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    Cost Audit

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    Audit

    Audit is nothing but verification of accounts soas to ascertain their accuracy .

    It is the checking of accounts of a businesswith a view to find the correctness of theentries recorded in the books of accounts.Also to find out the truthfulness of thetransactions and the results of the business.

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    Cost Audit

    Cots Audit is the application of auditingprinciples and procedures in the field of costaccounting.According to CIMA,London: The verification of cost accounts and the check on the adherence tothe cost accounting plan

    Thus according to definition cost audit performstwo basic functions:1.To verify that cost accountshave been properly maintained & complied.

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    Cost Audit

    2. To check their adherence to cost accountingplan.

    3. To detect errors and to prevent frauds andpossible misappropriations.(this is for all typesof audit)

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    Cost Audit

    Difference between cost audit and financialaudit:1.Statutory requirements:Financial audit is compulsory in case of allco s.Cost audit is not compulsory in all co s.

    Section 233-B of co s act 1956,has made costaudit compulsory in certain specified co s tobe notified by central govt. from time to time.

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    2.Objective:

    Financial audit serves the objective of securingthe correctness of accounts through verification.

    It aims for detection of errors and frauds in thebooks of accounts.The financial auditor has to express his opinionwhether balance-sheet and profit and loss a/cgives true and fair view of financial position andprofit and loss respectively.

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    Objective:Cost Audit lays stress on proprietory of

    expenditure and efficiency of performance .Cost audit is audit of efficiency and minutedetails of expenditure.

    It is mainly a preventive measure and guidefor mgt policy and decision making and abarometer of performance.

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    3. Scope:Financial audit covers the operations of the

    entire organisation including branches of theco.Financial audit is organisation oriented.

    Cost Audit emphasis mainly on operationsrelating to product .Cost audit is product oriented.

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    4. Qualifications of the Auditor:Financial auditor of co s must be CharteredAccountant (CA) within the meaning of

    chartered acountants act,1949., holding acertificate of practice issued by ICAI-Institute of chartered accountants of India.

    Cost Auditor should be CostAccountant (ICWA) within the meaning of Costand works accountant act,1959, holding acertificate of practice issued by ICWAI-Institute of cost and works accountants of India.

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    5. Appointments of Auditor:Financial auditor is appointed by members of

    the co.by an ordinary resolution in the annualgeneral meeting of the co.Cost auditor is appointed by BOD s of the co swith the prior approval of the co.lawboard,Govt.of India.

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    6.Time limit: Cost books must be completedwithin 90 days from the end of financial yearof the co.Cost audit report must be c

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    Statutory Cost Audit:Under section 233-B of co s act ,central

    govt.may, if it feels necessary ,direct the auditof cost accounts of a co.This audit should beconducted by a Cost Accountant within themeaning of Cost and works accountantsact,1959.Such cost audit under sec.233-B of co s act,1956 is statutory cost audit.

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    Voluntary cost audit:Where cost audit is not ordered by the govt.

    under section 233-B of co s act 1956,mgt.of co s may voluntarily get the cost auditconducted.Such voluntary cost audit helps the mgt. inrunning the business efficiently and makingoptimum use of resources available.

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    Objectives of Cost Audit

    1.General objectives2.Social objectives

    1. General objectives:1. To verify that the cost accounts aremaintained and complied according to thecost accounting system employed by the

    concern.2.To detect errors and prevent frauds of various types.

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    3. To verify cost of each cost unit and costcentre to ensure that this are accuratelyascertained.4. To ensure that co. is making optimum use of resources available.5. To bring into light the abnormal loss of

    material and abnormal idle time so thattimely corrective action may be taken to avoidthese losses.

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    6. To inculcate the habit of cost consciousness inthe organization.7. To advice mgt. on problems such as under

    utilization of production capacity, imbalances inproduction facilities.8.To help in fixation of price of goods and servicessupplied by the co.

    9. To determine Inventory valuation as accuratelyas possible.10. To see that costing plan is laid according toprescribed procedures of cost accounting.

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    Social Objectives:The objectives is to protectthe interest of consumers, shareholders andsociety at large.

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    Advantages of cost Audit:To the Manegement:1.Cost auditors are usually experts andexperienced cost accountants so that theymay suggest changes to overcome anyweaknesses in the systems and procedures.

    2.cost audit improves the effectiveness of costcontrol and cost reduction schemes bypointing out certain avoidable losses.

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    Costing data becomes more reliabl2.To Shareholders:

    Cost audit highlights the efficiency of themanagement in the utilisation of resources of the business.

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    3 . To consumers:The consumers get the advantage of fair price

    for the products of the co.This is because costaudit reveals the true cost of products andprice is generally based on such costs.

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    4.To Government:Cost audit provides true cost figures to the

    govt. for fixing the price for goods to preventundue profiteering.Audited cost data is taken to be more reliablein public interest.

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    5. To Statutory Auditor:Cost audit helps the statutory financial auditor

    in as much as he may rely on costing data suchas cost of closing stock of materials,work inprocess and finished goods,etc.

    Costing valuations are helpful and may be safely

    relied upon by the financial auditor formatters like remuneration to managers basedon percentage of dept.al profits etc.

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    Cost Audit Programme

    The programme of work to be done on auditshould be worked out.No std. form of auditprogramme can be laid down.As it depend onno. of factors such as nature and size of businessetc.Some of the areas which may be examinedare :1. MATERIALS:The cost auditor should examinethe following:i) Check various documents related tomaterials,eg. Purchase order,material requisitionnote,mat.transfer note,goods recd. Note.

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    Cost Audit Programme

    ii.To check whether materials are purchased inEconomic Order Quantities and whethermax.,min,.and reorder levels are maintained.iii.Check the qualities recd. As per goods recd.Note.iv Check the quantities posted and thebalance worked out in bincards and storesledger.

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    V. Check mat. Returned to supplier have beenaccounted or not.V i.verify the authority for issue of mat s.V ii check the reasonableness of various typesof material losses such as waste, scrap,etc.V iii Check separate records maintained for

    internal manufacturing of component parts.Ix Check whether the valuation of stocks is inaccordance with prescribed procedures.

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    X.Examine the computation of materialvariances wherever standard costing system isfollowed.2. LABOUR:Following points should be covered:Check the job time and attendance time

    records.Check the physical attendance of workers bysurprise visits.

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    Verify accuracy of calculation of wages.Check the records regarding overtime work.

    Check the system of payment of wages.Compare the performance efficiency of labourwith standard performance so that corrective

    action may be taken without any delay.

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    3.OV ERHEAD:Following points should be covered:Check the classification,allocation andapportionment of OH.Compare the actual amounts of prodn , adm.And selling and distr.oh.with the standards

    and any explanations offered for variations.Examine the steps taken to remove variancesfrom standards.

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    Cost Audit in India.

    Features of Statutory Cost Audit in Indiasummarised as follows:According to section 209 of co s act 1956,asamended govt.has powers to order co s engagedin prod. ,processing, manufacuring or miningactivities to maintain in their books of accounts

    particulars relating to use of materials,labour andother items of cost.This sec.ensures existence of cost a/c.,is prereqisite of cost audit.

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    The Govt.Of India have framed costaccounting(records)rules for the maintenanceof cost accounts for certain selectedindustries.These rules provides guidelines forco s to maintain cost accounting records.So far44 industries have been notified by the

    govt.,covering more than 2000 co s.

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    According to sec.233-B of co s act 1956 ,govt.has powers to orderfor audit of cost a/c of co.falling under purview of above record rules.Statutory cost audit can be conducted only bya qualified cost Accoutant holding a certificateof practice issued by ICAI.

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