BCom 3rd Year Cost Audit Notes Study Material
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BCom 3rd Year Cost Audit Notes Study Material
With the growth and development of cost accounting systems, it became necessary to maintain cost records and cost books to record costs and related transactions correctly. It is necessary that either in financial accounting or in cost accounting or in the management accounting system, wherever books and records are kept, they must be examined independently to ensure that they have been kept and recorded fairly and correctly and that there are no errors of omission and commission and there is no defalcation. So once the cost accounts are prepared, they should be audited in all fairness. (BCom 3rd Year Cost Audit Notes Study Material)
DEFINITIONS AND CONCEPT OF COST AUDIT
Cost audit means an audit of cost accounts, which is related to deep checking and verification of the accuracy of cost techniques, methods, and accounts. Some of its definitions are as follows:
(1) “Cost audit is the verification of cost accounts and checks on the adherence to the cost accounting plan.” -I.C.M.A., London
(2) “Cost audit means the detailed checking of the costing system, technique, and accounts to verify their correctness and to ensure adherence to the objective of cost accounting.” -Smith & Day
(3) “Cost audit can be defined as verification of the correctness of cost accounts and adherence to the cost accounting principles, plans, and procedures.” I.C.W.A., India
Like a financial audit, a cost audit is also an attest function. It is a systematic and accurate recording of detailed transactions and operations of manufacturing processing, contracting, extracting, transporting, supplying, etc., so as to show the actual cost of each individual piece of work, service or process, or operation. (BCom 3rd Year Cost Audit Notes Study Material)
The cost auditor is expected to examine the cost books, cost accounts, cost statements, and all other relevant documents to see not only that they have been correctly written and recorded but that they also give a fair and correct picture of the business with regard to costing operations.
From the definitions of cost audit, it is evident that cost audit aims at:
(a) verifying that the cost books, cost accounts, and cost records have been correctly maintained as per the costing system adopted;
(b) verifying that the cost plan i.e., the prescribed routine and procedure, has been adhered to; and
(c) detecting errors and preventing fraud, misappropriations, and defalcations.
DIFFERENCE BETWEEN COST AUDIT AND FINANCIAL AUDIT
Financial accounting and cost accounting are the two main branches of the accounting system. The same criteria and principles of audit hold good in both systems of accounting and sometimes it becomes difficult to make a clear-cut distinction between the two audits.
However, an auditor of financial accounting is more concerned with financial aspects, recording of cash and bank transactions, capital, debtors, creditors, assets & liabilities, etc, while the cost auditor is more concerned with correct recording, ascertainment, presentation, and control of costs. This leads to the following points of distinction:
- Presentation of Report: In a financial audit, the audit report is addressed and placed before the shareholders of the company, but the cost audit report is addressed to the appointing authority. In a financial audit, the auditor is the representative of the shareholders while in a cost audit, he is the nominee of the appointing authorities and reports to them on cost-effectiveness.
In a statutory cost audit, the report is to be submitted by the cost auditor to the Central Government, with a copy to the company.
- Statutory Compulsion: Audit of Financial accounts has been made statutorily compulsory by the companies Act while cost audit is not compulsory except in certain cases i.e., in case of companies that carry on manufacturing or mining business and which are required to maintain Cost Accounts under Section 209(1)(d) of the Companies Act and are asked to get their accounts audited under section 233(B) by the Central Government. (BCom 3rd Year Cost Audit Notes Study Material)
- Details in the Annexures: The audit examination of financial accounts is not as detailed as that of cost accounts. In the case of a statutory cost audit, the cost auditor has to furnish details in the annexures along with Cost Audit Report.
- The focus of Audit: In a financial audit, the auditor is required to report on the Profit & Loss A/c and the Balance Sheet whether they exhibit a true and fair view of the state of affairs of the company. In the cost audit, the auditor has to report whether the company’s cost accounting records have been properly kept as to give a true and fair view of the cost of production, processing, manufacturing or mining activities, and the marketing of the product under reference. (BCom 3rd Year Cost Audit Notes Study Material)
- The focus of Examination: The financial auditor is required to examine that the business transactions have been recorded correctly but the cost auditor has also to see that inventory management and control, inventory limits, E.0.9. etc., have been properly adhered to.
