final project of costing
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USE OF AUDIT
Project management includes the planning, organising, monitoring and controlling of all aspects
of the project in a continuous process to achieve its objectives. (ISO 10006:1997(E))
1.0 Objectives
The objectives of this Audit Guide are to ensure that
Projects are fully briefed with clear objectives, responsibilities and ownership defined,
Costs and benefits are clearly determined and properly monitored,
Projects are completed successfully in line with the plan, and on time and in budget.
2.0 Risks
The key risks are:
The project scope and plan is not in line with organisational needs,
There are time delays,
There are cost overruns,
There are inadequate resources to meet the project objectives,
The personnel organisational structure is inappropriate for the project,
The project failed to achieve its objectives.
3.0 Safeguards and Controls
3.1 Project Characteristics
Do Project Management Processes exist for planning, organizing, monitoring andcontrolling all aspects of the project?
Are projects divided into sub-processes / phases?
Is there a clear definition of responsibilities for monitoring the realization of the sub- process / phase objectives and related risks?
3.2 Quality in Project Management Processes
Which project management processes exist (documented or not) within the organisatione.g. cost, resource and time related processes to ensure the project is managed efficiently
and effectively?
Do Project Management guidelines and processes exist within the organisation / project
organisation to ensure quality?
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3.3 Strategic Processes
Have customer and stakeholder needs been clearly understood to ensure that all project-related processes focus on meeting their needs?
Has / is the project carried out as a set of planned and interdependent processes? Is there a clear division of responsibility versus authority between the organisation,
project team, customers and stakeholders?
Do project progress evaluations exist? If so, what do they evaluate?
Do quality attributes exist within the Project Management Process? E.g. approvals,documentation, preventative and corrective action, reviews, traceability, training,verification, etc.
Have management provided an organizational structure that is conducive to support the project objectives?
Does management make project decisions based on data and factual information?
Has a project manager been appointed and defined with accountability, authority and
responsibility for managing the project? Has a system been put in place to collect and analyze the information gained during /
after a project for use in a continual improvement process?
3.4 Interdependency Management Processes
3.4.1 General
Who is responsible for managing all of the interdependencies amongst the project processes?
3.4.2 Project Initiation and Project Plan Development
Does an approved project and quality plan exist? If so, is it kept up to date, and bywhom?
Has the project plan been prepared to allow for traceability (measuring and assessingobjectives/ deliverables)? If not, is there an alternative means of traceability?
Is the objective of the project to fulfil the requirements of a contract? If so, are contractreviews performed?
Is the retention of project related records managed?
Are reviews and progress evaluations included in the Project Plan? If so, do these reviews
include preventative / corrective action measures?
What project interfaces exist? Are they identified in the Project Plan and how are theymanaged? E.g. liaison with customer / stakeholders, reporting lines, functions within the
project organisation.
3.4.3 Interaction Management
Over and above the project organisation, does the project consist of project interactionteams? E.g. risk management teams, measuring project performance, project
communication.
3.4.4 Change Management
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ISO 10006:1997(E) Quality Management – Guidelines to Quality in Project Management
Does the Change Management Process include a control mechanism for documentation?
3.4.5 Project Closure
At project closure, are all the project records retained for a specified time?
At project closure, is a complete project review conducted irrespective of the reason for
project closure?
3.5 Scope related process
3.5.1 General
How are the customer requirements translated into activities to ensure project objectivesare achieved?
3.5.2 Scope Development and Control Has a project scope been developed?
Is there supporting evidence of alternative approaches and solutions?
3.5.3 Activity Definition (tasks, work packages, work breakdown structure)
In the definition of activities, has the project manager / project leader involved the
personnel who are responsible for carrying out the activities?
Have the activities been defined in such a way that its outputs are measurable?
3.5.4 Activity Control
Are the activities defined, carried out in accordance to the project plan? Have reviews been planned on the activities?
Are variations from the defined activities being updated on the Project Plan?
3.6 Time related processes
3.6.1 General
Does a time-related process exist to determine the dependencies and duration of activitiesto ensure timely completion of the project?
Is there a clear timetable?
3.6.2 Activity dependency planning
Has the project defined and documented inter-relationships, logical interactions and
interdependencies? E.g. project network diagrams.3.6.3 Estimation of duration
Who is responsible for establishing the duration of the activities within the project?
Has the ‘estimation of duration’ been linked to project resource planning?
Has time allocation been planned for quality practices within the project?
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3.6.4 Schedule development
What is the format of the project schedule?
Have key events, milestones, progress evaluations, critical and near-critical activities been identified in the schedule?
3.6.5 Schedule control
Changes that affect the project objectives - does the customer/ stakeholder agree to these before implementation?
How often is the schedule revised?
3.7 Cost related processes
3.7.1 General
How are the project costs managed to ensure that the project is completed within theoriginal budget constraints?
3.7.2 Cost estimation
Have project costs been clearly identified and documented? If so, by whom?
Have the project costs been linked to the activity definition process?
Has the project cost estimation involved significant cost related risk? If so, how are thesemanaged?
Has the project budget been established based on the project cost estimation process andis it accordance with the approved accounting procedures within the organisation?
3.7.3 Budgeting
Is the project budget consistent with the project requirements, assumptions, risks and
contingencies? Is this documented?
3.7.4 Cost Control
What is the process for project purchasing / expenditure requirements?
Has this process been documented and communicated to those responsible for authorisingexpenditure or authorizing work that may have cost implications?
Are project expenditure records reviewed, managed and maintained?
Are the root causes for budget variances, both favorable and unfavorable identified? If so,is this part of a project budget review?
3.8 Resource related processes
3.8.1 General
Has resource planning and control been applied on the project?
3.8.2 Resource planning
Does a resource plan exist for the project?
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3.8.3 Resource control
How does the project ensure that the remaining resources are sufficient to meet the project objectives?
3.9 Personnel related processes
3.9.1 General
Has a project organisational structure been established?
Is the project organisational structure encouraging for communication and co-operation between the project participants?
Is the project organisational structure appropriate for project scope, size and localconditions?
Does the project organisational structure identify customer / stakeholders?
Are accountability, authority, responsibility and job descriptions defined anddocumented?
How often is the project organisational structure reviewed for validity and adequacy?
3.9.2 Staff allocation
Were selection criteria prepared for staff allocation?
Has education, knowledge and experience been accounted for in the allocation of projectstaff?
Has the project manager been involved in the appointment of key team members?
Is project staff efficiency and effectiveness being monitored?
3.9.3 Team Development
Is the project team being recognized and rewarded?
Does the project environment encourage excellence, good working relationships, trust,respect and open communication?
3.10 Communication related processes3.10.1 General
Does the project plan consist of a communication plan?
Do ‘Project Progress Reports’ form part of the project communication?
3.10.2 Information Management
How does the project manage the following:
Preparing information
Collecting information
Classifying information
Distributing information
Filing information
Updating information
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project meetings consist of meeting agendas?
3.10.3 Communication Control
Is the project communication plan monitored and reviewed to ensure it continues to meetthe needs of the project?
3.11 Risk related processes
3.11.1 General
How often are risks identified through the project life cycle?
How are these risks managed?
3.11.2 Risk Assessment Is probability of the occurrence and impact of the identified risk assessed?
What techniques are being used in the project to prioritize, manage and record theidentified risks and their resolutions?
Are risks that may impact time schedules or project budget, identified and maintainedseparately?
3.11.3 Risk Control
Does the project plan consist of a contingency plan?
Do project risks form part of project progress reports?
3.12 Purchasing related processes
3.12.1 General
Does the project plan consist of a procurement / purchasing process?
Does the process cover internal and external acquisitions?
Does the project organisational structure identify the interfaces with sub-contractors?
Has project purchasing / procurement been reviewed?3.12.2 Documentation of requirements
Does purchasing documentation exist for the project?
Have the customer requirements been included into the purchasing / procurementdocuments?
Do the purchasing documents go through a review process to ensure that all requirementsare completely specified?3.12.3 Evaluation of sub-contractors
Have project related sub-contractors been evaluated that may impact on the project? E.g.technical experience, delivery times, quality system and financial stability.
