Mca 3RD Semestermod

``
MANAGEMENT AND COST AUDIT
S.G.A Government PG&Degree College

Code – 0354 Yellamanchili
M.COM 3rd SEMESTER

Study material
Mail id: gelli.santhoshkumar@gmail.com

Blog – gellicapreprationblogspot.com
1.SGAGDC (0354) Ph-9491853132

``
1. Explain about management audit and objectives ,scope ,advantages

,Limitations.
Ans:
Audit:
Management audit is a method of independent and systematic evaluation of the management-
activities at .all levels of management to ascertain the functions, efficiency and achievement of' the
management (i.e. policies) as compared to standards set by the company.
According to L. R. Howard, "Management audit is an investigation of business from the highest

level downward in order to ascertain whether sound management prevails throughout, thus
facilitating the most effective relationship with outside world and smooth running of internal
organization."
As per Taylor and Perry; "Management auditing is a method to evaluate the efficiency
of management at all levels throughout the organization, or more specifically, it comprises the
investigation of a business by an independent body from the highest executive level downwards, in
order to ascertain whether sound management prevails through and to report as to its efficiency or
otherwise with recommendations to ensure its effectiveness where such is not the case."
Scope of Management Audit:

The scope of management audit is much wider than financial audit because management
audit evaluates not only financial audit but also other aspects of the business. It is the method of
evaluating the total efficiency of the management from the top level to the lowest level.
Therefore, the main scope of management audit is:
1. Evaluate the Efficiency of the Management: Management· audit evaluates and appraises the
efficiency of the management at all levels.
2. Implementation of Principles and Policies of the Management: Management auditreview

whether principles and policies formulated by the management have been successfully
implemented or not.
3. Find Variances: It detects the variances in efficiency with the standards set by the management.
4. Analyze the Reasons for Variances: Management audit analyze the reasons for inefficiencies of
the management for not fulfilling the targets.
5. Recommend Suggestions for Improvement: It gives suggestions for improvement in the areas
e.g. production, sales, purchase, finance, human resources, administration etc.
Need and Objectives of Management Audit:

Management audit is the total audit of the management i.e. reviews how the policies of
the management have been implemented and its efficiency to execute the policy. Therefore,
the scope is much greater than financial audit, as it examines the all aspects of
the management. Management audit has some objectives. These are discussed below:
2.SGAGDC (0354) Ph-9491853132

``
1. Verifying the Efficiency: Management audit aims at to assess the efficiency at all levels
of management and implementation of policies.
2. Gives Suggestion for Increase in Efficiency: Management audit highlights the inefficiencies in
different areas of management and gives his valuable suggestions and means to improve the
efficiencies.
3. Asses the Effectiveness of Planning and Policies: Management audit examine andevaluates the
plans and policies and judge whether planning and policies are properly implemented.
4. Helps to Increase Profitability: Management audit helps the management to increase

profitability by giving remedies to maximize the organization's resources in an efficient way.
5. Helps to Co-Ordinate Activities: Management audit detects the interrelationship among the
activities, evaluates the authority and responsibility and gives valuable suggestions for
improvement of co- ordination among the activities and the employees.
6. Gives Valuable Advice: By scanning the management efficiency and detecting the weak spots of
different levels of management, the management auditor gives valuable advice to the
top management regarding different policies and future course of action.
Advantages or Importance of Management Audit:

There are several advantages of conducting management audit of an organization. When an
organization grows in its volume and activities, there is a need for management audit for
evaluating efficiency and effectiveness of the management at all levels of the organization. The
advantages and importance of management audit are discussed below:
1. Evaluates Efficiency of the Management: Management audit is a method of

independent and 'systematic evaluation of the management activities at all levels
of management to ascertain the functions, efficiency and achievement of the management (i.e.
policies) as compared to standards set by the company.
2. Scrutiny of the Plans, Policies and Procedure: Management audit helps to determine how
the management has implemented their plans, policies and procedure to reach the organizations
goal.
3. Helps for Correction of Plans, Policies and Procedure: Through management audit, it is possible
to change or revise the plans, policies and procedure as per needs of the company.
4. Aids for Decision Making: Management audit asses the ability of the managers to take
important decisions and helps them to rectify the defects.
5. Helps to Get Loan: Financial institutions who gives huge loan to the organizations are interested
to know the efficiency of the management and the profitability. Management audit certainly gives
a guide to them.
3.SGAGDC (0354) Ph-9491853132

``
6. Helps to Get Subsidy: Before granting subsidy by the government, to any entity they are
interested to know the efficiency and functioning of the management. Management audithelps in
this matter.
7. Helps to Increase Profitability: Management audit helps the management to increase

profitability by giving remedies to maximize the organization's resources in an efficient way.
Limitations of Management Audit:

1. The management audit is audit of the management, by the management, and for
the management. The management auditors are selected by the management itself. Such auditors
may or may not be able to handle the job assigned to them.
2. The management auditors are generally familiar with the organization and the staff and
employees. The personal aspects cannot be overlooked in such audits. Some may use this audit to
level the score with someone while other may utilize it to favor someone.
3.They are more likely to take the facts for granted and may not probe into depth to investigate the
matter any further.
4.Time and cost constraints may limit the scope, operation and extent of such audits.
5.The management audit team as selected by the management may not look, act and work as a
team. Conflicting interests, attitude and inclination may jeopardize the entire objective of the audit.
2.Cost Audit Meaning, Objectives, Advantages and
Disadvantages
Ans:
Cost Audit:
It is an audit process for verifying the cost of manufacture or production of any article, on
the basis of accounts as regards utilization of material or labour or other items of costs,
maintained by the company. In simple words the term cost audit means a systematic and
accurate verification of the cost accounts and records and checking of adherence to the
objectives of the cost accounting.
As per ICWA London’ “cost audit is the verification of the correctness of cost accounts
and of the adherence to the cost accounting plan.”
The ICWAI defines cost audit as “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"
From above definition of cost audit, it is clear that cost audit is a systematic examination
of cost accounts to verify correctness of cost accounting records.
As per the section 233 B of Company Law 1956, there is the provision for cost audit.
Under this section, cost audit is compulsory for all the public and govt. companies which
4.SGAGDC (0354) Ph-9491853132

``
are associated with the processing and production. If there aggregate value of net worth
exceeds 5 crores or total sale exceeds 20 crores, the cost audit is must.
Objectives of Cost Audit

The following are some of the objectives for which cost audit is under taken:
1. To establish the accuracy of costing data. This is done by verifying the arithmetical
accuracy of cost accounting entries in the books of accounts.
2. To ensure that cost accounting principles are governed by the management objectives
and these are strictly adhered in preparing cost accounts.
3. To ensure that cost accounts are correct and also to detect errors, frauds and wrong
practice in the existing system.
4. To check up the general working of the costing department of the organization and to
make suggestions for improvement.
5. To help the management in taking correct decisions on certain important matters i.e.
to determine the actual cost of production when the goods are ready.
6. To reduce the amount of detailed checking by the external auditor if effective internal
cost audit system is in operation.
Advantages of Cost Audit:

To The Management
1. Cost audit helps in detection of errors and frauds.
2. The management gets accurate and reliable data based on which they can make day-
to-day decisions like price fixation.
3. It helps in cost control and cost reduction.
4. It facilitates the system of standard costing and budgetary control.
5. It helps the management in inter-unit / firm comparison.
6. It enables the management to identify loss making propositions.
To The Government
1. Cost audit ensures efficient functioning of the industry. This in turn, nurtures a healthy
competition among the different companies and paves a path for fast progress.
2. It helps in identification of sick units and enables the Government to make relevant
decisions.
3. It helps in fixing prices in the case of essential commodities and checking undue
profiteering.
4. It enables to take decisions as to granting of subsidies, incentives and protection to
various industries.
5. It helps to take decisions as to levies, duties and taxes.
To the Society
1. Cost audit enables the Government to fix prices of essential commodities. This
safeguards the interests of the society.
2. Cost audit enables the Government to keep a check on undue profiteering by the
manufacturers and avoids artificial price rise due to monopolistic tendencies.
To the Shareholders
1. Cost audit reveals whether any of the products of the company are making losses.
Thus though the company making an overall profit, a loss making line may eat up the
5.SGAGDC (0354) Ph-9491853132

``
company’s profits. This is brought to the notice of the shareholders and the management
is forced to take remedial measures, thereby making optimum utilisation of resources.
2. Cost audit ensures that the shareholders get a fair return on their investments.
Disadvantages of Cost Audit:

1. Holding a Cost Audit can be expensive. This is because a company will often bring in
an independent auditor who are normally charging higher price.
2. A Cost Audit can be a long process which will likely involve more time. This extra time
and effort can impact an employee's day to day routine work.
3. If a Cost Audit is carried out in order to find fraudulent activity it can take a long time
by which time people stealing could have covered their tracks.
4. Cost Audits involve a large amount of estimation and so there is the possibility that
figures will be incorrect and if record keeping from the company is not good to start with
then inaccuracies will be arises.
Q.3.Types of cost audit.
Ans:
Types of Cost Audit:
The main types of Cost audit are the following:
(i) Cost Audit as an Aid to Management:
The aim is to see that all information placed before management is relevant, reliable and prompt so
that management can discharge its duties well. It must also be seen that no relevant or pertinent
information is suppressed.
(ii) Cost Audit on Behalf of a Customer:

Often contracts are placed on “Cost Plus” basis. In other words, the customer will determine the
final price to be paid on the basis of exact cost plus an agreed margin of profit. The customer, in
such a case, usually gets cost accounts of the product concerned audited to establish correct cost
and, therefore, price.
(iii) Cost Audit on Behalf of Government:

Sometimes the Government is approached with request for financial help or protection. Before
taking a decision on the request, the Government may choose to get cost accounts of the applicant
audited to establish whether the need for help is genuine or is a result of mere inefficiency.
(iv) Cost Audit under Statute:
The Amendment Act of 1965 has inserted a new section, 233B, in the Companies Act, 1956
whereby the Central Government may order that certain classes of companies will get their cost
accounts audited by a member of the Institute of Cost and Works Accounts of India. Only such
companies as are required to maintain proper records regarding materials consumed, labour and
other expenses under Section 209 (as amended to date) and may be required to get their cost
accounts audited.
6.SGAGDC (0354) Ph-9491853132

``
The powers and duties and manner of appointment of the cost auditor are the same as that of
external financial auditor and the same disqualifications will apply. The cost auditor will submit
his report to the Company Law Board with a copy to the company. The right to investigate all
aspects of cost accounts is presumably granted to the cost auditor.
The aim of cost audit under statute seems to be that the Government wishes to know, as an
instrument of control, the costs of various goods. Government has the power to prescribe the forms
in which cost audit reports are to be made out. These are designed not only to verify information,
but also to convey good deal of information to Government.
(v) Cost Audit on Behalf of the Trade Association:

Sometimes trade associations seek to maintain prices at a certain level. For this purpose, the
accuracy of costing information submitted by various concerns has to be checked. The trade
associations may seek to have full information about production capacity and the relative
efficiency of productive processes.
Q.4.What is the difference between financial audit and
cost audit?
Ans: Financial Accounting and Cost Accounting are two branches of the accounting
system. The same criterion holds well so far as the distinction between cost audit and
financial audit is concerned.
Thus, in principle there exists difference but it is difficult to make a clear-cut distinction
between cost audit and financial audit in practice.
An auditor, whether of cost accounts or of financial accounts, is very much concerned

with financial aspect of each and every business transaction. In cost audit, he is expected
mainly to concentrate on the items comprising cost structure whereas in financial audit he
has to examine the terms of financial accounts, such as capital creditors and debtors,
other assets, etc. This, however, leads to the following points of distinction:
1. Audit of Financial Accounts has been made statutorily compulsory by the Companies
Act, 1956 while Cost Audit is not compulsory except in certain cases, i.e., in case of
companies which carry on manufacturing or mining business which are required to
maintain Cost Accounts under Sec. 209(1) (b) of the Companies Act and to get their
accounts audited under Sec. 233B.
2. In financial audit, the auditor is required to report on the Profit and Loss Account and
Balance Sheet as to whether the former exhibits the true picture of profit or loss and
under the latter, he has to certify whether the expenditure involved has been incurred
7.SGAGDC (0354) Ph-9491853132

``
prudently or not. He has to find out the cost of manufacture of each unit of goods or
articles.
3. The Financial Auditor is required to examine that the business transactions have been
recorded correctly but the Cost Auditor has to see that the decision in accordance with
which the transactions have been made, have been taken wisely.
4. The Financial Auditor sees that the expenses incurred are properly authorised and are
supported with proper vouchers while the Cost Auditor ensures that the expenditure
incurred has been aimed at achieving better results.
5. The Cost Auditor is concerned with the scrutiny of reliability or otherwise of

transactions and the Cost Auditor is concerned with the propriety and efficiency thereof.
6. For closing stock, the Financial Auditor has to verify it and to ensure that it has been
correctly valued for the purpose of Balance Sheet but the Cost Auditor has to verify its
adequacy or otherwise to meet the needs of the organization.
7. In financial audit, the transactions made and recorded in the financial books are
checked while in cost audit, an advice is made available for the future on the basis of
previous records and experience.
8. The financial audit exhibits whether correct profits have been arrived at or not, but in
cost audit, the possibilities of earning more profits under the present circumstances are to
be explored.
9. Financial audit is usually conducted by the owners of an industrial enterprise but the
cost audit is ordered at the instance of outside parties such as the Government, Industrial
Tribunals, customers, etc.
10. A financial Auditor has to certify the arithmetical accuracy of Ledger entries and
castings but a Cost Auditor has to consider the storage cost.
11. In financial audit, the financial aspect of accounts is the matter of concern but in cost
audit, the cost aspect of accounts is of main concern.
12. The job of a Financial Auditor is to conduct the checking in the office and to submit his
report to the management on whose behalf he has conducted the audit but a Cost Auditor
has to examine the working in the factory and to report to the Company Law Board and
also to the company.
8.SGAGDC (0354) Ph-9491853132

``
13. The financial auditor is appointed normally by the shareholders in General Meeting
while the Statutory Cost Auditor is appointed by the Board of Directors with the previous
approval of the Central Government.
14. The financial audit is conducted every year while cost audit is conducted whenever
such a step is required to be undertaken by the Government or Industrial Tribunal.
15. The financial audit is a sort of post-mortem audit while cost audit is forward-looking
i.e., it has tendency to make suggestions for future
Q.5.Explain about the importance of internal audit of
cost records.
Ans :
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 costaccounts of the company shall be conducted in such manner as may be specified in the
order by a cost accountant.
Under section 233B of the Companies Act, 1956, orders are issued for
conducting audit of costaccounting records in accordance with the prevailing Cost Audit Report
Rules. Prior to the CostAudit Orders issued on 2nd May, 2011 and 3rd May, 2011, individual
orders were being issued to the respective companies for each product covered.
However, Ministry of Corporate Affairs vide F. No. 52/26/CAB-2010 dated 2nd
May, 2011 and 3rd May, 2011 has issued industry specific Cost Audit Orders subject to
certain conditions of Net Worth/Turnover of companies to which any of the 14
specified Cost Accounting Records Rules contained therein applied. No
individual Cost Audit Orders are being issued hence onwards. A Cost Auditor may be
appointed for conducting the audit of cost records by the companies
covered by orders issued under section 233B of the Companies Act, 1956.
What is the importance of Internal Audit of Cost Records?
Internal Cost audit is viewed as an instrument for ‘continuous improvement’. It is akin to
‘efficiency audit’. Internal Audit of Cost Records aims to provide an assurance to the management
and the government that the company is maintaining appropriate cost records as prescribed by law
and to identify waste of resources, if any. Thus, it identifies processes and activities where
improvements are necessary to optimise the productivity of resources.
The Report of the Internal Cost Auditor provides useful insights into the weaknesses in processes
and activities and also provides inputs in formulating plans for continuous improvement in
utilisation of resources.
Q.6Management Audit, Purpose, Scope, Advantages, Disadvantages.