- Relation with Decision-making: The financial audit is not so much related to decision-making aspects as the cost audit is related. The cost auditor points out errors and irregularities in managerial decision-making.
- Stock Valuation: The financial auditor has to verify the correct valuation of the closing stocks but the cost auditor has also to see that there is sufficient closing stock to meet the needs of the manufacturer. (BCom 3rd Year Cost Audit Notes Study Material)
- Correct Profit us. Potential Profit: The financial audit exhibits whether correct profits have been arrived at or not but in cost audit, the possibility of earning more profits is explored and advice is made available for the future for better results on the basis of previous records and experiences. (BCom 3rd Year Cost Audit Notes Study Material)
- An instance of Audit: Financial audit is conducted at the instance of owners of the business but a cost audit can also be done at the instances of Government, Banks and Investors, Industrial Tribunals and Customers, etc.
- Aspects of Audit: Financial audit is concerned with the financial aspects but an audit is more related to cost aspects. The cost auditor has to examine carrying an -carrying costs, engineering and works studies, variances, budgetary control and ratio studies, etc.
OBJECTS OR FUNCTIONS OF COST AUDIT
The objects or functions of cost audit are the following:
(I) Protective Objects
- Accuracy of Cost Accounting: To check the accuracy of cost accounting records and to verify that they have been maintained in accordance and in conformity with the accounting principles. (BCom 3rd Year Cost Audit Notes Study Material)
- Adherence of Principles and Procedures: To verify that the management is adhering to the accepted procedures and processes of cost accounting.
- Detection of Errors: To detect errors and frauds, if any.
- Examining the Adequacy of the System: To see how far the present practices of maintaining cost records, submission of reports, and returns are helpful and adequate. Changes may be suggested where necessary to make them more meaningful and decision-oriented.
- Pinpointing Deficiencies: To pinpoint the deficiencies or the inefficiencies in the use of materials, labor, and machines and to assist the management thereby. (BCom 3rd Year Cost Audit Notes Study Material)
- Verification of Correctness: To verify that the cost has been ascertained correctly and rightly presented.
- Enforcement of Cost Control: To see that the cost control and cost reduction programmes have been rightly enforced.
- Comparison with Budgets and Standards: To examine whether the expenditure incurred up to date is within the budget estimates and standards determined. (BCom 3rd Year Cost Audit Notes Study Material)
- Guidance to Management: To guide the management by giving positive suggestions to improve the working of the cost accounting department.
- Others: (i) To develop cost consciousness in the enterprise; (ii) To develop the process of moral check on staff from the view of cost control and cost reduction; (iii) To promote efficiency in the methods, techniques, and processes of cost accounting: (iv) To develop an effective system of internal cost audit.
(II) Constructive Objects
(1) To provide useful information and data to management for regulating production.
(2) To assist in the selection of economical methods of operation.
(3) To present suggestions for reducing operational costs.
(4) To give suggestions to resolve errors in cost accounts.
(5) To provide suggestions and consultancy for cost control.
IMPORTANCE OF ADVANTAGES OF COST AUDIT
The advantages of cost audit are the following:
(I) To the Management
- Reliable Data: The management feels assured that its cost accounting is fair and cost data are reliable. It all assists in taking various decisions related to price determination and control. (BCom 3rd Year Cost Audit Notes Study Material)
- Check on Wastages: Cost audit helps in continuous knowledge, check, and control of all types of wastages in production.
- Knowledge of Inefficiency: Cost audit brings to light various inefficiencies in the working of the company, which does help in taking corrective action at the proper time. (BCom 3rd Year Cost Audit Notes Study Material)
- Useful in Advanced Techniques: Cost audit promotes the use of advanced techniques of costing such as standard costing, budgetary control, etc.
- Cost Consciousness: Audit suggestions make the management cost-conscious and future plans and policies can be drawn from a better perspective.
- Proper Valuation of Stock: Cost audit does help in developing a proper system of valuation of closing stock and work-in-progress.
