Auditing involves detailed examination of financial and cost statements to ensure accuracy and compliance, distinguishing between financial audits and cost audits in their focuses and objectives. Cost audits aim to provide reliable data for management decision-making, compliance with cost accounting principles, and enhancing efficiency within organizations. While beneficial for management and shareholders, cost audits can also present disadvantages such as hindrance to daily operations and potential inaccuracies in auditor judgment.

1. MEANING OF AUDITING
Auditing is the task of careful and in detail checking or examining of cost &
financial statements of the company or organization to make sure that they are
correct and complete
MEANING OF FINANCIAL AUDIT
Financial Audit is the examination of financial records by an independent body which is
conducted for compliance, taxation or for disclosure purposes and ensures high
accuracy in the given reports
MEANING OF COST AUDIT
Cost Audit is thorough examination of Cost Accounting Records and adherence to Cost
Accounting Plan.
It is an effective tool of control in the hands of management
It provides reliable Cost data which can used by management for decision making
Unit 4 Cost Audit

2. DEFINITION OF COST AUDIT
The Institute of Cost and Management Accountants (ICMA), U.K. defines
cost
audit as "the verification of cost accounts and a check on the adherence to the
cost accounting plan. It comprises of
1. verification of the cost accounting records
2. To ensure whether cost accounting principles, plans, procedures and objectives
have been adhered to by the organization
TOPIC: OBJECTIVES OF COST AUDIT
1. Accuracy of Cost Data
2. To see whether cost accounting principles have been properly applied
3. Detect errors, fraud or malpractice
4. better utilization of resources
5. facilitate price fixation
6. Check on working of costing department and to make suggestions for
improvement
7. Helps management in taking correct decision

3. 8. To facilitate inter-firm and intra-firm comparison of cost and business
performance.
9. Bringing out inefficiencies in the matter of utilization of materials, payment
to
labourers and incurrence of overheads and direct expenses.
TOPIC: ADVANTAGES OF COST AUDIT
I. To the Management
(refer above
objectives)
II. To the Shareholders
1. Ensure that proper
records are
maintained
2. determine whether
they are getting return
on their investment or
not
3. Presents true picture

4. IV. To Government
1. basis to fix prices of commodities
2. fixing up tax or duty on the cost of finished products.
3. To take decision on tariff protection.
4. To know fraud intentions of management
5. To make measures to improve sick industrial units
6. To control prices
TOPIC: DISADVANTAGES OF COST AUDIT
1. It is unnecessary.
2. create unnecessary hindrance in day-to-day office work.
3. cost auditor may be a qualified person, but he may not be always right in
his
Judgement
4. may not suit small organizations.

5. TOPIC: TYPES OF COST AUDIT
1. Cost Audit on behalf of Management
2. Cost Audit on behalf of Customer
3. Cost Audit on behalf of Government
4. Cost Audit by Trade Association
Trade Association may ask its member units to submit detailed cost
information for verification . Cost audit helps member units to take
appropriate decision and make representation to government for
survival & growth of particular industry.
5. Statutory Audit
Conducted as per the provisions of section 148 of companies act 2013
Note: points 1 to 3 refer advantages

6. TOPIC : SCOPE/ ASPECTS OF COST AUDIT
1. Proprietary or Higher Audit
It judges the soundness of managerial decision and checks waste
expenditure. Cost auditor will be able to find out whether expenditure
incurred has shown best result or not.
2. Efficiency or Performance Audit
It involves comparison of actual performance with planned results and
thorough investigation into the variances to identify areas of inefficiency
and mismanagement

7. 1. Compulsory as per Companies Act
2. Financial Auditor has to report
whether balance sheet and profit and
loss account represent true & fair view
of state of affairs of company
3. Reveals whether correct profit has
been arrived or not
4. Concerned with financial aspects
5. Financial auditor has to check or
examine carefully and in detail the
exact value of closing the stock for the
purpose of balance sheet.
TOPIC: DIFFERENCES BETWEEN FINANCIAL AUDIT AND COST AUDIT
Financial Audit Cost Audit
1. Not Compulsory except companies
engaged in production of goods or
services under section 148 of
Companies act 2013
2. Cost Auditor has to certify whether
expenditure has been incurred wisely
or not
3. To suggest ways to eliminate wastage
and increase profits
4. Concerned with Cost aspects
5. Cost auditor has to see whether there
is sufficient stock maintaining in
order to fulfill the needs of the
business concern

8. Financial Audit
6. It serves interest of shareholders
7. Financial audit is mandatory to
be conducted every year
8. finance auditor submits the
report
in annual general meeting
organized by shareholders.
9. Financial audit is done
or conducted as per the demand
of
the shareholders.
Cost Audit
6. Serves the interest of
management
7. It is conducted in a year in
which audit is required by the
government
8. Cost auditor submits the report
to the company and central
government within 180 days
from
the end of financial year
9. Cost audit is done when
government or industrial
organization proposes to make
an
audit

9. TOPIC: FEATURES OF COST AUDIT
1. compliance by the company with the cost accounting records rules
2.the books and records maintained by the Company are in conformity with the
Cost Accounting Standards (CAS) & Generally Accepted Cost Accounting
Standards (GACAPS)
3. system of internal audit of cost records exists in the Company
4.Company keeps detailed unit-wise and product/ activity-wise cost
statements 5 . Evaluation of the operating and other efficiencies of the
organisation
6. Submission of Cost Audit

10. Cost Audit Prigramme
Cost audit programme is a coordination of the work to be done, the
work distributed among the audit staff and the time within which the
assignment has to be completed.
A Cost audit programme is the detailed plan of auditing work to be
performed specifying the procedures to be followed in verification of
each item in the cost statements and giving the estimated time
required.

