ASST PROF. JONLEN DESA

Before conducting cost audit, the cost auditor has to acquaint himself with the following:

1. Cost Accounting Records Rules2. Familiarization with the industry3. Familiarization with the company

He should familiarize himself with the company. He should go through various documents of the

company.

It is the duty of cost auditor to get general idea about the

industry which is under cost audit. For this purpose, he

should acquaint himself with the following details

relating to that industry:

a. Other units in the industry

b. Total production

c. Market potential

d. Performance of industry.

The idea is that cost auditor should make efforts to form a relative view of the company being audited and other units in industry.

This information relating to industry is available in various financial journals and publication of Govt of India, Chambers of Commerce, statistical reports , technical journals.

After having formed the idea relating to relevant industry, the cost auditor should get to know the company being cost audited.

For this purpose reference should be made to the following:

a. Memorandum of association & article of association.

b. Organization chart of the company

c. Details relating to factories, regional offices and their location

d. Product profile of the company

e. Licensed capacity

f. Installed capacity

g. Number of employees

h. Main raw material used

i. Inter-control procedure

j. Follow up of earlier cost auditor report.

The cost auditor should get acquainted with the manufacturing process relating to different products.

Also termed as manufacturing process.

Visit to factories, where manufacturing processes actually carried on will be essential for this purpose.

This exposure may help cost auditor a good deal with his habit of looking at the things from value analysis point of view

In the process of familiarization with the company, the main stress of cost accountant should be on procedures relating to purchases, recording of transaction, system of accounting, valuation of closing stock relating to raw material, WIP and finished goods.

Knowing companies procedure is very essential. The cost auditor should particularly note distinct

practice, company’s policy, how this policy is implemented and above all the impact of all this on the matters which he has to highlight in cost audit report.

For effective cost audit, a cost auditor has to go a little beyond familiarization.

He should get the feel of the company like a doctor who feels the pulse of the patient despite the apparent external symptoms.

He can do so by asking the company to furnish him comparative data in the format designed by him to elicit following information in the format.

Information on capital employed for last two years, statement of growth, statement showing the capacity utilization, statement showing cost comparison etc can be furnished to the auditor in the format provided by him.

The evaluation of internal control procedures and systems provides a reasonable assurance to the cost auditor.

This evaluation helps in identifying the strong points as well as the weak points of the internal control system.

This will help in designing of the audit programme accordingly.

The cost auditor may confine his checks and audit procedures to a representative sample, if these internal control procedures are effective.

This will help in reducing, the avoidable verification of each and every transaction, which will be not only very time consuming but costly as well.

SPECIFIC DOCUMENTS & INFORMATION

1. MOA & AOA2. Copies of published accounts of companies for last few

years.3. Objectives of the company, details of the factories, product

profile & organization chart.4. Internal Audit Report for the last few years.5. Previous Cost Audit Report, if any6. Relevant Cost Accounting Record & Rules7. Company’s accounting policy

8. Manuals like Cost Account Manuals, Accounts Manual, Purchase Manual, Stores Accounts Manuals, Internal Audit Manual & Delegation of Powers.

9. Detailed production process of the product.10.Closing inventory of raw materials. (All inputs used)11.List of non-moving stores, spare parts, raw materials.12.Statements of production account & dispatches13.Statement showing computation of depreciation for all

categories of assets.14.Details of all kinds of spoilages, wastages & rejections.15. Cost sheet of service centers

16. Statements of expenditure on major repair work and R&D activities.

17. Major contracts entered into during the period.18. List of imported items19. Reports of physical stock verification.20. Trial Balance21. All statements as per Cost Accounting Records Rules22. Reconciliation between the cost & financial accounts for

the year.23. Statements showing man power utilization & machinery

utilization.

24. Copies of return submitted to Central Excise Authorities.25. Summary statement of Central Excise duties paid during the

year with monthly breakup.26. Copy of annual stock-taking report certified by the Excise

Officials.27. Copy of annual statement of electricity generated &

purchased submitted to Central Electricity Authority.28. Information relating to financial position(capital employed,

net worth and profit before tax), details of annuals bonus, donations, interest on borrowings and debentures.

1. Data on general economic environment in respect of the industry such as capacities, production, demand, prices, market & international scenario.

2. Details of cost trends in the industry.3. Government policies on tariff, price control, licensing,

raw materials supply.4. Efficiency parameters adopted5. Industry norms given by various associations in the

industry.