- Detection of Errors and Fraud: Cost audit helps in the detection of errors and fraud in cost accounting and records.
- Others: (a) It helps the management to reduce costs and control costs in a more effective way. (b) Audited cost accounts are useful for inter-firm comparison. (BCom 3rd Year Cost Audit Notes Study Material)
In brief, it can be said that “A cost audit is a process of ascertaining whether the production, marketing, and sales processes of a business have been managed in the most cost-effective manner. The audits reveal the extent of efficiency and profitability of a company as well as the sector.”
(II) To the Shareholders
- Faith in Management: Cost audit inculcates a sense of goodwill and faith toward the company’s production management and marketing management in the minds of the shareholders. (BCom 3rd Year Cost Audit Notes Study Material)
- Satisfaction with the Amount of Profit: As the cost audit examines the valuation of closing stocks and work-in-progress, the shareholders feel satisfied with the profit shown by the company, on this account.
- Knowledge of Efficiency of Management: The cost audit brings to the knowledge of the shareholders the efficiency of the management, proper utilization of man, material, and resources, productivity, and weak points of the organization.
(III) To the Investors
- Faith in the Position of the Company: After the cost audit, investors feel that the statement presented before them is correct and accurate and it inculcates a feeling of faith among them about the position of the company. On this basis, they can also decide whether more investment in the company will be beneficial or not. (BCom 3rd Year Cost Audit Notes Study Material)
- Assistance in Lending: Banks and corporations give preference in granting loans to such companies which adopt cost audits.
(IV) To the Society and Consumers
- Better Quality at Reduced Cost: Cost audit is generally introduced for the purpose of fixation of price. The prices so fixed are based on the correct costing data and so the consumers are assured to get better quality goods at a reasonable cost. Quality is assured on account of better use of resources. (BCom 3rd Year Cost Audit Notes Study Material)
- Maintenance of Standard of Living: Since price increase by the industry is not allowed without proper justification for it, consumers can maintain their standard of living. (BCom 3rd Year Cost Audit Notes Study Material)
(V) To the Government
- Reliable Data of Production and Cost: Country’s economic planning based on data on production, cost, imports, exports, etc., can be better decided on the basis of reliable cost data available on the basis of cost audit.
- Convenience in Contract Pricing: Where the Government enters into a cost-plus contract, a cost audit does help the Government to determine the price of the contract. (BCom 3rd Year Cost Audit Notes Study Material)
- Assistance in Protection Decision: In matters of tariff protection to certain industries, audited cost accounts present a reliable cost structure to the Government. (BCom 3rd Year Cost Audit Notes Study Material)
- Control on Profiteering: Cost audit helps in the fixation of selling prices of essential commodities and thus, profiteering can be checked and controlled.
- Knowledge of Inefficient Units: Cost audit enables the Government to identify efficient industrial units and to focus its attention in resolving their problems. (BCom 3rd Year Cost Audit Notes Study Material)
- Settlement of Industrial Disputes: Cost audit facilitates the Government in setting trade disputes related to wages, allowances, etc.
- Creation of Healthy Competition: Cost audit ensures efficient running of business and availability of correct and accurate cost data. It promotes healthy competition among the various units in the industry and imposes an automatic check on inflation.
ASPECTS OF SCOPE OF COST AUDIT
There are two main aspects of cost audit-(1) Propriety Audit and (2) Efficiency Audit.
- Propriety Audit: It has been defined as an “audit of executive action and plans to bear on the finance and expenditure of the company”. (Management Accounting, Feb. 1965)
This audit is related to the propriety, i.e., fitness or rightness of the expenditure made. An expenditure may have been sanctioned and it may have been supported by the vouchers, yet the propriety audit has to satisfy whether or not the expenditure made was appropriate to the circumstances of the case and that there could not have been a better alternative. So this audit is concerned with the audit of such actions of the executives as having a bearing on the finances and expenditures of the company or concern.
The cost auditor, under propriety audit, has to ensure that:
(a) the expenditure has been planned in a way as to give the optimum results:
(b) the planned expenditure, its size, and channels have produced the optimum results; and
(c) there is no other better alternative to the expenditure made and results obtained.
