PROJECT REPORT ON

COST AUDIT
IN PARTIAL FULFILLMENT OF
THE DEGREE AWARDED AT

M.COM PART II
(ACCOUNTANCY)
SEMESTER III

SUBMITTED TO UNIVERSITY OF MUMBAI

FOR ACADEMIC YEAR 2019 – 2020
SUBMITTED BY

NAME : SHETKAR NEHA MOHAN

ROLL NO. 47

VIVA COLLEGE OF ARTS, COMMERCE AND SCIENCE VIRAR

(WEST)
401303

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 DECLARATION

I hereby declare that the project titled “COST AUDIT” is an original work
prepared by me and is being submitted to University of Mumbai in partial
fulfilment of “M.COM – PART II SEM III (ACCOUNTANCY)”
degree for the academic year 2019-2020.

To the best of my knowledge this report has not been submitted earlier to
the University of Mumbai or any other affiliated college for the fulfilment
of “M.COM” degree.

Date: Name:
Place: Signature:

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 ACKNOWLEDGEMENT

I am SHETKAR NEHA MOHAN the student of VIVA College

pursuing my “M.COM – II (ACCOUNTANCY)”, would like to pay the
credits, for all those who helped in the making of this project.

The first in accomplishment of this project is our Principal Dr. A.

P. Pandey, Vice-Principal Prof. Prajakta Paranjape, Course Co-
ordinator Dr. Nilima Bhagwat and Guide Prof. Amol Vaze and
teaching &non teaching staff of VIVA college.

I would also like to thank all my college friends those who

influenced my project in order to achieve the desired result correctly.

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4
 INDEX

PAGE
CHAPTER NAME OF THE CHAPTER
NO.

CHAPTER I INTRODUCTION TO COST AUDIT 6- 10

CHAPTER II HISTORY OF COST AUDIT 11- 12

TYPES & CLASSIFICATION OF

CHAPTER III 13 - 16
COST AUDIT

CHAPTER IV BENEFITS OF COST AUDIT 17 - 22

CASE STUDY OF THE

CHAPTER V 23 - 26
COMPANY

COST AUDIT PLANS

CHAPTER VI 27 - 39
AND PROGRAME

CHAPTER STATUTORY COST AUDIT IN

40 - 57
VII INDIA

CHAPTER
CONCLUSION 58 - 59
VIII

BIBLIOGRAPHY 60

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 CHAPTER – I
INTRODUCTION TO COST AUDIT

With the growth and development of cost accounting system, it became necessary to
maintain cost records and cost books to record costs and the related transactions
correctly. It is necessary that either in financial accounting or in cost accounting or in
management accounting system, wherever books and records are kept, they must be
examined independently to ensure that they have been kept and recorded fairly and
correctly and that there are no errors of omission and commission and there are no
defalcations. So once the cost accounts are prepared, they should be audited in all
fairness. It should be so done either by the internal staff of the company to the
satisfaction of management, or under Statutory audit, by the Government approved
auditors in case of companies in India to which Section 209 (1) (d) and Section 233
(B) of the Companies Act apply. The Companies (Amendment) Act, 1965 empowers
the Government of India to enforce cost audit on any company it may deem fit. It is
a matter of interest that India is probably the only country in the world where statutory
cost audit has been enforced on certain industries. In other countries, audit is
conducted by the management for its satisfaction, internally, to achieve the objectives
of the cost accounting system and to improve operational efficiency.

Definition and Concept of Cost Audit

Definition:

Cost audit is ―the verification of the correctness of cost accounts and of the
adherence to the cost accounting plan‖. — CIMA, London.
By the term Cost audit‘ is meant the detailed checking of the costing system,
technique and accounts to verify their correctness and to ensure adherence to the
objective of cost accounting.‖ — Smith & Day.
Like financial audit, cost audit is also an attest function. It is a systematic and accurate
recording of detailed transactions and operations of manufacturing, processing,
contracting, extracting, transporting, supplying, etc., so as to show the actual cost of
each individual piece of work, service or process or operation.

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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 mean 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 they also give a fair and correct picture of the
business with regard to costing operations.

Difference between Financial Audit and Cost Audit

Financial accounting and cost accounting are the two main branches of accounting
system. The same criteria and principles of audit hold good in both the systems of
accounting and sometimes it becomes difficult to make clear-cut distinction between
the two audits. However, an auditor of financial accounting is more concerned with
financial aspects, recording of cash and bank transactions, capital, debtors, creditors,
assets & liabilities, etc., while the cost auditor is more concerned with correct
recording, ascertainment, presentation and control of costs. This leads to the
following points of distinction:

1.In financial audit, the audit report is addressed and placed before the shareholders
of the company, but the cost audit report is addressed to the appointing authority. In
financial audit, auditor is the representative of the shareholders while in cost audit;
he is the nominee of the appointing authorities and reports to them on cost.
effectiveness. In statutory cost audit, the report is to be submitted by the cost auditor
to the Central Government, with a copy to the company.
2. Audit of Financial accounts has been made statutorily compulsory by the
Companies Act while Cost audit is not compulsory except in certain cases i.e., in case
of companies which carry on manufacturing or mining business and which are
required to maintain Cost Accounts under Section 209(1)(d) of the Companies Act
and are asked to get their accounts audited under Section 233(B) by the Central

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Government.
3. The audit examination of financial accounts is not as detailed as that of cost
accounts. In case of statutory cost audit, the cost auditor has to furnish details in the
annexure along with Cost Audit Report.

4.In financial audit, the auditor is required to report on the Profit & Loss Alc and

the Balance Sheet whether they exhibit a true and fair view of the state of affairs of
the company. In the cost audit, the auditor has to report whether company‘s cost
accounting records have been properly kept as to give a true and fair view of the

cost of production, processing, manufacturing or mining activities, and the

marketing of the product under reference.
5.The financial auditor is required to examine that the business transactions have been
recorded correctly but the cost auditor has also to see that inventory management and
control, inventory limits, E.O.Q. etc., have been properly adhered to.
6.The financial audit is not so much related to decision-making aspects as the cost
audit is related. The cost auditor points out errors and irregularities in managerial
decision-making.
7.The financial auditor has to verify the correct valuation of the closing stocks but the
cost auditor has also to see that there is sufficient closing stock to meet the needs of
the manufacture.
8.The financial audit exhibits whether correct profits have been arrived at or not but
in cost audit, the possibility of earning more profits are explored and advice is made
available for the future for better results on the basis of previous records and
experiences.
9. Financial audit is conducted at the instance of owners of the business but cost audit
can also be done at the instances of Government, Banks and Investors, Industrial
Tribunals and Customers, etc.
10. Financial audit is concerned with the financial aspects but the cost audit is more
related to cost aspects. The cost auditor has to examine carrying and non-carrying
costs, engineering and works studies, variances, budgetary control and ratio studies,
etc.

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Aspects or Scope of Cost Audit
1. Propriety Audit:
It has been defined as ―audit of executive action and plans bearing on the
finance and expenditure of the company‖.
This audit is related to the propriety, i.e., fitness or rightness of the expenditure made.
An expenditure may have been sanctioned and it may have been supported by the
vouchers, yet the propriety audit has to satisfy whether or not the expenditure made
was appropriate to the circumstances of the case and that there could not have been a
better alternative. So this audit is concerned with the audit of such actions of the
executives as have a bearing on the finances and expenditures of the company or
concern.
The cost auditor, under propriety audit, has to ensure that:
a)the expenditure has been planned in a way as to give the optimum results;
b)the planned expenditure its size and channels have produced the optimum result

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This is also known as ‗Performance audit‘ and is related to working efficiency of the
cost-plan. It has to be seen whether the plan has been executed efficiently or not and
for this the results obtained are to be judged. For example, the budget is a plan and
the efficiency audit would determine whether the expenditure is incurred according
to the budget and the results obtained are also in accordance with the budget, or not.
The emphasis is on the point that:
A) every unit of money invested must give the optimum or the best result,
B) the investment made in different types and areas is balanced and optimum.
The Management Accounting‘ defines Efficiency audit as the audit which ensures the
application of the basic economic principle that resources will flow into the most
remunerative channels.

