cost audit

1. Presentation by,
JITHIN KOSHY
AKSHAY MANGLA
ADITI MANGLA
JATIN

2. It is the process of verification of
cost accounts which includes all
the aspects that add to the cost of
production/manufacturing/
assembling of certain kinds of
goods ...

3. “It is the detailed checking of the costing system,
technique and accounts to verify their correctness
and to ensure adherence to the objective of cost
accountancy.”-ICMA LONDON
“An audit of efficiency ,minute details of expenditure
while the work is in progress and not a post –
mortem .cost audit is mainly a preventive measure
,a guide for management policy and decision ,in
addition to being barometer of performance “-
ICWAI INDIA

4.  Verify the cost accounts have been
properly maintained
 Check the adherence to the cost
accounting plan

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

6.  Objectives of cost audit include the
determination and control of cost together
with providing data for making judgments
and decisions on various matters, such as
operational efficiency.
 GOI has added industries involved in the
manufacturing of plantation products
together with the petroleum and
telecommunication industries in 2002 to
the list of industries requiring mandatory
cost audits.

7.  To detect errors & frauds
 To verify the accuracy
 To have a full control on working of
cost dept. of organisation
 To reduce the detailed checking of the
external auditor
 Help the management to take correct
and timely decision
 Moral check on staff of cost
accounting department

8.  To bring efficiency in cost accounting
systems & procedures
 To bring efficiency in use of material
labour machine ....

9. The Cost Auditor should pay his
attention to the following records:
 Record of Materials
 Labor Records
 Record of Overhead Charges
 Depreciation
 Work-in-Progress Records
 Incomplete Records
 Stores and Spare Parts Records

10.  The cost of raw materials, both in quantities
and value, as given in the statements, should
be verified.
 In case the transport cost of raw materials is a
significant element of cost, as in the case of
cement and sugar industry, the transport
cost is determined separately. In case
of imported raw materials, the various
elements are: ocean freight, insurance, custom
duty, clearing/forwarding and inland freight
 Data for raw materials consumption have to be
provided for the year under audit, as well as for
the previous two years, for comparison.

11.  Material consumption is worked out by deduc
ting closing inventories, from the receipts
and adding opening balance.
 Consumption of materials should be carefully
checked with the issues to production
processes.
 Provisions of the cost accounting record rules
should be kept in mind, as the rules
also specify accounting requirements for raw
materials and other direct and indirect
materials.

12. The following particulars relating to wages and
salaries be included in Cost Auditor's Report,
 Direct Labor Cost On Production;
 Indirect Employees Cost On Production;
 Employees Cost On Administration;
 Employees Cost On Selling And Distribution;
 Bonus To Workers And Employees;
 Other Employees Cost, If Any (Including Taxes
And Levies
 Total Employees Cost
After the ascertainment of cost is done it has
to be then compared with previous year
figures.

13.  The various inventory cost formulas (L
IFO, FIFO, HIFO),weighted average
cost, base stock, specific
identification, latest purchase price
have different effect on costing
and asset valuation.
 If an entity follows a formula which is
different from the one generally
followed by the industry, it should be
specially commented upon by the cost
auditor in his report.

14.  Cost accounting record order/rules require th
at record of all fixed assets, in respect of
which depreciation is to be provided, shall be
maintained.
 Depreciation is charged according to the
depreciation policy of management , which
may be on a straight line or reducing balance
method , based on the useful life of the asset.
 Any basis adopted should be consistently
followed. If any basis, other than the useful
life of the asset, is followed, the impact of
providing excess or less depreciation
should be pointed out.

15. The basis of allocation/apportionment
of overhead cost to cost centers
should be in accordance with the
 Accepted principles of cost accounting
 Quantification of services rendered by
service departments to cost centers.
 On the basis of activities which are
cost drivers

16.  Principles of Cost Audit
 Code of Ethics
 Independence of Cost Audit
 Integrity and Objectivity
 Professional Competence
 Confidentiality
 Professional Behaviour

17.  Technical Standards
 Professional Code of Ethics
 Engagement of other occupation

18. Financial audit
 Audit of financial
account has been
compulsory under
companies Act 1956.
Cost audit
 Cost Audit is not
compulsory in all
companies expect in
certain specified
companies which is
notified by central
government from
time to time under
sec 233 B.