- Efficiency Audit: This is also known as a ‘Performance audit’ and is related to the working efficiency of the cost plan. It has to be seen whether the plan has been executed efficiently or not and for this the results obtained are to be judged. For example, the budget is a plan and the efficiency audit would determine whether the expenditure is incurred according to the budget and whether the results obtained are also in accordance with the budget. or not. The emphasis is on the point that:
(a) every unit of money invested must give the optimum or the best result, and
(b) the investment made in different types and areas is balanced and optimum.
Management Accounting’ defines Efficiency audit as the audit which ensures the application of the basic economic principle that resources will flow into the most remunerative channels. (BCom 3rd Year Cost Audit Notes Study Material)
The Efficiency audit is based on determining the working efficiency of the enterprise and so it is related to the examination of aspects like inventory control, productivity, utilization of installed capacity, cost control, profitability, etc.
TYPES AND CLASSIFICATION OF COST AUDIT
The following are the types of cost audits:
- Cost Audit on behalf of Management: An audit may be instituted by the management for its own satisfaction. The purpose of this audit is to provide correct and reliable cost information to management for taking managerial decisions and to ensure that the costing department is functioning according to the plan. (BCom 3rd Year Cost Audit Notes Study Material)
The Cost Auditor is appointed by the management for this audit.
- Statutory Audit: Under Section 148(1) of the Companies Act, 2013, it has been laid down that where in the opinion of the Central Government it is necessary so to do in relation to any company required to include in its books of account particulars referred to therein, the Central Government may, by order, direct that an audit of cost accounts of the company shall be conducted in such manner as may be specified in the order, by an auditor who shall be a cost accountant within the meaning of the Cost and Works Accountants Act, 1956.
- Cost Audit by the Government: Besides the Statutory audit, the audit can be instituted by any Government-Central of State–for the following purposes:
(a) to ascertain the cost of production and marketing in case of industries to whom financial assistance in the form of subsidy, grant-in-aid, lower or free rates of taxes, etc., is to be provided,
(b) to ascertain costs in order to fix maximum prices of products,
(c) to ascertain the cost of contracts to be given to contractors under Cost-plus contracts, and
(d) to fix limits of loans to be advanced by financial corporations, small-scale industries, and banks to different industries, on the basis of production costs.
- Cost Audit by Contractees: Were it decided by the contractee with the contractor that the contractor would be paid the cost of the contract plus a fixed percentage of profit, as in the case of ‘Cost-plus’ contracts, the audit is instituted by the contractee to ascertain the correct cost of the contract. Similarly, where a contractor appoints sub-contractors on the basis of cost and profit basis, the contractor institutes a cost audit of the accounts of sub-contractors to settle payments. (BCom 3rd Year Cost Audit Notes Study Material)
- Cost Audit by Tribunals: To settle labor disputes on wages, bonuses, profit sharing, etc., the Tribunals may ask for a cost audit of the concerned businesses. Similarly, Income-tax Tribunals may direct cost audits for the assessment of tax based on the profits of a manufacturing concern. (BCom 3rd Year Cost Audit Notes Study Material)
- Cost Audit by Trade Associations: In the case of concerns of a similar nature costs are compared with each other under Uniform Costing or Inter-firm Comparison by Trade Associations. Trade Associations want to know the costs to seek concessions from the Governments in the gestation or take-off periods of certain concerns, and for that purpose, a cost audit is required.
Classification of Cost Audit
Cost Audit can be classified as (1) Internal audit and (2) External or Statutory audit.
(I) Internal Audit: Internal audit is done by the auditor who is in employment by the business, with the help of his departmental staff. The objectives and scope of internal audit differ from concern to concern depending on the requirements of the management.
