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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.
The Companies Act 1956, which has been amended several times, and is now known as Companies (Amendment)/(Second Amendment) Act 2002 contains the detailed provisions concerning the preparation of annual accounts and reporting.
A cost accountant offers to perform or perform services concerning the costing or pricing of goods and services or the preparation, verification or certification of cost accounting and related statements.
Tax Audit shall not apply to the person who derives income of the nature referred to in section 44B or section 44BBA, on or from the 1 st day of April, 1985 or, as the case may be, the date on which the relevant section came into force, whichever is later. Moreover a person who is wholly outside the purview of Income-tax Act need not get his accounts audited u/s 44AB even though his total sales exceed Rs. 40 lakh. Eg: An agriculturist.
Compliance of conditions before acceptance of Tax Audit assignment
A person defined as a chartered accountant within the meaning of Chartered Accountant Act, 1949 and who hold a Certificate of Practice can perform tax audit u/s 44AB. An auditor is required to comply with the following conditions before acceptance of tax audit:
In the interest of both client and auditor, the auditor should send an engagement letter, preferably before the commencement of the engagement, to help avoid any misunderstandings with respect to the engagement. This is necessary since section 44AB does not specify the rights of the auditor. It has become mandatory from 2003-04.
In case where the previous year’s audit is conducted by any other auditor, then “No Objection Certificate (NOC)” to be obtained from the previous auditor before the acceptance of the tax audit assignment.
In all other cases, an audit report is to be given in Form No. 3CB. The report in Form No. 3CA or 3CB is to be accompanied with Form No. 3CD.
For the purpose of section 44AB, an audit report is to be given in Form No. 3CA if the person carrying on business or profession is required to get his accounts audited under any other law.
In the audit report, the tax auditor has to express his opinion as to Whether or not the financial statements give a true and fair view of the profit or loss and the state of affairs (the auditor is required to state this where the accounts of the assessee have not been audited under any other law); and Whether or not the prescribed particulars contained in the statement annexed to the audit report are true and correct.
which any function or organization is guided. Organizational
objectives should be referred to as primary objectives.
objective clause of the Memorandum of Association
details with primary objectives of an organization.
Functional objectives should be referred to as subordinate objectives and are set for accomplishment of organizational objectives. Management audit should consider the following points for appraisal of company objectives and functional objectives:
The structure should provide for unity of command, i.e., a
person should not report to more than one supervisor.
The structure clearly defines responsibility for every
management person in organization.
The structure has proper balance, i.e., no function should be
excessively weak or excessively dominant
The organizational structure should permit flexibility to suit to the changing conditions.
3. Appraisal of Planning Process and Plans. Planning is an economic and motivational necessity. It is a beginning of the order. It provides basis for decision making. It aims at designing tomorrow. It is a call for action. Plans are the measures devised within the guidelines laid down by policies, to attain an objective.
The planning process is efficient enough to anticipate trouble spots.
The planning process existing in the organization capitalizes the abilities and ideas of individuals working in the organization.
Control assures attainment of objective. It compels events
to conform to plans. There are two important aspects of
Measurement of accomplishment against standard; and
Correction of deviations.
In this area, the activities of management audit should be
directed to determine whether controls provided are adequate
and are providing effectively for accomplishment of
management objectives and plans of operation. The auditor
examines and reports directly on control involved in various
5. Appraisal of Organizational Functions. Management audit is not confined to critical appraisal of management functions alone (i.e., Planning, Organization and Control, etc. It has to be subject to its review organizational functions (i.e., Production, Distribution, Personnel, etc.) Management functions influence organizational functions. Planning is a management function and production is an organizational function. This explains the basic attitude of management audit.
A. Appraisal of Production For appraisal of production, management will have to review a number of activities like: a. Buying, b. Planning, b. Processes, d. Storage and e. Inspection.
Management auditor should see that purchase of right
specifications in the right quantities are made at the right
time and at the right place. The emphasis will be to
review the methods, procedures and routines followed
determine ‘right specifications’, ‘right time’ and ‘right
Optimum utilization of available capacity is ensured by
the organizational procedures.
Procedures related to inventory control would be
thoroughly scrutinized to spotlight the areas for
improvement. Control techniques used to avoid
disproportionate amount being used in inventory are
A . Appraisal of Purchase Function Following points are taken care of: a. Organization of purchase function. b. Purchase policy should be seen, collating the various clauses. c. It should be examined whether purchase Procedure necessitates that the purchase requirements should be dependent on production schedule and level of inventories. d. Does the company ensure regular and dependable supplier? f. How is latest market information collected? g. Are the prices properly analyzed?
B. The Appraisal of Distribution i . Sales Records. ii. Sales policy iii. Service to customer iv. Publicity. Accounts and Finance . Here management auditor should not criticize the technical accountancy of the company: That is the subject of financial auditor. Management auditor may point out, if necessary, statistical information, which may have bearing on decision-making in the organization. Following points are of concern to management au4itor in this area:
Adequacy and effectiveness of financial analysis being
submitted by management
Adequacy and efficacy of procedures and practices
followed in cost accounting department, i.e., methods of
collecting material cost, labor cost, overhead, operation of
budgetary control, standard costing and reporting of variances.
Adequacy and efficiency of management information system.
Adequacy of internal audit procedures.
Methodology adopted for financial proposal, investment plans and project decisions.
Legal and Secretarial Practice . Here management auditor critically reviews the system relating to office organization. An effort will be made to determine whether the activities and routines related to handling of correspondence, filing system, telephone, telex and messenger service, etc, are carried out in simplest and most effective manner. Main concern management auditor in this area remains focused on appraisal of systems in vogue.
Personnel and Industrial Relations . This function has
assumed a lot of importance in recent years. Following
activities are primarily studied:
Employment and discharge, personnel records and works