Ans:
Meaning:Management audit is a systematic evaluation of the functioning performance and
effectiveness of management of an organization. It a thorough-going, critical and constructive
review of the quality of management. It is generally conducted at the instance of the management.
9.SGAGDC (0354) Ph-9491853132

``
Definition of Management Audit:

1. “Management Audit would……………… concern itself with the whole field of
activities of the concern, from top to bottom, starting, as always, where management
control is concerned, from the top, because we are primarily concerned with where
the general management is functioning smoothly and satisfactorily.” [T. G. Rose]
2. “The Management Audit may be defined as a comprehensive and constructive
examination of an organisation structure of a company, institution or branch of
Government, or of any component thereof, such as a division or department, and its
plans and objectives, its means of operation and its use of human and physical
facilities.” [William P. Leonard]
Purpose of Management Audit

The purpose of management audit is to assess whether the integrated
management system which are required to fulfill the agreed and legal
obligations of the company to its customers and community are being
effectively implemented and the true and fair presentation of results of
such an examination. It also aims at knowing
1. the efficiency with which all aspects or process of management are
being carried out with a view to ensure management that it is getting the
assigned job properly done,
2. the control systems introduced are functioning properly, and
3. the management itself is discharging its functions properly. It tells the
management the areas where these are to be strengthened.
Scope of Management Audit

The scope of management audit is very wide. Jakson Martindell of
the American Institute of Management identified ten areas of
management audit. They are:
1.Organizational Structure,
2.Appraisal of the Executives,
3.Functioning of the Board,
10.SGAGDC (0354) Ph-9491853132

``
4.Soundness of Earnings,
5.Economic Functioning,
6.Service to Shareholders,
7.R&D,
8.Fiscal Policy,
9.Efficiency in Production, and
10.Sales.
Scope of Management Audit:
The scope of management audit is much wider than financial audit because
management audit evaluates not only financial audit but also other aspects of the
business. It is the method of evaluating the total efficiency of the management from
the top level to the lowest level. Therefore, the main scope of management audit is:
1. Evaluate the Efficiency of the Management: Management· audit evaluates and

appraises the efficiency of the management at all levels.
2. Implementation of Principles and Policies of the Management: Management

audit review whether principles and policies formulated by the management have
been successfully implemented or not.
3. Find Variances: It detects the variances in efficiency with the standards set by
the management.
4. Analyze the Reasons for Variances: Management audit analyze the reasons for
inefficiencies of the management for not fulfilling the targets.
5. Recommend Suggestions for Improvement: It gives suggestions for

improvement in the areas e.g. production, sales, purchase, finance, human resources,
administration etc.
Need and Objectives of Management Audit:
Management audit is the total audit of the management i.e. reviews how the
policies of the management have been implemented and its efficiency to
execute the policy. Therefore, the scope is much greater than financial audit,
as it examines the all aspects of the management. Management audit has
some objectives. These are discussed below:
11.SGAGDC (0354) Ph-9491853132

``
1.Verifying the Efficiency: Management audit aims at to assess the

efficiency at all levels of management and implementation of policies.
2.Gives Suggestion for Increase in

Efficiency: Management audit highlights the inefficiencies in different areas
of management and gives his valuable suggestions and means to improve the
efficiencies.
3.Asses the Effectiveness of Planning and

Policies: Management audit examine and evaluates the plans and policies
and judge whether planning and policies are properly implemented.
4. Helps to Increase Profitability: Management audithelps

the management to increase profitability by giving remedies to maximize the
organization's resources in an efficient way.
5.Helps to CoOrdinate Activities: Management audit detects the

interrelationship among the activities, evaluates the authority and
responsibility and gives valuable suggestions for improvement of co ordination
among the activities and the employees.
6.Gives Valuable Advice: By scanning the management efficiency and

detecting the weak spots of different levels of management,
the management auditor gives valuable advice to the
top management regarding different policies and future course of action.
Advantages or Importance of Management Audit:
There are several advantages of conducting management audit of an
organization. When an organization grows in its volume and activities, there is
a need for management audit for evaluating efficiency and effectiveness of
the management at all levels of the organization. The advantages and
importance of management audit are discussed below:
1.Evaluates Efficiency of the Management: Management audit is a

method of independent and 'systematic evaluation of
the management activities at all levels of management to ascertain the
functions, efficiency and achievement of the management (i.e. policies) as
compared to standards set by the company.
12.SGAGDC (0354) Ph-9491853132

``
2.Scrutiny of the Plans, Policies and Procedure: Management audit helps
to determine how the management has implemented their plans, policies and
procedure to reach the organizations goal.
3.Helps for Correction of Plans, Policies and

Procedure: Through management audit, it is possible to change or revise the
plans, policies and procedure as per needs of the company.
4.Aids for Decision Making: Management audit asses the ability of the

managers to take important decisions and helps them to rectify the defects.
5.Helps to Get Loan: Financial institutions who gives huge loan to the
organizations are interested to know the efficiency of the management and the
profitability. Management auditcertainly gives a guide to them.
6.Helps to Get Subsidy: Before granting subsidy by the government, to any
entity they are interested to know the efficiency and functioning of the
management. Management audithelps in this matter.
7.Helps to Increase Profitability: Management audit helps

the management to increase profitability by giving remedies to maximize the
organization's resources in an efficient way.
Limitations of Management Audit:
1.The management audit is audit of the management, by the management,
and for the management. The management auditors are selected by the
management itself. Such auditors may or may not be able to handle the job
assigned to them.
2.The management auditors are generally familiar with the organization and
the staff and employees. The personal aspects cannot be overlooked in
such audits. Some may use this audit to level the score with someone while
other may utilize it to favour someone.
3.They are more likely to take the facts for granted and may not probe into
depth to investigate the matter any further.
13.SGAGDC (0354) Ph-9491853132

``
4.Time and cost constraints may limit the scope, operation and extent of such
audits.
5.The management audit:team as selected by the management may not look,

act and work as a team. Conflicting interests, attitude and inclination may
jeopardize the entire objective of the audit.
Q.7.What is the difference between statutory audit and
management audit?
Ans:
Though there is an accountant in all organizations to record the financial

transactions and for general book keeping, companies have to pass through an audit that
is a sort of scrutiny of the financial statements of the company prepared by the
accountant. This statutory audit is carried out under the provisions of the Companies Act.
This statutory audit is a tool to safeguard the interests of the shareholders of the
company to ensure that that the organization is performing satisfactorily financially.
However, there are companies that get performed an internal audit also to ensure they
are following the rules and regulations of accounting and to verify the statements
prepared by accountants. There are many differences in
an internal audit and statutory audit and these will be highlighted in this article.
14.SGAGDC (0354) Ph-9491853132

``
Internal audit is not mandatory and it is the choice of the management of the company to
get it done by its internal auditors. Management does not want to be red faced in case of
any irregularities when statutory audit is conducted which is why, to keep a check on the
operations of the company, internalaudit is done. Whether an internal audit has been
carried out or not, statutory audit is done that comments on the effectiveness of the
financial statements of the company. It is necessary to ensure that the company is
following the rules and regulations in maintaining its books and there is no compromise
with the financial interests of the shareholders.
The most obvious difference lies in the appointment of the auditor. While internal auditors
are appointed by the management of the company, statutory auditors are appointed by
the shareholders of the company. Another difference lies in the qualifications of
the auditors. While it is mandatory for statutory auditors to be certified chartered
accountants, it is not necessary for internal audit and the management may appoint
persons it deems fit.
The main objective of statutory audit is to give a fair and impartial assessment of the
financial performance of the organization while at the same time try to spot any
discrepancies and frauds. Internal audit also tries to detect any anomalies and errors that
may have crept in the financial statements. There is no way internal management can
change the scope of statutory audit as is the case with internal audit where the mutual
consent of the management and the auditors is enough to decide the scope of
the audit exercise. While the auditors of a statutory audit submit their final report to the
shareholders in their general meeting, the report of the internal audit is handed over to
the management by the auditors. Once appointed, statutory auditor is extremely hard to
get removed andthe management has to take permission of the central government after
its board of directors recommends a proposal to this effect. On the other hand,
management can at any time remove internalauditors.
Q.8.Five Elements of an Effective Audit Planning Process.

Ans:
Benjamin Franklin famously said: "By failing to prepare, you are preparing to fail."
Indeed, one of the most common causes of unsuccessful audits is inadequate
planning. Too often, audit staff commitments to current engagements become an
obstacle to planning the next engagement. I would submit that delaying an audit is
preferable to not investing the proper amount of time into planning for it.
1. Research the Audit Area

It is essential to understand the business process or function to be audited. If not familiar with it,
thoroughly research the process or function to fully understand the subject matter. Review internal
procedures, search the Internet for resources, and seek help from subject matter experts.
2. Maintain Open Communications Throughout the Planning Process
15.SGAGDC (0354) Ph-9491853132

``
The sooner the audit team reaches out to the auditee, the better. There is a certain amount of
trepidation involved in any audit. Working with an auditee prior to the audit helps ease concerns
the auditee may have. Communicating in person is always preferable. If this is not possible,
telephone calls are the next best thing. Avoid communicating by email if possible.
3. Conduct Process Walk-Throughs
Armed with a working understanding of the process or function, conduct a face-to-face walk
through with the auditee. Identify key business objectives, methods employed to meet objectives,
and applicable rules or regulations. A walkthrough may include a tour of facilities. You may gather
background information relative to the nature, purpose, volume, size, or complexity of automated
systems, processes, or organizational structure. You might scan documents or records for general
condition. All these activities provide opportunities to interface with the auditee and build rapport
before the formal entrance conference.
4. Map Risks to the Organization, Process, or Function
Ask the auditee what his concerns are, what "keeps him up at night." Through research and
interviews, identify risks to meeting business objectives and controls employed to mitigate those
risks. Rate risks with the auditee based on probability of occurrence and potential impact. Consider
control design, gaps, or mitigating factors to determine if the control system effectively mitigates
risks.
5. Obtain Data Prior to Fieldwork
This has become a principal focus for us recently. We emphasize data in our initial requests for
information. We perform data analytics before we begin field work. Identifying anomalies to
confirm a condition or weakness early helps us target testing and optimize sample selections.
Q.9.Write power and duties of cost auditor.
Ans:
Rights and Powers of a Cost Auditor:

According to Section 233B (4) of the Companies Act, 1956, the cost 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 Section 227(1) 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’.
Thus, the cost auditor has the same rights and powers as that of a financial auditor.
16.SGAGDC (0354) Ph-9491853132

``
The rights and powers of a cost auditor may be summarised as follows:

1. A right of access at all times to the books of accounts and vouchers of the
company, whether kept at the head office of the company or elsewhere.
2. A right to require and receive from the officers of the company such
information and explanations as he may think necessary for the successful
performance of his duties as a cost auditor of a company.
3. A right to visit branch offices and factories of a company, and to receive proper
returns therefrom as may be necessary for the conduct of his cost audit.
4. A right to receive such cost accounting records, cost statements and other
books and papers as would be necessary for cost audit within 90 days of the
financial year of the company.
5. A right to seek and enjoy assistance and facilities from the company so that he can
successfully complete his audit.
6. A right to receive remuneration from the company for his function as
a costauditor.
7. A right to receive notice and to attend the general meeting of the company.
:
8. A right to have technical and legal advice whenever necessary in connection with
his work of cost audit.
9. A right to sign on the cost audit report and a right to send his report to the Central
Government as well as to the company.
Duties of a Cost Auditor:

The provisions of the Companies Act, the Cost Audit (Report) Rules,
the Costand Works Accountants Act and Regulations, and the different laws that are
applicable on a particular company or companies govern the duties of a CostAuditor.
The duties may be described as follows:
17.SGAGDC (0354) Ph-9491853132

``
1. He should submit his Cost Audit Report to the Central Government within one
hundred and eighty days from the end of the company’s financial year to which such
report relates, and a copy of the said report to the company.
2. He should clearly state, in his report, that:
(a) He has obtained all the information and explanations relating to the costaccounts
which to the best of his knowledge and belief were necessary for the purposes of
the cost audit.
(b) Proper cost accounting records as required under the relevant CostAccounting
(Records) Rules have been kept by the company.
(c) Proper returns adequate for the purpose of his cost audit have been received from
the branches not visited by him.
(d) The books and records kept by the company give the information in the manner
required by the Companies Act, and
(e) In his 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, and marketing of the product.
3. He should also qualify his report to the extent it differs, where he is not satisfied
with any of the provisions stated above.
4. He should, if he considers it necessary after submission of his report, submit a
supplementary report, to the Central Government before the date fixed for folding
the annual general meeting of the company, limited to the extent of reconciliation of
the cost statements with the company’s financial accounts.
5. He should assist the Government in the latter’s investigation process being
launched for the purpose of examining the affairs of the company.
6. He should keep records of various errors or omissions and commissions done by
the client staff.
7. He should give necessary advice to the company about the irregularities in the
maintenance and recording of cost accounts books and statements.
18.SGAGDC (0354) Ph-9491853132

``
8. He should understand and appraise the company’s

policies and procedures and systems adopted for the purpose of controlling
wastages andinefficiencies.
9. He should see and ensure what other exceptional duties are cast upon him by the
Articles of the company.
10. He should owe his duty of care primarily to the company, act
honestly andsincerely and maintain the secrecy and confidentiality of his client, and
11. Lastly, he has a continuing duty to maintain his professional knowledge and skill
at a level conducive to act as a cost auditor competently.
Q.10 Appointment of cost auditor procedure.
Ans:The following article is an Detailed Explanation of Cost Auditor Under the
Companies Act 2013. Cost Auditor Meaning, Appointment of Cost Auditor, Procedure for
Appointment of Cost Auditor, Removal of Cost Auditor and Cost Auditor Remuneration
Explained in the Article Under the Companies Act 2013. The provisions relating
to appointment of cost auditors’ appointment are dealt in Companies (Cost Record and
Audit) Rules, 2014.
The category of companies specified in rule 3 and the thresholds limits laid down in rule 4, shall
within one hundred and eighty days of the commencement of every financial year, appoint a cost
auditor. “Cost auditor” means a Cost Accountant in practice, as defined in clause (b), who is
appointed by the Board [Rule 6].
Introduction
•A cost Accountant in practice or a firm of cost accountants can be appointed as a cost
auditor.
•A cost accountant holding certificate of practiced on part time basis is not entitled to
conduct cost audit. Thus, only a cost accountant in whole-time practice can conduct cost
audit.
•Statutory Auditor appointed under Section 139 of the Act can’t be appointed as Cost
Auditor of the Company
19.SGAGDC (0354) Ph-9491853132