Efficiency audit is based on determining the working efficiency of the enterprise and
so it is related to the examination of aspects like inventory control, productivity,
utilization of installed capacity, cost control, profitability, etc.

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 CHAPTER II
HISTORY OF COST AUDIT
In India methods and techniques of Cost Accounting and audit of Cost Accounts can
be traced back as early as 1925 when a large number of firms were given contracts
by the Government of India on "cost plus" basis and the Government started verifying
and investigating the cost structure of such firms.
The Institute of Cost and Works Accountants of India was set up in 1944 and its
statutory recognition under the Cost and Works Accountants Act, 1959 marked
beginning of the profession of cost accounting in the country. The name of the
Institute has changed to ―The Institute of Cost Accountants of India‖ by an Act
of Parliament namely The Cost and Works Accountants (Amendment) Act, 2011 (10
of 2012) dated 12th January 2012. The Central Government vide S.O. 191(E) dated
30th January 2012 made the name change effected from 1st February 2012.
Immediately after our country became independent, large scale industrialization took
place. Lots of concessions and facilities were given to entrepreneurs to establish
industrial undertakings for production of common goods and essential services.
Power was made available at concessional rates. Liberal finances were provided by
the banks and financial institutions. Land was made available with all infrastructures.
Transport facilities were provided. The government in turn had a right to ensure that
ultimately the consumers are benefited in that they are able to obtain their
requirements at a fair price and do not pay for the inefficiency of manufacturers.
In order to assess the productivity of some important industries which had direct
bearing on the supply management system for the growth of Indian economy and as
a service to the society, provision relating to maintenance of Cost Accounting
Records under section 209 (1) (d) of the Companies Act, 1956 was introduced. The
information on input cost of products, machine utilization, unit selling prices and
profitability of individual products etc. was required to be maintained.

The real beginning of the Cost Audit in the country, however, started in 1965 when
the Companies Act, 1956 was amended to incorporate the provisions relating to the
maintenance of Cost Accounting Records and Cost Audit. Such amendments were
made on the basis of recommendations received from Vivian Bose Commission,
Dutta Commission and Shastry Committee.
Cost Accounting and Cost Records under Section 209 (1) (d): Particulars as to

11
materials, labour and other items of cost – this clause was inserted by Section 20 of
the Companies (Amendment) Act, 1965.
Cost Audit under Section 233B: The Section was inserted by Section 23 of the
Companies (Amendment) Act, 1965.
The justification for mandatory Cost Accounting and Cost Audit has been well
documented in the Parliamentary debate that led to adoption of Companies
Amendment Bill, 1965 incorporating the above mentioned amendments. For
instance, during the relevant Rajya Sabha Debate Smt. Tara Ramchandra Sathe (MP
for Maharashtra) stated as under:
"What is Cost Audit? The Cost Audit is quite different from the Financial Audit. It
is to see whether the labour is efficient or not, whether the industry has provided
efficient labour or the labour which is required by that industry is less than what is
required, whether every material and every part of the machinery is used to the
optimum, whether any material is wasted, etc. We all know, we are short of material,
there is so much material is imported, when we are short of foreign exchange. In these
circumstances, it is very essential that there should be cost audit.

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13
 CHAPTER – III
TYPES & CLASSIFICATION OF COST AUDIT

Types of Cost Audit: -

1.Cost Audit on behalf of the Management: The principal object of this audit is to
see that the cost data placed before the management are verified and reliable and
prepared in such detail as will serve the purpose of the management in taking
appropriate decisions. The detailed objectives include:
a.Establishing the accuracy of the costing data, as for example, cost of material
used, allocation of wages into direct and indirect and on different products,
functions and cost centres.
b.Ensuring that the objectives of cost accounting are being achieved through
appropriate collection, segregation, analysis and compilation of data.
c.Ascertaining abnormal losses and gains along with the relevant causes, expressed
in financial terms in a manner that the person responsible for such loss or gain is
identified.
c. Determination of the unit cost of production in a precise but practicable manner.
d. Establishing proper overhead rates for absorption of overheads by various units of
costs so that the cost is properly ascertained and there is no significant over or under
recovery of expenses.
e. Fixation of contract price and the determination of the additional or supplementary
charge that can be raised against customers for alterations, etc

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2. Cost Audit on behalf of a Customer: In case of cost plus contracts, often the
buyer or the contractee insists on a cost audit to satisfy himself about the correct
ascertainment of cost. The provision for a cost audit in such a circumstance is put in
the relevant contract with the condition that the supplier or the contractor will extend
all co-operation to the cost auditor. The cost of production arrived at for this purpose
may differ from the cost of production ascertained for internal purposes.
3. Cost Audit on behalf of Government: Sometimes, government is approached
with requests for subsidies, protection, etc. Before taking a decision the government
may prefer to have the cost of production of the product determined on the basis of
cost audit to satisfy itself whether the need is genuine or the industry seeking
assistance is generally efficiently run. The government, of its own also may initiate
cost audit, in public interest to establish the fair price of any product.
4. Cost Audit by Trade Association: Where activities of a trade association include
maintenance of a price of the products manufactured by the member units or where
there is pooling or contribution arrangements, or uniform costing the trade association
may require the accuracy of costing information submitted by the member-units
checked. The trade association may seek full information on the costing system, level
of efficiency, utilisation of capacity, etc.
5.Under Companies Act: Section 148 of the Companies Act, 2013 empowers the
Government of India to order companies engaged in production, processing,
manufacturing or mining activities to maintain cost records in the prescribed manner
relating to utilisation of material, labour and other items of cost. This would enable
the management to identify the areas of inefficiencies and high costs and take
immediate corrective action.

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 Classification of Cost Audit
Cost audit can be classified as (i) Internal Audit & (ii) External or Statutory Audit.
Internal Audit:
Audit may be external, i.e., conducted by outside parties or it may be internal. Internal
audit is done by the auditor who is in the employment of the business, with the help
of his departmental staff The objectives and scope of internal audit differ from
concern to concern depending on the requirements of the managements. The
objectives of internal audit are the following:
to ensure that the business is being run according to plan;
a. to verify the correctness of accounts by vouching;
b. to check that the budgets have been prepared correctly;
c. to detect errors of omission, commission, and errors of principle, and to
prevent frauds and defalcations;
d. to check that forms and documents are executed regularly and submitted
punctually;
e. to ensure that accounting is done daily, as per schedule;
f. to check whether the routine and procedures are being following as per cost
plan;
g. to detect weaknesses of the system and remove them;
h. to see that there is no communication gap between top management and the
executives; the business policy and instructions are communicated to the
workers as scheduled and the managerial reports are submitted in time to the
management;
i. to verify the inventory control and check physically the stocks;
j. to compare the costs of products from period to period, analyse the causes of
variations and suggest ways and means to reduce and control costs; and

(i) External or Statutory Audit:

The external audit is conducted with a particular object in view, by the outside
auditors, and thus has a limited scope. It may be conducted by the Tribunal,
Government, Contractee, or Trade Association, but in each case the object is specific
and limited. The external auditor is not an employee of the company but an outside
party and he is responsible not to the company but to his appointing authority to whom
be submits his report.

