COST AUDIT

BY: DHIRENDRA KR CHAUDHARY

INTRODUCTION

“It is the detailed checking of the costing system, technique and accounts to verify their correctness and to ensure adherence to the objective of cost accountancy.”-ICMA LONDON

“An audit of efficiency ,minute details of expenditure while the work is in progress and not a post –mortem .cost audit is mainly a preventive measure ,a guide for management policy and decision ,in addition to being barometer of performance “- ICWAI INDIA

OVERVIEW¨ India was the first country in South Asia (and perhaps in the

world) to make cost audit mandatory for some of its business sectors. The Institute of Cost and Works Accountants of India (ICWAI) refers to cost audit as an audit of efficiency of minute details of expenditure while the work is in progress and not a post-mortem examination.

¨ Objectives of cost audit include the determination and control of cost together with providing data for making judgements and decisions on various matters, such as operational efficiency.

¨ GOI has added industries involved in the manufacturing of plantation products together with the petroleum and telecommunication industries in 2002 to the list of industries requiring mandatory cost audits.

OBJECTIVES1. From the perspective of management: Cost audit detects errors, frauds and misappropriation and hence

enhances efficiency. 2. From the perspective of shareholders: Cost audit ensures that the valuation of closing stock and work-in-

progress are correct, hence helps in the computation of more accurate profit figures.

3. From the perspective of the government: To curb the profiteering by the manufacturing concerns and help in

the decision to provide tariff protection to any industry. 4. From the perspective of customers: Customers may obtain more benefit if the cost is reduced due to

effective control, implemented as a result of a cost audit. 5. From the perspective of cost accountants: Cost accountants, who are employees of a company, obtain a

share of all benefits derived by the company from a cost audit.

Two aspect of Cost Audit¨ Property audit :” audit of executive actions and plans

which have bearing on finance and profitabilty of the concerns”

¨ Efficiency audit:”appraisal of performance of to ascertain whether plan have been executed efficentley “.audit is conducted to ensure that :

1. every rupee invested gives the maximum return2. Balancing of investment between difffrent functions of company designed to maximum return

COST AUDIT PROGRAMME The Cost Auditor should pay his attention to the

following records:¨ Record of Materials¨ Labour Records¨ Record of Overhead Charges¨ Depreciation¨ Work-in-Progress Records¨ Incomplete Records¨ Stores and Spare Parts Records

Difference between Financial Audit and Cost Audit

Financial Audit Cost AuditIt is statutority compulsory under CompaniesAct.

It is not compulsory except in certain cases asprovided under section 233B.

It covers all the financial transactions recordedin financial books and financial records

It covers only cost records and cost accounts.

It aims to examine that the businesstransactions have been recorded correctly

It aims to verification of cost accounts andensures the plan prepared in this connection hasbeen duly executed.

It is concerned with the past and historical in nature

It concerned with forward looking approach.

Difference between Financial Audit and Cost Audit (cont..)

Financial Audit Cost Audit

Reporting the true and fair view of the company's earnings and state of affairs.

Cost Auditor is required to report to themanagement except statutory audit.

Financial aspect of the accounts is a matter of concern.

Cost aspect of account is of main concern

It is concerned with the scrutiny ofreliability or otherwise of transactions.

It is concerned with the propriety and efficiencyof the transactions

Cost Audit Techniques and Procedure¨ Ascertai internal control¨ Vouching¨ Checking and ticking¨ Test checking¨ Valuation and verification¨ Questionnaires

Advantages of Cost Audit to management¨ Provides reliable data for managerial decision¨ Helps management to regulates production¨ Acts as detection tool for error¨ Helps in comparing actual results and budgeted

result¨ Helps in finding profitability of different unit

Advantages of Cost Audit to shareholders

¨ Ensure proper recording of cost data¨ Helps to evalute managerial efficiency¨ Ensures a true picture of company’s state of

affair

Advantages of Cost Audit to consumers¨ Reveals true cost of production

¨ Justify the price

Advantages of Cost Audit to Goverment

¨ Helps “tarriff board”¨ Help to meausre and improve the efficiency

of sick industrial unit¨ Revael fraundulent intention of

management¨ Help in pricing various commodities ¨ Helps in tax imposing decision

THANK YOU!