``
Appointment of Cost Auditor: Procedure
The category of companies specified in rule 3 and the thresholds limits laid down in rule 4
of Companies (Cost Records and Audit) Rules, 2014, shall within one hundred and eighty
days of the commencement of every financial year, appoint a cost auditor.
1.The audit committee, if constituted by the company shall ensure that the cost
auditor is free from any dis qualifications.
2.The audit committee shall obtain a certificate from the cost auditor certifying his
independence.
3.Every company referred to in sub-rule (1) shall inform the cost auditor concerned
of his or its appointment as such and file a notice of such appointment with the
Central Government within a period of thirty days of the Board meeting in which
such appointment is made or within a period of one hundred and eighty days of the
commencement of the financial year, whichever is earlier, through electronic mode,
in form CRA-2, along with the fee as specified in Companies (Registration Offices
and Fees) Rules, 2014.
4.On filing the application, the same shall be deemed to be approved by the Central
Government, unless contrary is heard within 30 days from the date of filing of such
application.
5.If within thirty days from the date of filing of such application, the Central Government
directs the company to re-submit the said application with additional information the period
of thirty days for deemed approval of the Central Government shall be counted from the
date of re-submission by the company.
6.After the expiry of thirty days, the company shall issue formal letter of appointment to
the cost auditor.
7.The audit committee, if constituted by the company recommends to the Board a
suitable remuneration to be paid to the cost auditor. In the case of those companies
which are not required to constitute an audit committee, the Board shall consider
and approve the remuneration of the Cost Auditor which shall be ratified by
shareholders subsequently.
8.Every cost auditor appointed as such shall continue in such capacity till the expiry of one
hundred and eighty days from the closure of the financial year or till he submits the cost
audit report, for the financial year for which he has been appointed.
9.Every cost auditor, who conducts an audit of the cost records of a company, shall
submit the cost audit report along with his or its reservations or qualifications or
observations or suggestions, if any, in form CRA-3.
10.Every cost auditor shall forward his report to the Board of Directors of the company
within a period of one hundred and eighty days from the closure of the financial year to
which the report relates and the Board of directors shall consider and examine such report
particularly any reservation or qualification contained therein.
11.Every company covered under these rules shall, within a period of thirty days from the
date of receipt of a copy of the cost audit report, furnish the Central Government with such
report alongwith full information and explanation on every reservation or qualification
20.SGAGDC (0354) Ph-9491853132

``
contained therein, in form CRA-4 along with fees specified in the Companies (Registration
Offices and Fees) Rules, 2014.
12.The company shall 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.
13.In those companies, where constitution of Audit Committee is not required by law, then
the role of Audit Committee shall be discharged by the Board of Directors.
14.The provisions of sub-section (12) of section 143 of the Act and the relevant rules made
thereunder shall apply mutatis mutandis to a cost auditor during performance of his
functions under section 148 of the Act and these rules.
Information for Appointment of Cost Auditor
i. Information to Cost Auditor: Every Company which requires appointment of Cost
Auditor shall inform the Cost auditor of his appointment within 30 days of Board Meeting
in which resolution for appointment has passed.
ii. Information to ROC: Company will file form CRA-2 with ROC:
1.Within 30 days of passing of Resolution in Board Meeting, OR
2.Within 180 days of the commencement of financial year.
3.Whichever is earlier.
Cost Auditor Remuneration ( Salary )

Rule 14 of Companies (Audit and Auditors) Rules, 2014 deals with Remuneration of the
Cost Auditor. For the purpose of sub-section (3) of section 148, –
1.in the case of companies which are required to constitute an audit committee-
1.the Board shall appoint an individual, who is a cost accountant in practice,
or a firm of cost accountants in practice, as cost auditor on the
recommendations of the Audit committee, which shall also
recommend remuneration for such cost auditor;
2.the remuneration recommended by the Audit Committee under (i) shall be
considered and approved by the Board of Directors and ratified subsequently by the
shareholders;
2.in the case of other companies which are not required to constitute an audit committee,
the Board shall appoint an individual who is a cost accountant in practice or a firm of cost
accountants in practice as cost auditor and the remuneration of such cost auditor shall be
ratified by shareholders subsequently.
21.SGAGDC (0354) Ph-9491853132

``
Q.11.Explain about Removal of Cost Auditor procedure.
Ans:
Removal of Cost Auditor:
The cost auditor appointed may be removed from his office before the expiry of his term,
through a board resolution after giving a reasonable opportunity of being heard to the Cost
Auditor and recording the reasons for such removal in writing
Appointment of Cost Auditor in case of Casual Vacancy:
i. Any casual vacancy in the office of a cost auditor whether due to resignation, death or
removal, shall be filed by the Board of Directors within 30 days of such Vacancy.
ii. Company will file form CRA-2 with ROC within said 30 days.
Period by which appointment to be made-Rule 6(1)
The concerned companies shall appoint the Cost Auditor within 180 days of the
commencement of every financial year.
Limit of number of Cost Auditor:
Limit of number of audit per person, as are applicable to Statutory Auditors are applicable
to Cost Auditors.
Qualifications, Rights, Duties and obligations of Cost Auditor:
The qualification, disqualification, rights, duties and obligations of Cost Auditor/firm of
Cost Auditor are same as applicable to Statutory Auditors.
Procedure for Removal

1. Special notice: The shareholder who intends to remove the auditor, shall give 14 days notice
(Special notice) to the company, informing his intention to remove the auditor by passing a
resolution in the general meeting.
2. Communication to the retiring auditor: The company on receipt of such notice, should send a
copy to the retiring auditor.
3. Representation by retiring auditor: The retiring auditor can make a written representation, not
exceeding a reasonable length, to the company, regarding his proposed removal. He may also
request the company to circulate his representation to the members. The company should send a
copy of the representation of the auditor to the shareholders, either along with the notice to
22.SGAGDC (0354) Ph-9491853132

``
meeting or subsequently. The company is required to send the representation to the shareholders
only if the representation is made by the auditor within a reasonable time.
4. Representation to be read: If the representation is not circulated to the shareholders,
the auditor may require that his representation be read out in the general meeting.
5. Right to attend the meeting: The auditor who is proposed to be removed has an inherent right
to attend the general meeting. He can also make an oral statement at the meeting as to his
proposed removal.
6. Not to abuse the right: The above privileges are extended to the auditor to protect his
independence and to prevent his unjust removal. However, if the Company Law Board is satisfied
that his right to make a representation is likely to be abused by him by way of seeking unwarranted
publicity for a defamatory matter, the CLB may order that the representation may not be read out
or circulated to the shareholders. In this regard, the company or any other aggrieved party may
apply to Company Law Board seeking the direction of the Company Law Board.
Q.12.Professional Ethics Prescribed for the Members in
Practice
Ans: This article throws light upon the six main professional ethics prescribed by the
I.C.W.A.I for the members in practice (Cost Accountants). Some of the Professional Ethics
are: 1. Independence, Integrity, Objectivity 2. Responsibility to Clients and Confidentiality 3.
Responsibilities to Colleagues 4. Responsibilities to Practice and Profession including Firm
Name, Service Holding, Designation etc and a few others.
Professional Ethic # 1. Independence, Integrity, Objectivity:

A member shall be straightforward, honest and sincere in his approach to professional work.
A member must be fair and must not allow prejudice or bias to over-ride objectivity and should
maintain impartial attitude while reporting on cost and financial statements.
A member should be and should appear to be free of any interest which might be regarded as being
incompatible with integrity and objectivity.
To ensure independence, a member shall not have substantial financial involvement in client’s
affairs/business.
If a member has any family/personal relationship with the client, it should be disclosed.
Professional Ethic # 2. Responsibility to Clients and Confidentiality:

A member should respect confidentiality of information acquired in course of work and should not
disclose any such information to a third party without specific authority/consent of client or unless
there is a legal/professional right/duty to disclosure.
23.SGAGDC (0354) Ph-9491853132

``
Confidential information not to be used for personal gain or gain of a third party. It is obligatory to
ensure that employees/assistants of the member or individuals from whom the member obtains
advice/assistance faithfully respect the principle of confidentiality.
Professional Ethic # 3. Responsibilities to Colleagues:

No practising member shall directly or indirectly solicit business.
If a practising member is approached by a client of another member to give services or advice of a
special character, communication must be made to the other member of the circumstances.
A practising member receiving an engagement for services under referral from another member
shall not go beyond the extent of that engagement without consulting the referring member.
If a member is approached to replace another member, that appointment must not be accepted
without first communicating with the previous or existing holder of office and ascertaining
existence of any professional reason necessitating such change; and
Communication in all cases must be made before acceptance of appointment.
Professional Ethic # 4. Responsibilities to Practice and Profession including Firm Name,

Service Holding, Designation etc.:
In case a Practicing Member/Firm maintains branch office in India, each shall be under separate
charge of a member of ICWAI.
A Practising Member is guilty of professional misconduct if:
a. The Practising Member allows any person to practice in the former’s name or allows such
person to sign any financial/cost statement or certificate on his behalf unless the latter is a member
in practice and is in partnership with or employed by the former.
b. The Practising Member pays, allows or agrees to pay, directly or indirectly any
share/commission/brokerage in the fees/profits of his professional business to any person other
than a member or a partner/a retired partner/legal representative of a deceased partner.
c. The Practising Member engages in any other business and occupation excluding those allowed
by a General or Specific Resolution of the Council of the Institute.
d. The Practicing Member certifies or submits in his name or in a firm name a report of an
examination of financial/cost statements unless examination of such statements and related records
are done by him or by a partner or employee of his firm or by another practising member.
e. Members to restrict use of trade/firm name to proper names and not to adopt any other name.
The firm name shall not be fictitious, indicative of specialisation or misleading as to the type of
organization.
24.SGAGDC (0354) Ph-9491853132

``
Professional Ethic # 5. Competence and Technical Standards:

Members are duty bound to carry out professional work with care and skill and in conformity with
the technical and professional standards prescribed by the related professional body or legislation
of the country. Members are to accept professional work only within their professional
competence.
Professional Ethic # 6. Publicity, Fees and Allied Issues:

Soliciting of Clients and Professional Work:
Following are prohibited:
a. Soliciting of clients/professional work, personal communication/interview by any means.
b. Responding to tenders/advertisements/circulars inviting quotation for professional work (not
applicable on enquiry by Government Company/Government Depts./Banks/Co-op. Societies,
Institutions).
c. Soliciting of professional work by making roving enquiry and making offer for employment
against advertisement.
d. Advertising for employment or for sub-contract/agency work.
e. Any advertisement or note to public/press that amounts to soliciting or canvassing.
Fees:
Following are prohibited:
a. To charge/offer to charge/accept/offer to accept any fee for professional work as a percentage of
profit or which are contingent upon the findings and results of such work.
b. To obtain professional work-through having quoted for that purpose a fee lower than that
charged by the cost accountant previously carrying out that work.
Publicity to Professional Attainment and Firm:
(a) Following are prohibited:
i. Advertisement of own professional attainment/services.
ii. Use of any designation/description other than degrees of universities established by law in India
or accepted by Central Government or membership of ICWAI/ professional Institutes recognised
by Central Government or other degrees/titles permitted by the Council.
iii. Press publicity to appointment as an auditor,
(b) Following are permitted:
i. Advertising changes in address/partnerships, dissolutions.
25.SGAGDC (0354) Ph-9491853132

``
ii. Entry into Telephone Directory to classified list under group heading limited to Cost
Accountants provided that all members of the area have access to such entry of own name whether
with or without payment of additional charges, where Telephone Authorities include in the
Directory a separate section with names of subscribers arranged according to group classification.
iii. Personal discussion/correspondence with prospective clients relating to achievements and
capabilities.
iv. Telephone Directory entry in block type permitted but entry in other directories or similar
publications shall not be a leaded type.
v. Publicity to member’s appointment to positions of local/national importance is encouraged (but
firm name shall be avoided).
vi. Notice to press—examination success of candidates belonging to a firm (without giving undue
publicity to the firm).
Following are allowed provided that prominence of display is not unusual:
a. Advertisement for staff/trainee in own office.
b. Advertisement on behalf of clients requiring staff or wishing to acquire/dispose of property
business.
c. Advertisement for sale of business/property with the practising member acting as
trustee/liquidator.
d. (In case of advertisement for staff, member’s name in the advertisement can be mentioned once
only as a part of forwarding address).
e. Publication of any document certified by the practising member (provided that nature and extent
of such publication justifies the purpose of publication).
Q.13.Write planning of cost audit.
Ans: General:
(i)Cost Audit should be planned with professional care, recognizing that circumstances may exist
to cause the cost statements to be materially misstated. For example, management will be
providing cost accounting information in the Schedules and Annexures prescribed in the cost
accounting record orders/rules, and also statements regarding capacity and inventories. The cost
auditor will be finding evidence to support the information provided, but he is not to assume it is
necessarily correct.
(ii) The cost audit should be so programmed and conducted as to provide reasonable assurance that
the cost information provided in the Schedules and Annexures, taken as a whole, are free
26.SGAGDC (0354) Ph-9491853132

``
from material misstatement. Reasonable assurance is a concept relating to the accumulation of

audit evidence, necessary or the cost auditor to conclude that there are no material
misstatements in the cost accounting information and statements, taken as a whole. The concept
relates to the whole audit process.
(iii) Acquiring an undertaking of the industry, studying the clients organizational set-up and the
cost accounting control exercised over the various elements of cost are all a part of conducting
the cost audit procedures, However, to planning cost audit the personnel requirements of an
assignment, documentation of the cost audit procedures and of audit evidence and quality
control exercised over performing cost audit are briefly discussed here.
This chapter relates to the planning done in the cost auditors office and the documentation, which
has to be looked after by the cost audit staff.
Personnel:
Cost audit is to be assigned to personnel who have the degree of technical training and proficiency
required in the circumstances. The personnel needs should be planned, keeping in view the staffing
and timing requirements of specific cost audit. Qualifications of personnel as to experience,
position, background and special expertise should be evaluated.
Care should be exercised in not assigning any staff, who may have any disqualifying relationship.
The following aspects of personnel are also to be considered:
Experience:
Experience and training of cost audit personnel should be considered, particularly keeping the
relevant industry in view, as the cost and management accounting procedures and techniques
considerably differ on the basis of the nature and type of industry. Earlier cost audit or
other practical experience of the industry helps in carrying out cost audit of a unit of that industry,
possible cost accounting and auditing problems that may affect the cost audit routine procedures
that they are to perform. The cost audit programme, in providing the time budget and the overall
audit plan should also prove helpful in providing necessary audit directions.
Directions:
Supervision involves both direction and review of audit work. Personnel carrying out supervisory
responsibilities generally perform the following functions during cost audit:
a) monitor the progress of the cost audit, also assess:
i) the assistants have the necessary skills and competence to carry out their assigned tasks;
ii) assistants understand the cost audit directions; and
iii) the cost audit is being carried out according to the overall cost audit plan and the cost audit
programme.
27.SGAGDC (0354) Ph-9491853132

``
b) stay aware of the cost accounting and cost auditing questions, raised during the cost audit,
assess their significance and modify the cost audit plan and the cost audit programme, as
considered necessary; and
c) remove any differences of professional judgment between personnel and decide the level to
which making reference is appropriate.
Documentation:
The cost auditor should document all matters which are important in
providing evidence in support the opinion given in the cost audit report. Documentation here
means the working papers prepared by and for, or obtained and retained by the cost auditor in
connection with the performance of cost audit. Working papers record the audit evidence, resulting
from the cost audit work performed, to support the cost auditors opinion. Although the extent of
working papers in matter of professional judgment, to cover the detailed aspects of the cost audit,
it may include the daily work sheets or daily diary maintained by each member of the cost audit
staff engaged on the assignment.
The daily work sheets should include queries raised, with whom each was discussed; and how, and
if they were, satisfied. The form and content of the working papers will be determined by the
nature and complexity of the business, nature and condition of the entity’s cost accounting and
internal control systems.
Use of standardized working papers, (such as checklists, confirmation forms, standard letters etc.)
may improve the efficiency with which such working papers are prepared and reviewed.
Standardized working papers facilitate delegation of work and provide a means to control quality
of work. Schedules, statements, analyses and other document prepared by the entity may be
utilized and made a part of the cost audit working papers, only after being satisfied that the
materials have been properly prepared with due care.
Confidentiality of Working Paper:
The cost auditor should adopt appropriate procedure “for maintaining the confidentiality and safe
custody of the working-papers and for retaining them for a period sufficient to meet the needs of
the practice and in accordance with legal and professional requirements of record retention.
Working papers are the property of the cost auditor. Although portions of extracts from the
working papers may be made available to the entity at the direction of the cost. auditor, they are no
substitute for the cost accounting records, that the entity has to maintain under the cost accounting
records orders rules, applicable to the industry.
Working Paper Management
Working paper management improves the cost audit productivity. The essential aspect of such
management is quick retrieval of information from the files of working papers. The filing system
should be sound. Normally working papers are organized into: Permanent file, Working file and
28.SGAGDC (0354) Ph-9491853132