11. Cost audit programme is a detailed plan of-
oAudit work to be performed,
o Procedures to be followed in verification of each item in the cost statements,
o Allocation of work to audit staff, and
o Estimated time duration for the completion of work.
points which need special attention in the course of cost audit are,
oDate of commencement of commercial production.
o Cost accounting system is in existence and it is adequate.
o Cost of major raw materials consumed both in terms of quantity and value.
o Incentive schemes with particular references for increasing the productivity.
o Method of depreciation adopted by the company.
o Significant variations in the expenditure incurred against overheads as compared
with the previous two years.

12. General Cost Audit programme consist of the following
Materials:
Inventory control size, minimum and maximum stocks, material limits, reorder
points, safety stocks, ABC analysis, etc.
 Perpetual inventory system, physical stock checking, and accounting for
differences.
 While detection and prevention of pilferage or loss of stocks.
 In the correct valuation of closing stocks and work in progress.
 The method of pricing the issues, whether they are in reasonable limits, their
reports should be examined.
 Budgetary control for materials and variances from standards should examine for
material cost control.
 Wastage, scrap, spoilage, and defectives, whether they are in reasonable limits, their
reports should be examined.
 Examine how losses of materials in storage and the process accounted for and
whether these are satisfactory according to cost auditing principles accepted as
authoritative.
stock materials issued for non-production activities, including capital jobs.

13. Labour:
Method of selection, appointment, and discharge labor turnover and functioning
of the personal department.
 Labour efficiency and productivity and their comparison with the standards fixed.
 Idle time and overtime their control and treatment in accounting.
 Wages policy and method of remuneration whether the system is working
satisfactorily to the benefit of the management and the labour.
 Timekeeping system and correct booking of labour cost about time /job cards.
 Total wages charged in the cost records reconciled with the full payments paid
during the financial year.
 Check the calculation of incentives or bonuses for direct or indirect workers.

14. Overheads:
Allocation, apportionment, and absorption of overheads on sound bases to
ensured.
 Comparison of overhead expenditure to the volume of production.
 Correct allocation of costs to work in progress.
 Treatment of items of overheads example, factory rent, interest on capital,
discounts, etc. should be examined whether they are treated on sound and accepted
principles.
 Obtain the trial balance of the organization under audit and prepare a list of
overhead items covering factory, administration, selling, and distribution,
eliminating those items of expenditure, which will not be considered in cost as per
the record.

15. Cost Audit Techniques:
1. Accounting or economic techniques
Physical Verification.
 Comparison of data with Peer.
 Break-even analysis.
 Budgetary control including flexible budget system.
Standard costing and marginal costing.
 Activity based costing to test the relevance of cost to activities.
 Quality analysis of company transactions

16. 2. Scientific Techniques
Computer Models: There are many types of problems which can be solved on a
computer e.g. decision on material mix, product mix, make or buy decisions etc.
 Network analysis: To analyze strings of tasks to arrange them in sequential or
parallel order so that the project is completed in a shortest possible time.
 Mathematical Programme solving by heuristic (trial and error) techniques to
determine the best material mix, best use of organization’s transport fleet, the best
mix of products to obtain or to maximize profits and optimum use of labour,
finance, equipments, etc.

17. 3. Statistical Techniques
Activity Sampling: It is one of the many ways in which the present workloads can
be measured to obtain controls to be exercised by management.
 Monte Carlo Simulation: In this a number of variables are drawn from large
statistical population which have equal choice of being selected and obtain the best
sample possible.
 Exponential smoothing
 Inter firm comparison

18. 4. Personnel Techniques
 Attitude survey
Ergonomic (Man-machine relationship)

Training methods

Profitability and productivity measurement


19. 5. General techniques
Analyzing the problem to establish the basic difficulties and factors involved.
 Establish management by objectives.
 Identifying the likely ways of tackling the problems in the light of objectives to
develop a solution
 Determine the key factors affecting management decision-making.
 Evaluating alternative courses of action
 Evaluating each alternative in terms of economy, efficiency and best fit.
 Specifying the action required to exploit the situation to the best advantage of the
organization.
 Brain storming
 Transfer pricing
 Management by objectives
 Management by exception

20. Cost Auditor
A cost auditor is a professional in India who independently examines a company’s
cost accounting records to ensure compliance with applicable laws, rules, and
regulations.
A cost auditor in India can be a practicing member of the Institute of Cost
Accountants of India (ICAI) or a firm consisting of such members, as stated in the
Companies Act of 2013.

21. Qualifications of Cost Auditor
He / she must be a Cost Accountant as defined in clause (b) of subsection (1) of
section 2 of the Cost and works Accountants Act, 1959 (23 of 1959).
 He / She must hold a valid certificate of practice issued by the Council of the
Institute of Cost and Works Accountants of India under Section 7 of the Cost and
Works Accountants Act, 1959
Disqualifications of Cost Auditor
1. A body corporate.
2. An officer or employee of the company.
3. A person who is a partner, or who is in the employment of an officer or employee
of the company.
4. A person who is indebted to the company for an amount exceeding one thousand
rupees

22. Power / Rights of Cost Auditor
•Right to access to books of accounts and other records
•Right to call for information and explanations
•Right to receive all the facilities from the company which he requires for doing the
work
•Right to visit branches
•Right to report
•Right to receive notice of the annual general meeting and to attend such meeting
•Right to sign the cost audit report
•Right to claim remuneration
• Right to seek advice

23. Duties of cost auditor
Statutory duties of a cost auditor
•Duty to conduct cost audit and prepare a cost audit report
•Duty to furnish information in the cost audit report as per rules and provisions
•Duty to submit a compliance report
•Duty to make enquiries
•Duty to attend Audit Committee / Board meetings

24. Thank You