- to ensure that the business is being run according to plan;
- to verify the correctness of accounts by vouching:
- to check that the budgets have been prepared correctly:
- to detect errors of omission, commission, and errors of principle, and to prevent frauds and defalcations;
- to check that forms and documents are executed regularly and submitted punctually:
- to ensure that accounting is done daily, as per schedule;
- to check whether the routine and procedures are being followed as per the Cost plan;
- to detect weaknesses in the system and remove them:
- to see that there is no communication gap between top management and the executives; the business policy and instructions are communicated to the workers as scheduled and the managerial reports are submitted in time to the management;
- to verify the inventory control and physically check the stocks:
- to compare the costs of products from period to period, analyze the causes of variations and suggest ways and means to reduce and control costs; and
- to effect moral checks and improve efficiency.
(II) External or Statutory Audit: The external audit is conducted with a particular object in view, by the outside auditors, and thus, has a limited scope. It may be conducted by the Tribunal, Government, Contractee, or Trade Association, but in each case, the object is specific and limited. The external auditor is not an employee of the company but an outside party and he is responsible not to the company but to his appointing authority to whom he submits his report. (BCom 3rd Year Cost Audit Notes Study Material)
It may be mentioned that statutory cost audit was introduced with the objectives (a) to make management cost-conscious, and (b) to help in improving industrial efficiency all around and to maximize production. However, such an audit may be required under the following conditions also:
- For fixation of retention price in case of materials of national importance such as steel, cement, etc.
- To check excessive profiteering.
- To find the reasons for cost variation from unit to unit in the same industry.
- For settling trade disputes about claims for higher wages, bonuses, etc.
- To determine the correct cost of production, where duty or tax is levied on products based on the cost of production.
- To find out the correct position of inefficient and uneconomic industrial units.
TECHNIQUE AND PROCEDURE OF COST AUDIT
In order to reap the benefit of cost audit, it is necessary that it should be done in its entirety and should be done continuously. Before the commencement of the audit, the costing method and technique adopted should be examined. The list of various sheets, documents, schedules, statements, etc., related to cost and cost records and books should be obtained.
It should be examined whether the work of internal control is effectively being done. It should also be seen what is the object for conducting the audit, the scope of the audit, nature, and size of the business. In case the size of the business is very large, then the function of book-keeping and accounting and internal control system should be very effectively organized.
After examining the above aspects, the cost auditor makes his cost audit programme which is similar to that of a financial audit. The work of vouching, checking, and ticking is also similar to a financial audit.
Generally, the technique of cost audit should be as follows:
(1) All the receipts and payments should be vouched i.e., each transaction should have a voucher, so as to verify the reliability of transactions.
(2) All the calculations and postings should be verified. For this special tick mark should be adopted. If the work is more and time is less then a test check should be applied. (BCom 3rd Year Cost Audit Notes Study Material)
(3) The items of the suspense account should be examined very carefully. All the adjustment entries should be well examined.
(4) The comparison of actual data with budgeted data should be made and any variance should be carefully analyzed.
(5) As regards to the technique the following points are to be considered:
(i) Physical Examination, (ii) Physical Count, (iii) Confirmation, (iv) Examination of original document, (v) Scanning, (vi) Enquiry.
(6) He should note down all those points in his notebook that he considers reasonable.
COST AUDIT PROGRAMME
The procedure and programme for cost audit should be recorded in Audit Manual and the following points should be examined by the cost auditor:
(i) Inventory Control-size, maximum and minimum stocks, material limits, Re-order points, Safety stocks, ABC Analysis, etc.
(ii) Purchase schedule—Selection of Suppliers, Approval of quotations, Terms of supply, Order placing, and follow-up. Economic Order Quantity, Carrying, and non-carrying costs, Lead Time, etc. (BCom 3rd Year Cost Audit Notes Study Materiall)
(iii) Receipt of materials and storage-Receipt, inspection, approval or rejection of material received, use of forms and documents with proper authorization, Bin cards, Stores Ledger, their reconciliation, etc.
(iv) Perpetual inventory system, physical stock checking, and accounting for differences.
(v) Detection and prevention of pilferage or loss of stocks.