``
correspondence and administrative file. Papers which normally do not change from year to year
are kept in the permanent file. Permanent file will have write up on the organization,
manufacturing process etc. The permanent file is updated at the beginning of every audit, making
changes, if any, since the previous audit. Working paper file contains details relating to the year of
audit. There will bear separate working paper file for every year. This file should be properly
indexed and divided into convenient sections. File management is a matter of personal preference
Of the cost auditor.
Quality Control:
Quality Control policies and procedures should be implemented at both the level of the cost audit
firm and on the level of individual cost audits.
The cost auditor should implement quality control policies and procedures designed to ensure that
all cost audits are conducted in accordance with international audit standards or relevant
national standards or practices. Quality control procedures, to a large extent, depend on strict
adherences to the laws, orders and rules applicable to cost audits. The objectives of the quality
control policies and procedures include professional requirements, skills and competence,
assigning work to personal having technical training and proficiency, providing sufficient
direction, adequate supervision and review of work. Every cost auditor has to continuously,
monitor that the quality control policies and procedures are being followed and the quality of work
is being effectively achieved. Quality control policies and procedures should not only be
communicated to personnel but also explained and some training provided to them to ensure
communicated to personnel but also explained and some training provided to them to ensure that
the policies and procedures are understood and implemented. The cost auditor and his staff
members with supervisory responsibilities will consider the professional competence of assistants
performing work delegated to them, when deciding the extent of direction, supervision and review
appropriate for each assistant. Any delegation of work to assistants should be on the basis of
reasonable assurance that such work will be done with due care by persons having the degree of
professional competence required in the circumstances.
Q.14.Auditing Cost Accounting Records.
Ans:
This top ten check points for auditing costaccounting records. Some of the check points are: 1.
Direct Materials, Including Process Materials 2. Finished and Semi-Finished Components 3.
Consumable Stores Tools and Spares 4. Wastages, Spoilages, Defectives, Rejection, etc. 5. Salaries
and Wages 6. Depreciation 7. Work-in-Progress and Finished Goods Stock and a few others.
Check Points for Auditing Cost Accounting Records:

1.Direct Materials, Including Process Materials
29.SGAGDC (0354) Ph-9491853132

``
2.Finished and Semi-Finished Components

3.Consumable Stores Tools and Spares
4.Wastages, Spoilages, Defectives, Rejection, etc.
5.Salaries and Wages
6.Depreciation
7.Work-in-Progress and Finished Goods Stock
8.Stock Verification
9.Production Records
10.Statistical Statements/Records
Check Point # 1. Direct Materials, Including Process Materials:

A. Requirements as per Cost Accounting Records Rules:
(a) Keeping in view the nature of industry, records showing the receipts, issues and balances both
in quantity and value in, respect of all items of Direct material (viz. Raw materials), including the
Process materials should be maintained. That means, a ‘Priced Ledger’ showing the above details
are required to be kept, so also the Bin cards (without value) or Stock cards.
(b) The valuation should be made taking into account all expenses up to works. A summary
distribution, on ad-hoc or other basis, of freight, insurance, etc., at the year end is not permissible.
The expenses have to be linked up with receipts.
(c) The element of transport cost of Raw material should be separately identified.
(d) A consistent procedure for the valuation of the issues of these materials for consumption is also
prescribed. So for costing purposes, net consumption has to be arrived at after adjustment of
unused stocks lying at the production site.
(e) Wastage, spoilages, rejections, losses, etc., whether in transit, storage, manufacture or for other
reason should be shown separately. The method followed for adjustments and the income derived
from the disposal of rejected and waste materials in determining the cost should be indicated.
B. The Cost Auditor should keep in mind the following:

(a) Ensure 100% checking of the Raw materials and the Process materials as they constitute a
major part of the total cost;
(b) Collect all documents connected with the receipts, issues, and stock-taking reports, check-up
the entries in the Priced Ledgers and examine evaluations or receipts with reference to the relevant
bills and Goods (Materials) Receipt Notes;
(c) Examine reconciliation of Materials Ledger at Cost Accounts Department with the Bin cards at
the Godown;
30.SGAGDC (0354) Ph-9491853132

``
(d) Ensure that the freight and other incidental expenses are added to each category of the
materials;
(e) Ensure that Materials Receipt Notes have pre-printed serial Nos. and that all are accounted for;
(f) Ensure that the materials received at year-end have been taken either as Receipts or at least as
Materials in transit;
(g) Examine the procedure for issue of materials, system of authorisation and movement;
(h) Check-up the posting of issues in the Ledger and Bin cards;
(i) Ensure that the Ledger contains the correct figure of opening balance in quantity and value as
per the previous year’s physical inventory. Similarly, he should check up the postings of closing
physical inventory. Should examine and check-up the procedure for treatment of excesses or
shortages;
(j) Ensure that the issues are valued consistently, and check-up the procedures for analysing the
issues department-wise and cost-centre-wise, and,
(k) Ensure that the balances in the individual Priced Ledger tally with the control accounts in the
General Ledger.
In addition to the above, the Cost Auditor should keep in his mind about his own
requirements, in connection with the Cost Audit Report (Annexure), to:
(a) Show the cost of major Raw materials consumed both in terms of quantity and value, and to
specify the related transport cost separately, if significant;
(b) show the consumption of major Raw materials per unit of production compared with the
standard requirements, and to give explanations for variations as compared to the preceding two
years, and
(c) Comment on the method of accounting followed.
Check Point # 2. Finished and Semi-Finished Components:

A. Requirement:
A similar procedure of Priced Ledger discussed against item No. 1 is envisaged in respect of
Bought-out components (finished or semi-finished) and Own manufactured components
(applicable to engineering industries).
For Own-Manufactured Components:
The records should be adequate to:
31.SGAGDC (0354) Ph-9491853132

``
(a) Show the cost arrived at through a system of Job-orders or Work-orders for individual items or
batches. A quantitative reconciliation with the issues for various purposes is also expected under
the rules. A consistent valuation procedure is also desirable.
(b) Show the quantities and values of individual components or group of components forming a
sub-assembly on the lines similar to those followed in the case of raw materials and purchased
components.
(c) Show the quantities manufactured, accepted, and rejected for individual components or each
batch of components or sub-assemblies, and indicate the method of dealing with losses on account
of rejection in the calculation of costs by way of foot-notes’ or explanatory notes.
(d) Show either the actual or standard cost of materials, labour and overheads expenses.
(e) Exhibit the reconciliation of the quantities produced, including adjustment for opening and
closing stock of major aggregates or components, with those required for the production or
assembly and transfer to spare parts, and
(f) Ensure physical control and verification.
For bought-out components:
(a) The elements of freight, insurance, etc.., should be separately identifiable for each type or
category, should the rules for a specific industry provide as such.
(b) The basis on which the values of the purchases and issues have been calculated should be
indicated and/or a separate manual of procedure should be maintained, and such basis should be
applied consistently.
(c) The records should be adequate to assess wastages, spoilages and rejections, etc. The method of
dealing with such rejections, etc., and that of accounting of their realised values should be
indicated in the Cost Records.
(d) If the value of the materials/components consumed is determined on any basis other than
actual, the method adopted for such valuation as well as the method of reconciling such
consumption with actual and the method of treatment of variations should be disclosed in
the Cost Records.
B. The Cost Auditor should:
(a) Exercise 100% checking in respect of all components—Bought-out or Own manufactured;
(b) Keep in mind the following special points:
(i) Whether the company is buying most of the components from outside and assembling them,
(ii) Whether the company is buying semi-finished components and/or finish the same or get them
finished from outside, and
32.SGAGDC (0354) Ph-9491853132

``
(iii) Whether the company is making its own components;

(c) Collect the list of components—own made, bought-out, finished or semi-finished.
(d) In case of own-made components, examine the system of accounting for quantities
manufactured in the shops and transferred to the components-stores or kept in the shops,
(e) Examine the movement documents from the shops to stores, from the stores to the assembly
line/shops, from the stores or assembly shop to godowns (for sale as spare parts or for supply as
free replacement),
(f) Examine the quantitative reconciliation between the components made and those issued for
various purposes,
(g) Examine the Job order system, issue of materials to the machine shops (i.e. Bill of materials)
and the system of Job-costing method with due consideration as to the following fundamental
aspects:
(i) Computation of machine hour rates or departmental or shop rates for charging labour and
overheads to the various jobs, and
(ii) Periodical review and reconciliation system of labour and overhead expenses actually charged
to the jobs with those actually incurred, ensure whether there is a proper control record showing
the essential particulars, viz. party-wise quantity of materials/parts issued, quantity actually
received back, time lag, etc. in respect of jobbing work done by the outside agencies, and check-up
the outstanding, and follow-up measures on the part of the management, check up the procedures
for receipt of the components after the job work is done- by the outsiders, and examine whether
jobbing costs and material costs are properly included,
(j) Check-up the Control record for the quantities of receipts and issues for outside job- work with
reference to the basic documents, e.g. Despatch advice, Goods Receipt Notes, etc.,
(k) Examine the quantitative reconciliation done for own-made components as well as link up the
entries made in the Priced Ledger for receipts and issues on the same pattern for Raw materials,
(l) Check-up the Priced Ledger maintained for fully bought-out components with reference to
the basic documents like—Receipt Notes, and Issue Notes for issues to the assembly lines,
(m) Examine the procedures adopted by the company for defective components returned to the
suppliers, mode of free replacements and the steps taken for accounting. Should check up and
ensure that the replacements are not counted as fresh supplies, and that the values are not included
for the returns as well as for the replacements in the Ledger,
(n) For Semi-finished components bought out from outside and the finishing work done at the
factory, examine the system adopted, and check up whether similar procedure outlined at (g) above
is followed.
33.SGAGDC (0354) Ph-9491853132

``
(o) Examine- whether the Priced Ledgers contain the correct figures of opening and closing
physical inventories, and check up the procedures for accounting treatments for shortages,
excesses and damages of bulky items due to long storage, if any, and-
(p) Ensure that the balances shown in the individual Priced Ledger tally with those in the control
accounts in the General Ledger.
Check Point # 3. Consumable Stores Tools and Spares:

A. Requirement:
A similar procedure of Priced Stores Ledger is envisaged for Consumable stores, Tools and Spares
also, as has been outlined at Serial No. 1 above. For engineering industries, the Rules generally
provide that adequate quantitative records should be maintained showing all receipts, issues and
balances of various items required for the manufacture of the product.
If the value for each individual item is not maintained, only quantitative records may be
maintained for the physical movement of each item, as the company decides. The values can be
had from the group Control Account. The Rules also prescribe that the consumption of these items
should be allocated to the different departments of production and services on a suitable basis.
The Bin Cards or Stock Cards (without values) are also to be maintained. Thus, it is possible to
group the Priced Ledgers for small items and major items separately. Detailed Priced Ledger
should be maintained for all major items of Consumable stores. As regards the valuation the
Record Rules prescribe for its adoption consistently.
B. The Cost Auditor should keep in mind that:
(a) The quantitative records for receipts, issues and balances should be maintained by the company
in respect of each item of Stores, Tools and Spares and for each specification. The Bin Card can,
therefore, constitute the record for the purpose.
(b) The accounting for values in respect of issues and balances may be limited to major items of
considerable value—which may constitute 70% to 80% of the total stores and for minor items a
consolidated group Control Account may serve the purpose,
(c) He may adopt a system of ‘test-checking’ regarding the entries in the quantitative records for
smaller items,
(d) The classification and codification by grouping of similar items would assist him in. carrying
out his routine checks in this area, and
(e) In engineering units, the company may buy small tools and at the same time may fabricate their
own tools.
He should, therefore:
34.SGAGDC (0354) Ph-9491853132

``
(a) Check-up the Priced Stores Ledger for major items as to their receipts, issues and balances,
consisting of both quantity and value.
(b) Link up the entries in these Ledgers with reference to the basic documents like Stores Receipt
Notes, Stores Requisition, Stores Issue Note, Stores Transfer Note, Stores Return Note, etc. The
extent of his checking need not be extended to 100% as this part is a task of great magnitude. He
may utilise the technique of statistical sampling in this audit area,
(c) Ensure that a Priced Ledger for Consumable tools purchased is maintained on a line similar to
the Raw materials at (1) above,
(d) Study and check-up the practices of issuing of tools,
(e) Examine as to whether the tools issued to the shop floor are again received back into the ‘Tool
Store’, in case the company follows a practice that the consumption will be limited to the
depreciation on the tools,
(f) Examine as to whether the tools issued are considered as consumed, and check up the
reasonableness of the system and in either case, ensure that this procedure is followed uniformly
and consistently,
(g) Examine as regards tools made and fabricated at the works, whether a proper costing-system is
followed before the completed tools are sent to the Tool Store, and check up the cost procedures
adopted,
(h) Ensure that the tools which are capitalized are not shown as expenditure in the form of
consumption, labour charges, etc.
(i) Examine the Stores Consumption Analysis Statement for a chosen period to ensure that the
Issue Requisition. Notes are identified with the well-defined cost-centres production as well as
services and capital job-work, and that the valuations are done on a consistent basis, and
(j) Check-up that the annual consumption, as disclosed by the periodical analysis statements (cost-
centre-wise) reconcile with the consumptions as derived, and arrived at in financial accounting, i.e.
(opening stock + purchases) – closing stock = consumption, after taking into account the excesses
and shortages in the physical stock-taking, and ensure that the valuation difference is within the
tolerable range.
In addition to the above, the Cost Auditor should keep in his mind about his own requirements to
report, on—
(a) The expenditure per unit of output on stores, etc.
(b) The proportion of closing inventory of stores representing the items which have not moved for
over 24 months.
35.SGAGDC (0354) Ph-9491853132

``
Check Point # 4. Wastages, Spoilages, Defectives, Rejection, etc.:

A. Requirement:
The Cost Accounting Record Rules provide that:
(i) Adequate records should be maintained to ascertain and assess wastages, spoilages, defectives
rejections and losses of materials during transit, storage, including the line spoilages in the
manufacture of the product in order to enable the company to exercise effective control on the
consumption and usage factors of the materials.
(ii) The cost records should indicate:
(a) The reasons and the method of dealing with such wastages, spoilages, etc., in the calculation
of costs,
(b) The quantity of scrap recycled and reprocessing charges, and
(c) The method of accounting of the realised value of such spoilages, wastages, rejection, etc., and
that of valuing rejected materials reused in process, and the manner of adjustments of these
recoveries in the cost of production. The method of cost computation should be followed
consistently,
(iii) Where the company operates a Standard Costing System, the standard or norm of
consumption of materials should take into consideration the factors of wastage, spoilage, scrap,
etc. Such wastages, etc., should also be classified into normal and abnormal categories according
to their nature and extent.
The cost of normal wastages should be charged to the production orders or recovered from the
suppliers where such wastages or defects are due to bought-out components and materials.
The cost of abnormal wastages should not be charged to the cost of production. The account to
which such costs have been originally debited should be credited with the realised value of the
wastages, etc.
B. The Cost Auditor:
The Cost Auditor should, before auditing these items, obtain from the company the ‘Production
Process Flow Chart’ showing the input of materials, process materials stocks at the beginning and
at the end, output of materials at different stages of operation, etc., and should ascertain the criteria
applied by the company to distinguish and differentiate the various categories of wastages,
defectives, spoilages, etc.
He should, therefore, keep in mind:
(a) The nature and type of industry,
(b) The nature and extent of wastages, etc., generally found with such industry, and
(c) Their accounting treatment followed in general.
36.SGAGDC (0354) Ph-9491853132

``
The Cost Auditor should:

(i) Study the different processes or operations where such spoilages or defectives occur, and check
up the system followed by the management for collection of such spoilages;
(ii) Verify whether the terms of supplies of materials, components and parts, etc., by the outside
supplies provide for replacement of defectives or adjustments otherwise;
(iii) Ascertain whether the ‘Bill of Materials’ (in Jobbing and Engineering industries) provides for
wastage allowance and their extent, and accordingly, examine whether
Such limits of allowance are uniformly and consistently applied for and technically reviewed from
time to time by the management;
(iv) examine not only the records contemplated by the rules but also other documents or operating
reports, e.g. Job Order Report on Defective Work, Statement of Materials Standards vis-a-vis
Scrap Arising’s, Bin cards for Scrap at the yard, etc., as may be made out by the company;
(v) Examine reconciliation of a record showing the quantity of an intermediary product issued and
the quantity of the components produced taking into account the number of rejects due to
workmen’s faults, line damages and faulty materials, in the case of shop-fabricated parts or
components.
Here, the Cost Auditor should ensure that the cost of the rejects, except where the cost is claimed
from the suppliers of intermediary products, is absorbed in the cost of the finally accepted output;
(vi) keep in mind that, in the case of heavy engineering industries involving assemblies and sub-
assemblies and machining operations, the rejections occur in the course of manufacture of semi-
finished items due to the suppliers’ defectives, and such defects can be detected only after some
machining and/or other process has been carried out, and therefore, the loss is not only on account
of the material costs but also the labour spent in the processes up to the stage of rejection.
While the material loss is generally recoverable from the suppliers, the cost on labour spent is a
loss to the company. In these cases, the Cost Auditor should check up and ensure that such losses
are analysed by the management and added to the cost of the good quantities produced;
(vii) Understand that the value of scrap, defectives and rejects etc., particularly in heavy
engineering industries, is quite significant, and accordingly, should make sure that adequate and
effective control measures are in existence, and that the physical standards of the materials are
periodically examined by the company so as to ascertain the extent of scrap provided for the
standards, where a Standard Costing System is in operation; and
(viii) Keep in mind that certain ferrous and non-ferrous-based industries (e.g. Aluminium, Steel
pipes and tubes, Electrical cables and conductors, etc.) recycle scrap and rejected materials, for
which he should examine the method for adjusting these recoveries in the cost of production.
37.SGAGDC (0354) Ph-9491853132

``
Check Point # 5. Salaries and Wages:

A. Requirements as per Cost Accounting Records Rules are:
(a) Maintenance of Appropriate and Systematic Records to:
(i) Show the attendance of all employees, viz.—workmen and other operating – staff and the
departments or cost centres and the work on which they are employed or engaged:
(ii) Indicate separately their earnings for each cost centre (Production, Utilities and Services)
Piece-rate wages earned;
Incentive wages earned either individually or collectively as production bonus or under any other
scheme based on output;
Overtime wages earned; and
Earnings of casual labour engaged on casual work under classified headings.
In case of engineering industries (such as, Cycles, Room Air conditioners, Refrigerators,. Electric
Lamps and Motors, etc.), the records should further show the cost of all wages and salaries
allocated to different job-order/work-orders of shop-manufactured components, assemblies, sub-
assemblies and machining operations including the finishing operations required for bought out
semi-finished components.
(b) Maintenance of systematic idle time records duly classified according to the causes. The
information should be maintained in such a way that the Cost-centre-wise analysis is possible.
The Cost Records should disclose the method adopted for accounting of idle time payments in
determining the cost of the products.
(c) Any Wage and Salaries allocable to capital works, such as additions or heavy repair works to
plant and machinery, building or other fixed assets should be accounted for under the relevant
capital heads.
(d) The Cost Accounting Records should disclose the fact of adjustments as to the variances, if the
wages and salaries are charged to production on any basis other than actual and in the event, the
reconciliation of such wages with actual should be made.
(e) In case of seasonal industries (e.g. Sugar), the records of attendance and earnings should show
separate details of salaries and wages pertaining to the season and offseason periods.
(f) In case of Textile and Jute goods industries, the allocation of wages and salaries should be
made to the various cost-centres and sub-centres on the basis of some key operating data, like
machine hours, spindle shift hours, etc., and the piece-work wages absorbed on the basis of related
output, such as bales, yardage, etc.
B. The Cost Auditor:
38.SGAGDC (0354) Ph-9491853132

``
The Cost Auditor while auditing this item should keep in mind the following important matters,
and should:
(a) Ensure checking of the following particulars for a period covering 2 to 3 months depending on
the effectiveness of Internal Check System operating in the company:
(i) Method of recording of attendance, overtime, job or operation time, idle time, etc. for regular
employees, daily-rated and casual employees.
(ii) Method of authentication and authorisation of overtime work, piece-work and of the rates as
approved by the management.
(iii) System of internal controls and internal checks obtaining in the company to obviate the
possibilities of collusion, dishonesty and other malpractices, on the part of people entrusted with
the tasks of time-keeping, time-booking, quantum of piece-work output, etc.
(iv) Systems of payroll preparation, payroll analysis to various cost-centres and disbursement of
wages.
(b) Examine the statement of reconciliation of total attendance in conjunction with leave and
absenteeism records and the attendance paid for through the payroll department;
(c) Test checks the reconciliation of the total wages payable/paid and the department
or cost centre-wise totals.
(d) Examine the reconciliation statement showing the total piece-work payments made and the
total quantity of accepted piece-work output obtained in various operations, after having verified
the authorised rates for piece-work.
(e) Check up the procedures adopted for inter-departmental movement of workmen and
corresponding attendance booking for reasonable ascertainment of the cost of wages/salaries
appropriate to the departments.
(f) Make sure that annual bonus to employees other than incentive bonus, provision for statutory
gratuities are not clubbed with the salaries and wages.
(g) Ensure that the salaries of supervisory staff, who are not specifically identified to a particular
department or cost centre, are not incorporated in this item, but considered as overhead.
(h) Verify the practice being followed in respect of:
(i) Perquisites, like house rent allowance, dearness allowance, Provident fund/ESI contribution,
etc., as to their inclusion and cost centre-wise identification; that is, whether these are apportioned
in the ratio of salaries and wages or otherwise.
(ii) Adjustment of variance in the cost records and the manner of reconciliation when wages and
salaries are charged to production/services/utilities on any basis other than actual (i.e.
Standard Costing System), and
39.SGAGDC (0354) Ph-9491853132

``
(i) Examine the reconciliation made between the total salaries and wages as per Profit and Loss
Account and that as per the Totals of cost-centre-wise Distribution Statement. This reconciliation,
if not maintained by the company, should be insisted upon by the Cost Auditor as this would be of
much assistance to him in filling up the Cost Audit Report.
In addition to the above, the Cost Auditor should keep in his mind about his own requirements to
report,
(1) Total wages and salaries paid for all categories of employees separately in respect of:
(a) Direct labour costs and indirect employee costs on production,
(b) Employee cost on administration, selling and distribution,
(c) Other employee costs,
(2) Total direct labour man-days available and actually worked,
(3) Average number of workmen employed,
(4) Direct labour cost per unit of output of the product(s), and explanations for variations thereof
as compared to the previous two years, and
(5) Comments on the incentive schemes as to their contributions towards increasing productivity
and its effect on the cost of production.
Check Point # 6. Depreciation:

A. Requirements as per Cost Accounting Records Rules are :
(a) This item presupposes the maintenance of adequate and systematic recordsto show the cost and
other relevant details of Fixed Assets in respect of which depreciation provision has to be made.
The records should contain:
(i) Cost of each item of assets including installation charges,
(ii) The date of its installation,
(iii) The rate of depreciation,
(iv) The location of each asset,
Subject to a flexibility clause that the valuation in respect of old assets for which the
original cost of acquisition cannot be ascertained without unreasonable expenses or delay, the
valuation shown in the books at the commencement of the financial year beginning on or after the
commencement of the Cost Accounting Records Rules should be taken as the cost. Such valuation
should not, of course, include revaluation done in the previous years.
40.SGAGDC (0354) Ph-9491853132

``
(b) The Cost Records should:

(i) Indicate the basis, on which depreciation is calculated and allocated/apportioned to the various
departments and cost centres and ultimately absorbed in the products,
(ii) Ensure that depreciation chargeable to the different departments/costcentres relates to the plant
and machinery and other fixed assets utilised in those departments/cost centres,
(iii) Take care that depreciation amounts charged are not lower than the amounts chargeable under
Section 205(2) of the Companies Act, 1956,
(iv) Show clearly and separately the amount of excess depreciation charges made in any financial
year beyond the quantum chargeable under Section 205(2) of the Companies Act, and its impact
on the cost per unit.
(c) The cumulative figures of depreciation charged in the cost accounts against any depreciable
asset should not exceed its original cost.
(d) The amount of depreciation which represents 100% write-off in a particular year contrary to
the provisions in the Income Tax Act, 1961 and relevant rules should be spread over the number of
years during which benefit is derived from such asset (applicable for Cotton Textile, Power driven
pumps, Internal Combustion Engines, Diesel Engines, Electrical cables industries).
(e) The rates of depreciation adopted should be applied consistently from year to year. (This
provision is applicable only for the products).
(f) The cost of lesser value items of plant and machinery should be allowed to be completely
written-off in the year of acquisition up to the limit specified in the Income Tax Act, 1961 (such as
Cement, Cycles, Tyres & Tubes, Caustic Soda, Room Air Conditioners, Refrigerators, Automobile
Batteries and Electric lamps).
(g) The method of depreciation adopted should be applied consistently from year to year. (This
provision covers only the products, such as Motor Vehicles, Electric Fans, Electric Motors and
Tractors).
(h) The depreciation figure should be shown separately in all Cost Proformae prescribed with the
exception that such information could, if the company desires, be included in the manufacturing
overheads of the department or costcentre for the products, such as Cement, Cycle, Rubber Tyres
and Tubes, Caustic Soda, Air conditioners, Refrigerators, Electric Lamps and Automobile Batteries
only.
(i) Hundred per cent depreciation should be charged on assets specified in Schedule XIV of the
Companies Act, 1956.
(j) Extra depreciation for double shift/triple shift working should be computed and charged
separately “in the proportion which the number of days for the factory worked double shift/triple
shift, as the case may be, bears to the normal working days during the year”.
41.SGAGDC (0354) Ph-9491853132

``
For this purpose, the normal working days during the year in a non-seasonal factory should be
deemed to be as “the number of days on which the factory actually worked during the year or 240
days, whichever is greater”. [Schedule XIV of the Companies Act, 56 on WDV method and rate of
depreciation].
B. The Cost Auditor should, while Auditing this Item, keep in mind the Following Important
Aspects:
(a) Whether a detailed Fixed Assets Register incorporating the particulars as required under the
relevant Cost Accounting Records Rules is maintained and updated regularly.
(b) Whether the cost of any special repairs or renovations, if added to the value of the concerned
asset, has been separately recorded indicating the basis on which such additions are made (for
specified industries only).
(c) Whether a statement, duly extracted from the Assets Register, showing the cost- centre-wise
asset values and their depreciation is prepared. This would assist him in identification and
reconciliation of depreciation distribution.
(d) Whether the basis adopted for apportionment of depreciation of common assets to various
centres ensures reasonability and consistency.
(e) Whether the depreciation charged is more than or equal to or lower than that chargeable under
Section 205 (2) of the Companies Act; In case the actual depreciation is in excess, whether it is
separately shown to ascertain the impact on the cost per unit.
The Cost Auditor should check up whether the cumulative depreciation charged in cost exceeds
the original cost of the asset. For 100% depreciation written-off assets, he should bear in his mind
that he can ignore this criterion only in respect of asset items worth up to Rs. 750 in consideration
of ‘materiality’ concept.
He should note that the company is free to adopt any method of depreciation and may even change
to another method, and in that event, he must examine as to whether the rates fulfil the criteria set
out under Section 205(2) of the Companies Act, and the extent of effect of this changeover on
the cost of production. He should also enquire into the reasonableness and adequacy of the rates
and methods so changed.
Check Point # 7. Work-in-Progress and Finished Goods Stock:

A. Requirements of Cost Accounting Records Rules:
Although the requirements of the Rules for various products in this respect are different in
view of differing nature of fundamental processes of manufacture involved, a general pattern
can be outlined into two categories:
42.SGAGDC (0354) Ph-9491853132

``
(i) Requirements for engineering industries (such as Cycles, Refrigerators, Automobile batteries,
Electric lamps, Air-conditioners, Motor Vehicles, Electric Fans, Electric Motors, Power driven
Pumps, Industrial Combustion Engines, Diesel Engines, Electrical Cables and conductors).
(ii) Requirements for processing industries (such as Cement, Rubber Tyres and Tubes, Caustic
Soda, Aluminium, Industrial Alcohol, Bulk Drugs, Paper, Jute Goods, Cotton Textile, Infant Milk
Foods, Vanaspati, Soda Ash, Rayon, Polyester, Sulphuric Acid, Dyes).
For Engineering Industries, the requirements are:
(a) The quantities and values of work-in-progress, if any, in relation to the various components,
sub-assemblies, assemblies, final assembly in the process of manufacture at the end of the period
for which the costs are made up, should be calculated to represent the cost incurred up to the
relevant stage of manufacture and the information exhibited in the relevant Proforma in Schedule
II.
(b) The quantities and values of work-in-progress and that of finished products in stock at the end
of the relevant period, for which the costs are made up, should be calculated so as to represent
the cost of material, labour and overheads separately (with some variations for some of the
products).
For example, the valuation of work- in-progress for Motor Vehicles requires this analysis. Similar
exercises for other products are also called for adjustment purposes, though Proforma are not pre-
scribed.
Further, the Closing Stock valuation of the finished products should be for each model, type,
classification, etc., and the same should take into consideration the adjustments necessary on
account of physical verification particularly in case of Electrical Cables and Conductors.
For Process Industries, the requirements are:
(a) The method adopted for determining the cost of work-in-progress should reveal the elements
of cost taken into account, and be exhibited in the costrecords and applied consistently. The same
procedure has been prescribed for finished stocks also.
(b) In case of Vanaspati, the rules provide that work-in-progress should normally include cost of
materials, labour and overhead and depreciation, and the basis of arriving at the cost of work-in-
progress and finished stock to be indicated in the Cost Records.
From (a) and (b) above, it is obvious that element-wise cost calculations are- necessary with a
view to making adjustments for increase or decrease in the work-in-progress and finished stock
between the opening and closing balances.
(c) The valuation of closing stocks should be for each type of products/production, as has been
specifically itemized including others in the relevant Proforma in Schedule II, and the same should
43.SGAGDC (0354) Ph-9491853132

