, byproducts joint products, scraps etc.
3. Financial Position – Showing details of
- Capital employed
- Net worth
- Profit
- Net sales
- Operating profit
- Value addition
- Ratios for the company as whole and products under references.
4. Production - Registered capacity, installed capacity, enhancement in production capacity if any, actual production in relation to capacity and planned target, percentage production to installed capacity etc.
5. Process of Manufacturing –Full details of manufacturing process including flow chart should be given.
6. Raw Material – Details of cost of major raw material, quantity of material consumed, standard requirement of material and actual material used, variations in material use and their reasons, material and components not moved since last 12 months etc.
7. Power and Fuel – Quantity, rate and cost of major form of power/fuel used in production e.g. coal, furnace oil, electricity etc. compare the same with standard and reasons of difference and measures initiated to conserve energy. 8. Wages and Salaries – Direct and indirect wages & salaries, wages & salaries on production, administration, selling and distribution, total man days, labour per unit of production, comment on incentive schemes for labour.
9. Repairs and Maintenance -Details & comparative picture of repairs & maintenance for current and previous year, repairs of store & spares, outside contract & repairs etc.
10. Depreciation -Method of depreciation, basis of apportioning depreciation amongst different department etc.
11. Overheads –
Total amount of overheads pertaining factory, administrative, selling & distribution overheads etc. basis followed for their allocation and apportionment, standard and actual overheads, reasons for their variations.
12. Sales – Details of sale in the country, exports , net sales realization, different selling prices as per Govt. policies, packing, delivery charges, etc.
13. Abnormal nonrecurring costs – Details of such costs like strikes break downs, lock outs, substantial power cuts, serious accidents and their effect on cost of production.
14. Auditors observations and conclusions –To make a report on:
- Matters which appear to him wrong in principle.
- Cases where funds have been used negligently, inefficiently.
- Factors which could have been controlled but not controlled.
- Contracts through undue benefits provided.
- Adequacy of budgetary control system
- Suggestions to over come defects
- Imbalances in production
- Full utilization of capacity
- scope for cost reduction
- Scope for increasing productivity.

- Scope for improved inventory policies
- In case of qualified report, its extent
- Reconciliation of profit as per cost & financial accounts
- Details of each factory under production
- Details of each product in specified format by way of annexure
- All cost statements and other statements in respect of intermediate and finished products as prescribed in schedule I
- Cost report is as per format prescribed.