Cost Audit Full

COST AUDIT
Submitted By: Nisha

Roll. No.-1906
M.Com-II
Subject: Corp. Financial A/cing & Auditing

Concept
As its clear from the name Cost Audit is the Audit of cost, i.e.
and costing methodologies followed by any production/
manufacturing organization.
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.
Definition
According to I.C.W.A. ( Institute of cost and works

accountant of India):
“ Cost audit is an audit of efficiency of minute details

of expenditure while the work in progress, and not a
post mortem examination”.
“Cost Audit is mainly a preventive measure, a guide

for management policy and decision, in addition to
being the barometer of performance.”
Objectives of Cost Audit
1) To Detect Errors & Frauds

2) To verify the accuracy
3) To have a full control on working of costing Dept. of the Org.
4) To Reduce the detailed checking of the external auditor
5) Helps the mgt. to take correct and timely decision
6) Moral check on staff of cost accounting Dept.
7) To bring efficiency in cost a/cing systems & procedures
8) To bring efficiency in the use of material labour machines etc.
Evolution
In India the evolution of cost audit can be traced from the
era of the World War II. The government made a lot of
purchases in order to fulfill the requirements of the armed
forces.
The govt. was willing to purchase big lots of goods in low

cost.
Evolution Cont…
The Suppliers faced problem in quoting prices as the cost of

variable inputs was fluctuating.
In order to resolve this issue the govt. started entering into a
cost-plus contract with the suppliers.
Under this, the Govt. verified the cost incurred and then
added up a certain percentage of total verified cost to get the
amount payable by the government.
Evolution Cont…
After Independence Govt. took steps to study the cost

aspects of production and developed a system of control
over the Prices by checking the authenticity of costs being
showed.
This ensured fair price to consumer and fair

remuneration to manufacturer.
Principles of Cost Audit
1) Code of Ethics
2) Independence of Cost Audit
3) Integrity and Objectivity
4) Professional Competence
5) Confidentiality
6) Professional Behavior
7) Technical Standards
8) Professional Code of Ethics
9) Engagement of other occupation
Performing Cost Audit
1. COST OF RAW MATERIAL;
 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: FOB value, 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.
2) Material Consumption
i. Material consumption is worked out by deducting closing

inventories, from the receipts and adding opening
balance.
ii. Consumption of materials should be carefully checked

with the issues to production processes.
iii. 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.
3) Wages And Salaries
The following particulars relating to wages and salaries be

included in Cost Auditor's Report,
i.Direct Labor Cost On Production;

ii.Indirect Employees Cost On Production;
iii.Employees Cost On Administration;
iv.Employees Cost On Selling And Distribution;
v.Bonus To Workers And Employees;
vi.Other Employees Cost, If Any (Including Taxes And Levies
vii.Total Employees Cost
After the ascertainment of cost is done it has to be then
compared with previous year figures.
4) Inventory Valuation
i. The various inventory cost formulas (LIFO, FIFO, HIFO),

weighted average cost, base stock, specific identification,
latest purchase price have different effect on costing and
asset valuation.
ii. 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.
5) Depreciation
i. Cost accounting record order/rules require that record of
all fixed assets, in respect of which depreciation is to be
provided, shall be maintained.
ii. 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.
iii. 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.
(Vi) Allocation Of Overheads
The basis of allocation/apportionment of overhead cost to cost

centers should be in accordance with the
i.Accepted principles of cost accounting.
ii.Quantification of services rendered by service departments

to cost centers.
iii.On the basis of activities which are cost drivers.

Types of Cost Audit
1.Cost Audit under Statute.

To maintain proper records regarding materials
consumed, labour and other expenses under section 209 that
are required to get their cost accounts audited.
-To ascertain the relationship of costs and prices.
2. Cost Audit to Assist Management
-To make accurate, relevant and
prompt information to mgmt to assist in imp
managerial decision.
3.Cost Audit on behalf of Govt.

-To ascertain correct cost of certain units.
-To ascertain correct cost of contract given
to private firms under ‘cost plus’ basis.
4. Cost Audit on behalf of Customer
-Cost audit may be conducted on behalf of the
customer when he agrees to pay price for a certain product on
‘cost plus’ basis.
5. Cost Audit on behalf of Trade Association.

-To ascertain comparative profitability of its
members.
-To determine min price to avoid cut throat
competition among its members.
Aspects Of Cost Audit
It has two important aspects:
1)Propriety Audit
2)Efficiency Audit
1. Proprietory Audit
Cost audit as a basis of proprietary 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.
2. Efficiency Audit
 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 proper allocation and apportionment of overheads on the most

equitable basis.
In creating an atmosphere, Cost conscience through out the

organization.
Advantages of Cost Audit
The important advantages of cost audit can be studied as

under:
1)To the Management
2)To the Shareholders
3)To the Consumers
4)To the Government
5)To the Society