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3.12.4 Sub-contracting
How does the project manage project-relevant information being supplied tosubcontractors?
How are subcontractors tenders evaluated?
3.12.5 Contract control
Does the project consist of a process to ensure that all contract requirements, due datesand records are met?
How often are the contracts verified to ensure the performance of each subcontractor meets the contract requirements?
Are all contracts, prior to project closure, verified and updated?
3.13 Learning from the Project
At project closure, does the originating organisation collate, store, update and retrieveinformation from the project?
At project closure, are reviews performed of project performance, highlighting
experience from the project and is the customer involved?
Was expenditure within budget and objectives achieved and the project accounted for accurately?
4.0 Opinion FormingThe following provides some overall guidance in opinion forming. The descriptions are not
exhaustive of all possible projects, but have been provided in order to give an indication of theopinion to be formed and provide some consistency.
Seriously Deficient No Project Management processes exist for planning, organising, monitoring or controlling the
project. The project scope does not match the project objectives. There is a severe lack of
organisation, excessive time delays and overspend. The project team skills and competencies donot match the project requirements. The project does not meet its objectives.
Weak Project Management processes exist, but are not properly applied. The project scope is not in
line with project objectives. There is poor organisation, time delays or cost overruns due to weak
controls. The project team does not have adequate skills to meet the project requirements
effectively. The project does not fully meet its objectives.
Satisfactory
Basic processes are in place, which are adequate to ensure the project objectives are met. The
control environment is sufficient to ensure that all time and cost constraints are fully adhered to, but deviations are not excessive. The project team skills match the project requirements. The
project results are generally in line with the objectives.
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GoodThere is a defined Project Management process in place. The project scope is in line with project
objectives. The project is meeting its time and budget constraints. The project team member’s
skills match the projects needs. The project has met its objectives.
Very Good
The Project Management process is clearly defined, ensuring the project is planned, organised,
monitored and controlled to meet organisational objectives. The project is flexible and adaptablein meeting and surpassing its time and budget constraints. The project has entirely met its
objectives. Good practices have been identified to be transferred to other Project Management
processes.
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References
ISO 10006:1997(E) Quality Management – Guidelines to Quality in Project Management
Cost Audit
Meaning
Cost Audit is the verification of the cost accounts and of the adherence to the costaccounting plan. That is, it not only involves the examination of cost accounts but alsothe fact that plan prepared in this connection has been duly executed. The IndianCompanies Act has made provisions to perform cost audit to certain categories of companies engaged in the production processing, manufacturing and mining activitiesunder section 209 and 233 B. It has however not been made compulsory for all thecompanies. The duties and powers of the Auditor are set out under section 227 of thesaid Act. Cost Auditor will not submit his report to the members of the company but willhave to submit to the Company Law Board.
DefinitionCost Audit may be defined as ―the verification of cost records and accounts and a
check on the adherence to the prescribed cost accounting procedures and thecontinuing relevance of such procedures.‖
Difference between Financial Audit and Cost Audit
(1) It is statutority compulsory under Companies Act.(2) It covers all the financial transactions recorded in financial books and financial
records.(3) It aims to examine that the business transactions have been recorded correctly.(4) It is concerned with the past and historical in nature.(5) Reporting the true and fair view of the company‘s earnings and state of affairs.
(1) It is not compulsory except in certain cases as provided under section 233B.(2) It covers only cost records and cost accounts.(3) It aims to verification of cost accounts and ensures the plan prepared in this
connection has been duly executed.(4) It concerned with forward looking approach.(5) Cost Auditor is required to report to the management except statutory audit
Proposes or Objective of Cost Audit
The purpose of Cost Audit is to examine whether the methods laid down for ascertaining costs and other decisions are being properly implemented and whether thecost accounting plan is being adhered to or not. The purposes can, therefore, beclassified under two heads, namely :
(1) Protective
(2) Constructive
(1) Protective Purpose: Under protective purpose, it aims to examine that there is noundue wastage or losses and costing system brings out the correct and realistic cost of production or processing.
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(2) Constructive Purpose: Cost Audit has a constructive purpose as well. Cost Auditplays a constructive role by providing management of the company with informationuseful in regulating production, choosing economical methods of operation, reducingoperation costs and reformulating plans etc. on the basis of his findings during thecourse of Cost Audit.
A Text book of Financial Cost and Management Accounting
Circumstances Under Which Cost Audit is Desirable
The following are the circumstances under which cost audit is ordered :
PRICE FIXATION
COST VARIATION WITHIN THE INDUSTRY
INEFFICIENT MANAGEMENT
TAX ASSESSMENT
TRADE DISPUTES
Types of Cost Audit
The following are the important types of Cost Audit:
1) Efficiency Audit2) Propriety Audit
3) Statutory Audit
(1) Efficiency Audit: Efficiency Audit is directed towards the measurement of whether corporate plans have been effectively executed. It is concerned with theutilization of resources in economic and most remunerative manner to achieve theobjectives of the concern. For example, the effective utilization of capitalin anorganization can be gauged by determining return on capital employed.(2) Propriety Audit: Propriety Audit is concerned with executive actions and plans
bearing on the finance and expenditure of the company. The auditor has to judgewhether the planned expenditure is designed to give optimum results.
(3) Statutory Audit: This type of audit is conducted in accordance with the provisionsof Section 233B of the Companies Act 1956. It is the compulsory audit whichrequired to maintain the related books and accounts of specified establishments.The chief aims of this types of audit is that the government wants to ascertain therelationship of costs and prices.
Advantages or Usefulness of Cost Audit
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Besides the chief merit of detecting and preventing errors and frauds as in the caseof audit in general, cost audit secures the following advantages to the management,shareholders and Government.
I. Usefulness to the Management:
(1) It ensures effective internal control.
(2) It provides necessary information for prompt decision making.
(3) It facilitates inter firm comparison.
(4) Ithelps to increase the overall efficiency of productivity.
(5) Inefficiency can be eliminated by suitable corrective actions.(6) Errors, omission, fraud and mistakes can be detected and prevented due toeffective auditing ofCost Accounts.
(7) It facilitates cost control and cost reduction.
(8) It creates cost consciousness among employer and employees.(9) It assists in valuation of stock of materials, work in progress and finished
goods.
(10) It ensures maximum utilization of available resources.
II. Usefulness to the Government:
(1) Cost Audit helps in fixing contract price in cost plus contract.
(2) Helps in fixing of selling price for essential commodities.
(3) Enables Government to focus attention on inefficient work.
(4) Enables Government to give protection to certain industries.
(5) Facilitates settlement of trade disputes.
(6) It imposes an automatic check on inflation.
III. Usefulness to the Shareholders:
1) Itensures more profit and high return to the shareholders
.
2) Itcreates an image of creditworthiness of the concern.
3) It reflects a high degree of reliability to cost data.
4) It ensures efficient management in utilization of plant and machinery,and building, worker and employees etc
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COST AUDIT PROGRAMME
A suitable programme for cost audit should be drawn out in detail, specifying eachitem of audit work to be carried out. An audit programme is a written plan prepared by
the Cost Auditor showing the following salient features :- how much work is to be done?
- who is going to do a particular portion of work?
- and what is the duration of time by which the work is to be finished?Prof. Meig defines ―An audit programme is the detailed plan of auditing work to be
performed specifying the procedures to be followed in verification of each item in thefinancial statements and giving the estimated time required.‖
Areas of Cost Audit Programme is Carried Out
The areas which a cost audit programme should include are as below :(1) Inventory of stores and work in progress
(2) Labour
(3) Overheads
(4) Selling, Distribution, Office and Administrative expenses
(5) Capital expenditure
(6) Utilization of capacity, plant and equipments
Advantages of Cost Audi t Programme
The following advantages will accrue, if a cost audit is carried out with the help of acost audit programme :
(1) It helps the auditor to know about the progress of audit.
(2) It increases the efficiency of the cost audit associates.
(3) It facilitates the uniformity in work.
(4) It helps to safeguard against omission.