19.  The Financial
Auditor is required
to report whether
the financial
statement exhibits
true and fair view
of state of affairs
of the business
 Financial Auditor
submit his report
to the shareholders
 Cost Auditor has to
check the propriety
of each item of
each item of
expenditure and
certify whether they
have been incurred
prudently or not.
 Cost Auditor
reports to the Board
of Directors

20.  Financial Audit is
mainly to check the
arithmetical accuracy
of different books of
accounts.
 Cost Auditor sees
also whether suitable
steps have been
taken to reduce the
cost of production

21.  Financial Audit is
conducted every
year in all
companies
 Financial
Audit does not
measure the real
efficiency of an
organization.
 Cost Audit may be
conducted only
for a particular
year and even for
a specific jobs
 Cost Audit
measure the
efficiency of the
organization ,
especially
production
processes.

22.  Auditor verifies
whether the closing
stock has been
properly valued.
 Financial Audit is a
sort of post-
mortem audit
 The Cost Auditor
looks into the
methods followed
and the adequacy
or otherwise of the
stock to meet the
requirements of
the organization.
 Cost Audit is
forward looking
with suggestion for
future

23. It has two important aspects:
 Propriety Audit
 Efficiency Audit

24. Cost audit as a basis of propriety audit serves the
following;
 Whether the expenditure is appropriate and
not more than what the situation demands.
 Whether any personal benefit has accrued
to the sanctioning authority as a result of
this expenditure.
 Whether the expenditure has indeed served
the purpose for which it has been incurred.
 Whether the prescribed rules and
regulations have been duly followed.

25.  In identifying the areas of
inefficiencies and weaknesses.
 In determining the appropriate selling
price of the commodity and services.
 In determining appropriate cost of
different products & services.
 In ensuring the optimum utilization of
the plant capacity.
 In creating an atmosphere, Cost
conscience through out the
organization.

26. The important advantages of cost audit
can be studied as under:
 To the Management
 To the Shareholders
 To the Consumers
 To the Government
 To the Society

27.  Control On Different Elements Of Cost
 Assessment Of Profitability
 Check On The Role Of Uneconomic
Units
 It Helps In Reducing The Prices
 Check On Cost Control Techniques
 Helpful In Budgetary Control &
Standard Costing
 Fixing Responsibilities Of Specific
Person

28.  Guarantee Of The Proper Maintenance
Of Records
 Fair Return On Investment
 Timely & Proper Information

29.  It Helps In The Fixation Of Fair Prices
 Increase In The Standard Of Living

30.  Improve working of uneconomic
industrial units
 Guidance
 Helpful in providing cost statements &
other relevant information
 It facilitates the settlement of trade
disputes
 Ceiling prices
 Cost plus contract

32. Meaning
The Examination review of various
policies and action of the Management on
the basis of certain specified objectives.
Definition
Management Audit is Independently
Examination of organisation structure,
operation function, Analyzing goals,
Policies, Activities, weaknesses and
Evaluation of earning capacity of the
Management.

33.  To identify the level of achievements
of main objectives of organisation
 To identify the defects or irregularities
of management executives
 To ensure that the management is
going to achieve the objectives
 To help management to do efficient
administration of the operations

34.  Management functions and processes
in order to improve its efficiency
 A change in method of purchase in
beneficial to company
 To success or failure of business or
company depends fully on the quality
of management

35.  Management audit provides
suggestions to the management which
helps to maintain effective
management
 Management audit provides
information about strong and weak
point of the management after
reviewing policies and programs. So, it
helps to the smooth operation of an
organisation

36.  Management auditor cannot
understand the practical problems. So,
it suggestion provided by them is
theoretical but not practical
 Scope of management audit is vague.
So, it does not help to achieve specific
goal