Basiscs of Audit and Cost Audit, Genesis of Cost Audit

1. Genesis of Cost Audit

2. Points to be Noted:
 In the mid-fifties, famous case of corporate frauds in Dalmia-Jain companies
virtually jolted the Government.
 It resulted in the Government appointing Vivian Bose Commission and later the
Dutta Commission and Daphtary- Sastri Committee.
 These Commissions/ Committees observed inadequacies in the then existing system
of financial accounting and audit and also in the then existing system of corporate
disclosures. They recommended a more effective system of cost accounting and
cost audit, to supplement the financial accounting and auditing practices.

3.  Further, in the initial phase of industrial development of the country, there was
an acute shortage of goods & materials, as well as, majority of inputs and
resources for the production/manufacture of various capital & consumer goods.
 In the face of scarcity and shortage of almost all the inputs, products and
services, Government had to resort to a policy of permits and licensing.
 A mechanism of Cost audit and maintenance of structured cost data were
considered as important instruments in the hands of the regulatory authorities
to monitor, control and regulate the efficient use of scarce resources and inputs
so made available and monitor cost of production and administer prices.
 Thus, Cost Audit as a unique feature of corporate management in India,
emerged.

4. 1944
Institute of Cost & Works
Accountants of India was
established under the Companies
Act 1913, as a Limited company.
1959
The Institute of Cost and Works
Accountants of India (ICWAI)
was established under Cost &
Works Accountants Act, 1959
The Institute of Cost and Works
Accountants of India (ICWAI) was
renamed as “The Institute of Cost
Accountants of India”
2012
History of
sjdICAI

5. 1965
Cost Audit was first introduced in India
with the introduction of Sec 233B of
Companies Act 1956 for Cost Audit and
Sec 209 (1) (d) for maintenance of Cost
Records.
1965-
2008
44 industries were covered under
cost record maintenance & cost
audit is on a company specific
basics.
Expert Group set up to study the
existing cost audit mechanism. 2008
History
Cost Audit

6. 2009
Expert Group submitted its report
to the Central Government.
2011
Introduction of mandatory Cost Audit of Cost Records
maintained by the Companies under Companies Act 1956 for
Manufacturing, Mining and processing operations depending
on limits of Turnover and Limits of Net Worth and issue of
Compliance Certificate by the Cost Accountants.
New Companies (Cost Records
and Audit Rules), 2014 issued
under Companies Act, 2013.
2014
History
Cost Audit

7. TYPES OF AUDIT
I. Based on SCOPE
 General: A general audit is a comprehensive review of an organization's financial
records and procedures to ensure accuracy and compliance with all applicable
rules and regulations.
 Specific:
1. Partial audit: A partial audit is concerned with the part of accounting books and
records or part of the year.
2. OCCATIONAL AUDIT: An occasional audit is an audit which is conducted once a
while, whenever the need arises. In other words , it is a kind of audit which is
not conducted on regular basis, but is conducted for a special event, time or
purpose.
3. COST AUDIT: A cost audit represents the verification of cost accounts and
checking on the adherence to cost accounting plan. Cost audit ascertains the
accuracy of cost accounting records to ensure that they are in conformity with
cost accounting principles, plans, procedures and objectives.

8. 4. Management Audit: Management audit involves the review of managerial aspects
like organizational objective, policies, procedures, structure, control and
system in order to check the efficiency or performance of the management
over the activities of the company.
5. Performance Audit: Performance audit is an independent, objective and
reliable examination of whether. public sector undertakings, systems,
operations, programmes, activities or organizations are. operating in
accordance with the principles of economy, efficiency and effectiveness.
6. Operational Audit: An operational audit refers to a method of examining how an
organization conducts business. It requires analyzing the processes, procedures
and systems used within the company.
7. Social Audit: A social audit is a way of measuring, understanding, reporting and
ultimately improving an organization's social and ethical performance. A social
audit helps to narrow gaps between vision/goal and reality, between efficiency
and effectiveness.