(5) It guides for proper distribution of works and fixing responsibility.
(6) It serves as a defense against charge of negligence.
(7) It serves asa reference for the future audit of the same concern.
Disadvantages of Cost Audi t Programme
There are certain disadvantages, if the cost audit work is carried out with the help of cost audit programme. They are as follows :
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(1) For small concern, it would be unnecessary to prepare a programme.(2) Audit associates have no interest and initative since, they perform their work
mechanically.(3) As each business has its own problems and procedures, a rigid audit programme
cannot be laid for all types of business.
Cost Accounting Records
The areas of activity in respect of which cost accounting records are to bemaintained under Cost Accounting Record Rules are :
674
A Textbook of Financial Cost and
Management Accounting
(1) Raw Materials, Components, Stores and Spare Parts
(2) Salaries and Wages
(3) Service Department Expenses
(4) Utilities
(5) Depreciation
(6) Other Overheads
(7) Conversion Cost
(8) Research and Development Expenses
(9) Interest
(10) Joint Products and By-products
(11) Work in Progress and Finished Goods Stock(12) Cost Statements
(13) Records of Physical Verification
(14) Packing
(15) Production Records
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PROCEDURE FOR COST AUDIT (FOR FINANCIAL YEAR 2011-2012 ONWARDS)
Applicability of cost audit is based on turnover of the total company or meeting the other
conditions laid down in the respective Cost Audit Orders issued by the Cost AuditBranch, Ministry of Corporate Affairs. Subject to meeting total turnover criterion or other criteria laid down in the respective Cost Audit Orders, if any activity of a company iscovered under cost audit order Nos. 52/26/CAB-2010 dated 2nd May 2011 or 30th June2011 or 24th January 2012, the cost audit will be applicable to that companyirrespective of the turnover of that particular activity.
It may please be noted that according to revised system of cost audit as above, individual Cost
Audit Orders for the companies or products are now not issued by the Cost Audit Branch,
Ministry of Corporate Affairs
The procedure for appointment of Cost Auditor has been modified by the Cost Audit Branch,
Ministry of Corporate Affairs vide General Circular No. 15/2011 dated 11th April 2011. The
revised procedure is effected from the financial year commencing on or after the 1st day of
April, 2011.
As per provisions of section 233B (2), the Board of Directors of a Company can appoint a cost
auditor after obtaining prior approval of the Central Government.
As per the revised procedure, the first point of reference will be the Audit Committee toensure that the cost auditor is free from any disqualification as specified under section 233B (5)
read with section 224 and sub-section (3) or sub-section (4) of section 226 of the Companies
Act, 1956. The Audit Committee should also ensure that the cost auditor is independent and is
at arm's length relationship with the company. After ascertaining the eligibility, the Audit
Committee will recommend to the Board of Directors for appointment of the Cost Auditor
Cost Auditor to provide a certificate under Section 224 (IB) of The Companies Act, 1956. (Refer
Model Format)
Board Resolution to be passed by the Company for appointment of Cost Auditor. (Refer Model
Format)
Form 23-C to be filed by the Company, with Cost Audit Branch, Ministry of Corporate Affairs seeking
approval for appointment of Cost Auditor. (Refer Form 23C)
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Enclosure with Form 23-C
a) Certified Copy of Board Resolution passed by the Company sanctioning the proposal for
which the Central Government approval has been sought.
b) Copy of Certificate obtained from cost auditor regarding compliance of Section 224 (1B).
Any other information can be provided as an optional attachment. For example:
c) In case of change in cost auditor, letter to the previous auditor informing him about the
change.
d) In case there is extension of financial year, approval letter for such extension.
e) Payment of Application fee is through ON LINE Mode: Credit Card/Debit Card. The amount
fee payable as on date is as follows
Amount of fees to be paid Rupess
By a company having an authorised share capital of
(a) Less than Rs. 25,00,000 500
(b) Rs. 25,00,000 or more but less than Rs. 5 crores 1000
(c) Rs. 5 crores or more 2000
Cost Audit Branch
Directory Name
Designation Telephone (Off.) E-Mail Address
Shri B.B. Goyal Adviser 23386003/
23386284 (Fax)
bharat.goyal@mca.
gov.in
Shri V.K. Aggarwal Director 23386685 vijay.aggarwal@mc
a.gov.in
Shri RajivWadhawan
Dy. Director 23386349 [email protected]
Smt. Bharati Sahai Asstt. Director 23386349 bharati.sahai@mca
.gov.in
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Basic of Cost AuditNature and Scope of Cost Audit
Provisions Under Companies Act Relating to Maintenance of Cost Records and Cost
Audit
Cost Auditor - Appoinment, Rights and Responsibilities
Planning and Structuring the Cost Audit
Cost Audit Report Rules, 2001
Provision of Cost Audit Report Rules 2001
Cost Audit Report Rules, 2001 (With Author‘s Comments)
Form II - The Cost Audit Report
Proforma
Review of Cost Audit Report by the Company Cost Audit Branch
Disclosure of Information and Confi dentiality
Cost Accounting Record Rules
Procedure for Precription of Cost Accounting Record Rules
General Provision Under the Various Cost Accounting Record Rules
Cost Accounting Record (Telecommunication)Rules, 2002
Cost Accounting Standards
Cost Accounting Standards - Backgrounds and History
Federal fi nancial Accounting Standards
Government Accounting standards Advisory Board in India
Cost Accounting Standard Board in India
Cost Accounting Standards
Cost Accounting standards vs Cost Accounting Record Rules
Basics of Internal Audit and Opertional Audit
Concept of Internal Control
Origin of Internal Auditing
Operational Audit
Budgetary Control System
Capacity Utilization
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Inventory Control
Management Informational System Audit of Management Process and Functions
Management Audit in different Function
Corporate Culture and Objectives
Corporate Services Audit
Audit checks of Different Functions
Audit Committees and Corporate Governance
Various Types of audit and Their Process
Due Diligence Audit
Energy Audit
Productivity audit
Inventory Audit
VAT Audit
Computation of Tax Liability Under VAT
Environment Audit
Bank Audit
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History
The Institute of Cost Accountants of India was first formed as a registered limited
company in 1944 under the provisions of the then companies Act 1913 with the
objective of promoting, regulating and developing the profession of Cost Accountancy.
Post Independence, "The Cost Accountants Act", a special act, was passed by the
parliament on May 28, 1959 to accord statutory recognition to ICAI as an autonomous
professional Institute with the objectives of promoting, regulating, and developing the
profession of Cost and Management Accountancy.
The ICAI Amendment bill,2011 was passed by both the Houses of Indian Parliament
viz. Lok Sabha and the Rajya Sabha on December 12, 2011 and assented by the
Honorable President of India on January 12, 2012. The changes were published in the
Official Gazette of India on January 13, 2012.
[Objectives
Objectives of the Institute of Cost Accountants of India
(a) To develop the Cost and Management Accountancy function as a powerful tool of
management control in all spheres of economic activities.
(b) To promote and develop the adoption of scientific methods in cost and management
accountancy
(c) To develop the professional body of members and equip them fully to discharge their
functions and fulfill the objectives of the Institute in the context of the developingeconomy
(d) To keep abreast of the latest developments in the cost and management accounting
principles and practices, to incorporate such changes are essential for sustained vitality
of the industry and other economic activities
(e) To exercise supervision for the entrants to the profession and to ensure strict
adherence to the best ethical standards by the profession
(f) To organise seminars and conferences on subjects of professional interest in
different parts of the country for cross-fertilisation of ideas for professional growth
(g) To carry out research and publication activities covering various economic spheresand the publishing of books and booklets for spreading information of professional
interest to members in industrial, education and commercial units in India and abroad
ICAI aims to promote and develop the adoption of scientific methods in cost and
management accountancy for management control. It develops the professional body of
members and equips them fully to discharge their functions as professional Cost &
Management Accountants. ICAI helps its members to keep abreast with latest
developments in the field of cost and management accounting.[6]
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Qualifications
[Cost & Management Accountants (CMAs)
This is the primary qualification of the ICAI and following completion of up to three levels
(Foundation, Intermediate and Final) examinations [7]
and three years of practical
training [8]
in areas like Management Accounting, Cost Accounting, Financial
Accounting, Taxation, Audits, Corporate Laws etc. enables an individual to become a
Cost & Management Accountant.The new syllabus has been introduced in January
2008 following the International Education Guidelines (IEG) of IFAC to get the
advantages in the process of Mutual Recognition Agreement ( MRA) among /different
member countries of the world under GATS in WTO.
