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MANAGEMENT ACCOUNTING AND CONTROL SYSTEMENT TERM PAPER ON COST AUDIT

Usha S USN: 1PB11MBA57


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Introduction
Cost audit would apparently mean an examination of cost books , cost accounts, cost statements and subsidiary and prime documents with a view to satisfying the auditor that these represent a fair and true view of the cost of production . this will naturally means an examination of the appropriateness of the cost accounting system adopted by the business and effectiveness of its implementation. The cost auditor is expected to examine the cost books , cost accounts, cost statements and all other relevant documents to see not only that they have been correctly written and recorded but that also give a fair and correct picture of the business with regard to costing operation According to institute of cost and management accountants of England cost audit represents the verification cost accounts and check the adherence of cost accounting plan . According to the institute of cost and works accountants of india , cost audit is 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 Origin of cost audit: The origin of the concept of cost audit could be traced to the second world war period when the practice of assigning cost plus contracts stared . however , probably india is the only country in the free world where cost audit is statutorily prescribed . cost audit can offer valuable assistance to management in its decision making process since it ensures reliable cost accounting data and information .

Overview of cost audit India Cost Audit The central government has issued different orders dated 2nd may 2011 [Eight Industries], 3rd May 2011 [Six Industries], 30th June 2011 [Eight Industries]. All industries covered under this orders, shall be audited its cost records on or after 1st April 2011. The central government enlarged the scope of cost audit through issuing cost audit order on 24th January 2012 and included another nine industries under cost audit. The following industries shall get its cost accounting records audited by cost accountant on or after 1st April 2012. - All companies to which the Companies (Cost Accounting Records) Rules, 2011 apply and - The company engaged in the production, processing, manufacturing or mining of the following products/activities, including intermediate products and articles or allied products thereof and
SN Name of the Industry Relevant Chapter Heading of the Central Excise Tariff Act, 1985 1 2 3 Jute, cotton, silk, woolen or blended fibers/textiles Edible oil seeds and Oils (incl. vanaspati) Packaged food products Chapters 50 to 63 Chapters 12 and 15 Chapters 2 to 25 (except Chapters 5, 6, 14, 23 and 24) 4 5 6 Organic & Inorganic Chemicals Coal & Lignite Chapters 28, 29, 32, 38 and 39 Chapter 27

Mining & Metallurgy of ferrous & nonferrous metals Chapters 26 and 74 to 83 (except Chapters 76 and 77)

Tractors & other motor vehicles (incl. automotive Chapters 84, 85 and 87 components)

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Plantation Products

Chapters 8, 9, 21 and 40,

Engineering machinery (incl. electrical & electronic Chapters 84 and 85 products)

- If the aggregate value of the turnover made by the company from sale or supply of all its products/activities during the immediately preceding financial year exceeds hundred Crore of rupees Or - If the companys equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India Features of cost Audit- Every cost auditor shall forward his report to central government and company within 180 days from the end of financial year of the Company - The company and every officer of the Company shall render necessary assistance to the cost auditor so as to enable him to complete the cost audit. - The annexure prescribed with cost audit report shall be approved by Board of Director before submitting the same to central government. The annexure shall also be signed by company secretary and at least one Director of the Company. If there is no company secretary, then two Directors shall sign the same. - No person in employment can be appointed as a cost auditor. - The company shall within 30 days from the date of receipt of the copy of the cost audit report, furnish to the central government with full information and explanations on every reservation or qualification remarks. - Sometimes, the central government may direct to circulate the cost audit report to members. - A cost accountant in full time practice or a firm of cost accountants appointed for conducting cost audit of a product/activity of a company is eligible to also authenticate the Compliance Report of the Company in respect of Companies (Cost Accounting Records) Rules 2011

- A cost auditor would be deemed to have concluded his appointment as cost auditor and eligible to accept appointment of another company within the limits of Section 224 (1B) . - The following persons shall be disqualified for appointment of as cost auditor of a company under section 226 of the companies act 1956

Body corporate An officer or employee of the company A person who is partner or who is an employment of an officer or employee of the company

A person who is debtor or creditor with related to company for an amount of exceeding Rs. 1000