``
invariably consider the adjustments necessary on account of differences/discrepancies found in

physical verification.
B. While Auditing this Item, the Cost Auditor should keep in his mind the Following
Important Aspects:
(a) For Work-in-Progress:
(i) The method adopted by the company to ascertain the equivalent good quantities in respect of
semi-finished components/sub-assemblies-in-progress/ assemblies awaiting final stage, etc., in the
case of engineering industries, and that of the stocks at various processes of production in the case
of processing industries, and the measurement yardsticks applied which are definitely different for
different processes or operations involved.
In this regard, the Cost Auditor should check up as to:
a. what is the practice normally obtaining in the similar industry;
b. whether the company’s practice is identical or not;
c. whether there are adequate Shop/Process Records to show physical examination and
verification, such as Operation Cards or Process Flow Sheets indicating the stages of completion
as to material and labour, and
d. whether the person responsible for estimation of work-in-progress is technically qualified.
He should also review the records of similar estimations made in previous years in order to judge
the principle of uniformity and the soundness of the system developed.
(ii) The method adopted by the company in the computation of the cost rates separately for
material, labour and overheads. In this regard, Cost Auditor should ascertain as to the
appropriateness and reasonableness of the share of works administration overheads considered in
the relevant Cost Statements.
For the purpose of verification, he should ask for a detailed calculation sheet with a view to
ascertaining the extent such overheads are attributable to in bringing the goods/products to such
state,
(iii) The valuation is required to be done at actual cost. The Cost Auditor should,- therefore, ensure
that standard cost duly adjusted with variations is applied when the company operates
Standard Costing System.
(b) For Finished Goods Stock:
The points discussed at (a) (ii) and (a) (iii) above apply, but the Cost Auditor should be aware that
a company may adopt a method of valuation different from that adopted for Raw materials or
Stores and should, in such case, check up that consistency is being followed by the company.
44.SGAGDC (0354) Ph-9491853132

``
Check Point # 8. Stock Verification:

A. The requirements of Cost Accounting Records Rules are:
(a) Maintenance of records of physical verification in respect of all items held in stock, such as
raw materials, process chemicals, packing materials, consumable stores, machinery spares, fuels,
finished goods and fixed assets.
It is to be noticed that the Verification Records in respect of ‘finished goods’ and ‘fixed assets’ are
not necessary for certain industries (such as Cement, Caustic Soda, Air-conditioners, Refrigerators,
Automobile Batteries, Electric Motors, Electric Fans, Motor Vehicles, Tractors, Rubber Tyres and
Tubes, Power-driven Pumps, Internal Combustion Engines, Diesel Engines).
For Engineering industries, such as Motor Vehicles, Electric Fans, Electric Motors, Tractors,
Power-driven Pumps, Internal Combustion Engines, adequate physical controls and
verification records are envisaged for the items held in stock, such as raw materials, manufactured
components, bought-out components and stores.
Physical verification of work-in-progress including shop-manufactured components lying on the
shop floor is also a necessity.
(b) The reasons for shortages or surpluses arising out of physical verification should be identified.
(c) The method followed for adjustments in the costs of the product should be disclosed in the
relevant records.
B. The Following Important Points should be kept in mind by the CostAuditor
while Auditing this Item:
(a) That there is an adequate system of physical stock verification, perpetual (i.e. continuous stock-
taking) or periodical so as to cover all items held in stock.
(b) That appropriate Stock Sheets are used to verify the items.
(c) That there is a proper control over the adjustments of physical discrepancies.
(d) That there is an adequate segregation of duties between the persons responsible for stock
verification and those responsible for keeping of stock records.
Check Point # 9. Production Records:

A. The Cost Accounting Records Rules require:
(a) Maintenance of detailed and adequate records showing the quantities and balances of:
(i) different shop-manufactured components/parts, sub-assemblies, assemblies as well as
completed products produced, duly classified under model, type size,, specification, etc. as
appropriate for the class of engineering industries and as specified in the relevant rules.
45.SGAGDC (0354) Ph-9491853132

``
Illustrations:
1. Cycle Industry.
For components/ Sub-assemblies For complete cycle
such as—Frame, Fork, Handle, Brake set, Pedal Rim, Seat, etc. — by type, size, model.
2. Electric Lamps Industry.
For components for complete product
a. Glass Shells, Glass Tubes, Filaments etc.
b. Lamps/Fluorescent Tubes by type, size, specification (wattage), etc.
(ii) different raw materials, process materials as well as finished products produced, duly classified
under the type, quality, packing etc., as appropriate and specified in the relevant rules for the class
of processing industries.
B. The Following Important Points should be borne in mind by the CostAuditor
while Auditing this item:
(a) That the quantitative production data are essential for the requirements of Cost Statements. It
is, therefore, essential for him to prepare a programme of his own in order to ensure that
such records are necessarily linked with the Cost Statements and do provide the necessary
information for verifications.
(b) That the production of completed products or finished goods tallies with the figures recorded in
Excise Accounts (viz., R.G. I. etc.) and summarised in Excise’s Periodical Returns, Returns of
D.G.T.D. and National Sample Survey, etc.
(c) That the records show quantities of production at various intermediary stages of manufacture.
This is especially required in Textile, Jute goods, Steel pipes & tubes, etc., where stage-wise
conversion costs arc worked out.
(d) That the methods of estimating production, where physical ascertainment is difficult, are
realistic and similar to those obtaining in similar industries. For this purpose, the Cost Auditor
should check up the very basis, e.g. volumetric measurement and conversion into quantity,
working back of stage-wise production from the final output, etc.
He should make use of Process Flow Chart (in case of processing industries, continuous or semi-
continuous nature) and process loss norms, input- output analysis, etc., wherever possible.
(e) That the quantity records are there for all individual items when values are maintained in
Control Accounts for each product group. The Auditor should ensure that annual reconciliation at
least is done by the company, and for this, he should apply test checks to a few transactions right
through the documents and Control Ledgers by selecting few items.
46.SGAGDC (0354) Ph-9491853132

``
(f) That the differences as a result of physical verification arc adjusted in the quantity of process
stock for working out process production. This area is quite susceptible to a difference of opinion
between the Company and the Cost Auditor, as the company may not agree to a physical stock-
taking of process stock on the ground of maintaining Job Cards which show the quantities of
Work-in-progress.
(g) That a reconciliation statement is drawn up by the company (by taking extracts from the
production records and other relevant records) to show that— Closing Stock (as per physical
inventory or estimate) + Process transfers/sales/ despatches—Opening Stock is equal to
Production.
Check Point # 10. Statistical Statements/Records:

A. The Requirements of Cost Accounting Records Rules are that there should he:
(a) Adequate and systematic records to show statistical data, such as available machine hours,
actual machine hours worked in different departments, etc., with reasons for stoppages (idle time)
under classified headings, yield percentage for the various inputs of raw materials/process
materials or chemicals/stocks transferred to next process, consumption per unit, production per
hour, etc. available/utilised direct labour hours in various departments, etc., on a period basis
(monthly or otherwise).
(b) Adequate records to identify as far as possible the capital employed, fresh investments on fixed
assets during the year, fresh investments that have not contributed to production, effect of under-
utilisation of capacity, etc.;
(c) Statistical statements and other records in compliance with the requirements/provisions of
Schedules I and II; and
(d) Records to indicate the assets added as replacement and that they are for increasing existing
capacity, etc.; in such a manner as to enable the company to exercise, as far as possible, control
over operations and costs, and to provide the necessary information required by the Cost Auditor
to suitably report to the Company Law Board on all the points referred to in
the CostAudit (Report) Rules, 1996.
B. In this regard, the Cost Auditor’s prime consideration should be to examine the validity of data
with reference to the base records generated and maintained by the company. He should keep in
mind the auditing principles of relevancy, consistency, materiality, accuracy and disclosure pattern.
47.SGAGDC (0354) Ph-9491853132

``
Q.15.Cost Auditor Research and Development Expenses.

Ans:
A. Requirement:
(a) Expenses incurred in connection with the research and development shall be shown separately
in the cost records.
(b) The method of charging these expenses to the cost of production as well as deferring the same
in appropriate cases particularly where the utility of such work extends beyond one year is to be
indicated.
(c) Expenses incurred on design and development of plant facilities shall be capitalized.
(d) Expenses incurred on furnishing technical know-how to outsiders shall be recorded separately
and compared with the amount recovered from them.
B. Cost Audit check-points:
(a) Whether the cost records are separately made and maintained for:
(i) Existing products,
(ii) New products,
(iii) Manufacturing process improvement,
(iv) Plant & equipment design,
(v) Design of production/plant facilities, etc.
(b) Whether proper allocation of R & D expenses on general research or applied research is made
and indicated as to the production/services costcentres.
(c) Whether there is reasonability, consistency and uniformity in the treatment of R & D costs to
the products, including its categorisation as to revenue or deferred revenue expenditure.
(d) Whether adequate records are kept for R & D services to the outsiders and whether the
revenues earned compare well with the relevant costs.
Q.16.Materials receipt checking consistent of material cost.
Ans: The store-keeper receives the goods supplied by the supplier, in case of small & medium
sized organizations. So, no separate receiving department is there in this case & a copy of the
purchase order is received by the store keeper, while in big concerns, the receiving department
48.SGAGDC (0354) Ph-9491853132

``
receives the same. The goods are inspected by the store keeper with reference to quality &
quantity. However, separate receiving & inspection department are there in the big concerns. In
this respect, the following is the routine work:
1.Get the challans & invoices & unloading of the materials.
2.Physical survey, regarding the number of packs, physical conditions outwardly shown
etc. is made.
3.The materials are unpacked, marked, physical verification of the quantity received is
made with reference to the challan & the purchase order, any shortage, breakage or surplus
is brought to the notice of the supplier.
4.The quality of the material required to be checked with reference to the sample or grade.
Sometimes inspection department, where there is such a separate department, performs
laboratory testing & the report of the testing is prepared in triplicate- one copy is for the
office copy, second copy is for the receiving department & the third is for the purchase
department.
5.The challan needs to be signed & a copy required to be returned to the supplier as
acknowledgement of receipt.
6.After all the above have been done, goods received note in five copies will be prepared
by the receiving department, out of which the original is to be retained, & the others needs
to be sent to the purchase department, the accounts department, the store-keeper (if the
material is not received by him) & the department which is responsible for making
purchase order.
The entries are made in the stores ledger on the basis of the goods received note
If the materials physically supplied are found less than the quantity which is mentioned in the
challan & the invoice or if some items have been rejected, then in that case, the fact of such
shortage or rejection needs to be noted in the challan before a copy to the supplier is sent as
acknowledgement of receipt. In respect of value of such shortage or rejection, a debit note needs to
be prepared, &copy of which should be sent to the supplier so that they can make similar
adjustment of value in their books. On the other hand, if the materials are found in excess, then in
such case, the fact must be noted in the challan & regarding the surplus, negotiation needs to be
made with the supplier. Necessary gate pass should be issued, if the surplus materials are taken
back by the supplier. However, in respect of value of surplus materials, a credit note should be
prepared, if the surplus materials are taken by the buyer.
The value of invoice must include such value & in the goods received note, such materials must be
included in the ‘net quantity received’ column.
(E) Invoice checking & passing the same for payment:-
In respect of the materials supplied by the supplier, invoice (i.e. bill) together with the challan is
usually sent by the supplier along with the goods. With reference to purchase order, goods received
note, inspection report, debit or credit card note, invoice is to be checked. In the purchase order,
quantity ordered, rate, terms of delivery, terms of payment etc. are mentioned. Whether or not all
the terms & conditions have been fulfilled, must be seen. Net quantity received are mentioned in
the goods received note where as the quality of the material are approved by the inspection report.
49.SGAGDC (0354) Ph-9491853132

``
The quantity of short or excess supply is shown in the debit or credit notes. Confirmation of the
invoice figures needs to be done with the goods actually received at the agreed rates. So, in respect
of short or excess supply, inappropriate rate charged or wrong calculation, adjustment of the
invoice price shall be required. Any violation of terms is to be taken up with the supplier for
settlement of final claim & it involves penalty.
After the invoice is checked carefully on each of the above mentioned points, if an invoice is
found correct, then to that effect, endorsement is made on the invoice & under the signature of
purchase officer/manager, such invoice is passed on to the accounts department for payment.
When for any reason, any alteration needs to be made in the invoice, it should be altered &
through the debit or credit note showing the reasons for alteration, supplier should be informed.
Constituents of Material Cost:
When materials are purchased, we do not pay for the materials only but sales tax, excise duty,
octroi, freight, insurance etc. are also paid by us. Sometimes, the cost of packing or hire charge for
packages is also paid by us. At the same time, trade & cash discounts are also enjoyed by us. The
material cost therefore includes the following:
1.Invoice Price:Invoice price is the price of materials which is calculated at the agreed rate
subject to any deduction of trade discount.
2.Excise duty, Sales tax, Octroi etc.:These are the levies which the government has made
on production or sales. So the cost of materials purchased includes these.
3.(c)Freight, Insurance etc.:Cost of materials includes the cost of bringing the materials
from the supplier’s end when borne by the buyer. Thus, carriage inward & insurance cost
on inward goods is included in the cost of materials.
4.Packing Cost:If in addition to the invoice price, packing cost is also charged, cost of
materials includes such cost. When in returnable packages which are charged to the buyer,
materials are delivered & buyer is given credit at a lower rate of return, the difference
between the rate charged & the rate credited is known as hire charges (or rental) & the
same is included in the cost of materials.
5.Cash Discount:When deductions are available in respect of invoice value, on the
condition that payment must be made within the prescribed time, this is called cash
discount. Thus, this is a reward for good financial management & hence has got nothing to
do with the purchase. So, in order to ascertain the cost of materials, cash discount should
not be deducted.
Q.17.Pay roll audit procedures.
Ans:
Small business owners should audit payroll processing as part of regular business operations. A
small business usually has the advantage of fewer employees making a thorough auditpossible
rather than sampling data for further review. A good time frame for scheduling a payroll audit is at
the end of each quarter of business.
Verify Active Employees:For each person that received a paycheck during the quarter, verify that
the person was employed during the time period for which the check was issued. Pay particular
50.SGAGDC (0354) Ph-9491853132

``
attention to recent changes in job status. Although it is more difficult to commit payroll fraud on a
smaller business, one method of financial theft is by cutting checks to terminated employees and
then altering the checks for cashing or colluding with the terminated employee to cash the checks
and provide a kick back.
Verify Pay Rate

Verify the pay rate entered into the payroll processing system for each employee. Payroll rates
should always be in writing, approved by an owner or manager, and filed with other employee
paperwork.
Review Hours Paid

Compare the hours paid to employees for each pay period to the time clock reports or other
tracking device used to record employee hours worked. Pay special attention to overtime hours as
the cost of overtime can add up quickly and push a small business over budget in salaries and
wages expense. If you offer paid time off, such as paid holidays, sick time and vacation days,
review each entry of paid time off to ensure the employee who received paid time off pay was
eligible for the pay.
Compare Payroll Reports to General Ledger

Compare the totals, such as gross payroll expense, taxes withheld and net check amount, to the
general ledger to ensure each payroll processing is correctly recorded on the general ledger. If you
have multiple salaries and wages accounts, such as manager payroll, administrative payroll and
sales payroll, ensure that each category of payroll reflects the correct expense for the employees in
those specified positions.
Review Payroll Tax Submissions