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 CHAPTER – IV
BENEFITS OF COST AUDIT
In India, Government started verifying cost structures of the firms around 100 years
back when large firms were given contracts by Government of India on ―Cost Plus‖
basis.
The Companies Act 1956 vide Sec 209(1) (d) of the Act, prescribed maintenance of
Cost Records. In the year 1965, provisions related to Cost Audit were inserted vide
Sec 233 (B) of the Act. Under these provisions, cost audit was required to be done by
companies engaged in production, processing, mining and manufacture of various
products.
Government of India, Ministry of Corporate Affairs, vide order No.2/1/2008CL.V
dt.21st January 2008, constituted an Expert Group to review and suggest development
of cost accounting methodologies and standards to increase the competitiveness of
the Indian manufacturing sector and to advise the Government suitable measures for
the same. The recommendations of the Expert Group shifted the focus of the cost
records from ―rule based‖ to ―principle based‖.
The Companies Act 2013 also provides for maintenance of Cost Records and Cost
Audit under Sec 148(1) and 148(2) of the Companies Act,2013.
Cost Accounting Records help in decision making and guiding for better resource
management. It has also brought consciousness among Indian industries in the use of
cost information. Cost Accounting Records and Audit thereof is found useful to
Industry, Government, Tax Authorities, Investors and Consumers. Benefits to
Industry
1.Help to Management, Directors and Industry:
The Cost Accounting Records (CARR) and Audit thereof provides reliable and
authentic data to the management in understanding and taking decisions in following
areas:
a) Segment-wise performance and major costs affecting performance.
b) Product-wise performance and major costs affecting performance.
c) Internal Control Systems, their adequacy and improvement, if any.
d) Details of operational and non-operational income and expenses and its effect
on operational performance.
e) Make or Buy decisions.
f) Optimum utilization of resources: - Cost Audit improves efficiency of the

17
 organization by ensuring effective utilization of resources through the
analysis of cost data and avoidance of wastages highlighted by Cost Audit. It
helps in making the industry competitive both in the national and the global
market place and also leads to good corporate governance. Business
sustainability depends greatly on cost competitiveness.
g) Opportunities and threats: - Analysis of the data available in cost accounting
records helps management to understand the trend of sales realization,
behaviour of costs which helps management to understand the opportunities
and threats to the business, decide whether to continue production of
continuous loss making products, revival of business and overall
sustainability of business.

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1. Related Party Transactions:
The cost audit facilitates cost
information required for transfer pricing, inter unit transfers and transfers amongst
the related parties. The information in respect of international as well as domestic
transfer pricing can be derived from the cost records and audit thereof. It is pertinent
to note that the Tax Audit Report under Income Tax mandates submission of copy of
the Cost Audit Report. Thus the Cost Audit Report helps in cross checking the data
required for tax audit and helps in minimising litigations.
2. Quantitative Information:
In view of change in the Schedule VI information, Annual Report does not contain
any quantitative details. Under the circumstances, Cost Audit Report is the only
source which provides authentic data.
3. WTO and Anti-Dumping:
The companies, against whom the antidumping cases are filed, are required to prove
that their international selling prices are not less than indigenous cost. Similarly
lodging of complains against foreign rivals for dumping, etc. and determination of
compensation essentially requires a proper cost database.
4. Cost Accounting in Service sector:
The growth rate of service sector in India has brought new dynamism in Indian
economy. Also Service sectors such as IT & ITES, Banking, Insurance, Health
Services, Education, Hospitality management, communication, infrastructure related
services etc. have attained strategic importance to the economy and the public at
large. The cost advantages give tremendous edge to service sector in negotiating trade
prospect, give them competitive advantage and enable them to adopt scientific cost
management practices for a long-term sustained growth.

A) Benefits to Government
5. Helps the Government in Policy Making:
Cost data enables government in policy making e.g., Free Trade Agreements which
require analysis of cost data for each product for favourable negotiation, Anti-
Dumping which is based on verification of cost data of the industry, subsidies to
industries, Transfer pricing, pricing of scarce resources and the like.
The cost audit also helps the government in working out concessional rate, utilities
like power, water etc., loans at concessional rates and concessions in taxes in addition
to outright subsidies.

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6.Preventing Inventory Manipulation:
Cost accounting provides cost information for valuation of inventory based on cost
records maintained for each products/ services and gives no leverage to the
management in manipulating stock valuation. The cost audit report also requires the
cost auditor to report undervaluation/ over-valuation of opening/ closing stock in the
financial accounts and also to give reconciliation of profits between financial and cost
records.
B. Benefits to Regulators
8. Cost audit helps the regulators in fixation of prices /tariff based on reliable and
verifiable cost data leading to better regulation of industry keeping in view the
interests of the consumers. Cost Audit Reports are of immense use to the Regulators
and various agencies of the Government in areas like, subsidy determination,
administered pricing, predatory pricing, check price rigging, cartelization, of funds.
C. Banks and Financial Institutions

9. In cases of restructuring of loans or enhancements of facilities when the

performance of the companies is not up to the mark, banks and financial institutions,
among other things, ask for the Cost Audit Report. The cost audit report helps bank
to check the operating efficiency, working capital management, working below
capacity, inventory management, abnormal costs etc.
10. Cost Audit and cost records also help the corporate / bankers/ financial institutions
in deciding upon matters related to risk assessment and efficient risk management.

D. Protection of Investor’s Interest

11. The investors of a company are always interested in the working of the company
to know the prospect and safety of their investment. This essentially involves proper
utilization of materials, labour and other resources, waste reduction to ensure
maximum return on and reliability of investments made. Proper system of Cost Audit
ensures investor protection.
E.Benefits to Economy

12. In the absence of an integrated cost management culture, the cost of products and
services become avoidably prohibitive which lead to inflation, increase in current
account deficit and will also greatly impact the flow of Foreign Direct Investment
into the country which may decelerate the growth rate of Indian economy.

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F. Benefits to Consumers

The Cost Accounting helps the consumer in getting the commodities at a fair and
competitive price and also protects the consumers from unscrupulous trade practices.
Consumers are not against the profit earned by the manufacturer because it is
necessary for the survival and sustainability of the business. However, with the help
of cost records overpricing of the essential commodities, medicines can be arrested.

Conclusion

Considering the benefits of the cost audit to the various stakeholders and the cost of
the cost audit, it can be said that cost records and cost audit mechanism has made
formidable contribution in bringing cost effectiveness and cost consciousness
amongst industry.

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 CHAPTER – V
CASE STUDY OF THE COMPANY

Cost Audit and Assurance Standard (CAAS-101) on

“Planning an Audit of Cost Statements” defines
Cost Auditor:
Cost Auditor‖ means an auditor appointed to conduct an audit of cost records, under sub-
section (2) of section 233B of the Companies Act and shall be a cost accountant within the
meaning of The Cost and Works Accountants Act 1959. ―Cost Accountant‖ is a cost
accountant as defined in clause (b) of sub-section (1) of section 2 of The Cost and Works
Accountants Act, 1959 (23 of 1959) and who holds a valid certificate of practice under
subsection (1) of section 6 and who is deemed to be in practice under subsection (2) of
section 2 of that Act and includes a firm of cost accountants. Cost Auditor includes audit
partner.
Audit Partner:
Audit partner means the partner or other person in the firm who is a member of the
Institute of Cost Accountants of India and is in full time practice and is responsible
for the engagement and its performance, and for the report that is issued on behalf of
the firm, and who, where required, has the appropriate authority from a professional,
legal or regulatory body.

Audit Team:

Audit team means all personnel performing an engagement, including any experts
contracted by the firm in connection with that engagement.
Firm:
Firm means a sole practitioner, partnership including LLP or any other entity of cost
accountants as may be permitted by law and constituted under The Cost and Works
Accountants Act & Regulations.

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Information to be submitted by the Cost Auditors To Company for
Form 23C:
1. Consent Letter to be given by Cost Accountants Firm u/s 224 (1–B)
2. Income Tax PAN of Cost Auditor or Cost Auditors Firm
3. Institute of Cost Accountants of India Membership No. for the Cost Auditor or 4.
4. Cost Auditors Firm
Email– ID of Cost Auditor or Cost Auditors‘ Firm
Whether the previous Cost Auditor has been informed of the change (Applicable in
case of change of Cost Auditor)

Information of appointment of cost auditor of the company to Central

Government:
The Cost Auditor is required to inform the Central Government within thirty days of
receipt of formal letter of appointment from the Company. Such intimation is required
to be done in prescribed e-Form 23D along with a copy of such appointment letter.
In case the relevant Form 23C is filed on or after 01.05.2011, MCA21 system will
automatically display the details such as the category, Income-tax PAN, Name,
Membership number, address and email ID of the cost auditor. In case of any change
in address or email ID, the cost audit should enter the latest valid address or email ID
as the case may be. In case of Individual, details will be validated from the records of
Institute of Cost Accountant of India (Institute). The cost auditor filing the
information should ensure that the details being entered are updated as per Institute‘s
records. Further, the cost auditor should ensure that the email ID of the cost auditor
or cost auditor‘s firm is correct as all the future correspondence with the cost auditor
will be sent by Cost Audit Branch to this email id only.
Limits on number of audits of the company :

