A presentation on cost audit for degree level.

1. ON
COST AUDIT
A PRESENTATION
As A Part Of Assignment Of
“Cost Accounting Standards and Reporting”

2. GENESIS/ORIGIN
DEFINITIONS
• PROTECTIVE
• CONSTRUCTIVE
• TO THE MANAGEMENT
• TO THE SHAREHOLDER
• TO THE GOVERNMENT
• TO THE SOCIETY
• STATUTORY COST AUDIT
• TRIBUNALS
• TRADE ASSOCIATION

3. WHAT IS COST
AUDIT?
3ADD A FOOTER
Cost audit is the audit of cost records.
According to Chartered Institute of Management
Accountants, London (CIMA), cost audit is “the
verification of the correctness of cost accounts
and of the adherence to the cost accounting
plan”.
The Institute of Cost and Works Accountants of
India on the other hand, defines cost audit as “a
system of audit introduced by the Government of
India for the review, examination and appraisal
of the cost accounting records and attendant
information, required to be maintained by
specified industries.”
Cost Audit in India refers to the statutory Cost
Audit of the selected companies covered under
the relevant provisions of the Companies Act,
1956.

4. 01
IT IS THE
VERIFICATION
OF
CORECTNESS
OF COST
RECORDS
02
IT IS NOT OF
HISTORICAL
NATURE
03
IT IS NOT A
POSTMORTEM
EXAMINATIO
N
07
TOOL
FOR
PRICE
CONTRO
L
06
HELPS IN COST
CONTROL &
REDUCTION
05
IT REQUIRES
SPECIFIC
SKILLS AND
KNOWLEDGE
04
REPORTING IS
MUST

5. OBJECTIVES OF COST
AUDIT
5ADD A FOOTER
•To examine whether proper cost
accounting records as per the provisions
of the companies act have been
maintained.
•To verify the cost data and the reports
generated there from.
•To reduce wastage of material and labour
•To maintain internal check and internal
control in the various areas of operation.
PROTECTIVE
OBJECTIVES
•To make available accurate and timely
information to the management.
•To generate useful information for the
government.
•To help the management in decision
making process.
•To enable fixation of prices.
•To promote cost-consciousness.
•To reduce cost of production by
maximum utilization of resources.
CONSTRUCTIVE
OBJECTIVES

6. ADD A FOOTER 6
THE OBJECTIVES CAN ALSO BE CLASSIFIED AS
GENERAL & SOCIAL OBJECTIVES
• Verification of cost accounts with a view to ascertaining that these have
been properly maintained and compiled according to the cost accounting
system followed by the enterprise.
• Ensuring that the prescribed procedures of cost accounting records
rules are duly adhered to.
• Detection of errors and fraud.
• Verification of the cost of each “cost unit” and “cost center” to ensure
that these have been properly ascertained.
• Determination of inventory valuation.
• Facilitating the fixation of prices of goods and services.
• Periodical reconciliation between cost accounts and financial accounts.
• Ensuring optimum utilization of human, physical and financial resources
of the enterprise.
• Detection and correction of abnormal loss of material and time.
• Inculcation of cost consciousness.
• Advising management, on the basis of inter-firm comparison of cost
records, as regards the areas where performance calls for improvement.
• Promoting corporate governance through various operational disclosures
GENERAL OBJECTIVES

7. ADD A FOOTER 7
Facilitation in fixation of
reasonable prices of goods and
services produced by the
enterprise.Improvement in productivity
of human, physical and
financial resources of the
enterprise.Channelizing of the
enterprise resources to most
optimum, productive and
profitable areas.
Availability of audited cost
data as regards contracts
containing escalation
clauses.Facilitation in settlement of bills
in the case of cost-plus
contracts entered into by the
Government.

8. ADD A FOOTER 8
E OF COST AUDIT INCLUDES 2 IMPORTANT ASPE
EFFICIENCY AUDIT is
systematic appraisal of
management methods and is
intended to assess the actual
performance levels relative to
applicable peer benchmarks or
internal standards.
 The process is also designed to
identify opportunities to ensure
performance benefits. Thus it is
also known as ‘Performance Audit’
and 'Profitability Audit.
 It may be defined as a systematic
examination of management‘s
effort to accomplish goals
efficiently and effectively.
 It ensure that the results obtained
are according to the plans
 The parameters of measuring
efficiency include overall rate of
return, capacity utilization,
utilization of national, financial,
physical and human resources,
PROPRIETY AUDIT
stands for verification of
transactions in the best interest
of the public, commonly accepted
customs and standards of
conduct.
 The term propriety means
‘justness’ or 'rightness’. Propriety
audit has been described as an
audit of the actions and decisions
of the executive.
 The term “propriety” has been
defined by Kholer as “that which
meets the tests of public interest,
commonly accepted customs and
standards of conduct and
particularly as applied to
professional performance,
requirements of Government
regulations, and professional
codes.”

