Definition of Cost Audit

Cost Audit represents the verification of cost accounts and check on the
adherence to cost accounting plan. Cost Audit ascertain the accuracy of cost
accounting records to ensure that they are in conformity with Cost Accounting
principles, plans, procedures and objective
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.
Cost Audit as prescribed under section 233B of Company Act, 1956.
This is the audit governed by statute such as the company's Act....
We ensure that the cost statements of the Company (ies) are prepared as per
Cost Accounting standard issued by the Institute of Cost Accountants of
India.
We analyze the performance and provide the Management Reports to the
Company lies.
We evaluate and report on the internal controls.
We provide assurance to the shareholders regarding the performance of the
Company.
We provide assurance to the lenders of the Company (ies) regarding the
stability and financial position of the business.
We provide assurance to the various regulatory authorities.

Purpose of Cost Audit

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.
Objectives of cost audit include the determination and control of cost together
with providing data for making judgements 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.
Cost Audit is the process of ascertaining whether the production, marketing and
sales processes as well as other aspects of a business are managed in the most
cost effective way.
This is essentially an Internal Audit and is done as a tool for optimising
management efficiency. The most important benefit is the location of unseen
leaks in revenues or unproductive or under- productive employment of
resources.
It is mandatory if the Business is under scrutiny by a financial institution or
regulator on the basis of complaints of mismanagement.
Always it is desirable to have a Cost audit done periodically, to prevent the
situation getting out of control, and to help the management to take prompt
action where necessary.

Provision of section 233B of Companies Act 1956 for Cost

Audit
1. Where in the opinion of the Central Government it is necessary so to do in
relation to any company required under clause (d) of sub- section (1) of section
209 to include in its books of account the particulars referred to therein, the
Central Government may, by order, direct that an audit of cost accounts of the
company shall be conducted in such manner as may be specified in the order by
an auditor 2 who shall be a cost accountant within the meaning of the Cost and
Works Accountants Act, 1959 (23 of 1959 ): Provided that if the Central
Government is of opinion that sufficient number of cost accountants within the
meaning of the Cost and Works Accountants Act, 1959 (23 of 1959 ), are not
available for conducting the audit of the cost accounts, of companies generally,
that Government may, by notification in the Official Gazette, direct that, for
such period as may be specified in the said notification, such Chartered
Accountant within the meaning of the Chartered Accountants Act, 1949 (13 of
1949 ), as possesses the prescribed qualifications, may also conduct the audit of
the cost accounts of companies, and thereupon a Chartered Accountant
possessing the prescribed qualifications may be appointed to audit the cost
accounts of the company.
2. The auditor under this section shall be appointed by the Board of directors of
the company in accordance with the provisions of sub- section (1B) of section
224 and with the previous approval of the Central Government: Provided that
before the appointment of any auditor is made by the Board, a written
certificate shall be obtained by the Board from the auditor proposed to be so
appointed to the effect that the appointment, if made, will be in accordance with
the provisions of sub- section (1B) of section 224.
3. An audit conducted by an auditor under this section shall be in addition to an
audit conducted by an auditor appointed under section 224.

4. An auditor shall have the same powers and duties in relation to an audit
conducted by him under this section as an auditor of a company has under subsection (1) of section 227 and such auditor shall make his report to the 2 Central
Government] in such form and within such time as may be prescribed and shall
also at the same time forward a copy of the report to the company.
5. a) A person referred to in sub- section (3) or sub- section (4) of section 226
shall not be appointed or re- appointed for con- ducting the audit of the cost
accounts of a company.
b) A person appointed, under section 224, as an auditor of a company, shall
not be appointed or re- appointed for conducting the audit of the cost
accounts of that company.
c) If a person, appointed for conducting the audit of cost accounts of a
company, becomes subject, after his appointment, to any of the
disqualifications specified in clause (a) or clause (b) of this sub- section, he
shall, on and from the date on which he becomes so subject, cease to conduct
the audit of the cost accounts of the company.
6. Upon receipt of an order under sub- section (1), it shall be the duty of the company to
give all facilities and assistance to the person appointed for conducting the audit of the
cost accounts of the company.
7. The company shall, within thirty days from the date of receipt of a copy of the report
referred to in sub- section (4), furnish the Central Government with full information and
explanations or every reservation or qualification contained in such report.
8. If, after considering the report referred to in sub- section (4) and the information and
explanations furnished by the company under sub- section (7), the Central Government is
of opinion that any further information or explanation is necessary, that Government may
call for such further information and explanation and thereupon the company shall
furnish the same within such time as may be specified by that Government.
9. On receipt of the report referred to in sub- section (4) and the informations and
explanations furnished by the company under sub- section (7) and sub- section (8), the
Central Government may take such action on the report, in accordance with the
provisions of this Act or any other law for the time being in force, as it may consider
necessary.
10. The Central Government may direct the company whose cost accounts have been audited
under this section to circulate to its members, along with the notice of the annual general