A person who hold any security of that company

- Under section 224(1B), the company shall appoint elsewhere or firm as its cost auditor if such person or firm is, at the date of such appointment or re-appointment, holding appointment as auditor of the specified number of companies or more than the specified number of companies. As per section 224(1C), the specified no. of companies per partner of firm/ individually includes twenty companies, in the case of a person or firm holding appointment as auditor of a number of companies each of which has a paid-up share capital of less than rupees twenty-five Lakhs, or in any other case, twenty companies, out of which not more than ten shall be companies each of which has a paid-up share capital of rupees twenty-five Lakhs or more. In above specified no. of Companies, following audits of companies not includedi) Private Company (After Companies amendment act 2000) ii) Guarantee companies having no share capital (Departments Letter No. 8/12/(224)/74-CL-V, dated 28-9-74) iii) Foreign companies (Circular No. 21 of TSF No. 35/3/75-CL-III, dated 24-9-1975) iv) Branch audit of the Indian Companies not counted for calculating the specified number u/s 228 and as per Department circular No. 21/75(35/3/75-CL-III), dated 24.09.1975.

Procedure for Appointment cost auditor- Company appoint cost auditor who hold valid certificate of practice of the Institute cost Accountants of India [ICAI], - In company, Audit Committee of Board shall be first point of reference regarding appointment of Cost Auditor. - The Audit Committee shall be consider disqualification as per section 224(1B) of Cost Auditor at the time of his appointment. Audit Committee shall be responsible for such Compliance. - The Audit Committee shall obtain a certificate from cost auditor certifying his/its independence and arm length relationship with company. Then, the Board of Directors of the company approves his appointment in their meeting. - After that the Company shall file form 23C within 90 days from the date of his appointment and attach a copy of certificate received from cost auditor and Board resolution. However, under the present procedure, the prior approval would be deemed to have been granted if the Central Government does not raise any query within 30 days of filing of Form 23C.In case the Central Government raises any query within the said period of 30 days, the company would be required to clarify the issues and re-submit the Form 23C. The period of 30 days, in this case, would run from the date of resubmission of Form 23C - After expiry of 30 days from filing of form 23C, the company issues a formal letter of appointment as approved by the Board to cost auditor. - Cost Auditor shall inform through filing of e-form (form 23D) along with copy of appointment to Central government regarding his consent to adopt the appointment. - The Company is required to disclose full particulars of the cost auditor along with the due date and actual date of filing of the Cost Audit Report by the cost auditor, in its Annual Report for each relevant financial year. Since the notification has made effective from April 1, 2011, companies under cost audit are required to furnish the details in its Annual Report from the financial year 2010-11. Since the cost audit report of a particular financial year may not have
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been submitted before publication of the Annual Report, relevant details of due and actual date of filing for the last financial year and the due date of filing for the current year may be published in the Annual Report. - If there is no audit committee, then Board of Director of that company shall be responsible for the implementation of above procedure. Relevance of Cost Audit
In the initial years, Cost Audit was taken merely as a tool for price control mechanism for consumer and infrastructure industries in India. The main objective of Cost Audit when statutorily introduced under the provisions of Companies Act, 1956 was to meet the Government requirements for regulating the price mechanism in core industries like Cement, Sugar, Textiles and consumer industries like Vanaspati, Formulations and Automobiles. The objective was to provide an authentic data to the Government to regulate the demand and supply in the country through a price control mechanism.

The liberalization of the economy and consequential globalization has further enhanced the need for authentic data. Therefore, the Cost Audit Report Rules have been amended from time to time to ensure that the comprehensive authentic information is available in the format required. The basic structure of the cost audit was laid down by the Cost Audit (Report) Rules, 1968 as prescribed under the relevant provisions of Companies Act, 1956. They were superceded by the Cost Audit (Report) Rules 1996, which were notified vide GSR 511(E) dated 5.1.1996. These Cost Audit (Report) Rules 1996 were also subsequently superseded by the Cost Audit Report Rules 2001, which were notified vide GSR 294(E) dated 27.12.2001.

Literature review
Mandatory cost audit: Do we need it?
It's a measure of efficiency & governance Corporate governance has taken centre-stage in all business models since the Enron debacle. But recent happenings have shown that a governance structure should also support an organizations efforts to improve performance. There is a need to move from compliance governance to business governance. The governance structure has to expand its horizon to include a system that ensures optimal utilisation of resources while meeting societal expectations. There has to be a shift from compliance- or rule-based governance to a performance management framework with enterprise governance in mind. In the context of evaluating the economic competitiveness, the significance of cost management in enterprises cannot be underestimated. CII had studied the cost management practices in different companies, both in the manufacturing and services sector. The study evolved the concept of maturity levels of companies in cost management. It also suggested the mechanism of certification of cost management practices in companies so as to make them more efficiency driven and competition conscious. It is true that in a market economy, government control is unwarranted. However, market forces do not eliminate the need to regulate the prices, profits and quality of various products and services to modify the economic behavior of individuals and firms. Regulatory apparatus needs to foster efficiency and investment by eliminating outdated restrictions and promoting sustainable growth. Regulators are required to frame right regulations in the interest of the industry as a whole and also in the interest of the consumers and other stakeholders. Cost audit, supported by cost accounting standards, can provide relevant and credible cost and revenue data to the regulators to support their decisions. Cost audit mechanism under the Companies Act, which is a measure of efficiency and performance and Corporate Social Responsibility can serve as an important tool for effective enterprise governance. Clause 49 of Sebi guidelines on Listing Agreements speaks about performance monitoring.