Companies amendment Act 1988 has introduced two important limits on number of
cost audits.' The first relates to the maximum number of audits and the second relates
to the distinction between part time practitioners and full time practitioners.
The provision to section 233B (2), introduced by the Amendment Act 1988,
apparently puts financial auditors and cost auditors on par as it requires a certificate
from the proposed cost auditor, in terms of Sec. 224(1 B), which was previously
required only from financial auditors. Sec. 224 limits number of audits per auditor, at
any point of time to twenty companies. It further stipulates that no one can be an

23
auditor of more than ten companies having paid up capital of Rupees twenty-five lack
or more.
Number of audits at a point of time & Tenure of company:
As the law provides that maximum number of companies for which a person can be
the auditor at a point of time cannot be more than twenty, it becomes important to
understand when the holding of appointment as cost auditor begins and when it ends.
As per the revised procedure, the appointment of cost auditor is by the company
through Audit Committee and finally by the Board of Directors, subject to the
approval of the Central Government. The question arises whether appointment begins
from the date of the resolution of the Board or only after the approval of the
Government.
As clarified by Master Circular No. 2/2011 dated 11th November, 2011, the specified
number of companies for the purpose of section 233B (2) read with section 224 (1B)
of the Companies Act, 1956 is to be computed for a given financial year with
reference to the number of companies wherein he has been appointed as the cost
auditor, including those wherein he is proposed to be appointed for which he has
given his consent

24
Communication to Previous Cost Auditor of the company:
The Cost and Works Accountants Act, 1959, the first schedule Part I, deals with
Professional misconduct in relation to cost accountants in practice.A cost accountant
in practice shall be deemed to be guilty of professional misconduct vide clause (8) of
Part I of the First Schedule to The Cost and Works Accountants Act, 1959 if he -
accepts a position as a cost accountant previously held by another cost accountant in
practice without first communicating him in writing.

Cost Auditor cannot be Internal Auditor of the same Company:

Master Circular No. 2/2011 dated 11th November 2011 issued by the Ministry of
Corporate Affairs clarified that as per provisions of the Cost Audit Report Rules that
are in force from time to time, a cost auditor is required to comment on the scope and
performance of internal audit of cost records. Hence, it would tend to mitigate against
the proper and dispassionate discharge of his duties if he was also the internal auditor
of the company for the same period for which he is conducting the cost audit. In view
of this, the cost auditor cannot also be the internal auditor of a company for the period
for which he is conducting the cost audit, irrespective of the fact whether he is
conducting cost audit for one or all of the company‘s product/ activities.

25
 CHAPTER – VI
COST AUDIT PLAN & PROGRAME

Planning for Cost Audit

Basically the cost audit is industry oriented; it lays stress on propriety of expenditure
and efficiency of performance. The cost auditor is required to comment, inter-alia, on
current operating performance and internal control system of the manufacturing unit
he is auditing and also recommends for improvement wherever felt necessary.
Therefore, it is essential that he should do his own homework, as illustrated below,
before commencing audit of the unit concerned: -

1) Cost Auditor should gather knowledge about the history, growth and organisational
structure of the unit he is auditing. It is expected that he has already collected relevant
data about the industry from the association/chamber, before starting audit.

2) He should study the existing system and procedures followed by the unit to
familiarise himself with the unit‘s manner of working.

3) He should collect information about the types of products, specialties of the products,
their cost structure and manufacturing process of the unit concerned.

4) He should also study the methods of cost accounting vis-a-vis financial accounting
adopted by the unit.

5) The system and extent of internal checks in the unit should be studied. The unit‘s
internal audit program-cum- report would be of much help to him.

6) He should prepare a list of his requirements of information, explanation etc. which

could be given to the management beforehand.

7) Such requirements would help in building up working notes for the purpose of giving
his opinions in the Cost Audit Report and also to answer the queries that might come
up from the Government after long interval. Illustrative list of requirements for Paper
unit may be as under:
a) Monthly quantity of purchase, issues and stocks of major raw materials, chemicals
etc.

26
b) Category wise (as per Para XVI of Schedule I of the Cost Accounting
c) Records Rules) monthly/yearly production in quantities.
d) Estimated or standard requirement of the raw materials in respect of the items in (a)
above, in quantity in relation to monthly/yearly production as in (b) above.
e) List of non-moving items of raw materials and spares (indigenous and imported
separately) lying in stock at year-end. Items not moved for 12/24 months for raw
materials and stores respectively and above to be listed with quantity and value.
f) Physical verification sheets or tags for work-in-progress as at beginning and closing
of the year.
g) Utilisation statement of important Multi-Purpose Vessels and Plants.
h) List of rate contracts for purchase of materials, transporting of goods, labour supplies
etc.
i) Cost Audit Programme
Introduction:

Cost Accounting Records (Paper) Rules 1975 as amended lay down the system and
procedures for maintenance of records with particular reference to the Paper products
covering the production, processing or manufacturing. The Rules prescribe guidelines
in general principle, for the companies to whom the Rules apply to maintain cost
accounting records in certain prescribed manners and particulars relating to utilisation
of materials, labour, overheads, machine utilisation, etc. The Rules prescribe
proforma of various cost statements showing the cost of production and cost of sales
of Paper products.
The Cost Auditor (Report) Rules 2001 has substituted the Cost Audit {Report) Rules
1996. The new Cost Audit (Report) Rules 2001 have been framed in broad terms and
provide guidelines for the cost audit indicating the areas in which the direct attention
of Cost Auditor is required.
The New Rules consist of 3 parts viz (a) Rules; (b) Form of the Cost Audit Report;
and (c) Annexure to the Cost Audit Report. For a proper and efficient

conducting of statutory cost audit, it is necessary for the Cost Auditor to acquaint
himself thoroughly with the relevant provisions in the Companies Act, 1956, the
provisions of the Records Rules and Cost Audit Report Rules, 2001.
Furnishing of Cost Accounting Records and Time Limit for Submission of Report as
per Rule 6 of the Cost Audit (Report) Rules 2001, the cost records, cost statements

27
and annexure to the Cost Audit report and other records are to be furnished to the
Cost Auditor within one hundred and thirty-five days from the end of financial year
as against within 90 days under earlier rales.
As per Rule 5 of the above Rules, the cost auditor shall submit his report to the Central
Government and to the concerned Company within 180 days from the end of the
Company‘s financial year to which the cost audit report relates. Non-adherence of the
time limit will attract penal provision.
Therefore, it is necessary for the cost auditor to chalk out his audit programme at least
in broad outlines before the commencement of the audit. As the audit progresses and
as the situation demands, he has to make suitable adjustments to the programme. He
has to use his discretion to decide on what items he should spend more time for a
study in depth and on what items the audit should be of a routine nature. As the work
progresses, he will also be in a position to determine the percentage of check required
for the different items to be covered in cost audit.

28
Materials:

1. Study the store accounting systems and procedures followed by the unit for
indenting, purchasing, receiving and inspection and delegation of powers to the
various authorities in this regard. Check the adequacy of the systems as appropriate
for inventory control.
2. Collect a set of documents/ proforma used for recording arrival of materials at the
factory, their acceptance into stock, issues for consumption, return and transfer of
materials between the departments and stores, physical verification of stocks, written
off unserviceable materials, etc., and check the system of linking the documents.
3. Examine the system of passing and payment of purchase bills to ensure that there
is no scope of fraudulent or duplicate payment
4. Examine and note any delays in accounting of materials after their receipt in the
factory.
5. Check whether the bin cards and individual material wise priced stock ledger are
maintained. Also examine whether the records for raw materials are maintained for
imported and indigenous supplies separately.
6. Check whether bin cards are posted chronologically and how often balances as per
bin card are compared with the priced stock ledger.
7. Check the serial number control of the documents for receipts, issues and returns
and transfers.
8. Examine the procedure for Issues of materials to the user departments.
9. Examine how losses of materials in storage and in process are accounted for and
whether these are satisfactory according to cost accounting principles accepted as
authoritative.
10. Scrutinize the transit losses register and verify the amounts reimbursed by the
Insurance Company.