Subjects for examinations include management accounting, Financial
Accounting, strategic management, taxation, corporate law, financial
management, business valuation, financial reportingand cost & management audit
etc.
Students who have passed degree examination of any recognized University or
equivalent are eligible for admission directly to Intermediate level.
Paperwise exemptions on the basis of reciprocal arrangement are available to
students who have passed Institute of Company Secretaries of India Final
Examination.[9]
Examinations are held twice a year in June and December in various examination
centres in India and overseas centres at Dubai and Muscat.
A student has to successfully pass three levels of examination and complete three
years of practical training to be eligible to apply for Associate membership of the
Institute.The members of the Institute of Cost Accountants of India carry the designation
ACMA (Associate Cost and Management Accountant) and FCMA (Fellow Cost and
Management Accountant), as applicable based on the relevant work experience.
Certificate in IFRS Convergence
In order to equip its members with the knowledge of International Financial Reporting
Standards (IFRS) which is scheduled to be introduced in India in the near future, ICAIhas introduced the "Certificate Course on International Financial Reporting
Standards(IFRS) Convergence'.
Certificate in Accounting Technicians (CAT)
The Certificate Course in Accounting Technicians (CAT) [10] was launced by ICAI in year
2009. This is one year course that comprises examinations, computer Training, practical
training and orientation training programmes.
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The main objective of CAT is to develop among the students the necessary skills
required to apply theoretical knowledge of accounting to practical situations in different
functional areas of accounting.The CAT Course comprises two levels namely Level-I &
Level -II and a CAT aspirant is required to complete both the examinations for obtaining
CAT Certification.
Diploma in Management Accountancy (Dip. MA)
The Management Accountancy Examination is a post-membership examination. Only
Members of ICAI who have completed at least a period of one year's Associateship are
eligible for admission to this examination.[11]
This is a research oriented Programme in
two parts. Part I consists of two groups and Part II requires for submission of a
Dissertation followed by Viva-voce. On completion of the referred Programme, a
candidate is eligible to use the letters-"Dip. Ma" after his or her name.
Membership
According to Sec 2(b) of CWA Act 1959, ―Cost Accountant‖ means a person who is a
member of the Institute. Sec 5(1) provides that the members of the Institute shall be
divided into two classes designated respectively as Associates and Fellows.
Associate Member
A person who has passed the Final Examination of the Institute and has obtained for a
period of not less than three years of practical experience in the field of Cost &
Management Accountancy and other related areas can apply for Associate
Membership. The practical experience as above may be acquired prior to or after
passing the Final Examination or partly before and partly after passing the saidexamination. The applicant has to produce evidence to the satisfaction of the Council
[12]
After admission to membership, members are entitled to use the letter ACMA after his
name to indicate that he or she is an Associate Member of the ICAI.
Fellow Member
An Associate Member who has been in continuous practice in India for at least five
years or a member who has been an Associate for a continuous period of not less than
five years and who possesses such qualifications and experience as the Council may
prescribe apply for Fellow Membership of ICAI.[13]
Any person whose name is entered in the Register as a fellow of the Institute and solong as his name remains so entered, shall be entitled to use the letters FCMA after his
name to indicate that he is a Fellow of the ICAI. The Council of the Institute has
mandated that the members of the Institute should use "CMA" as the prefix before their
names to signify that he/she is a professional "Cost & Management Accountant"
Graduates of ICAI
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In the first instance, an individual registers as a student. Upon successful completion of Final Examination, student applies for graduate status of the Institute. He/she shall be
entitled to use letter Grad.CMA after his/her name. Grad. CMAs should apply for
associate membership after they have gained relevant practical experience as
prescribed by the institute.
Cost & Management Accountancy Practice in India
Practice as Cost & Management Accountant
Cost Accounting Standards and Management Accounting Guidelines issued by
ICAI
The Council of the ICAI at its 2511st Meeting held on 12 –13 February 2009 and 258thMeeting held on 14 December 2009 decided on Mandatory application of Cost
Accounting Standards (CASs). The CASs shall be mandatory with effect from period
commencing on or after 1 April 2010 for being applied for the preparation and
certification of General Purpose Cost Accounting Statements. So far ever 14 Cost
Accounting Standards and 4 Management Accounting Guidelines have been issued by
the Institute.[14]
Cost Accounting Standards
CAS1(Final)
Classification of Cost For preparation of Cost Statements Assessment of excise dutyand other taxes, anti-dumping measures, transfer pricing etc.
CAS2(Final)
Capacity Determination For determination of capacity Proper allocation,
apportionment and absorption of cost.
CAS3(Final)
Overheads under revision For Collection, Allocation, Apportionment and Absorption of
overheads Determining Cost of products, services or activities
CAS4(Final)
Cost of Production for Captive Consumption To determine the assessable value of
excisable goods used for captive consumption.Determining Cost of products, services
or activities
CAS5(Final)
Average (equalized) Cost of Transportation To determine averaged/equalized
transportation cost Calculating the amount of deduction from assessable value of
excisable goods, freight subsidy, Insurance claim valuation, etc.
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CAS6(Final)
Material Cost To bring uniformity and consistency in the principles and methods of
determining the material cost with reasonable accuracy in an economically feasible
manner. Applicable to all cost statements which require measurement, assignment,
classification and presentation of material costs. To be followed in all cost statements
requiring assurance including attestation.
CAS6 Draft Guidance Note
The Secretariat of the CASB of ICAI has drafted the Initial Draft of Guidance Note on
Cost Accounting Standard - 6 on Material Cost (CAS - 6). The proposed initial draft shall
be modified in light of comments received before being forwarded to the Cost
Accounting Standard Board for consideration.CAS7(Final)
Employee Cost To bring uniformity and consistency in the principles and methods of
determining the Employee cost with reasonable accuracy. Applicable to cost statements
which require classification, measurement, assignment, presentation and disclosure of
Employee cost including those requiring attestation
CAS8(Final)
Cost of Utilities To bring uniformity and consistency in the principles and methods of
determining the Cost of Utilities with reasonable accuracy. Applicable to cost statements
which require classification, measurement, assignment, presentation and disclosure of Cost of Utilities including those requiring attestation
CAS9(Final)
Packing Material Cost To bring uniformity and consistency in the principles and
methods of determining the Packing Material Cost with reasonable accuracy. Applicable
to cost statements which require classification, measurement, assignment, presentation
and disclosure of Packing Material Cost including those requiring attestation
CAS10(Final)
Direct Expenses To bring uniformity and consistency in the principles and methods of
determining the Direct Expenses with reasonable accuracy. Applicable to coststatements which require classification, measurement, assignment, presentation and
disclosure of Direct Expenses including those requiring attestation
CAS11 (Final)
Administrative Overheads To bring uniformity and consistency in the principles and
methods of determining the Administrative Overheads with reasonable accuracy.
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CAS12 (Final)
Repairs And Maintenance Cost To bring uniformity and consistency in the principles
and methods of determining the Repairs and Maintenance Cost with reasonableaccuracy. Applicable to cost statements which require classification, measurement,
assignment, presentation and disclosure of Repairs and Maintenance Cost including
those requiring attestation.
CAS13 (Final) Cost of Service Cost Centre To bring uniformity and consistency in the
principles and methods of determining the Cost of Service Cost Centre with reasonable
accuracy.
Applicable to the preparation and presentation of cost statements, which require
classification, measurement and assignment of Cost of Service Cost Centre, including
those requiring attestation
CAS14 (Final) Pollution Control Cost This standard deals with the principles andmethods of classification, measurement and assignment of pollution control costs, for
determination of Cost of product or service, and the presentation and disclosure in cost
statements.The objective of this standard is to bring uniformity and consistency in the
principles and methods of determining the Pollution Control Costs with reasonable
accuracy.