9. ADD A FOOTER 9
COSTAUDITONTHEBEHALFOFMANAGEMENT
COSTAUDITONTHEBEHALFOFCUSTOMER
COST AUDIT ON THE BEHALF OF
GOVERNMENT
COST AUDIT ON THE BEHALF OF TRADE
ASSOCIATION
COSTAUDITONTHEBEHALFOFTRIBUNAL
COSTAUDITONTHEBEHALFOFSTATUTE

10. ADD A FOOTER 10
COST AUDIT ON THE BEHALF OF
MANAGEMENT: The main objective of this
type of cost audit is to make available
accurate , relevant and prompt information
to management to assist it in taking
important managerial decisions.
COST AUDIT ON THE
BEHALF OF
CUSTOMER: Sometimes,
cost audit may be
conducted on behalf of a
customer when he agrees
to pay price for a certain
product on “cost plus”
basis. The customer in
such a case gets cost
accounts of the product
concerned audited to
establish correct cost so
that he may be able to
pay price on the basis of
correct cost plus an
agreed margin of profit.
COST AUDIT ON BEHALF OF
TRIBUNALS: Sometimes, Labour Tribunals
may direct the audit of cost accounts to settle
trade disputes for more wages, bonuses, share
in profits, etc. Similarly Income-Tax Tribunals
may direct the audit of cost accounts to assess
correct profit for assessment purposes.

11. ADD A FOOTER 11
COST AUDIT ON THE
BEHALF OF GOVERNMENT
: The Government may appoint a
cost auditor to conduct cost audit
where it is necessary:
-To do so in the opinion of the
Government under section 233-B
of the Companies Act, 1956;
-To ascertain correct cost of
certain units when Government is
approached for protection or
financial help.
COST AUDIT UNDER
STATUTE: The Central
Government may, under section
233-B of the Companies Act,
1956 order that certain classes
of companies which are required
to maintain proper records
regarding materials consumed,
labour and other expenses under
section 209 are required to get
their cost accounts audited. The
aim of such type of audit is that
the Government wants to
ascertain the relationship of
costs and prices.
COST AUDIT ON THE BEHALF OF TRADE
ASSOCIATION: Sometimes, a trade association
may appoint a cost auditor to conduct cost
audit: -to ascertain comparative profitability of
its members ; -to determine minimum price to
avoid cut throat competition among its
members; -to maintain prices at a certain level
so as to prevent undue profiteering.

12. ADVANTAGES OF COST
AUDIT
ADD A FOOTER 12

13. ADD A FOOTER 13
ADVANTAGES TO
MANAGEMENT
ADVANTAGES TO
SHAREHOLDERS
ADVANTAGES TO
SOCIETY
ADVANTAGES TO
GOVERNMENT
 Detects error and frauds and
minimizes their chances of re-
occurrence.
 Examines the adequacy of internal
control system.
 Keeps a check on wastage of
material and labour and minimizes
cost.
 Fixes accountability for inefficiency
or poor performance.
Assists to see whether a particular unit
or industry requires government
protection aid or subsidy.
Enforces fair trade practices.
Controls industrial sickness to some
extent.
Determines whether the loans can be
sanctioned to a particular industrial unit
for a better economic performance.
Helps in determining the
true cost of production and
fair selling price.
Measures the efficiency
of level of production and
its contribution to
economic development of
the society.
Discloses inefficiency in
all facets of management.
 Ensures effective
utilization of resources and
checks leakage of
resources.
 Examines whether the
industry is properly
managed or not.
 Measures the efficiency of
process of production.
 Ensures adequate returns
to shareholders.

14. LIMITATIONS ADD A FOOTER 14
It is an undue interference in
the internal operations of the
management.
It is an expensive and time
consuming process because it
starts with the purchase of raw
material and ends with sale of
finished products.
It is a verification of accounts of
estimated figures only which are
invariably different from actual
expenses.
Cost records serve as an
important instrument of
facing market competition
and the relevant information
must be treated as trade
secrets.

15. ADD A FOOTER 15
A
PRESENTATION
BY:
ANJALISHARMA