It is required to be amended to focus and to conform to the cost audit structure so that companies report on the efficiency performance in greater detail enabling the stakeholders to make better evaluation. Cost audit provisions can also help an enterprise to achieve management maturity. An appropriate cost management system is required in all business units to remain competitive and the government should ensure through a legal framework that such a cost management system is in-built in the governance structure of every company. The ministry of corporate affairs constituted an Expert Group to review the existing mechanism of statutory cost accounting records and cost audit. The group, in its report submitted in December, 2008, has recommended a radical shift of cost accounting records and cost audit from being compliance- or rule-based governance to performance management framework with focus on three key objectives viz. enterprise governance, competitiveness and strengthening the regulatory mechanism. These recommendations acquire great significance in the current context of governance failure. Cost audit methodology as structured originally under Section 233B and the existing Cost Audit Report Rules, is proposed to be realigned with the cost management perspectives. The Group has redefined the cost audit objectives focusing on the efficiency review aspect making the entire mechanism a value-adding exercise without losing the legal backup and the mandatory force it gives for compliance and has aligned the same with cost management and better enterprise governance.

Scope of cost audit


Section 227 (2) of the companies act 1956, requires the auditor of company to state whether the accountants in his opinion give a true and fair view of the state of the state of the companys affairs in the case of the balance sheet and of the profit and loss for its financial year in the case of the profit and loss cost audit and operational audit accountant . therefore statutory financial audit of a company conducted by the chartered accountant is an essential annual feature of all the companies registered under the provisions of companies act 1956. The board of directors of every company has a statutory obligations to palce its audited annual accountants viz. P&l account and balance sheet before the shareholders in the general meeting, duly certified by a chartered accountant appointed as an auditor under the provisions of section 224 of the act . however , there is no corresponding statutory provision for compulsory annual audit of cost accounts of a company covered under section 209(1) of companies act or under relevant cost accounting records rules
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Objectives of study To understand the concept of cost audit To know the applicability of cost audit in india To understand the Provisions Under Companies Act Relating to Maintenance of Cost Records and Cost Audit to know the process of cost and its applicability

Methodology

The main sources of data collection and methodology used in this paper is secondary data . There are a range of resources available for secondary research: the main sources from where data is collected are :

Published statistics: census, accounting journals and social security data, and so on Published texts: theoretical work, secondary analyses by experts and reports Media: documentaries for example, as a source of information

Limitations of study : The main limitations under this study are Data related limitation

Lack of consistency of perspective Biases and inaccuracies can not be checked Published statistics often raise more questions than they answer Conceptual limitation The cost audit is wide concept it is not possible to cover entire aspects in this paper It is not possible to evaluate the real applicability and workings of cost audit as it is mainly based on the secondary methodology

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Conclusion: The Ministry of corporate affairs has framed the different rules, orders in respect of utilization of labour or other items of cost in the books of account. This orders enlarged the scope of cost audit than the individual specific industry cost audit order. Now the company shall be required to comply with compliance report and cost audit simultaneously, if the products covered under different orders. Also, the department have mandated to file the cost audit report [form I] and compliance report [form A] for the year 2011-12 onwards [including the pending report relating to any previous year] by using the XBRL taxonomy. Such different orders on cost audit have been created complexity in mind of stakeholders regarding their implementation and follow up. Many companies are unaware about the applicability to their companies and put into operation of cost accounting record still now. Therefore, the Ministry of corporate Affairs and other authorities should take steps towards familiarization of cost audit concept in mind of stakeholders who covered first time under this. Such steps will be helpful to take away the complexity of cost audit orders and avoids the irregularity in implementation of government order.

Bibliography

Master Circular on Cost Accounting Records and Cost Audit www.icmap.com.pk/.../brochure_cost_audit_benefit_to_industry.pdf accountlearning.blogspot.com/2012/02/advantages-of-cost-audit.html www.caclubindia.com

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