29
Power Fuel and Utilities:
1) Check the records showing generation purchase of electricity, steam, chilled water,
treated water etc. and their distribution to various cost centers.
2) Check the correctness of various elements of costs of these utilities and compare
the unit cost of generation with budget or previous periods.
3) Also check that details in respect of major items each constituting at least 2% of
the total material cost relating fuel etc. has been furnished under para 7(A) of the
Annexure to the Report Rules and standard consumption of power and fuel per unit
of production under Para 7(B).
4) Verify the basis of distribution of the cost to various cost centers and assess
whether the bases are reasonable.

Labour, Salaries and Wages:

1) Review the system of recording of attendance at the Time Office and booking of
time in the department for all employees, i.e. direct, indirect and supervisory
personnel.
2) Study the classification of labour engaged in production and service departments
as also the reclassification within the production department into direct (treated as
variable) and indirect (treated as fixed).
3) Check the procedure for identification and booking of direct labour. A direct labour
may be utilized for part of a month as indirect labour in the same production
department or by transfer to service department.
Repairs and Maintenance:

1) Check and verify the expenses incurred on the repairs and maintenance of land
and building, plant and machinery, equipments, staff quarters and colony etc.
maintained by the company.
2) Check whether any expenditure on repairs and maintenance needs to be capitalised
and if so necessary details have been furnished under Para 9 of the Annexure.
3) Check the deferred amount of repairs and maintenance incurred in earlier years
and written off during the current year.
Fixed Assets Register and Depreciation:

1) Check the assets registers or records are maintained for each type of assets and
they show the locations, installation dates, original costs, written down value and rate

30
of depreciation charged
2) Verify the method of charging depreciation adopted by the unit.
3) Verify whether depreciation charged to cost accounts is more or less than the
amount of depreciation in accordance with provisions of sub• section (2) of Section
205 of the Companies Act, 1956. If it is more or less, it is better that quantum of
excess or under charge to be specified in cost records.
4) Check the department/cost centre wise asset values and amount of depreciation
according to the assets registers or records.
5) Check the basis for apportioning depreciation of common assets to various cost
centers and see that the basis used is reasonable and consistent.

6) Compare the amount of depreciation considered in financial accounts and

depreciation charged in cost accounts. This difference should appear in
Reconciliation Statement.
7) Check if the company has revalued the assets its impact is not included in the cost
of production.
8) Examine the lease agreement in case the company has taken on lease fixed asset
and verify the amount of lease rent paid thereof.

31
32
 Research and Development:

1) Check whether the unit under audit is a recognized R&D unit.

2) Verify the records maintained on R & D showing details of R & D work undertaken
and their costs.
3) Verify the procedure of classifying the R&D expenses into process development and
improvement, existing product development charging expenses to the cost of products.
4) Check the details furnished under para 13 of the Annexure to the Report Rules relating
to the amount capitalised/deferred during the year, deferred amount of earlier years, if
any and total amount provided in the cost of products.
5) Also examine the amount paid to related parties, if any under this head.

Royalty Technical Know:

1) Ascertain if any Royalty has been paid to Collaborator/Technology supplier. If it

is one-time payment/lump sum check the charge to cost of product is equitable and
reasonable.
2) Examine the Royalty agreement and check the details furnished under para 14 of
the Annexure to the Report Rules. The details are to be furnished in respect of each
agreement separately.
Quality Control Expenses:
Check whether the company has ISO certificate or not. If yes verify the certification
number, category in which the company is certified.
1) Check the amount incurred on the quality control, quality/ISDO audit etc. and their
treatment in the cost of product, as furnished under para 15 of the Annexure to the
Report Rules.

33
Pollution Control Expenses:

Examine whether company is complying with the various legislation provision in

regard pollution applicable to chemical industries.
1)Check the details of expenditure furnished under para 16 of the Annexure to the
report in respect of effluent treatment, control of air pollution and ash pound etc.
separately and its treatment in the cost of the product.
Sales of the Product under Reference:
1) Examine the system of preparation of sales invoices and recording of sales figures
in accounts.
2) Examine whether sales figures both in quantity and value for each type of product
is available by direct tabulation of invoices.
3) Verify the sales figures given under this para in the Annexure.
4) Verify the domestic and export sales of the product under cost audit.
5) Verify whether separate cost statements are maintained for export products.
6) Ensure that the deemed exports are treated appropriately.
7) Verify the quantities exported, the countries to which exported and the FOB value
of export (FOB values are to be treated as sales realisation as invoiced).
8) Examine that the basis of allocation and apportionment of expenses are in
uniformity with the home products.
9) Ensure that the value of export incentives, viz cash compensatory support, duty
draw back etc. are shown separately in the cost statement distinct from realisable
value.

34
Margin per Unit of Output:

1) Verify the margin per unit of output on domestic sale and export with reference to
cost statements
2) If sale is made under group of product, check and verify the margin per unit of
output of all the major group of products.
3) In case of significant variation in the margin compared to previous year, the
reasons for the same are ascertained and recorded.
Competitive Margin against Imports:
1) Examine whether detail in regard WTO requirements are maintained to assess its
competitiveness in global market for import/export.
2) Check the information furnished under this para in the annexure with the source of
information. Verify the cost of production details for domestic sale and export. This
information is required under WTO/antidumping exercise against dumping of the
goods.
3) The bound rate of various items under WTO agreement relevant to India is
available on the web at: http ://www.wto.org/englishitratope/inftece/india2.pdf.
Financial Position and Ratios:

4) Verify the ratios given under this para.

5) Examine the capital employed for the product with reference to Cost centre wise
fixed asset register and working capital required.
6) Verify the basis adopted for division of common assets e.g. Head office assets
value may be prorated on basis such as turnover, manpower, profitability of different
divisions or other suitable basis.

35
Capitalisation of Revenue Expenditure:

A Scrutinise the figures given under this para with reference to details given in
financial accounts.
B Verify whether share of overhead as applicable has been allocated.
C Verify the amount of capitalisation under various heads in the fixed asset register
such as Building, Plant and Machinery/equipment manufactured etc.
D Verify the amount of excise duty paid and capitalized.

Related Party Transactions:

1. Examine the appropriateness of the Transfer Policy adopted by the company for
charging the price on sale or on purchase from the company under the same
management.
2. Verify the details given under this para. If there is variation in the price charged
compared to normal price or transactions are not on an arm‘s length, the same may
be commented upon.
Central Excise Reconciliation:

3. Verify the details given in this para with reference to Form C (5), PLA and Excise
Duty paid as per Monthly Returns (ER 1).
4. Verify the amount of Cent vat available by the company during the year.
5. Examine the difference between duty paid and recovered if any. The reasons for
difference could be excise duty paid on free issues of samples, inter-factory transfer,
captively consumed goods, etc.
Cost Statements:

Examine that cost statements have been prepared as per requirements of Cost
Accounting Records Rules and Cost Audit Report Rules.
Standard Cost:

Where a system of standard costing is used, it should be ensured that such costs are
converted into actual for the purpose of determining the figures required to comply
with the requirements of Cost Accounting Record Rules. The cost Auditor should
study and examine the method of adjustment of variances to arrive at the actual cost
from the standard cost.

36
Authentication of the Annexure to the Cost Audit Report:
The annexure to the Cost Audit Report Rules 2001 containing 28 paras and Proforma
prescribed under the Rules has been authenticated and signed by the Company
Secretary and at least one of director on behalf of the Company. In the absence of
Company Secretary in the Company, the same shall be signed by at least two
directors.
Preparation of Report:

After conducting audit, the cost auditor should prepare his report and ensure that it
covers all areas as required under these two rules. It is also open to him to make
constructive recommendations for improvements wherever necessary for better
compliance of the requirements of the Rules. The report should be brief, to the point,
but complete in all aspects. The report should be discussed with the appropriate level
of the management before finalization so that misunderstanding and unnecessary
controversies can be avoided.