meeting to be held for the first time after the submission of such report, the whole or such
portion of the said report as it may specify in this behalf.
11. If default is made in complying with the provisions of this section, the company shall be
liable to be punished with fine which may extend to five thousaands rupees.

Cost Audit Programme

1.
KNOWLEDGE RELATING TO THE COMPANY: The auditor must know the work
being done by the company. The knowledge relating to entity, production process, types of
products, and financial performance as well as general level of competence of management.

2.
EVALUATION OF INTERNAL CONTROL SYSTEM: The auditor can examine
internal control. The management is responsible for maintaining effective internal control
system. The auditor can check whether it is working properly or not. The auditor can ascertain,
evaluateand test the system.

3.
COST ACCOUNTING SYSTEM: There are two basic types of cost system used to
accumulate cost data that include standard cost system and actual cost system. The auditor must
understand the cost accounting system being used in the company by his client.

4.
COST ACCOUNTING RECORD RULES: Certain companies are required to prepare
cost accounting records under section 230 (1) (e) of the Companies Ordinance 1984. The cost
auditor must have knowledge of cost accounting record rules. The main record is cost ledger that
is used for maintaining records relating to real and nominal accounts. The subsidiary record
includes.

5.
ARITHMETICAL ACCURACY OF COST RECORDS: The cost auditor should
check arithmetical accuracy of cost record. The auditor can apply routine checking technique to
determine
the
arithmetical
accuracy
of
cost records.

6.
ANALYTICAL REVIEW OF ENTIRE COSTING SYSTEM: The auditor
can check the ratios and percentage for a number of years. He can examine the trend of various
items in order to note the unusual items.

7.
EVALUATION OF OPERATING EFFICIENCY: The auditor should state with reasons
the operating efficiency of the company. The weaknesses of the management must be brought to
light. The performance and profitability of the company must be disclosed clearly. The
suggestion for improvement in present system must be mentioned for betterment of the
company.

8.
RECORDS OF MATERIALS: The cost auditor should the consumption
of raw materials in terms of quantity and price. He should also mention the consumption of raw
material
per
unit
of
output.
He
should
disclose
material consumption variance.

9.
RECORDS OF LABOUR: The cost auditor should check that total
wages and salaries for direct labour; indirect labour; marketing employees; and administration
employees. He should also check the salaries and perquisites of directors and chief executive. He
should check the direct labour available and worked during the year. He should note average
number of workers employed. He, should check direct labour cost per unit. He must comment on
the incentive scheme if any.

10. RECORDS OF OVERHEAD: The auditor must. state separately factory overhead;
administration expenses; selling and distribution expenses and financial charges. The auditor
should mention the reasons for variances in the expenditure incurred against the item. He must
record the basis of allocation overhead to cost centres.

11. DEPRECIATION: The cost auditor should state the method used in calculation of
depreciation. He should disclose the basis of allocation of depreciation and basis of charging
depreciation to cost of products.

12. WORK-IN PROGRESS: The auditor should see the basis of valuation of work-inprogress. He should check the principle of allocation of overhead charges. He should compare
overhead charged used with actual rate for the year. He should ensure that there is correct
allocation is made. He should check that work-in-progress has been properly valued.two years.

14 . DISCLOSURES REQUIRED: The cost auditor must know disclosures required under cost
audit report rules. All the required information must be disclosed in the audit report.

15. REPORT RULES: The cost auditor must have knowledge relating to preparation and
submission of cost report rules. The auditor is bound to submit audit report within sixty days.