ASST PROF JONLEN ASST PROF JONLEN DESADESA

Auditing is the process of examination or verification of the books of accounts.The main purpose is to verify the accuracy of accounting transactions and to detect frauds and errors.Audit can be done internally and externally by professionals who are termed as auditors.In auditing, the accounts of all entities, are scrutinized to check their accuracy and truthfulness.For this purpose, he examines various books of accounts, makes notes, asks for clarification & explanation and then give his final opinion after preparing an audit report.

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.It verifies the correctness of cost accounts.Cost audit may be conducted by an internal or external agency. It is a preventive measure and a guide for management policy and decision making.Cost audit is conducted by a cost auditor.

CIMA, London defines Cost Audit as “ the verification of the correctness of cost accounts and the adherence to the cost accounting plan”.

The Institute of Cost and Works Accountants of India defines statutory audit as “a system of audit introduced by the Government of India for the review, examination and appraisal of the cost accounting records and added information, required to be maintained by specified industries.”

India is the only country to introduce statutory cost audit to regulate vital industries.

It is conducted when asked for by the Government.

It is efficiency auditIt is a propriety auditIt is different from financial auditIt is a specialized service, which can be rendered by a qualified cost accountant

SCOPE OF COST AUDITSCOPE OF COST AUDIT

OBJECTIVES OF COST AUDITOBJECTIVES OF COST AUDIT

Effectiveness & EfficiencyEfficiency refers to accomplishment of objectives with minimum time and resources.

Cost audit is an efficiency audit.

It verifies records relating to the usage of material and labour, whether are being utilized in the most efficient manner.

Efficiency audit is a staff function.

Efficiency audit is the audit, which ensures that every rupee invested yields optimum results. The main purpose is to ensure that:

i. There is most optimum utilization of investmentii. That investment is channelized in most profitable

lines.

Efficiency audit also intends to assess the actual performance with expected efficient standards.

The parameters based on which efficiency audit is conducted are:Return on capital Capacity utilizationOptimum utilization of men, machines and moneyExport performance and import substitution Liquidity positionPay- back period

Following arguments can be advanced to support the statement that cost audit is efficiency audit:

Para 4 of the annexure to the Cost Audit Report deals with licensed capacity, installed capacity, actual production and percentage of actual production to installed capacity. This brings to light broad factors responsible for underutilization.

Para 6 of the annexure to the Cost Audit Report deals with cost of raw materials consumed both in terms of quantity and value besides the following information:

(i) quantity of consumption of major raw materials per unit of production(ii) standard requirement per unit of production in terms of quantity(iii) explanation for variations along with the consumption of the preceding two years(iv) value of raw materials and component, finished and semi-finished which have not moved for one year or above with their proportion to the value of stock at the end of the year.

Para 7 of annexure to Cost Audit Report dealing with power and fuel compares the actual physical consumption per unit of production with standards or physical per unit of production and with preceding two years consumption.

Para 14 of annexure to Cost Audit Report deals with abnormal / non-recurring cost and the task of management should be to bring down this quantity as far as possible.

Para 16 of annexure to Cost Audit Report provides practical suggestions from the Cost Auditor in respect of :(i) better capacity utilization,(ii) cost reduction,(iii) key limiting factors causing production bottlenecks,(iv) improved inventory policies.Under each element of cost, the Para provides much needed flexibility to Cost Auditor to make comments, which may have direct bearing on efficiency of management efforts.

The term ‘propriety’ means that which meets the test of public interest, commonly accepted customs and standards of conduct. Propriety audit refers to an audit in which various actions and decisions are examined to find out whether they are in public interest and whether they meet the standards of conduct.He attempts to examine regularity, prudence and impact of various actions and decisions.

The auditor while conducting the propriety audit should ensure compliance to the following:The expenditure should not be more than the occasion demands.The authority which has power to sanction the expenditure should not pass order to its own advantage directly or indirectly.Public money should not be utilized for the benefit of a particular person or section of community.It should be so arranged that allowance (like travelling allowances etc.) are not on the whole source of profit to the recipient.

Cost audit is a propriety audit.

Cost audit report should cover the following points:a. Matters which appear to the cost auditor to be

clearly wrong in principle or unjustifiable.b. Cases, where company’s funds are used in a

negligent or inefficient manner.c. Factors that could have been controlled, but have

not been done, thus increasing the cost of production.

The ICMA defines management audit “as an objective and independent appraisal of the effectiveness of managers and effectiveness of the corporate structure in achievement of company objectives and policies. It aims at identifying existing and potential management weaknesses within an organization and to recommend ways to rectify these weaknesses.”