37
Scope of Cost Audit Certificate:

The scope of the Cost Audit certificate has been enlarged under the revised rules. The
Cost Auditor has to give his observations and suggestions on the following points:
a) Adequacy of cost accounting system including the system of inventory valuation;
b) Budgetary control system;
c) Matters which appear to be clearly wrong in principle or apparently unjustifiable;
d) Related party transaction;
e) Give Break-even point in case of company is incurring losses or when there is
decline in profitability;
f) Default on payment of dues to Government, financial institutions and bank etc.
g) Steps required strengthening the competitive environment;
h) Export commitment;
i) Internal audit of cost records;
j) Improvement in the performance in respect of Cost Control and Cost Reduction.
Form of the Cost Audit Report:

A Cost Audit Report duly authenticated by the Company Secretary and the Director
along with auditor‘s observations and suggestions, annexure and proforma is to be
submitted in the form of one hard copy and a soft copy.
B Department of Company Affairs has clarified vide its circular no.52/22/CBA-
2002 dated 26th November 2002 that soft copy of the report shall be submitted in
non- re-writable CD-ROM containing two files/parts.
C Part II of the soft copy shall consist of para 4 to para 28 of the annexure to the
cost audit report in worksheet form of Microsoft office Excel or compatible. No
reference whatsoever including identity/locations of the unit or the company should
find a place in the soft copy.
D The Cost auditor should put the Rubber stamp and initials on all pages and
initials for corrections therein, if any in the Cost Audit Report and Cost Statements
maintained by the organization after these have been authenticated by the company.
E Hard copy of the report should be properly bound.
F All working papers and other important papers should be properly filed and
indexed.

38
 CHAPTER – VII
STATUTORY COST AUDIT IN INDIA

Statutory Cost Audit in India

The Statutory cost audit was introduced for the first time in India by an amendment
of the Companies Act in 1965. The Duftri-Shastry Committee and the Vivian Bose
Enquiry Commission felt that the then existing provisions in the Companies Act were
not adequate to check the malpractices in the manufacturing, processing or mining
companies. As such the Companies Act was amended.
According to Section 209(1) (d) of the Companies Act, the Central Government may
require certain companies engaged in manufacturing, processing, production or
mining, to keep books of accounts pertaining to utilization of materials, labour and
other items of cost as may be prescribed. Section 209(1) (d) is reproduced below:
Section 209, Books of account to be kept by company

Every company shall keep at its registered office proper books of account with respect
to..............
In the case of a company pertaining to any class of companies engaged in production,
processing, manufacturing, or mining activities, such particulars relating to utilisation
of material or labour or to other items of cost as may be prescribed, if such class of
companies is required by the Central Government to include such particulars in the
books of account.
On perusal of the above section, it is clear that all the industries engaged in
manufacturing, processing or mining, etc., are not required to keep the books of
account, but only such companies or class of companies would do so as are required
by the Central Government, as a regular feature. The Central Government has by now
directed some 42 industries to keep books and maintain cost accounts. The Central
Government has framed Cost Accounting Record Rules pertaining to each industry
which are required to keep cost accounts and records according to this Section. To

name a few, such industries are: Cement, Cycle, Caustic soda, Tyres and tubes, Room
air-conditioners, Refrigerators, Electric lamps, Electric fans, Electric motors,
Fluorescent tubes, Automobile batteries, Motor vehicles, Tractors, Aluminium,

39
 Vanaspati, Bulk drugs, Sugar, Infant milk food, Industrial alcohol, Jute goods, Paper,
Rayon, Dyes, Soda ash, Cotton Textiles, Polyester, Nylon, Dry cell batteries,
Sulphuric Acid, etc. Many more industries will be covered in course of time if the
Central Government so desires.

Provisions Regarding Statutory Audit

Section 233B of the Companies Act empowers the Central Government to institute
Statutory Cost Audit in any company to which Section 209(1) (d) applies. It should
be noted that all the companies covered under section 209 are not subject to statutory
audit. Only such companies are subject to cost statutory audit as are required by the
Central Government to do so and which are covered by Section 209(l)(d). Section
233B is reproduced below:
Section 233-B, Audit of Cost accounts in certain cases
Where in the opinion of the Central Government it is necessary so to do in relation to
any company required under clause (d) of sub-section (1) of section 209 to include in
its books of account the particulars referred to therein, the Central Government may,
by order, direct that an audit of cost accounts of the company shall be conducted in
such manner as may be specified in the order by an auditor [Who shall be a cost
accountant within the meaning of the Cost and Works Accountant Act, 1959 (23 of
1959)] Provided that if the Central Government is of opinion that sufficient number
of cost accountants within the meaning of the Cost and Works Accountants Act, 1959
(23 of 1959) are not available for conducting the audit of the cost accounts of
companies generally, that Government may, by notification in the Official Gazette,
direct that for such period as may be specified in the said notification, such Chartered
Accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949),
as possesses the prescribed qualifications, may also conduct the audit of cost accounts
of companies, and there upon a Chartered accountant possessing the prescribed
qualifications may be appointed to audit the costs accounts of the company.

(1) The auditor under this section shall be appointed by the Board of directors of the
company in accordance with the provisions of sub-section (IB) of section 224 and
with the previous approval of Central Government: Provided that before the
appointment of any auditor is made by the Board, a written certificate shall be
obtained by the Board from the auditor proposed to be so appointed to the effect that

40
 the appointment, if made, will be in accordance with the provisions of sub- section
(IB) of Section 224.
(2) An audit, conducted by an auditor under this section shall be in addition to an audit
conducted by an auditor appointed under Section 224.
(3) An auditor shall have the same powers and duties in relation to an audit conducted by
him under this section as an auditor of a company has under sub-section (1) of section
227 and such auditor shall make his report to the Central Government in such form
and within such time as may be prescribed and shall also at the same time forward a
copy of the report to the company.
(4) (a) A person referred to in sub-section (3) or sub-section (4) of section 226 shall not
be appointed or re-appointed for conducting the audit of the cost accounts of a
company.
(5) A person appointed, under section 224, as an auditor of a company, shall not be
appointed or re-appointed for conducting the audit of the cost accounts of that
company.
(6) If a person, appointed for conducting the audit of cost accounts of a company;
becomes subject, after his appointment, to any of the disqualifications specified in
clause (a) or clause (b) of this sub-section, he shall, on and from the date on which he
becomes so subject, cease to conduct the audit of the cost accounts of the company
(7) Upon receipt of an order under sub-section (1), it shall be the duty of the company to
give all facilities and assistance to the person appointed for conducting the audit of
the cost accounts of the company.
(8) The company shall, within thirty days from the date of receipt of a copy of the report
referred to in sub-section (4) furnish the Central Government with full information
and explanations on every reservation or qualifications con-tamed in such report.
(9) If, after considering the report referred to in sub-section (4) and the information and
explanations furnished by the company under sub• section. (7), the Central
Government is of opinion that any further information or explanation is necessary,
that Government may call for such further information and explanation and thereupon
the company shall furnish the same within such time, as may be specified by that
Government.
(10) The Central Government may direct the company whose cost accounts have been
audited under this Section to circulate to its members, along with notice of annual
general meeting to be held for the first time after the submission of such report, the

41
whole or such portion of the said report as it may specify in this behalf.
(11) If default is made in complying with the provisions of this section, the company
shall be liable to be punished with fine which may extend to five thousand rupees,
and every officer of the company who is in default, shall he liable to be punished with
imprisonment for a term which may extend to three years, or with fine which may
extend to five thousand rupees, or with both.

42
Cost Audit Report
The cost Auditor makes his report (triplicate) in the prescribed form to the Central
Government within such time from the end of the financial year (presently it is 180
days) and copy of the said report is forwarded to the company in the prescribed
period. To enable the cost auditor to discharge his functions, the company is obliged
to give all facilities and assistance to the cost auditor. In this regard, the company and
its officers are required to make available to the cost auditor, within 90 days from the
end of the financial years, the cost accounting records, cost statements and other
books of account. If these documents are not made available within the prescribed
period, the cost auditor should inform the Central Government within 10 days of the
aforesaid time limit of 90 days [Refer Rule 6 of the Cost Audit (Report) Rules, 1996].