Applied to cost statements which require classification, measurement, assignment,
presentation and disclosure of Pollution Control Costs including those requiring
attestation.
Management Accounting Guidelines
MAG1 Implementing Benchmarking
MAG2 Valuations Management a Tool of Management Accountant
MAG3 Implementing Corporate Environmental Strategies
MAG4 Tools and Techniques of Environmental Accounting for Business
Expert Group Recommendations
The 13-member expert group composed of representatives from three Professional
Institutes namely—ICAI, ICAI and ICSI—Industry Body CII and market Regulator SEBI,
have recommended that all companies whose turnover is more than Rs 50 crore should
be mandated to maintain cost audit books. .
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Accounting
Main article: Financial audit
Auditing is a vital part of accounting. Traditionally, audits were mainly associated with
gaining information about financial systems and the financial records of a company or a
business.
Financial audits are performed to ascertain the validity and reliability of information; also
to provide an assessment of a system's internal control. The goal of an audit is to
express an opinion of the person / organization / system (etc.) in question, under
evaluation based on work done on a test basis.
Due to constraints, an audit seeks to provide only reasonable assurance that thestatements are free from material error. Hence, statistical sampling is often adopted in
audits. In the case of financial audits, a set of financial statements are said to be true
and fair when they are free of material misstatements – a concept influenced by
both quantitative (numerical) and qualitative factors. But recently, the argument that
auditing should go beyond just True and fair is gaining momentum.[1]
And the US Public
Company Accounting Oversight Board has come out with a concept release on the
same.[2]
In cost accounting, it is a process for verifying the cost of manufacturing or producing of
any article, on the basis of accounts measuring the use of material, labour or other
items of cost. In simple words the term, cost audit , means a systematic and accurate
verification of the cost accounts and records, and checking for adherence to the cost
accounting objectives. According to the Institute of Cost and Management
Accountants of Pakistan, a cost audit is "an examination of cost accounting records and
verification of facts to ascertain that the cost of the product has been arrived at, in
accordance with principles of cost accounting."
An audit must adhere to generally accepted standards established by governing bodies.
These standards assure third parties or external users that they can rely upon the
auditor's opinion on the fairness of financial statements, or other subjects on which the
auditor expresses an opinion.
The Definition for Audit and Assurance Standard AAS-1 by the Institute of Chartered Accountants of India( ICAI) – "Auditing is the independent examination of financial
information of any entity, whether profit oriented or not, and irrespective of its size or
legal form, when such an examination is conducted with a view to expressing an opinion
thereon."
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Integrated audits
In the US, audits of publicly traded companies are governed by rules laid down by
the Public Company Accounting Oversight Board (PCAOB), which was established by
Section 404 of
theSarbanes-Oxley Act of 2002. Such an audit is called an integrated audit, where
auditors, in addition to an opinion on the financial statements, must also express an
opinion on the effectiveness of a company's internal control over financial reporting, in
accordance with PCAOB Auditing Standard No. 5.
There are also new types of integrated auditing becoming available that use unified
compliance material
(see the unified compliance section in Regulatory compliance). Due to the increasing
number of regulations and need for operational transparency, organizations are adopting risk-
based audits that can cover multiple regulations and standards from a single audit
event.[citation needed ]
This is a very new but necessary approach in some sectors to ensure
that all the necessary governance requirements can be met without duplicating effort
from both audit and audit hosting resources.[citation needed ]
Assessments
The purpose of an assessment is to measure something or calculate a value for it.
Although the process producing an assessment may involve an audit by an independent
professional, its purpose is to provide a measurement rather than to express an opinion
about the fairness of statements or quality of performance.
As a general rule, audits should always be an independent evaluation that will include
some degree of quantitative and qualitative analysis whereas an assessment implies a
less independent and more consultative approach.
[edit] Auditors
Auditors of financial statements can be classified into two categories:
External auditor / Statutory auditor is an independent firm engaged by the client
subject to the audit, to express an opinion on whether the company's financial
statements are free of material misstatements, whether due to fraud or error.For publicly-traded companies, external auditors may also be required to express an
opinion over the effectiveness of internal controls overfinancial reporting. External
auditors may also be engaged to perform other agreed-upon procedures, related or
unrelated to financial statements. Most importantly, external auditors, though
engaged and paid by the company being audited, are regarded as independent
auditors.
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Cost auditor / Statutory Cost auditor is an independent firm engaged by the client
subject to the Cost audit, to express an opinion on whether the company's Cost
statements and Cost Sheetare free of material misstatements, whether due to fraud
or error. For publicly-traded companies, external auditors may also be required toexpress an opinion over the effectiveness of internal controls over Cost reporting.
These are Specialized Person called Cost Accountants in India & CMA globally
either Cost & management Accountant or Certified management Accountants.
The most used external audit standards are the US GAAS of the American Institute of
Certified Public Accountants; and the ISA International Standards on
Auditing developed by the International Auditing and Assurance Standards Board of
the International Federation of Accountants
Internal auditors are employed by the organization they audit. They perform various
audit procedures, primarily related to procedures over the effectiveness of thecompany's internal controlsover financial reporting. Due to the requirement of
Section 404 of the Sarbanes Oxley Act of 2002 for management to also assess the
effectiveness of their internal controls over financial reporting (as also required of
the external auditor), internal auditors are utilized to make this assessment. Though
internal auditors
are not considered independent of the company they perform audit procedures for,
internal auditors of publicly-traded companies are required to report directly to the
board of directors, or a sub-committee of the board of directors, and not to
management, so to reduce the risk that internal auditors will be pressured to
produce favorable assessments.
The most used Internal Audit standards are those of the Institute of Internal Auditors
Consultant auditors are external personnel contracted by the firm to perform an
audit following the firm's auditing standards. This differs from the external auditor,
who follows their own auditing standards. The level of independence is therefore
somewhere between the internal auditor and the external auditor. The consultant
auditor may work independently, or as part of the audit team that includes internal
auditors. Consultant auditors are used when the firm lacks sufficient expertise to
audit certain areas, or simply for staff augmentation when staff are not available.
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Nature and Scope of Cost AuditOrigin of Cost AuditMethods and techniques of ‗cost accounting‘ and audit of ‗cost accounts‘ in India can betraced back to the year 1925, when large number of fi rms were given contracts by the
Government of India on ―cost plus‖ basis and the Government started verifying andinvestigating the cost structure of such firms.
The investigations of Dalmia-Jain group of companies further brought out the need for moreeffective audit. Thus ―cost audit‖ gained recognition, both as an effective tool of cost -control in thehands of management to control costs and produce at competitive rates and also as a monitoringmechanism on behalf of other stakeholders including the consumer and the government. Cost Auditas a tool in the hands of Management enabled them to identify the ineffi ciencies. It acts as a reviewof the activities of the various cost centers of the company and points out the avoidable wastagesand losses. The expertise and experience of the Cost Auditor helps them in knowing the exact areashaving the scope for cost control and cost reduction through inter-fi rm comparison with standardindustrial norms or peers in the industry. Government in turn ensured that the consumers are able
to obtain their requirements at a fair price and do not pay for the ineffi ciency of manufacturers.
Introduction to Cost AuditCost audit is the audit of cost records. According to Chartered Institute of Management Accountants,London (CIMA), cost audit is ―the verifi cation of the correctness of cost accounts and of the adherence to the cost accounting plan‖. In other words, cost audit is the verifi cation of the cost of production of any product, service or activity on the basis of accounts maintained by an enterprisein accordance with the accepted principles of cost accounting. This defi nition of Cost Audit isrelevant to the voluntary Cost Audit without any statutory backing.