1)To the Management
i.Control On Different Elements Of Cost

ii. Assessment Of Profitability
iii. Check On The Role Of Uneconomic Units
iv. It Helps In Reducing The Prices
v.Check On Cost Control Techniques
vi. Helpful In Budgetary Control & Standard Costing
vii. Fixing Responsibilities Of Specific Persons
viii. Proper Valuation Of Raw Material & Work- In-
Progress
ix. Helpful In Fixation Of Contract Price ( Tender Price)
) To the Shareholders
i. Guarantee Of The Proper Maintenance Of Records
ii. Fair Return On Investment
iii. Timely & Proper Information

) To the Consumers
i. It Helps In The Fixation Of Fair Prices
ii. Increase In The Standard Of Living

) To the Government
i. Improve working of uneconomic industrial units
ii. Guidance
iii. Helpful in providing cost statements & other relevant

information
iv. It facilitates the settlement of trade disputes
v. Helps the ‘Tariff Board’
vi. Ceiling prices
vii. Cost plus contract

5) To the Society
i. Provides guidelines to the industries for improving

working
ii. Justification of price increase by increase in cost of

production
iii. Reduces the prices

Exemption from Cost Audit
The exemption from Cost Audit on year-to-year basis in the

following situation :
(i) Temporary Closure of the company/products.
(ii) Negligible production activity.
Company having an Amount of fees to be
authorized Capital paid
A. Less than Rs.25 lakh ` 500
B. Rs.25 lakh or more ` 1000

but less than Rs.5
crore
C. Rs.5 crore or more ` 2,000

Cont..
Appropriate documents are required to be furnished along with

application for exemption :
(i) True copy of complete Annual Report containing balance sheet and
profit and loss account for the year for which exemption is being sought
along with copies of the same pertaining to preceding two years.
(ii) An affidavit containing full facts of capacity utilization turnover and

financial status of the company, duly signed by two Directors of the
company and authenticated by a Notary Public.
(iii) A brief note/status report on steps taken by the management for

revival of the said unit.
Criticism against cost audit
1) Unnecessary interference of government in the working

of the companies
2) It leads to duplication of work
3) Expensive & luxury
4) Harm to the interests of the company
5) Unrealistic regulations
Criticism (cont..)
6) Repeation
7) Shortage of cost accountants

Finally ....
It is wrong to say that Govt. will interfere in the

work of management rather it will help them with
valuable informations. The role of cost auditor is
constructive as he may recommend a number of
improvements in the working of organization.
Bibliography
Advanced Auditing and Professional Ethics, Volume-1, Board

of Studies ,The Institute of Chartered Accountants of India
(ICAI).
Basu S.K. Auditing – Principles and Techniques, Pearson

Education, 2nd Edition 2007.
Thanks..

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COST AUDIT

Submitted By: Nisha

Subject: Corp. Financial A/cing & Auditing

It is the process of verification of cost accounts which includes

According to I.C.W.A. ( Institute of cost and works

“ Cost audit is an audit of efficiency of minute details

“Cost Audit is mainly a preventive measure, a guide

1) To Detect Errors & Frauds

The govt. was willing to purchase big lots of goods in low

The Suppliers faced problem in quoting prices as the cost of

After Independence Govt. took steps to study the cost

This ensured fair price to consumer and fair

1. COST OF RAW MATERIAL;

 The cost of raw materials, both in quantities and value, as given in

 In case the transport cost of raw materials is a significant element of

i. Material consumption is worked out by deducting closing

ii. Consumption of materials should be carefully checked

iii. Provisions of the cost accounting record rules should be

The following particulars relating to wages and salaries be

i.Direct Labor Cost On Production;

i. The various inventory cost formulas (LIFO, FIFO, HIFO),

ii. If an entity follows a formula which is different from the

ii. Depreciation is charged according to the depreciation

iii. Any basis adopted should be consistently followed. If any

The basis of allocation/apportionment of overhead cost to cost

i.Accepted principles of cost accounting.

ii.Quantification of services rendered by service departments

iii.On the basis of activities which are cost drivers.

1.Cost Audit under Statute.

3.Cost Audit on behalf of Govt.

5. Cost Audit on behalf of Trade Association.

It has two important aspects:

Cost audit as a basis of proprietary audit serves the following ;

Whether the expenditure is appropriate and not more than what

 In identifying the areas of inefficiencies and weaknesses.

In determining the appropriate selling price of the commodity and

In determining appropriate cost of different products & services.

In ensuring the optimum utilization of the plant capacity.

In proper allocation and apportionment of overheads on the most

In creating an atmosphere, Cost conscience through out the

The important advantages of cost audit can be studied as

1)To the Management

2)To the Shareholders

3)To the Consumers

4)To the Government

5)To the Society

i.Control On Different Elements Of Cost

i. Guarantee Of The Proper Maintenance Of Records

ii. Fair Return On Investment

iii. Timely & Proper Information

i. It Helps In The Fixation Of Fair Prices

ii. Increase In The Standard Of Living

i. Improve working of uneconomic industrial units

iii. Helpful in providing cost statements & other relevant

iv. It facilitates the settlement of trade disputes

v. Helps the ‘Tariff Board’

vi. Ceiling prices

vii. Cost plus contract

i. Provides guidelines to the industries for improving