Business payroll taxes include Social Security taxes, Medicare/Medicaid taxes, state
unemployment taxes and federal unemployment taxes, as well as the remission of federal
withholdings for the employee. The total amount of payroll processed determines how often you
remit payroll taxes to the respective taxing authorities, but most payroll remissions will occur at
least quarterly with the exception of federal unemployment taxes, which can occur once a year if
the business has low payrollamounts.
Compare the payroll totals on the tax remittance reports with reports generated by
the payroll system to ensure proper reporting of all payroll amounts. Perform manual calculations
of all computer-generated totals to ensure proper calculation of amounts due. Verify that electronic
or check remissions equal the exact amount recorded on tax remittance reports.
51.SGAGDC (0354) Ph-9491853132

``
Bank Reconciliation Review

Review the bank reconciliation for the payroll account to ensure that all checks cleared for the
issued amount and make a note of any stale-dated payroll checks to research. Make sure you
receive the hard copy of all payroll checks from your bank, even if you have to pay an additional
fee for the service. Review each payroll check to ensure the check does not appear altered in any
way.
Q.18.Overhead Checking.
Ans:
(a) The details of overhead expenses are to be collected from financial accounts, analysed into
Factory, Administration and Selling and Distribution and allocated to various departments or units
on a reasonable and consistent basis.
(b) Where the company manufactures products other than that under cost auditand also make
capital additions, the common expenses including head office expenses shall be apportioned on an
equitable basis over all the activities.
(c) Expenditure related to exports should also be segregated and charged against export sales.
(d) The methods adopted for allocating expenditure to the different manufacturing departments and
absorption by the products shall have to be indicated clearly and followed consistently.
(e) The records of overheads should be kept in such a way as to enable the cost auditor to furnish
information regarding factory overheads, administration overheads and selling and
distribution overheads as required under item No. 11 of the Cost Audit (Report) Rules.
The additional points relating to overheads for the product-related rules are:
(1) Caustic Soda:Where caustic soda is sold in different forms such as liquid or flakes, the
common selling and distribution expenses are to be allocated and shown in each cost statement.
(2) Cement:Administration overheads for manufacture of cement can be shown in one lump sum
in the cost statement.
(3) Cycles:The selling and distribution expenses pertaining to complete cycles may be shown in
one lump sum and those pertaining to components or sub-assemblies sold as spares are too shown
separately in the respective cost records.
(4) Motor vehicles:Selling and distribution overheads and after sales service applicable to
completed motor vehicles shall be shown separately indicating the basis of allocation.
(5) Jute goods:Factory and administration expenses shall be charged to the individual jute goods
on the basis of machine hours, spindle hours, loom hours, piece wages, yardage, bales, etc. as may
be suitable.
52.SGAGDC (0354) Ph-9491853132

``
(6) Dyes:Where a vessel or plant is used for manufacture of more than one product, the cost
thereof shall be charged on occupancy hours or some other equitable basis and applied consistently
(7) Bulk drugs:Where different processes are carried out in multipurpose vessels for the
manufacture of different drugs, the cost thereof shall be charged on equipment occupancy hours.
Where predetermined rates are used, the variances from actual shall be adjusted at- the end of the
year.
Q.19.Depreciation checking COST ACCOUNTING
STANDARD – 16 (CAS – 16).
Ans:COST ACCOUNTING STANDARD ON DEPRECIATION AND AMORTISATION
The following is the COST ACCOUNTING STANDARD – 16 (CAS – 16) issued by the Council
of The Institute
of Cost Accountants of India on “DEPRECIATION AND AMORTIZATION”. In this Standard, the
standard
portions have been set in bold italic type. This standard should be read in the context of the
background
material which has been set in normal type.
1.Introduction:This standard deals with the principles and methods of measurement and
assignment of Depreciation
and Amortisation for determination of the cost of product or service, and the presentation and
disclosure in cost statements.
2.Objective:The objective of this standard is to bring uniformity and consistency in the principles
and methods of
determining the Depreciation and Amortisation with reasonable accuracy.
3.Scope:This standard shall be applied to cost statements which require measurement, assignment,
presentation and disclosure of Depreciation and Amortisation, including those requiring
attestation.
4. Definitions
The following terms are being used in this standard with the meaning specified:-
4.1 Amortisation: Amortisation is the systematic allocation of the depreciable amount of an
intangible asset over its useful life.
It refers to expensing the acquisition cost minus the residual value of intangible assets such as
Franchise, Patents and Trademarks or Copyrights in a systematic manner over their estimated
useful economic life so as to reflect their consumption in the production of goods and services.
4.2 Asset: The terms Asset, Fixed Asset and Intangible Asset will have the same meaning as in
the
Accounting Standards notified by the Central Government under the Companies (Accounting
Standards) Rules, 2006.
An asset is a resource controlled by the enterprise as a result of past events from which future
economic benefits are expected to flow to the enterprise. In case of some assets which are
acquired for safety or environmental reasons, the acquisition of such assets may not provide
future economic benefits directly but may be necessary for an entity to obtain the future
53.SGAGDC (0354) Ph-9491853132

``
economic benefits from other assets. Such items also qualify for recognition as assets.
4.3Cost Object: This includes a product, service, cost centre, activity, sub-activity, project,
contract, customer or distribution channel or any other unit in relation to which costs are
ascertained.
4.4Depreciation: Depreciation is a measure of the wearing out, consumption or other loss of value
of a depreciable asset arising from use, efflux of time or obsolescence through technology and
market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable
amount in each accounting period during the estimated useful life of the asset.
4.5Depreciable amount of a depreciable asset is its historical cost, or other amount substituted for
historical cost in the financial statements, less the estimated residual value.
4.6 Depreciable fixed and Intangible assets are assets which:
(i) are expected to be used during more than one accounting period;
(ii) have a limited useful life; and
(iii) are held by an enterprise for use in the production or supply of goods and services,
for rental to others, or for administrative purposes and not for the purpose of sale in the
ordinary course of business.
Land is not a depreciable asset as it does not have a defined useful life.
4.7 Residual (salvage) value: Residual value is the amount which an enterprise expects to
obtain
for an asset at the end of its useful life after deducting the expected costs of disposal.
4.8 Useful life of asset is either
(i) the period over which a depreciable asset is expected to be used by the enterprise; or
(ii) the number of production or similar units expected to be obtained from the use of the
asset by the entity
5. Principles of Measurement
5.1 Depreciation and Amortisation shall be measured based on the depreciable amount and the
useful life.
The residual value of an intangible asset shall be assumed to be zero unless:

(a) there is a commitment by a third party to purchase the asset at the end of its useful life; or
(b) there is an active market for the asset and:
I.residual value can be determined by reference to that market; and
II.it is probable that such a market will exist at the end of the asset’s useful life.
III.The residual value of a fixed asset shall be considered as zero if the entity is unable to
estimate the same with reasonable accuracy.
The minimum amount of depreciation to be provided shall not be less than the amount
calculated as per principles and methods as prescribed by any law or regulations applicable
to the entity and followed by it.
5.2 In case of regulated industry the amount of depreciation shall be the same as prescribed by
the concerned regulator.
5.3 While estimating the useful life of a depreciable asset, consideration shall be given to the
following factors:
(a) Expected physical wear and tear;
(b) Obsolescence; and
(c) Legal or other limits on the use of the asset.
54.SGAGDC (0354) Ph-9491853132

``
5.4 The useful life of an intangible asset that arises from contractual or other legal rights shall
not exceed the period of the contractual or other legal rights, but may be shorter depending on
the period over which the entity expects to use the asset.
If the contractual or other legal rights are conveyed for a limited term that can be renewed,
the useful life of the intangible asset shall include the renewal period(s) only if there is evidence
to support renewal by the entity without significant cost. The useful life of a re-acquired right
recognised as an intangible asset in a business combination is the remaining contractual
period of the contract in which the right was granted and shall not include renewal periods.
The useful life of an intangible asset, in any situation, shall not exceed 10 years from the
date it
is available for use.
5.5 Depreciation shall be considered from the time when a depreciable asset is first put into use.
An asset which is used only when the need arises but is always held ready for use.
Example:
fire extinguisher, stand by generator, safety equipment shall be considered to be an asset in
use. Depreciable assets will be considered to be put into use when commercial production of
goods and services commences.
Depreciation on an asset which is temporarily retired from production of goods and
services
shall be considered as abnormal cost for the period when the asset is not in use.
5.6 Depreciation of any addition or extension to an existing depreciable asset which becomes an
integral part of that asset shall be based on the remaining useful life of that asset.
5.7 Depreciation of any addition or extension to an existing depreciable asset which retains a
separate identity and is capable of being used after the expiry of the useful life of that asset
shall be based on the estimated useful life of that addition or extension.
5.8 The impact of higher depreciation due to revaluation of assets shall not be assigned to cost
object.
5.9.Impairment loss on assets shall be excluded from cost of production.
5.10 The method of depreciation used shall reflect the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity.
5.11 An entity can use any of the methods of depreciation to assign depreciable amount of an
asset on a systematic basis over its useful life.
For example:
(a) Straight-line method;
(b) Diminishing balance method; and
(c) Units of production method.
5.12 The method of amortisation of intangible asset shall reflect the pattern in which the economic
benefits accrue to entity.
5.13 The methods and rates of depreciation applied shall be reviewed at least annually and, if
there has been a change in the expected pattern of consumption or loss of future economic
benefits, the method applied shall be changed to reflect the changed pattern.
5.14 Spares purchased specifically for a particular asset, or class of assets, and which would
become
redundant if that asset or class of asset was retired or use of that asset was discontinued, shall
form part of that asset. The depreciable amount of such spares shall be allocated over the
useful life of the asset.
5.15 Cost of small assets shall be written off in the period in which they were purchased as per the
55.SGAGDC (0354) Ph-9491853132

``
accounting policy of the entity.

5.16 Depreciation of an asset shall not be considered in case cumulative depreciation exceeds the
original cost of the asset, net of residual value.
5.17 Where depreciation for an addition of an asset is measured on the basis of the number of days
for which the asset was used for the preparation and presentation of financial statements,
depreciation of the asset for assigning to cost of object shall be measured in relation to the
period, the asset actually utilized.
6. Assignment of Costs:
6.1 Depreciation shall be traced to the cost object to the extent economically feasible.
6.2 Where the depreciation is not directly traceable to cost object, it shall be assigned based
on
either of the following two principles:
i. Cause and effect - cause is a process or operation or activity and effect is the incurrence
of cost.
ii.Benefits received– depreciation is to be apportioned to the various cost objects in
proportion
to the benefits received by them.
7.Presentation:
Depreciation and Amortisation, if material, shall be presented in the cost statement as a
separate
item of cost.
8.Disclosures
8.1The cost statement shall disclose the following:-
1. The basis of distribution of Depreciation and Amortisation to the cost objects.
2. Any credits / recoveries relating to Depreciation and Amortisation.
3. Additional Depreciation on account of revaluation of asset, which is not included in cost.
4. Amount of depreciation that is not included in cost because of temporary retirement of
assets from production of goods and services.
8.2 Disclosure shall be made only where material, significant and quantifiable.
8.3 Disclosures shall be made in the body of the cost statement or as a foot note or in a separate
schedule.
8.4 Any change in the cost accounting principles and methods applied for the measurement and
assignment of Depreciation and Amortisation during the period covered by the cost statement
which has a material effect on Depreciation and Amortisation shall be disclosed. Where the
effect of such change is not ascertainable wholly or partly, the fact shall be indicated.
9. Effective date:
This Cost Accounting Standard shall be effective from the period commencing on or after 1st April
2014 for being applied for the preparation and certification of General Purpose Cost Accounting
Statements.
Q.20.Audit procedure of fixed assets.
Ans:
Financial statement audits are performed to provide reasonable assurance
that an entity’s financial statements are fairly presented in accordance with
generally accepted accounting principles. To obtain this assurance, auditors
examine material account balances. The fixed asset balance, which deals with
56.SGAGDC (0354) Ph-9491853132

``
assets that can't easily be converted into cash, is a common material account
balance on an entity’s financial statements. It is audited through procedures
that confirm the existence and valuation of the reported account balance.
Gather Evidence
The auditor’s client, or the auditee, provides the auditor with a detailed listing
of items included in fixed asset accounts. The detailed list, or a depreciation
schedule, includes a description of the asset, the original cost, method of
depreciation, depreciable life and prior and current years’ depreciation
expense. The auditor reviews the list for reasonableness and determines if the
account balance on the financial statements matches the depreciation
schedule.
Perform Analytics
According to Qualified Advice and Audit Partners, analytical procedures
encompass the investigation of identified fluctuations and relationships that
are inconsistent with other relevant information or deviate significantly from
predicted amounts. For instance, auditors compare the current year account
balance to the prior year balance and determine if the difference is
reasonable. A financial statement ratio, such as “depreciation expense as a
percentage of fixed assets,” is also considered an analytic. The auditor tracks
ratios for a period of three to five years and evaluates ratios that produce
unexpected variances.
Review invoices to determine the client correctly recorded acquisition costs

and dispositions of assets. To test existence of fixed assets, the auditor selects
a sample of items and matches the detail on the invoice to the detail on the
client’s depreciation schedule. While reviewing invoices, or vouching, the
auditor checks the date of purchase, the description of the asset and other
costs incurred to place the asset in service. In addition, an auditor reviews
gain and loss accounts to determine if dispositions are correctly recorded.
Inquiry and Observation: The auditor asks the client about the
location of fixed assets and any changes in value of existing assets. The
client’s response helps the auditor determine which fixed assets he selects to
physically observe. While observing an asset, the auditor determines that the
asset exists and that the asset’s condition is comparable to the remaining life
listed on the depreciation schedule.
57.SGAGDC (0354) Ph-9491853132

``
Recalculation: According to Qualified Advice and Audit Partners,

recalculation consists of checking the mathematical accuracy of documents
and records. The auditor selects a sample of items from the fixed asset listing
and recalculates prior and current depreciation expense. The auditor
determines if the amounts are accurate and records any necessary
adjustments.
Q.21.Stock valuation checking and procedure.
Ans:
The method of valuing stock for balance sheet purpose is quite independent of the system of
pricing for costing purposes. The valuation of stock in financial accounts is dome on the basis of
the principle that it is imprudent to consider unrealized profits and ignore anticipated losses.
Therefore, stock for balance sheet purposes is value at lower of the cost or market price. For
calculating the cost price of stock of materials in hand, it is assumed that stock consists of most
recent purchases.
Stock audit
Stock audit implies the physical verification of stock with the inventory records. Even in the cases
where stores ledger is maintained in the perpetual inventory system, physical verification
of stock is necessary which have become obsolete or useless.
Periodic stock verification
When the physical verification of stock is done periodically (e.g. half-yearly on annually), the
system of verification is known as periodic stock verification system. The disadvantage of this
method is that during the stock taking all transactions relating to materials “in or out of the store
will have to be suspended.
Continuous stock verification
In this method continuous checking is done by taking different sections of the stores in rotation.
This method is used is used by large concerns because they can afford to maintain a trained staff to
take inventory continuously throughout the year. The system has the following advantages:
(a) It does not require a shutdown or business operation for stock taking.
(b) It serves as a moral check on the stores staff as they keep their records up-to-date at all times in
anticipation of the unexpected arrival of the inventory staff.
58.SGAGDC (0354) Ph-9491853132

``
(c) It estimates the possibility of delay in production on account of unexpected shortage in

the stock of materials.
Following procedures may be followed in this connection:
1. The work of inventory taking should be taken during a period of slack business activity so that
the production activities are disrupted for the minimum possible time.
2. The store-keeper should be asked to arrange the stock of materials and factory supplies in an
orderly way. Obsolete and useless items should be separated from the normal stock for separate
listing.
3. The inventory staff should be properly selected. They should be persons who are familiar with
the various types of materials and capable of counting items quickly. They should be persons other
than those who are working in the store.
4.Supervisors should be appointed from the foreman or the executive group. Each supervisor will
have under him and a number of stock rooms. He will be assisted by counting and recording
clerks. He will make groups of two – one to count and the other to record on the inventory tag or
any other special sheet meant for this purpose. He will also appoint certain clerks as stock
verifiers.
Stock in trade verification procedure:
The audit procedure, which the auditor should follow while verifying the stock-in-trade, is as
follows:
1. The auditor should examine the internal check system in operation.
2. He should study and make himself familiar with the stock taking system followed in the
organization. He should also see whether the system is proper.
3. He should check the Stock Sheets with the Stock Registers.
4. He should examine how the management controls the receipts and issues of stock.
5. He should check the prices of stock with the help of catalogs, invoices, and price lists.
6. He should check the totals, balances, and extensions of stock sheets.
7. He should get a copy of the physical stock taking instructions given by the client beforehand
and see whether they are proper and possess adequate safeguards against possible errors or frauds.
8. If possible he can send one of his staff to observe the physical stock taking.
59.SGAGDC (0354) Ph-9491853132

``
9. He should see whether the job of stock sheet preparation is allotted to a responsible official of
the organization and also should insist that a top-level executive like director should sign it.
10. If there is any alteration in stock sheet, he should see whether the responsible official attests
such alteration. Besides, he should also find out the intention for such alteration.
11. He should test check some of the items of the stock with the stock records with regard to their
quantity and value. If there is any material difference it must be en quired into.
12. He should test check the physical existence of at least 5% of the items to determine whether
records represent correctly the stock in hand.
13. He should see whether all the goods purchased during the year included in the stock.
14. He should see whether all old, and damaged stocks have not been included in the stock, and
they have been written off.
Q.22.Write contents of cost audit.