The Institute of Cost and Works Accountants of India on the other hand, defi nes cost audit as ―a system of audit introduced by the Government of India for the review, examination and appraisalof the cost accounting records and attendant information, required to be maintained by specifi ed
industries.‖ Thus the concept and scope of cost audit as defi ned in India is more specifi c and lays emphasis on the evaluation of the effi ciency of operations and the propriety of management actionsas introduced by the Government of India for specifi ed industries. In this sense, cost audit in Indiaappears to be synonymous with effi ciency audit mainly as a guide for management policy anddecision making besides being a barometer of actual performance.
Thus Cost Audit in India refers to the statutory Cost Audit of the selected companiescovered under the relevant provisions of the Companies Act, 1956. These requirementsare mandatory and non-compliance may invite penal provisions also.
Relevance of Cost Audit
In the initial years, Cost Audit was taken merely as a tool for ‗price control mechanism‘ for consumer and infrastructure industries in India. The main objective of Cost Audit when statutorilyintroduced under the provisions of Companies Act, 1956 was to meet the Government requirementsfor regulating the price mechanism in core industries like Cement, Sugar, Textiles and consumer industries like Vanaspati,
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The Institute of Cost and Works Accountants of India
Cost Audit and Efficiency AuditEfficiency Audit is systematic appraisal of management methods and is intended to assess theactualperformance levels relative to applicable peer benchmarks or internal standards (e.g., profitability or stated business plan objectives etc.). The process is also designed to identify opportunities toensureperformance benefits. It aims at identifying efficiency and productivity improvement opportunitiesso that the resources flow into the most remunerative channels to ensure the optimum returns. Theparameters of measuring efficiency include overall rate of return, capacity utilization, utilizationof national, financial, physical and human resources, cash flow performance and the pay backperiod of the entire organization. Thus efficiency audit seeks to evaluate the overall organizationalefficiency
The cost audit report also mainly the comment on efficiency of the company namely, utilizationaspect of the factors of production. To enable the cost auditor to make efficiency audit, Section 209
(1) (d) of the Companies Act provides for ―records of utilization of material, labour and other items of cost.‖ Since a proper appraisal of the extent of efficiency of utilization of factors of production is possible in cost audit, it may appropriately be called effi ciency audit.
The cost audit as efficiency audit can also be understood from the fact that cost audit reports enablethe determination of accurate costs of production of various products, services and activities witha view to compare the same with the comparable fi gures of the earlier years and those of the peersor benchmarks in the industry. It seeks to identify the areas of inefficiency or poor decision makingto ensure diversion of funds to most optimum channels. The information regarding exact unitcosts after proper allocation of overheads, capacity utilization, per unit consumption of major raw materials (including power and fuel), man-hour productivity, idle hours or un-productivemanpower wastage etc. serve as basis for efficiency audit and helps in fixing appropriate prices.
Features of Cost AuditThe cost audit of the companies under the relevant provisions of the Companies Act, 1956 has thefollowing features:(i) Assessing compliance of the relevant cost accounting records rules as applicable to the productunder review;(ii) Study of the costing system to assess whether it is adequate for the cost ascertainment of theproduct under review;(iii) Evaluation of the operating and other effi ciencies of the organization under audit with specialreference to the product under review; to ensure the submission of necessary details requiredunder the Cost Audit Report Rules, 2001 as amended from time to time.(iv) Submission of Cost Audit Report in the format prescribed.
Since cost audit is carried out under the various provisions of the Companies Act, 1956, a thoroughand comprehensive knowledge of the Indian Companies Act including various rules prescribedthereunder and the circulars issued by the Ministry of Corporate Affairs is essential for conductingan effective Cost Audit.
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The Institute of Cost and Works Accountants of India
Cost Audit and Management AuditCost audit report and the information to be furnished therein is prescribed by the CentralGovernment. However, most of the information contained in the cost audit report is relevant for making managerial decisions. Normally a management audit is an audit for the management andby the management. Such audit looks into the economy and the effectiveness of performance of various activities of an organization. Cost audit also looks into the effectiveness of performance andeffi ciency in various areas such as capacity, input costs of materials, utilities and other controllableareas so far as the manufacturing aspect is concerned. Detailed information on these areas hasto be given in the cost audit report by the cost auditor comparing it with the standards and pastactuals wherever necessary. Since Cost Audit is very useful to the management as it points outareas where performance can be improved, it can be called an audit for the management.
Cost Audit and Social AuditSocial audit is generally defi ned to be the audit of data or information depicting social performanceof a business in contrast to its normal economic performance as measured in fi nancial audit.
A lot of research and experimentation are being conducted to device techniques or models, whichcan measure the contribution of an enterprise to the society. These developments result from anincreasing realization of the fact that business undertakings have social responsibilities also and
that the performance as a whole should be seen in this context.Social performance is discharged by providing some social amenities for the use of community as awhole e.g. provision of a hospital, a recreation club, a temple, etc. As provision of such amenitiesinvolves diversion of profi ts earned by the business for charitable or philanthropic purposes, it isadvisable to conduct an audit of such expenses spent on welfare which are in no way related tothe main task of business of production or marketing of goods/services and earning profi ts. Suchactivities, which apparently are not directly connected with the main business activity, help thebusiness to create a favorable image for the business and those at the helm of affairs.
Duties of the Cost Auditor
The duties of the cost auditor are also similar to those of the (fi nancial) auditor of the companyhas under sub-Section (1) of Section 227 (Section 223B(4)).The duties of the cost auditor inter-aliainclude:
(a) To ensure that the proper books of accounts as required by Cost Accounting Records Ruleshave been kept by the company so far as it appears from the examination of those books andproper returns for the purpose of his audit have been received from branches not visited byhim;
(b) To ensure that the Cost Audit Report and the detailed cost statements are in the formprescribed by the Cost Audit Report Rules by following sound professional practices i.e. thereport should be based on verifi ed data and observations may be framed after the companyhas been afforded an opportunity to comment on them;
(c) The underline assumptions and basis for allocation and absorption of indirect expenses arereasonable and are as per the established accounting principles;
(d) If the auditor is not satisfi ed in any of the aforesaid matters, he may give a qualifi ed reportalong with the reasons for the same;
(e) Sending the Report to the Cost Audit Branch within 180 days from the end of the fi nancialyear with one copy to the company;
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The Institute of Cost and Works Accountants of India
Ceiling on Number of Cost AuditsThe sub-Section (2) of Section 233B inter-alia provides that before the appointment of any auditor ismade by the Board, a written certifi cate shall be obtained by the Board from the auditor proposedto be so appointed to the effect that the appointment, if made, will be in accordance with theprovisions of sub-Section (1B) of Section 224.Section 224(1)(B) provides that no company or its Board of directors shall appoint or re-appoint anyperson who is in full time employment elsewhere or fi rm as its auditor if such person or fi rm is, atthe date of such appointment or re-appointment, holding appointment as auditor of the specifi ednumber of companies or more than the specifi ed number of companies. The proviso to Section224(1B) further provides that the provisions of this sub-Section shall not apply, on and after thecommencement of the Companies (Amendment) Act, 2000, to a private company.Explanation I to the Section 224 provides that for the purposes of sub-Sections (1B) and (1C),―specifi ed numbers‖ means :
(a) in case of a person or fi rm holding appointment as auditor of a number of companies eachof which has a paid-up share capital of less than rupees twenty-fi ve lakhs, twenty suchcompanies;
(b) in any other case, twenty companies, out of which not more than ten shall be companies eachof which has a paid-up share capital of rupees twenty-fi ve lakhs or more.Explanation II to the Section 224 provides that in computing the specifi ed number, the number of companies in respect of which or any part of which any person or fi rm has been appointed asan auditor, whether singly or in combination with any other person or fi rm shall be taken intoaccount. It can be seen from above that Section 224(1B) and Explanation I to Section 224 refers tothe ceilings for the number of companies and not to the number of cost audit orders or products.Therefore, if more than one products of a particular company are covered under cost audit for thesame year, a cost auditor should count their number as one company only, since the audits for allthe products relate to the same company despite the fact that separate cost audit orders have beenissued with respect to each such product. Similarly, if that company appoints different cost auditorsfor different products, each auditor shall count the company as one company for counting their
individual quota for number of audits.