Action on the Cost Audit Report

The company within 30 days from the date of receipt of the cost audit report is
required to furnish full information and explanations on every reservation or
qualification, if any, contained in the audit report to the Central Government. The
cost auditor shall also give clarifications, if any, required by the Central Government
on his report within 30 days.
The Central Government on receipt of report and/or explanations etc., may take such
action as it may deem necessary. It may also direct the company to circulate the report
in whole or in part to its members along with the notice of the annual general meeting.
The Cost Audit (Report) Rules, 2001 [w.e.f. 1-10-2002]:

The Central Government has framed ―The Cost Audit (Report) Rules, 2001 [in
supersession of the Cost Audit (Report) Rules, 1996] as to audit of cost accounts. In
the Cost Audit Report, the cost auditor has to state whether he has examined the books
of account maintained under clause (d) of sub-
section (1) of section 209 of the Companies Act and other relevant records. The Cost
Auditor has also to report on certain matters, viz.
1. Whether he has obtained all information and explanations necessary for the
purpose of audit.
2. Whether proper cost accounting records as required under section 209 (1) (d)
have been kept by the company.
Whether proper returns adequate for the purpose of cost audit have been received

43
from branches not visited by him.

3. Whether the books and records give the information required by the Companies
Act, 1956 in the manner required.
4. Whether the company‘s cost accounting records have been properly kept so as to
give a true and fair view of the cost of production, processing, manufacturing or
mining activities and marketing of the product.
5. Whether the cost statement as specified in the Annexure/Proforma of Schedules I
to III as applicable of Cost Accounting (Records) Rules duly audited by him are
kept in the company.
The salient features of the Cost Audit (Report) Rules, 2001 are given below:
The Cost Audit Report is required to be submitted to the Central Government, in the
prescribed form, with a copy thereof to the company which is subject to Cost Audit,
within one hundred eighty days from the end of the company‘s financial year to
which the Cost Audit Report relates.
The clarifications, if any, required by the Central Government on the Cost Audit
Report shall be furnished by the Cost Auditor within thirty days of the receipt of the
communication in that regard.
The concerned company shall make available the cost accounting records to the
Cost Auditor within one hundred and thirty-five days from the end of the financial
year of the company.

44
COST AUDIT REPORT FORMAT
I/We................... having been appointed as auditors) under Section 233B of the
Companies Act, 1956 (1 to 1956) hereinafter referred to as that Cost Auditor(s)‘ of
Messrs.................. Ltd. (hereinafter referred to as the company), have examined the
books of accounts prescribed under clause (d) of sub-Section (1) of Section 209 of
the said Act and other relevant recordsfor the year
ended.............relating to. maintained by the company and report that:
a) I/We have obtained all the information and explanations which to the best of
my/our knowledge and belief were necessary for the purposes of this audit;

b) proper cost accounting records as required under clause (d) of sub-Section (1) of
Section 209 of the Companies Act, 1956 (1 of 1956) have been kept by the company;
c) proper returns adequate for the purpose of my/our cost audit have been received
from branches not visited by me/us;
d)t he said books and records give the information required by the Companies Act,
1956 (1 of 1956) in the manner so required; and
e) in my/our opinion the company‘s cost accounting records have been properly kept
so as to give a true and fair view of the cost of production, processing, manufacturing
or mining activities, as the case may be, and marketing of the product under reference.
The matters contained in the Annexure to this report form part of this report which is
also subject to my/our observations made therein.
Dates this.... day of.... 20.......at. @Cost Auditors(s).

45
ANNEXURE TO THE COST AUDIT REPORT
1. General:

Name and address of the registered office of the company whose accounts are
audited.
Name and address of the Cost Auditor.
1. Reference No. and date of Government Order under which the audit is conducted.
2. Date of the general meeting of the company in which the auditor under Section
233 B has been appointed.
3. The company‘s financial year for which the audit report is rendered.
4. Date of incorporation of the company, and its ‗status‘ (i.e., whether it is a public
company/private company / private company which is a subsidiary of a public
company etc.)
a. Location where accounts are maintained.

b. Location of Factory/Factories.

c. If there is any foreign technical collaboration for the product under reference,
attach a copy of the collaboration agreement. If this is not possible, prepare a brief
note indicating:

46
1. Name and address of the foreign collaborators.
Main terms of agreement.
2. Amount of Royalty/Technical aid fee payable and the basis of calculating the same.
3. Whether the technical collaborator has contributed to the share capital. If so, the
paid-up values of shares so held.
5. Licensed, installed and utilized capacities of the Factory/Factories for the product
under reference.
6. Date of first commencement of commercial production of the product under
reference (If more than one factory under the same company produces the product
under reference, particulars in respect of each may be given).
47. If the company is engaged in other activities besides of the other activities.
Cost Accounting System:
Briefly comment on the Cost Accounting system and its adequacy or otherwise to
determine correctly the cost of the product under reference.
Financial Position; Relating of the product under the reference if possible
otherwise company as a whole:
Capital Employed: Capital employed is defined as total assets at book values
(excluding investments outside the business) minus current liabilities.
Net worth: Net worth, i.e., Capital plus Reserves or Capital less losses, as the case
may be. If there is any change in the composition of the net worth during the year,
special mention may be made.
Profit before tax: Profit after providing for depreciation both other expenditure except
interest on borrowings and debentures but before providing for taxes on income.
(i) Expenses to be specified- the Amounts in respect of the following:
Annual bonus to employees.
Interest on borrowings and debentures etc.

Bad debts.
Donations of all kinds.
Retrenchment or other compensation to employees excluding premium on account of
workmen‘s compensation insurance.
Lay-off wages.
Expenditure on special exhibition etc.other normal trade advertisements.
1. Commission based on profit to Managerial personnel.

47
2. Income-tax and Surtax.
3.Any other item of expenditure the incidence of which is neither normal nor of a
recurring nature.
4.Income to be specified:
Interest received on investments outside the business.
Capital gains.
Any other income which is neither normal nor of a recurring nature.
Ratios:
Profit arrived at as per 3(3) above expressed as a percentage of:
Capital employed as per 3(1) above
Net sales.
Current assets expressed as a percentage of current liabilities.
Net worth expressed as a percentage of long-term borrowings and liabilities.
Net worth expressed as a percentage of capital employed as per 3(1) above.
Cost of Production as a percentage of:
Capital employed as per 3(1) above.
Working capital (i.e., current assets less current liabilities).

Production:

This information is to be given for each type of product under reference.

Production in quantities.
Indicate percentage of production of the product under reference in relation to the
installed capacity. If there is any shortfall in production as compared to the installed
capacity, comment briefly as to the reasons for the shortfall.
If there is any addition to the production during the year under review or in the
immediately preceding two years this may also be mentioned.
Process of Manufacture:

A brief note regarding the process of manufacture of the product under reference may
be given.
Raw Materials:

Show the cost of major raw materials consumed both in terms of quantity and value.
Where the cost of transport etc. of raw materials is significant, specify the same
separately.
(a) Consumption of major raw materials per unit of production compared with the

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standard requirement, if any.
(b) Explanations for variations if any, in the consumption of man or raw materials per unit of
production as compared to the preceding two years.
Briefly comment on the method of accounting followed for recording the quantities
and value of receipts, issues and balances of all materials directly- used in production.
Power and Fuel:

Quantity, rate per unit and total cost separately for each major form of power and fuel used
in production, e.g. coal, furnace oil, electricity etc. Compare the actual consumption per unit
of production with standards, if any. Special features, if any, may also be indicated

Wages and Salaries:

Total wages and salaries paid for all categories of employees, separately in respect of
each of the following:
Direct labour costs on production.
Indirect employee costs on production.
Employee costs on administration.
Employee costs on selling and distribution.
Other employee costs if any (specifying purpose).

Total employee costs [total of items (a) to (e) above].