(vi) Issue of materials from stores to workshops or departments, authorization of Stores Requisitions, Weighing system, checking of weighing balances and measurements. (BCom 3rd Year Cost Audit Notes Study Material)
(vii) Checking of materials transferred from one job to the other or materials returned to stores, with the relevant documents and entries made in the cards and accounts. (BCom 3rd Year Cost Audit Notes Study Material)
(viii) Method of pricing the issues—whether it is in accordance with the system approved.
(ix) Wastage, scrap, spoilage, and defectives—whether they are within reasonable limits, their Reports should be examined.
(x) Correct valuation of closing stocks and work-in-progress.
(xi) Accounting of materials received, issued, transferred, returned, etc. and accounting of materials consumed by jobs, products, etc., should be examined.
(xii) Budgetary control for materials and variances from standards should be examined for material cost control.
(i) Application of labor cost control factors and devices and optimum utilization of labor, by production planning, budgets, standards, performance reports, and study of effective wage policy. (BCom 3rd Year Cost Audit Notes Study Material)
(ii) Method of selection, appointment, and discharge: Labour turnover, and functioning of Personnel department.
(iii) Labour efficiency and productivity and their comparison with the standards fixed.
(iv) Standards fixation-whether the standards are attainable or not.
(v) Time-keeping system and correct booking of labor costs with regard to job/time cards.
(vi) Preparation of wage sheets and examining that correct wage amounts are disbursed to the right workers and no frauds are perpetuated by the inclusion of names of dummy workers. (BCom 3rd Year Cost Audit Notes Study Material)
(vii) Idle time and over-time-their control and treatment in accounting.
(viii) Forms, cards, sheets, and other documents used for time-keeping, time-booking, and wage payments should be properly authenticated and checked.
(ix) Wage policy and method of remuneration-whether the system is working satisfactorily to the benefit of management and labour.
(i) Proper classification of overheads into factory, administration, selling and distribution should be examined.
(ii) Allocation, apportionment, and absorption of overheads on sound bases should be ensured.
(iii) Preparation of overhead budgets, comparison of actuals with the budgets and standards, and analysis of variances.
(iv) Comparison of overhead expenditure to the volume of production.
(v) Correct allocation of overheads to the work-in-progress.
(vi) The method of charging depreciation should be carefully examined.
(vii) Treatment of items of overhead, e.g., factory rent, interest on capital, discounts, etc., should be examined whether they are treated on sound and accepted principles. (BCom 3rd Year Cost Audit Notes Study Material)
(viii) The administration, selling, and distribution overheads require different treatment from factory overheads, in respect of their allocation and apportionment. Their proper accounting should be ensured. (BCom 3rd Year Cost Audit Notes Study Material)
The Cost Auditor should examine the above points mentioned under sub-heads carefully for a completed audit. He should take note of the discrepancies and remove his doubts. It is essential that before the audit is started, all the books of accounts and records should be posted up-to-date and vouchers filed serially. All relevant documents and information should be made available to the auditor and full cooperation be extended to him by the staff. (BCom 3rd Year Cost Audit Notes Study Material)
COST AUDIT UNDER THE COMPANIES ACT, 2013
In India, legal provisions relating to Cost Audits were incorporated in Section 233(B) of the Companies Act, 1956, and these provisions have been substituted by Section 148 of the Companies Act, 2013. On the whole legal provisions relating to Cost Audit may be summarised as follows:
(I) Statutory Requirement of Cost Audit as per Companies Act: The Statutory cost audit was introduced for the first time in India by an amendment of the Companies Act in 1965. (BCom 3rd Year Cost Audit Notes Study Material)
According to Section 148(1) of the Companies Act, 2013, “The Central Government may, by order, in respect of a such class of companies engaged in the production of such goods or providing such services as may be prescribed, direct that particulars relating to the utilization of material or labor or to other items of cost as may be prescribed shall also be included in the books of account kept by that class of companies.”
If Central Government intends to such an order in respect of any class of companies regulated under a special Act, it will consult the regulatory body constituted or established under such a special Act.
According to Companies (Cost records and Rules), 2014, all industries have been classified into four broad sectors for which cost audit will be applicable:
(1) Strategic Sectors: It includes six groups of industries such as machinery and mechanical appliances used in defense, space, and atomic sectors. In this sector cost audit will be applicable if the net worth of the company is 500 crore or more or the turnover is 500 crore or more.