Particulars of cost accounting records are stated in details in the cost accounting records rules of each industry.

Cost accounting comprise all books of accounts including registers, documents, vouchers, reports, statement, schedules, annexure, proforma or any other record in whatever from prepared and designated.

Section 209(1) (a), (b) and (c) deal with accounting records. Accounting records include documents, vouchers, receipts, invoices, bills, debit notes, credit notes, journal vouchers etc.

In addition, the company should have to maintain the following records as classified in the schedule of the cost accounting records rules relating to particular products

1. PRODUCTION

• Records showing the consumption of raw material and components parts in quantities and value.

• Records showing the production for each type, class, category , quality , size etc. of the products.

• Records showing wastage, spoilage, rejection , scrap and loss of materials including spoilage and defectives etc.

• Reports on stoppage of machines, plants and equipment with adequate reasons.

• Records on idle time with adequate reason.• Records showing the utilization of machines, plants and

equipment

2. WORK IN PROGRESS AND FINISHED GOODS

Registers showing the process stocks cost centre-wise and

product-wise.

Registers showing the stock of finished goods product-wise.

3. WORKSHOPS, REPAIRS AND MAINTENANCE AND

TOOLS-ROOMS

• Records showing the details of work order for repairs and

maintenance under the different head and by various cost centre's

and departments.

• Records of major repairs from which benefit is likely to accrue for

more than one financial year.

4. UTILITIES (STEAM, POWER,

WATER & COMPRESSED AIR).• Records showing the quantity of power purchased or

generated, consumed in different cost center's and

department.

• Similar records of inputs and outputs and allocation of

output to various cost center's and departments in respects

of water, steam and other utilities.

6. WAGES AND SALARIES• Attendance record of all employees for each cost center

and department.• Salaries and wages sheets or payroll for each centre and

department• Records of leave and gratuity payment.

7. OVERHEADS• Records showing the details of production hours, machine

hours, labour hours, to facilitate distribution of overheads expenses to production and service departments.

8. COST ACCOUNTS

• Overheads analysis register.• Records of services department expenses for each service

cost-centre and their apportionment.

9. SALE

Sales Analysis by product

10. MISCELLANEOUS. Records of royalty or other payments. Records of inter-firm / company transaction showing

contracts. Stock verification records in respect of all items in

stock. Records of research and development expenses. Annexure and proforma as per rules Standard costing

A cost audit programme is the cost auditor’s plan of action indicating the tests and procedures to be followed to implement the cost audit.

The programme should be comprehensive and detailed to serve as a manual to the assistants and as a means to efficiently and effectively execute the audit.

It is prepared after the preliminaries to the cost audit are over.

The cost audit programme should then be discussed with the management to ensure that the programme does not clash with other audits as far as possible.

The cost audit programme will ensure that: work will be done on time, nothing relevant is left out, review of the work done by juniors, a documentary evidence of work done by the cost auditor.

Cost Audit Programme is a systematic plan or course of action so as to accomplish the audit work within the time frame and at optimum cost.

It is chalked out by the cost auditor himself.

Cost Audit Programme comprises of 3 basic elements:a. The work to be doneb. Its proper distribution among the audit staffc. The time schedule to finish the task and submit the

report.

The cost auditor should keep in view the following factors while chalking out the audit programme:

a. Objects of cost audit.b. Organizational structure of the companyc. The efficiency & reliability of internal control system in

operation.d. Instructions issued by the company or Govt in relation to

conduct of cost audit.e. The details of cost accounts & records maintained by the

organization.f. Additional information required.

• It helps the auditor to know about the progress of audit.• It increases the efficiency of the cost audit associates.• It facilitates the uniformity in work• It helps to safeguard against omission.• It guides for proper distribution of works and fixing

responsibility.• It serves defense against charge of negligence.• It serves as a reference for the future audit of the same

concern.

After examining the books and records of the company,

the cost auditor, shall submit his reports to the secretary

of the government of India, department of company

affairs, Ministry of Law, Justice and Company Affairs,

in the form and in accordance with the procedure in the

schedule annexed to the Cost Audit Report Rules, 1968.

A copy of the report is forwarded to the company.