Planning and Structuring the Cost Audit
Need for Planning an Audit
The Cost Auditor should always plan to conduct an effective cost audit in an effi cient and timelymanner. This is very necessary to attain objectives of the cost audit. Audit plan for new client willbe generally more detailed than in case of a repeat audit. In case of new audit, the cost auditor hasto collect all information about the company like nature of business, organization structure, keypersonnel, accounting system etc. Similarly, he has to also collect information about other peersin the industry, nature of problems etc. The details required shall be much less in case of a repeat
audit. The proper planning helps in:
(a) appropriate attention to all the areas for comprehensive audit;
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The Institute of Cost and Works Accountants of India
(b) identifi cation of key areas needing more attention;(c) timely completion of work;(d) optimum utilization of assistants;(e) no overlapping and proper co-ordination between the work done by differentassistants,other auditors and experts.
1.4.2 Elements of Planning
1.4.2.1 Planning of cost audit involves:
(a) Familiarization about the company and applicable cost accounting record rules;(b) Collection of all relevant information;(c) Evaluation of internal control procedures and the system;(d) Preparation of appropriate cost audit programme; and(e) Audit of working papers and cost sheets.
1.4.2.2 Familiarization about the Company and Applicable Record Rules
1.4.2.2(a) It is very necessary for the cost auditor to familiarize himself with therequirements of Cost Accounting Records Rules for the class of the companies to which the companyunder audit belongs. Similarly, the disclosure requirements as contemplated under the
Cost Audit Report Rules 2001 should also be seen before actually designing the costaudit programme.This is necessary to ensure that the audit programme includes the examination of all
the relevant records required to be maintained
1.4.2.2(b) In addition to these, the cost auditor should also familiarize himself with thecompany especially with respect to its organization, organization structure, productrange, market share, major inputs, profi tability, fi nancial status, marketing set-up,method of inventory valuation and detailed costaccounting system etc.
1.4.2.3 Collection of All Relevant Information1.4.2.3(a) The following records, explanations and information may also need to be collected before
fi nalization of audit programme and actual commencement of audit:(a) A brief history of the company and its business activities;(b) Memorandum of Association and Articles of Association;(c) Annual reports and accounts for the last three to fi ve years;(d) A list including addresses of all factories, branch offi ces and depots with the names of managers-in-charge;(e) Organization chart with details of key personnel;(f) Collaboration agreements, if any, including agreements for payment of royalty;
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The Institute of Cost and Works Accountants of India
(g) Details of manufacturing capacity – installed, licensed and utilization installed capacity for the last three years;
(h) A detailed note indicating the system and procedure followed in – (i) Cost department(ii) Financial accounting department(iii) Purchase, raw materials/packing materials stores, etc.(iv) Time offi ce(v) Production department(vi) Sales department(vii) Management Information System(viii) Personnel Department(ix) Internal audit department(i) Copies of budget manual;(j) Flow charts and description of manufacturing process;(k) Major raw materials with quantitative details for each unit of fi nished output;(l) Labor incentive schemes, if any;
The Institute of Cost and Works Accountants of India
Working Papers
The Audit working papers contain the basic records including audit programme, nature of queriesraised in course of audit, important information about the business of the company and auditfi ndings. Such audit working papers help to locate audit fi ndings. The working papers are theimportant aid in planning and performance of the cost audit. It facilitates the supervision andreview of the audit work. It also provides supporting evidence of the audit work performed. Auditof working papers usually consist of:(a) evidence obtained during the audit exercise;(b) details of methods and procedures followed during such exercise; and(c) conclusions derived by the cost auditor as regards objectives of the cost audit.1.4.5.2 The working papers should record the cost audit plan, the timing, nature and extent of theaudit procedures performed and the conclusions derived from the evidence obtained. The workingpapers serve as an important proof regarding the way evidence was found, analyzed and verifi ableconclusion drawn1.4.5.3 Whenever any question is raised or a clarifi cation is desired by the Central Governmentregardingany point, the cost auditor can reply properly if the audit working papers are properly kept. Suchworking papers will help the cost auditor in cost audit of that company during subsequent yearsalso. The working papers should be cross-indexed in such a manner that required information
could be obtained with minimum delay. The working papers may be arranged properly accordingto Para numbers of the Annexure to the Cost Audit Report Rules.
Verifi cation of Records and ReportsDetails of Cost Accounting Records
1.4.6.1(a) The records contemplated under Section 209(1)(d) of the Companies Act,
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The Institute of Cost and Works Accountants of India
Some Records are considered as part of the cost accounting records-(1) Production
(a) Consumption register of raw material, packing materials, etc.(b) Production reports.(c) Scrap, wastage, spoilage and defective reports.
(d) Machine utilization report and idle time report.(e) Details of production hours, labour and machine hours.(2) Raw materials stores etc. :
(a) Goods received register.(b) Bin cards and stores ledger.(c) Material consumption and stock reports. Etc…
Preparation of Cost Audit Report
When review and verifi cation of the cost accounting records and proformae and Annexures/fi nancial statements are completely in line with the Cost Audit Report Rules, the cost auditor willbe in a position to prepare his report. It may be pointed out that the report should refl ect theprofessional care exercised by the cost auditor. Certifi cation of fi gures is only a part of the report.Other aspects are the analysis, critical review of the systems in vogue in the company, identifi cationof areas where improvements can be made and suggestions on those areasThe cost auditor has to give his observation in the main certifi cate with qualifi cations, if any. He hasto complete all paras contained in the Annexure to the Cost Audit Report Rules, 2001 and fi nalisethe checking of Proforma to the Cost Audit Report.
1.4.8 Authentication of Annexure to the Cost Audit Report
The annexure and proforma prescribed under the cost audit report shall be approved by the board of directors of the company before submitting the same to the Central Government by the cost auditor.
1.4.9 Number of Copies of Cost Audit Report
1.4.9.1 The Cost Audit Report is electronically fi led with the Central Government and is physicallysubmitted as was done previously. However, Cost Auditor may sign at least fi ve physical reportsalso as per following usage :-e-fi ling for Cost Audit BranchOne copy to the cost auditor himself One copy for the companyOne copy for the Central ExciseOne copy for Income Tax authority
(One copy extra for future cost audit)1.4.9.2 In view of e-fi ling, no hard copy is required to be submitted to the Cost Audit Branch.
Provisions of Cost Audit Report Rules 2001Cost Audit was initially introduced in the country about 43 years back in the year 1965, when theCompanies Act, 1956 was amended through Companies (Amendment) Act, 1965 to incorporate the provisionsrelating to the maintenance of Cost Accounting Records and Cost Audit. These amendments were madeon the basis of recommendations received from Vivin Bose Commission Act 1956.
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requiresthe cost auditor to submit his cost audit report to the Central Government in the prescribed formandsimultaneously send a copy of report to the company. The Cost Audit Report Rules 2001 prescribethe form, procedures and rules regarding the cost audit report. The following are the salient features:
(a) The report is to be sent to the Central Government and to the company within 180 days from the endof the company‘s financial year to which the cost audit report relates (Rule 5); (b) The Cost Audit Report includes auditor‘s observation and suggestions, Annexure and Performa to the Cost Audit Report. Therefore, these must also be submitted along with the Cost Audit Report(Rule 2(c)); (c) The cost statements as prescribed under Cost Accounting Records Rules are not
required to be attached with the cost audit report to be submitted to the central government. Thesecost statements and other working papers duly audited and signed by the cost auditor remain withthe company (Rule 4); (d) The Annexure and Proforma prescribed with the Cost Audit Report shallbe approved by the Board of Directors before submitting the same to the Central Government by theCost Auditor; (e) The Annexure and Proforma, duly audited by the Cost Auditor, shall also be signedby the Company Secretary and at least one Director on behalf of the company. In the absence of Company Secretary in the Company, the same shall be signed by at least two Directors (Rule 7);(f) The Cost Audit Report (Amendment) Rules 2006 provide that these reports shall be filed throughelectronic media or through any other computer readable media as referred u/s 610A of theCompanies Act, 1956. These shall be authenticated by the authorized signatories using digitalsignatures.