(2) Industry regulated by Sectoral Regular: This sector includes 11 groups of industries such as port and Aeronautical services, telecommunication services, generation, transmission, distribution and supply of electricity, roads and other infrastructure projects, steel, etc.
(3) Companies operating in areas involving Public Interest: This sector includes 11 groups of industries such as railways, Mineral Products, Chemicals, Jute Products, Companies engaged in health and educational services, etc.
(4) Companies engaged in the production, import, supply, and trading of medical devices: It includes the list of 20 medical devices such as cardiac stents, Heart valves, Intra-ocular lenses, Heart valves, etc.
It is worth mentioning that in every sector threshold limits of turnover have been specified.
(II) Cost Accounting Records Rules: These rules, as referred to above, provide guidelines to the companies to maintain their cost records. These rules may differ from industry to industry according to the nature of the industry. Some of the main heads under which the cost data are to be compiled are given below:
- Input Material(s)/Service(s): The records of material received, issued, consumed, lost in transit, or wasted in storage, their pricing, or valuation is to be given. (BCom 3rd Year Cost Audit Notes Study Material)
- Salaries and Wages: Attendance of workers and staff, departments where each is working, a system of remuneration and bonus, allocation of wages, idle-time costs, over-time costs, etc., are to be shown.
- Utilities: Cost of each major utility such as power, water, steam, effluent treatment, etc.
- Service department costs: These costs are to be worked out and their apportionment to production is to be shown.
- Repairs and Maintenance: Expenditure incurred by the workshop, tool room, and on repairs and maintenance in the various Cost centres or departments.
- Fixed Assets, Depreciation, and lease charges: It includes proper records for assets used for the production of goods/rendering of services, the amount of depreciation charged, and details of assets taken or gain on lease along with lease charges.
- Overheads: Their classification, basis of apportionment, and method of absorption are to be shown separately for production, administration, selling, and distribution, along with overhead costs attributable to each type of product.
- Royalty and Technical know How fee: The basis of calculating and charging royalty and other payments should be shown.
- Research and development expenses.
- Quality Control: Expenses incurred in respect of the quality control department for goods/services under reference.
- Work-in-progress and finished Stock: Opening and closing W.I.P. and finished stock their valuation method and costs, physical checking records, etc. (BCom 3rd Year Cost Audit Notes Study Material)
- By-products: Details of by-products, if any, produced showing the receipt, issues, and balances both in quantity and value.
- Packing Expenses: Records for domestic and export packing showing the cost of various packing materials.
- Expenses or costs incurred on export sales.
- Production Records: Quantitative records of all finished goods/services showing production, issues for sales, and balances of different types of goods and services. (BCom 3rd Year Cost Audit Notes Study Material)
- Cost Statements: quarterly or annually showing quantitative information in respect of each good/ service under reference.
- Reconciliation of cost and financial books: It is to be done periodically and recorded.
- Records of Physical verification: Tallying of balances shown by Bin-Cards and Stores Ledger Accounts, physical checking reports, perpetual inventory system, stock valuation, wastage or loss or pilferage, etc.
(III) Provisions Regarding Statutory Audit: Section 148(2) of the Company Act, 2013 empowers the Central Government to institute a Statutory Cost Audit in any company to which Section 148(1) applies.
(IV) Appointment of Cost Auditor: According to Section 148(3) of the Companies Act, 2013 the cost Audit shall be conducted by a Cost Accountant in practice who shall be appointed by the Board of Directors on such remuneration as may be determined by the members.
(1) The category of companies, which come under the applicability of cost audit, shall within 180 days of the commencement of every financial year, appoint a cost auditor. (BCom 3rd Year Cost Audit Notes Study Material)
(2) Every company referred to in sub-rule (1) shall inform the cost auditor concerned of his or its appointment as such and file a notice of such appointment with the Central Government within a period of thirty days of the Board meeting in which such appointment is made or within a period of one hundred and eighty days of the commencement of the financial year, whichever is earlier, through electronic mode, in form CRA-2, along with the fee as specified in Companies (Registration offices and Fees) Rules, 2014.