9. II. Based on Nature of Activity
 Commercial: Commercial audit and review (CAR) is a process of evaluating the
performance, compliance, and value of suppliers and contractors of a firm. It helps you to identify
risks, opportunities, and areas for improvement in the commercial relationships.
 Non-commercial: The audit of non-profit organization will fall under non- commercial audit. Eg:
government audit, audit of organization involved in promotion of education, health or
environment etc.
III. Based on Form of organization:
 Private: It is conducted to meet regulatory requirements, a private audit is typically initiated
by the organization itself, often to gain insights into its financial health, identify areas of
improvement, and ensure compliance with internal policies and procedures.
 Government: Government audit serves as a mechanism or process for public accounting
of government funds. It also provides public accounting of the operational, management,
programme and policy aspects of public administration. Not only that, it also ensures
accountability of the officials administering them

10. IV. Based on the person who conducts:
External: An external audit is a financial review that is conducted by a party not
associated with the company or department that is voluntarily or involuntarily under audit.
An external audit takes place within a defined set of rules or laws.
internal: Internal audits evaluate a company's internal controls, including its corporate
governance and accounting processes. And it is done by the auditors who are have the
internal relationship with the firm
v. Based on legal necessity:
Statutory: Statutory Audit means a type of audit mandated by the law or a statute to make sure
that the book of accounts is true and fair which is presented to the public and regulators. If
the business meets certain criteria, then the statutory audit is mandatory. Generally, statutory
audit means financial audit. It is mandatory for a Public & Private Company, Cooperative
Society, Trust, Banking & Insurance Companies.

11.  VoluntaryAudit:
 Voluntary Audit means the auditing of accounts carried out in compliance with
contractual obligations.
Voluntary audit has following points: 1] Person is not required to get his books of
account audited and furnished as per section 44AB of the Income Tax Act, 1961. 2] But he or
she wants to obtain and furnish Tax Audit Report as per provisions of Sec 44AB of the Income
Tax Act, 1961.
 StatutoryAudit:
 A statutory audit is a legally required review of the accuracy of a company's or
government's financial statements and records. The purpose of a statutory audit is to
determine whether an organization provides a fair and accurate representation of its
financial position by examining information such as bank balances, bookkeeping
records, and financial transactions.
 Government Audit:
 Government audit is divided into several branches like Defense, Railways, Posts and
Telegraphs audit. It works only for government offices and departments. This
department cannot undertake audit of non-government concerns. Its working is
strictly according to government rules and regulations.

12.  Operational Audit:
An operational audit is an examination of the manner in which an organization conducts
business, with the objective of pointing out improvements that will increase its efficiency
and effectiveness. This type of audit is substantially different from a normal audit, where the
objective is to examine the adequacy of controls and to evaluate the fairness of presentation
of the financial statements.
 Management Audit:
A management audit is an analysis and assessment of the competencies and
capabilities of a company's management in carrying out corporate objectives. The purpose of
a management audit is not to appraise individual executive performance but to evaluate the
management team in its effectiveness to work in the interests of shareholders, maintain good
relations with employees, and uphold reputational standards.
 Cost Audit:
A cost audit represents the verification of cost accounts and checking on the adherence
to cost accounting plan. Cost audit ascertains the accuracy of cost accounting records to
ensure that they are in conformity with cost accounting principles, plans, procedures and
objectives

13. Nature of cost AUDIT
 Examination of the operation of the system, to discover where it is
being handled differently from the way originally intended.
 Verification of fixed charges, as equipment may have been added or
disposed of without charging depreciation; insurance or tax rates or
amounts may have charged; or depreciation rates may not be correct.
 Study of distribution of expenses to departments and of
apportionments of service departments cost to producing
departments to discover errors in principle of methods.

14.  Investigation of the classification of departments to find whether
departments have been consolidated or sub-divided in such manner
as to distort costs.
 Examination of purchasing, receiving, storing, and issuing of
materials, to see that the necessary routine is followed correctly.
 Tests of the method of costing used to discover variations from
correct methods.
 Examination of payrolls, time reports, clock cards, and methods of
posting labour cost to orders.

15. T H E E N D