(g) A copy of the Report is also to be submitted to the Company by the Cost Auditor and a datedacknowledgement should be obtained from the company;(h) Clarifications sought by the Central Government from the Cost Auditor should be furnished by theCost Auditor within thirty days of the receipt of such communication. It is a statutory duty of the Cost
Auditor;
(i) If the Cost Auditor gives a qualified report, he should indicate the extent to which he has qualifiedthe cost audit report and the reasons therefore;
Cost Audit Report Rules, 2001 (With Author’s Comments The Cost Audit Report Rules, 2001 as notified vide G.S.R. 924(E) dated 27th December 2001 alongwithauthor‘s comments (in italics) are explained as under:
MINISTRY OF LAW, JUSTICE AND COMPANY AFFAIRS
(DEPARTMENT OF COMPANY AFFAIRS)NOTIFICATIONNew Delhi, the 27th December, 2001G.S.R. 924(E).- In exercise of the powers conferred by sub-section (4) of section 233B, read withsub-section (1) of section 227 and clause (b) of sub-section (1) of section 642, of the Companies
Act, 1956 (1 of 1956), and in supersession of the Cost Audit (Report) Rules, 1996, except asrespect things done or omitted to be done, before such supersession, the Central Governmenthereby makes the following rules, namely:-1. Short title and commencement . – (1) These rules may be called the Cost Audit Report Rules, 2001.
(2) They shall come into force on the date of their publication in the Official Gazette.(Comments: Rule 1: The Cost Audit Report Rules, 2001 were published in the Official Gazette videGSR 924(E) dated 27 December 2001. These rules have superceeded the Cost Audit (Report)Rules, 1996 and came into force on the date of publication in the Official Gazette i.e., 27th
December 2001. The Institute of Cost and Works Accountants of India
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2. Definitions – In these rules, unless the context otherwise requires,-(a) ―Act‖ means the Companies Act, 1956 (1 of 1956);(b) ―Cost Auditor‖ means an auditor directed to conduct an audit under sub-section (1) of section233B of the Act;(c) ―Form‖ means the Form of the Cost Audit Report and includes auditor‘s observations and suggestions, Annexure and Proforma to the Cost Audit Report;(Comments: Rule 2(c) - This rule clearly states that the auditor’s observation and suggestions,
Annexure and Proforma to the Cost Audit Report are included in the prescribed form of Cost Audit Report to besubmitted tothe Central Government under rules.(d) ―Report‖ means Cost Audit Report duly audited and signed by the Cost Auditor in the prescribed form of Cost Audit Report;(e) ―Product under reference‖ means the product or activity to which the Report relates;((Comments: Rule 2(e) -The term “product under reference” was defined to include “product” as well as“activities” (in service sector). This explanation was followed by notification of Cost Accounting Records(Electricity) Rules, 2001 and Cost Accounting Records (Telecommunication) Rules 2001.Thisclarification
brought paradigm change in the applicability of Cost Audit as the various “services” are also produced, processed and sold like “products” now a days and in any case the term “processing” always meant to include“services” as well. In any case, the fast pace of technology development and opening up of economy for international
The Cost Audit ReportThe Rule 2(c) of the Cost Audit Report Rules, 2001 provides that the term ―Form‖ means the Form of the Cost Audit Report and includes auditor‘s observations and suggestions, Annexure and Proforma to the Cost Audit Report. The Cost Audit Report (Amendment) Rules, 2006 have
renamed the Form of the Cost Audit Report as ―FORM II – THE COST AUDIT REPORT‖ and have introduced one more Form i.e., FORM I, which is the form for online filing of the cost auditreport and other documents with the Central Government.2.3.2 The Cost Audit Report Rules 2001, which are framed in exercise of the powers conferredunder various provisions of the Companies Act, require the Cost Auditor to enlarge his function beyondverification / audit and to give his observations and suggestions on various aspects of Cost Auditand Efficiency Audit/Propriety Audit mentioned therein.Cost audit is not confined to narrow concepts of audit. It has a much wider role and ambit. Cost
Audit involves complete process of audit and on completion of that elaborate process only, theCost Auditor is drawing various conclusions and is offering his observations. The said FORM – II
– THE COST AUDIT REPORT gives an opportunity to the cost auditor to share his expertise andcompetence with the company management. The detailed para-wise comments are explained as
under:
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DIFFERENT BETWEEN AUDITING & ACCOUNTING
Accounting is process of identifying, measuring, and communicating economic information to various
users.The main goal of accounting is to provide a company with clear, comprehensive, and
reliable information about its economic activities and status of its assets and liabilities.
This information is presented in the form of accounting reports like the balance sheet,
income statement, statement of changes in equity (also calledshareholders' equity
statement ), and statement of cash flows (also called cash flow statement ). By means of
accounting reports it is possible to perform the following (list non-inclusive):
Understand and re-allocate internal resources of the company to ensure its financialstability
Review profitability of the company's economic activities
Understand the company's cash inflows and outflowsVerify conformity of a company'seconomic activities to government regulations
Internal users of accounting reports are managers, owners, and employees. External
users of accounting reports are investors, creditors, and government.
Audit is independent appraisal performed by an independent expert of an activity or event. There areoperational, technical, ecological and other types of audit. Most commonly, nevertheless, this term refers
to audits of financial statements. Audit of financial statements is the process of examining thefinancial statements and the underlying records of the company in order to render an
opinion as to whether the statements are fairly presented. Most commonly financialaudits are performed on a company's request for the benefit of financial informationusers (i.e. internal and external). Auditors analyze and compare accounting reports andconfirmation documents as well as verify conformity of a company's accounting withestablished standards and regulations (e.g. US GAAP, IFRS). Therefore, the main goalof an audit is to perform thorough evaluation of a company's financial records andreports and provide a company with improvement recommendations based on thatevaluation. As we can see, accounting provides financial information to users of such information, and
auditing is a means to ensure such information is reliable and comforts with established rules andregulations
Accounting is concerned with the preparing of financial statements while auditing is concernedwithchecking of financial statements. The purpose of accounting is to show the performance and financialposition of a business. The purpose of auditing is to certify the true and fair view of financial statements.
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The accountant has no liability for preparing final accounts. The auditor has liability after presenting auditreport.The main distinction between auditing and accounting are as follows:1-From the objective aspect
The accounting aims to record the financial transactions in a way that will enable the accountant to
prepare the financial statements at the end of the period. But the auditing will enable the auditor to besure that the financial transactions are correct and accurate according to the generally acceptedaccounting principles.2-From the appointment aspect
The accountant is hired by the company‘s management. Auditor is hired in the General Assemblymeeting by the shareholders based on the company‘s law and other related laws. From the Subordination aspect
The accountant is an employee in the entity executing the orders and the policies of the management.Otherwise the auditor is independent and executes the professional auditing standards.3-From work timing aspect
The accountant‘s work begins from the beginning to the end of the year, otherwise the externalauditor‘s work begins according to the conditions of the contract signed by the auditor and the company under audit.
4-From the standard used aspectThe accountant should be used the generally accepted accounting principles to record the financial
transactions in a way that will enable the accountant to prepare the financial statements at the end of theperiod. Auditor should be used the International slanders of Auditing and to be sure that the financialtransactions are correct and accurate according to the generally accepted accounting principles..Special qualifications and he shall independent of the company's management, also the qualification of auditors are determined be the company‘s law and others related laws 5-From the Qualifications aspect
The accountant should has general qualifications and is not independent of the company management,so he has reported directly to the company management. Otherwise, the auditor shall has. Accounting is used to communicate the financial report of an organisation and help accountant to providethe financial information will help the organisation to achieve it's sole aim of maximizing profit .Accountantis also responsible for the provision of set of accounting system and prescribe the most easily one to helpthe firm achieving their goal while auditing information helps an auditor. From definition of both accounting and auditing, it is clear that both make use of accounting information tocarry out their respective works. Both preparation of accounting information as well as auditing the samestatement by an auditor requires conformity with statutory regulations.These are the little I know, please feed me the others if there is still any available.
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