Total man-days of direct labour available and actually worked for the year.
Average number of workers employed for the year.
Direct Labour cost per unit of output of the product under reference (if more than
one type of product, give information in respect of each).
Brief explanations for variations in (4) above, if any, as compared to the previous
two years.
Comments on the incentive schemes, if any, with particular reference to its
contributions towards increasing productivity and its effect on the cost of
production.
Stores and Spare Parts:
The expenditure per unit of output on stores etc.
Discuss the system of stores accounting for recording receipts, issues and balances,
both in quantities and values.
Indicate, if practicable, the proportion of closing inventory of stores representing
items which have not moved for over 24 months.

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Depreciation:

State the method of depreciation adopted by the company, e.g. straight line or
diminishing balance etc. State whether the depreciation provided by the company is
more or less than the amount of depreciation worked out inaccordance with provisions
of sub-Section (2) of Section 205 of the Companies Act, 1956.
State the basis of allocation of depreciation of common assets to the different
departments.
Indicate the basis of charging depreciation to the cost of products.

Overheads:

Give separately the total amounts of the following overheads and a break-up of items
(a), (b) and (c) below.
Factory overheads.
Administration overheads.
Selling and distribution overheads.
Interest.
Bonus to employees.
Commission to Managerial personnel.
State whether any amounts in respect of items (d), (e) or (1) have been included, in
the total amounts of items (a), (b) or (c) and give the amounts so included, if any.
Indicate reasons for any significant variations in the expenditure incurred against the
items included in overheads as compared with the previous two years.
State the basis of allocation of overheads to cost centers and of absorption to products.
Give brief comments, if any, on the basis of allocating adopted by the company.
Cost of packing, if any, of the products under reference to be shown separately with
details to the extent possible.
Royalty/Technical Aid Payments:
State the total amount of Royalty/Technical Aid Fees payable for the year and the
amount chargeable per unit of the product.
Sales:
Indicate the sales in quantities and net sales realisation of the products under reference
showing the average sales realisation per unit. (If more than one type of product is
sold, information to be given in respect of each).

50
If the product under reference is exported, indicate quantity exported, net realisation
per unit, countries to which exported—details may be given, indicate the profit/loss
incurred in exports.
Abnormal Non -Recurring Costs:

If there were any abnormal features affecting production during the year, e.g. strikes,
lockouts, major breakdowns in the plant, substantial power cuts,
serious accidents etc., they shall, wherever practicable, briefly mentioned indicating
their effect on the cost of production.
Other Items:
It there are any special expenses which have been directly allocated to products under
reference the total amount as also the unit incidence shall be shown.
Auditor’s Observations and Conclusions:
The cost auditor may here report on:
matters which appear to him to be clearly wrong in principle or apparently
unjustifiable
Cases where the company‘s funds have been used in a negligent or inefficient
manner;
Factors which could have been controlled, but have not been done resulting in
increase in the cost of production;
Contracts or agreements, if any, between the company and other parties relating to
selling, purchasing etc.
(i) the adequacy or otherwise of budgetary control system, if any, in vogue in the
company;
the scope and performance of internal audit, if any.
Suggestions for improvements in performance, if any, e.g., by—
Rectification of general imbalance in production facilities;
fuller utilisation of installed capacity;
Concentration on areas offering scope for—
Cost reduction
Increased productivity
Key limiting factors causing production ‗bottlenecks‘.
Improved inventory policies.
The opinions expressed shall be based on verified data, reference to which shall be
made here and shall, wherever practicable, be included after the company has been

51
afforded an opportunity to comment on them.
Copies of the cost statements in respect of completed products as given in Schedule
II of the relevant notification issued under clause (d) of subsection (I) of Section 209
of the Companies Act, 1956 duly completed and audited shall be appended to the
report.

If as a result of the examination of the books of account, the auditor desires to give a
qualified report, he shall indicate the extent to which he has to qualify the report and
the reasons therefore.
A statement showing the reconciliation of the profit or loss as indicated under 3(3)
above with the profit or loss relating to the product under reference as arrived at on
the basis of the cost statements annexed to the report and the net sales realization as
indicated in 13(1) above shall be appended to the report.
After the auditor appointed under Section 224 of the Companies Act, 1956 (1 of 1956)
submits his report, the cost auditor may, if he considers it necessary, submit a
supplementary report to the Central Government before the date fixed for holding the
annual general meeting of the Company. The supplementary reports shall be limited
to the extent of reconciling the statements annexed to the cost audit report with the
financial accounts of the Company.

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 Notes:
Figures to be given for the year under audit and to the extent practicable, for the two
preceding years.
If the company has more than one factory producing the product under reference,
details indicated in the annexure may be given separately for each factory, if such
details are available.
If different varieties/types of products under reference are manufactured by the
company, details of cost in respect of each shall be given.
The matters contained in the annexure shall be duly authenticated by the cost
auditor.

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 CHAPTER –VI
CONCLUSION
With the growth and development of cost accounting system, it became necessary to
maintain cost records and cost books to record costs and the related transactions
correctly. It is necessary that either in financial accounting or in cost accounting or in
management accounting system, wherever books and records are kept, they must be
examined independently to ensure that they have been kept and recorded fairly and
correctly and that there are no errors of omission and commission and there are no
defalcations. So once the cost accounts are prepared, they should be audited in all
fairness.
Financial accounting and cost accounting are the two main branches of accounting
system. The same criteria and principles of audit hold good in both the systems of
accounting and sometimes it becomes difficult to make clear-cut distinction between
the two audits. However, an auditor of financial accounting is more concerned with
financial aspects, recording of cash and bank transactions, capital, debtors, creditors,
assets & liabilities, etc., while the cost auditor is more concerned with correct
recording, ascertainment, presentation and control of costs.
In order to reap the benefit of cost audit, it is necessary that it should be done in its
entirety and should be continuously done. Before commencement of audit, the costing
method and technique adopted should be examined. The list of various sheet,
documents, schedules, statements etc. related to cost and cost records and books
should be obtained. It should be examined whether the work of internal control is
effectively being done. It should also be seen that what is the object for conducting
the audit, and scope of audit, nature and size of business. In case if the size of the
business is very large, then the function of book• keeping and accounting and internal
control system should be very effectively organized.

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Thus the concept and scope of cost audit in India is much wider as the definition lays
much emphasis on the evaluation of the efficiency of operations and the propriety of
management actions and decisions, and executive programs and policies. In this
sense, cost audit appears to be synonymous with efficiency audit.
Considering the benefits of the cost audit to the various stakeholders and the cost of
the cost audit, it can be said that cost records and cost audit mechanism has made
formidable contribution in bringing cost effectiveness and cost consciousness
amongst industry.
Basically the cost audit is industry oriented; it lays stress on propriety of expenditure
and efficiency of performance. The cost auditor is required to comment, inter-alia, on
current operating performance and internal control system of the manufacturing unit
he is auditing and also recommends for improvement wherever felt necessary.
Therefore, it is essential that he should do his own homework.
After doing his homework, the Cost Auditor should draw out in detail a suitable plan
of audit, which should cover audit of various elements of cost and sales as prescribed
in the rules. The Cost Auditor shall discuss his audit programme with concerned
officials of the company so as to ensure the availability of the concerned officials at
the office as well as at the factory.
The company within 30 days from the date of receipt of the cost audit report is
required to furnish full information and explanations on every reservation or
qualification, if any, contained in the audit report to the Central Government. The
cost auditor shall also give clarifications, if any, required by the Central Government
on his report within 30 days.
The Central Government on receipt of report and/or explanations etc., may take such
action as it may deem necessary. It may also direct the company to circulate the report
in whole or in part to its members along with the notice of the annual general meeting.

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 BIBLIOGRAPHY

Advanced Auditing and Professional Ethics Vol.1. (2007). Dr. T. P. Ghosh, Director
of Studies, ICAI.
Ainapure, C., & Ainapure, C. (2017). Advanced Auditing. Manan Prakashan.

Basu, D. K. (2006). Auditing Principles And Techniques. Dorling Kindersley (India)

Pvt. Ltd.
Cost Effectiveness through Cost Audit. ICAI-CMA & CII Knowledge Study.

Exposure Draft of Guidance Note on Cost Audit (Form II). "Professional

Development Committee" of the Institute of Cost Accountants of India.

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