The cost audit report shall be made in the form and in

accordance with the procedure laid down in the schedule

annexed to the Cost Audit Reports & Rules 1968. Mainly the

cost audit report shall furnish the exact position regarding the

following:

a) Adequacy of the costing system.

b) Various Financial and operating ratios to assess the propriety

and efficiency of the management.

d. Full details regarding depreciation and valuation of the

stock and details of wages and salaries.

e. Any abnormal and non-recurring item of expenditure.

f. Details regarding branch accounts.

g. Details regarding production, processing, manufacturing,

mining activities and marketing of the product under

reference.

h. Details regarding installed and utilized capacities.

Cost Auditor may sign at least five physical

reports also as per following usage:

One copy to the cost auditor himself

One copy for the company

One copy for the Central Excise

One copy for Income Tax authority

(One copy extra for future cost audit)

Audit working papers refer to all the documents prepared, obtained or gathered by the auditor during the course of conducting audit.

Audit working paper helps in planning & performance of the audit, reviewing the work done and provides evidence of the audit work performed.

AAS 3- Documentation gives detail information about audit working papers.

They include all evidences gathered by the auditor, indicating the work done by him.

The Audit working papers contain the basic records including audit programme, nature of queries raised in course of audit, important information about the business of the company and audit findings.

The working papers are the important aid in planning and performance of the cost audit.

It facilitates the supervision and review of the audit work.

It also provides supporting evidence of the audit work performed.

Whenever any question is raised or a clarification is desired by the Central Government regarding any point, the cost auditor can reply properly if the audit working papers are properly kept.

Such working papers will help the cost auditor in cost audit of that company during subsequent years also.

The working papers should be cross-indexed in such a manner that required information could be obtained with minimum delay.

The audit working papers may be kept in two files – a “permanent” file for all the years and a “variable” file for each year of audit.

Permanent File includes- MOA, AOA, legal documents, agreements and minutes, notes of significant accounting policies, significant ratios etc.

Variable or Current File includes correspondence relating to acceptance of appointment, audit programme, analysis of transactions & balances, copies of communication with other auditors, experts & third parties, copies of letters etc.

Helps in planning & performance of audit work. Helps in supervision & review of audit work. Provides evidence of the audit work performed. Facilitates delegation of work. Maintains secrecy & safe custody of facts discovered

during audit.

Who is the real owner of the audit working papers?? There is a controversy as to whether the audit working

papers belong to the client or the auditor. Client’s Argument Auditor’s Argument Thus, the auditor is the owner of the working papers. Working papers are the property of the auditor. However, the auditor at his discretion can make

available portions of the working papers to the client. The auditor should keep the working papers safely in

his custody for the required period of time.

Audit notes are the notes or points prepared by the auditor during the course of conducting the audit.

These audit notes are important points written down by the auditor.

They serve as future reference. The audit notes also form important points that can be

included in the audit report. It is important for the auditor to make audit notes as and

when required. It includes queries, balances, irregularities that an auditor

comes across during the course of the audit.

An audit notebook is a book or register maintained by the auditor and his assistants.

It is a written and systematic record of the queries made by them and the replies thereto.

Audit notebook may be in the form of a bound register or loose sheets of paper filed together.

Important and meaningful information gathered by the auditor is recorded in the audit notebook.

Points which require certain explanation, clarification and investigation are written in the audit notebook.

It records all significant information affecting the audit. The recorded information can be used at the time of

preparation of cost audit reports. It facilitates smooth conduct of audit. It helps the auditor judge the efficiency of his staff. It acts as a documentary evidence. It proves that the auditor has not acted negligently. It serves as a source of information about the audit work

and points that require special attention.

A cost auditor has to report on a variety of subjects in cost audit report.

It is necessary for him to carry out compliance procedures and substantive procedures to form his opinion.

Compliance procedures refer to audit tests which are carried out to check the degree of compliance to internal controls and effectiveness of internal audit and control techniques.

The auditor should be satisfied whether the control has been effective throughout the period.

The comments that a cost auditor records must be a result of the compliance test carried out by him.

Compliance procedures alone are not enough. It is necessary to follow substantive procedures.

Substantive procedures include the test performed by the previous auditor.

It relates to the information that is generated from a system.

Cost audit techniques represent the different exercises by which the cost auditor collects evidence for forming his opinion along with supplementary information, which he records in the cost audit report.

The various cost audit techniques are as follows:a. Physical Examinationb. Observationc. Formal Discussionsd. Confirmation

e. Examination of documents and their comparison with records.

f. Recomputationg. Retracing Proceduresh. Depth Testingi. Weakness Testsj. Rotational Tests