(3) Every cost auditor appointment as such shall continue in such capacity till the expiry of one hundred and eighty days from the closure of the financial year or till he submits the cost audit report, for the financial year for which he has been appointed.
(4) Every cost auditor, who conducts an audit of the cost records of a company, shall submit the cost audit report along with his or their reservations or qualifications or observations, or suggestions, if any, in form CRA-3.
It is important that no person appointed under Section 139 of the Companies Act, 2013 as an auditor (financial) of the company shall be appointed for conducting the audit cost records. Moreover, the auditor conducting the Cost Audit shall comply with the cost auditing standards. The expression ‘Cost Auditing Standards’ means such standards as are issued by ICWAI.
It is also worth mentioning that Cost Audit conducted under Section 148 shall be in addition to the audit conducted under section 143 of the Companies Act, 2013.
(v) Qualification of a Cost Auditor: A Cost Accountant within the meaning of the cost and Works Accountants Act, 1959 is eligible to be appointed as a cost auditor. (BCom 3rd Year Cost Audit Notes Study Material)
(vi) Disqualifications of Cost Auditor: A person referred to in such Sub-Section (3) or Sub-Section 4 of Section 141 of the Companies Act, 2013 shall not be appointed or re-appointed for conducting the audit of cost accounts.
As regards to above Section, the following are some disqualifications for the appointment of a cost auditor :
(i) An employee or officer of the company cannot be appointed as an auditor.
(ii) Any person who has been appointed as a financial auditor cannot be appointed as a cost auditor.
(iii) A company cannot be appointed as a cost auditor.
(vii) Powers and Duties of Auditor: An auditor shall have the same powers and duties in relation to an audit conducted by him under this Section as an auditor of a company has under Sub-Section (1) of Section 143 of Companies Act, 2013 and such auditor shall submit his report to the Board of Directors of the Company. (BCom 3rd Year Cost Audit Notes Study Material)
(viii) Facilities to the Auditor: It shall be the duty of the company to give all facilities and assistance to the person appointed for conducting the audit of the cost accounts of the company. (BCom 3rd Year Cost Audit Notes Study Material)
(ix) Information and Explanations: The company shall, within thirty days from the date of receipt of a copy of the report referred to as above furnish the Central Government with full information and explanations on every reservation or qualification contained in such report.
(x) Action by Government: If after considering the Cost Audit report and the information and explanations furnished by the company under Section 148(6), the Central Government is of the opinion that any further information or explanation is necessary, it may call for such further information and explanation and the company shall furnish the same within such time as may be specified by the Government.
(xi) Penalty: If any default is made in complying with the provisions of Section 148:
(i) The company and every officer of the company who is in default shall be punishable in the manner as provided in subsection (1) of Section 147.
(ii) The cost auditor of the company who is in default shall be punishable in the manner as provided in subsection (2) to (4) of Section 147.
COST AUDIT REPORT
In the Cost Audit Report, the cost auditor has to state whether he has examined the books of account maintained under the Companies Act and other relevant records. The Cost Auditor has also to report on certain matters, viz.:
- Whether he has obtained all information and explanations necessary for the purpose of the audit.
- Whether proper cost accounting records as required under Act have been kept by the company.
- Whether proper returns adequate for the purpose of cost audit have been received from branches not visited by him.
- Whether the books and records give the information required by the Companies Act, 1956 in the manner required.
- Whether the company’s cost accounting records have been properly kept so as or mining activities and marketing of the product.
- Whether the cost statement as specified in the Annexures/Proforma of Schedules I to III as applicable of Cost Accounting (Records) Rules duly audited by him are kept in the company. (BCom 3rd Year Cost Audit Notes Study Material)
In short “Cost Audit Report” means the report duly audited and signed by the cost auditor including attachment, annexure, qualification or observations, etc. to the cost audit report. (BCom 3rd Year Cost Audit Notes Study Material)
BCom 3rd Year Cost Audit Notes Study Material