Management audit is a method of evaluation of efficiency of management at all levels throughout the organization.

Management audit is conducted either by internal auditor (who must be an independent from managers being audited) or by specialist brought in from outside the organization. It investigates all the levels of management of a company, to ascertain the soundness of the company and check its effectiveness and efficiency.It checks the productivity, profit and progress of a firm.It investigates the performance of individual managers and the management team.

It concentrates on the management themselves but can be extended to include an administration audit.

Mgmt audit also includes an appraisal of the achievability of the organization’s objectives and the awareness of the management as regards to the developments in the business environment and its impact on the organization.

He also checks whether decisions have been taken in a proper manner and in the best interest of all stakeholders.

Management audit involves the following steps:Identification of objectives of the organisation.The overall objectives of the organisation are to be broken down into detailed targets and plans of various segments.A thorough review should be made whether overall objectives can be achieved.The performance of each functional area should be examined.On the basis of above, realistic course of action should be suggested.

A lot of work is being done these days to develop techniques to measure the contribution that an enterprise makes to the society. It is increasingly realized that business entities have a social responsibility and their performance should be viewed from this point of view. Social audit is a systematic attempt to identify, analyse, measure, evaluate and monitor the effect of enterprise’s operations on society and on public well-being. It attempts to measure the consequences of corporate actions and estimate their cost to society.

Matters which fall in the ambit of social audit are :Impact of an enterprise on ecology.Improving the minority group.Eliminate adverse effect on environment.

Actions of an enterprise, are classified under 3 broad categories:

Relation with the peopleRelationship with environmentRelation with the product

Social Process Audit Social balance sheet and income statement Social performance AuditConstituency group attitudes Audit Government mandated Audit

POINT OF POINT OF DIFFERENCEDIFFERENCE

FINANCIAL AUDITFINANCIAL AUDIT COST AUDITCOST AUDIT

1. Purpose Financial Audit is to report on profit and loss account and balance sheet so as to present a true and fair view of the state of affairs of the company.

Cost audit is to check whether the cost records are maintained as prescribed by the law

2. Nature It covers all the financial transactions recordedin financial books and financial records.

It covers only cost records and cost accounts.

POINT OF POINT OF DIFFERENCEDIFFERENCE

FINANCIAL AUDITFINANCIAL AUDIT COST AUDITCOST AUDIT

3. Compulsory Nature

Compulsory for all companies

Not compulsory for all companies

4. Recurrence Conducted every year Conducted only when required by the Govt

5. Instance Conducted at the instance of the shareholders

Conducted at the instance of the Govt

6. Scope Wide Scope Narrow Scope

POINT OF POINT OF DIFFERENCEDIFFERENCE

FINANCIAL AUDITFINANCIAL AUDIT COST AUDITCOST AUDIT

7. Report To be submitted to company

To be submitted to company & Govt.

8. Appointment Financial auditor is appointed by the shareholders

Cost Auditor is appointed by the B.O.D, with the approval of the Govt.

9. Qualification Chartered Accountant Cost Accountant

10. Treatment of Ratio Analysis

Current, Liquidity, Profitability Ratios

Operating ratios

POINT OF POINT OF DIFFERENCEDIFFERENCE

FINANCIAL AUDITFINANCIAL AUDIT COST AUDITCOST AUDIT

11. Type of audit Post- mortem audit Forward looking audit

12. Stock Check the exact value of closing stock

Check the adequacy of stock

The management will get reliable data for its day to day operations like price fixing, control, decision making, etc.A close and continuous check on all wastages will be kept through a proper system of reporting to the management.Inefficiencies in the working of the company will be brought to the notice of the management to take corrective action.The system of budgetary control and standard costing will be greatly facilitated.A reliable check in the valuation of closing stock and work-in-progress can be established. It helps in the detection of errors and fraud.

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.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.Cost Audit is also useful for the purpose of Cost Control; Cost reduction and proper utilization of scarce resources.

Cost audit ensures that proper records are kept as to purchases and utilization of material and expenses incurred on wages, overheads, etc. It also ensures that the unit has been run economically and efficiently. It also makes sure that the valuation of closing stocks and work-in-progress is on a fair basis. The shareholders are assured of a fair return on their investment.

Where the government enters into a cost plus contract, cost audit helps the government to fix the price of the contract.Cost audit helps the fixation of selling prices of essential commodities and thus undue profiteering is checked.Cost audit enables the government to focus its attention on inefficient units.Cost audit enables the government to decide in favor of giving protection to certain industries. Since cost audit ensures efficient running of the business, a healthy competition is generated among the various units in an industry. This imposes an automatic check on inflation.