Ans:
Contents of a Cost Audit Report:
This article throws light upon the six main classifications of contents in the cost
audit report. The classifications are: 1.Statutory Affirmations 2.Objective Statement
of Findings 3.Statement of Facts 4.ReStatement of Figures and Data 5.Statement
of Opinion or Facts on Matters requiring Professional Competence 6.Statement of
Opinion or Facts on Matters Relating to Management Performance.
Contents in the Cost Audit Report: Classification # 1.
Statutory Affirmations:
These require the Cost Auditor to state categorically whether or not his
requirements relating to five paragraphs on fifteen specific points have been
fulfilled.
Objective Statement of Findings:
These include: comparison of actual with standards, nonmoving stock, writtenoff
stock, inventory valuation, references to abnormal features affecting production
thereby having their effect on the cost of production (i.e., abnormal nonrecurring
60.SGAGDC (0354) Ph-9491853132

``
costs), power/fuel/utilities, and consumption per unit of production — for each
type/variety.
Contents in the Cost Audit Report: Classification# 3.
Statement of Facts:
These include: Method of depreciation adopted by the company, basis of
allocation of overheads and the detailed factual data relating to the company
in respect of matters such as:
(i) Date of first commencement of commercial production,
(ii) Location of factories,
(iii) Location where cost accounts are kept,
(iv) Licensed capacity and the extent of its utilization,
(v) Process of manufacture along with a flow chart of the product under reference,
(vi) Activities other than the product under reference,
(vii) Loan license/job work arrangement, and
(viii) Foreign technical collaboration, etc.
ReStatement of Figures and Data:
These include:
(i) A statement of the company’s financial position, such as Capital employed, Net
worth, Profit before tax and ratio in terms of value and as percentage for the
company sales, operating profit, value addition as a whole and for the product
under reference, current ratio, debtequity ratio, stocks of raw materials, stores &
spares, WIP and finished goods in terms of number of months of consumption,
production cost and cost of sales, respectively;
(ii) Statistics relating to Production job work, loan license and other similar figure:
(iii) An analysis of expenditures restated in terms of costs per unit of output (e.g.,
direct labour cost, stores and spares, etc.) and reasonwise analysis of idle man
days for both direct and indirect workers, etc.;
61.SGAGDC (0354) Ph-9491853132

``
(iv) Working capital requirement in terms of no. of months of cost of sales
excluding depreciation, power/fuel/utilities’ costs, salaries and wages, repairs &
maintenance, overheads, R&D expenses, Royalty & technical knowhow charges,
quality control/pollution control expenses, sales, capitalization of revenue
expenditure, central excise reconciliation, profit reconciliation, etc.
Statement of Opinion or Facts on Matters requiring Professional Competence:
These include comments on:
(i) The cost accounting system — adequacy or otherwise to determine the costof
production of the product;
(ii) The basis of charging depreciation to the cost of production;
(iii) The basis of allocation of overheads to cost centres and the manner of
absorbing overheads to products;
(iv) The adequacy or otherwise of the Budgetary Control System;
(v) Possibilities of improvement in performance by cost reduction, improved
inventory policies, and scientific methods of locating and correcting factors causing
bottlenecks;
(vi) Margin per unit of output, and competitive margin against imports.
Statement of Opinion or Facts on Matters Relating to Management Performance:
This is really an expression of opinion on ‘efficiency’ and ‘propriety’ which would
fall broadly under the classification of Management Audit or Management
Evaluation.
These include the following major areas:
(i) The incentive schemes for wage payments indicating their contribution towards
increased productivity and reduced costs;
(ii) Cases where the company’s funds have been used negligently or inefficiently;
(iii) Controllable factors which have not been controlled resulting in increase in the
cost of production;
62.SGAGDC (0354) Ph-9491853132

``
(iv) Review of agreements and contracts relating to selling, purchasing, foreign
collaboration, etc.;
(v) Suggestions for improvement in performance by production capacity balancing,
cost reduction, capacity utilization, etc.;
(vi) Measures taken for the conservation of energy and their impact on the unit
cost of production of the product; and
(vii) Value addition and distribution of earnings, and related party transactions.
Q.22.Explain depreciation checking in audit.

Ans. Check the depreciation rates as provided in companies act 1956. check
whether is any addition made during the year , if yes then check depreciation is
correctly charged from the date of purchase till last date of a/c year.
check there is sale of any asset and if yes den check its treatment given by the
company. Scrutinize all th original documents supporting any additions made by the
company in case of fixed assets and cross tally the amount debited to FA a/c with
such documents.
Also check application of AS-10 & AS-6 whether it has been correctly applied by the
management. See whether all the assets added and sold by the management are
properly authorized by passing resolution for it. Also check the internal policy if any
of the company. This are some of the imp points that you need to keep in mind
while doing audit of asset & depreciation.
Financial statement audits are performed to provide reasonable assurance that an

entity’s financial statements are fairly presented in accordance with generally
accepted accounting principles. To obtain this assurance, auditors examine material
account balances. The fixed asset balance, which deals with assets that can't easily
be converted into cash, is a common material account balance on an entity’s
financial statements. It is audited through procedures that confirm the existence and
valuation of the reported account balance.
Gather Evidence
The auditor’s client, or the auditee, provides the auditor with a detailed listing of
items included in fixed asset accounts. The detailed list, or a depreciation schedule,
includes a description of the asset, the original cost, method of depreciation,
depreciable life and prior and current years’ depreciation expense. The auditor
63.SGAGDC (0354) Ph-9491853132

``
reviews the list forreasonableness and determines if the account balance on the
financial statements matches the depreciation schedule.
Perform Analytics
According to Qualified Advice and Audit Partners, analytical procedures encompass
the investigation of identified fluctuations and relationships that are inconsistent
with other relevant information or deviate significantly from predicted
amounts. Forinstance, auditors compare the current year account balance to the prior
year balance and determine if the difference is reasonable. A financial statement
ratio, such as “depreciation expense as a percentage of fixed assets,” is also
considered an analytic. The auditor tracks ratios for a period of three to five years
and evaluates ratios that produce unexpected variances.
Review Documentation
Review invoices to determine the client correctly recorded acquisition costs and
dispositions of assets. To test existence of fixed assets, the auditor selects a sample
of items and matches the detail on the invoice to the detail on the
client’s depreciationschedule. While reviewing invoices, or vouching, the auditor
checks the date of purchase, the description of the asset and other costs incurred to
place the asset in service. In addition, an auditor reviews gain and loss accounts to
determine if dispositions are correctly recorded.
Inquiry and Observation

The auditor asks the client about the location of fixed assets and any changes in
value of existing assets. The client’s response helps the auditor determine which
fixed assets he selects to physically observe. While observing an asset, the auditor
determines that the asset exists and that the asset’s condition is comparable to the
remaining life listed on the depreciation schedule.
Recalculation
According to Qualified Advice and Audit Partners, recalculation consists of
checking the mathematical accuracy of documents and records. The auditor selects a
sample of items from the fixed asset listing and recalculates prior and
current depreciation expense. The auditor determines if the amounts are accurate and
records any necessary adjustments.
64.SGAGDC (0354) Ph-9491853132

``
Q.23.Inventory audit procedures.

Ans:
If your company records its inventory as an asset, and it undergoes an
annual audit, then the auditors will be conducting an audit of your inventory.
Given the massive size of some inventories, they may engage in quite a large
number of inventory audit procedures before they are comfortable that the
valuation you have stated for the inventory asset is reasonable. Here are
some of the inventory audit procedures that they may follow:
•Cutoff analysis. The auditors will examine your procedures for halting any
further receiving into the warehouse or shipments from it at the time of
the physical inventory count, so that extraneous inventory items are
excluded. They typically test the last few receiving and shipping transactions
prior to the physical count, as well as transactions immediately following it,
to see if you are properly accounting for them.
•Observe the physical inventory count. The auditors want to be comfortable
with the procedures you use to count the inventory. This means that they will
discuss the counting procedure with you, observe counts as they are being
done, test count some of the inventory themselves and trace their counts to
the amounts recorded by the company's counters, and verify that all
inventory count tags were accounted for. If you have multiple inventory
storage locations, they may test the inventory in those locations where there
are significant amounts of inventory. They may also ask for confirmations of
inventory from the custodian of any public warehouse where the companyis
storing inventory.
•Reconcile the inventory count to the general ledger. They will trace the valuation
compiled from the physical inventory count to the company's general ledger, to
verify that the counted balance was carried forward into the company's accounting
records.
•Test highvalue items. If there are items in the inventory that are of unusually high
value, the auditors will likely spend extra time counting them in inventory,
ensuring that they are valued correctly, and tracing them into the valuation report
that carries forward into the inventory balance in the general ledger.
•Test errorprone items. If the auditors have noticed an error trend in prior years for
specific inventory items, they will be more likely to test these items again.
•Test inventory in transit. There is a risk that you have inventory in transit from one
storage location to another at the time of the physical count. Auditors test for this
by reviewing your transfer documentation.
65.SGAGDC (0354) Ph-9491853132

``
•Test item costs. The auditors need to know where purchased costs in your
accounting records come from, so they will compare the amounts in recent supplier
invoices to the costs listed in your inventory valuation.
•Review freight costs. You can either include freight costs in inventory or charge it
to expense in the period incurred, but you need to be consistent in your treatment
so the auditors will trace a selection of freight invoices through your accounting
system to see how they are handled.
•Test for lower of cost or market. The auditors must follow the lower of cost or
market rule, and will do so by comparing a selection of market prices to their
recorded costs.
•Finished goods cost analysis. If a significant proportion of the inventory valuation
is comprised of finished goods, then the auditors will want to review the bill of
materials for a selection of finished goods items, and test them to see if they
show an accurate compilation of the components in the finished goods items, as
well as correct costs.
•Direct labor analysis. If direct labor is included in the cost of inventory, then
the auditors will want to trace the labor charged during production on time
cards or labor routings to the cost of the inventory. They will also investigate
whether the labor costs listed in the valuation are supported by payroll records.
•Overhead analysis. If you apply overhead costs to the inventory valuation, then
the auditors will verify that you are consistently using the same general ledger
accounts as the source for your overhead costs, whether overhead includes any
abnormal costs (which should be charged to expense as incurred), and test the
validity and consistency of the method you use to apply overhead costs to
inventory.
•Workinprocess testing. If you have a significant amount of workin
process (WIP) inventory, the auditors will test how you determine a percentage of
completion for WIP items.
•Inventory allowances. The auditors will determine whether the amounts you have
recorded as allowances for obsolete inventory or scrapare adequate, based on your
procedures for doing so, historical patterns, "where used" reports, and reports of
inventory usage (as well as by physical observation during the physical count). If
you do not have such allowances, they may require you to create them.
•Inventory ownership. The auditors will review purchase records to ensure that the
inventory in your warehouse is actually owned by the company (as opposed to
customerowned inventory or inventory on consignment from suppliers).
•Inventory layers. If you are using a FIFO or LIFO inventory valuation system,
the auditors will test the inventory layers that you have recorded to verify that they
are valid.
If the company uses cycle counts instead of a physical count, the auditors can still
use the procedures related to a physical count. They simply do so during one or
66.SGAGDC (0354) Ph-9491853132

``
more cycle counts, and can do so at any time; there is no need to only observe a
cycle count that occurs at the end of the reporting period. Their tests may also
evaluate the frequency of cycle counts, as well as the quality of the investigations
conducted by counters into any variances found.The extent of the procedures
employed will decline if inventory constitutes a relatively small proportion of the
assets listed on a company's balance sheet.
Q.24.Briefly write Cost audit report writing.
Ans:
In addition to the above, the Cost Auditor should
ascertain and verify as to:
(1) Whether there was any press advertisement,
(2) Whether enquiries were floated to the accredited suppliers or manufacturers of such
components, (listed or not),
(3) Whether tenders or quotations were received from those suppliers or manufacturers
other than the firm the partner of which is also a director of the company,
(4) whether the company has prepared an analytical comparative statement of the tenders
in regard to the prices, specifications, quality, term of delivery and terms of payment, etc.,
and
(5) Whether there is an existence of Tender Committee and, if so, their recommendations,
including ascertainment as to the recommendations of the Purchase or Contracts Manager
of the company, and whether such purchase agreements were based on reasonable
conclusions in keeping with other factors and practices normally followed.
That means, whether such agreement was concluded under normal or abnormal
circumstances. Finn is the only Supplier: The Cost Auditor will have no choice or means to
compare the price charged by the firm with those of others as no suppliers of the
component are available.
In such a situation, in order to obtain reasonable assurance and to arrive at a reasonable
conclusion, the Cost Auditor has to apply other ‘substantive audit procedures’, such as:
(a) Obtaining from the firm the details of the particulars of the component, for example:
(i) The price charged by the firm to other customers, and the price catalogue, if any,
67.SGAGDC (0354) Ph-9491853132

``
(ii) The ex-factory price or selling price declared by the firm to the Excise authorities or to
other Government authorities,
(iii) The total cost of the component and the margin of profit of the firm in selling it to the
company with whom the contract is made and to other independent buyers; and
(b) Verifying the earlier Cost Audit Report or the Cost Accounting Records, if the firm’s
component was at any time under Cost Audit or is converted by the Statutory Cost
Accounting Record Rules, and ascertaining the reasonableness of the margin of profit
made by the firm.
Charging and Justifying Higher price: The Cost Auditor should:
(a) Ask for a Certificate from the company’s technical personnel as to the quality of the
component supplied by the firm;
(b) Engage another technical expert having knowledge of the component, (such technical
expert should in no way be connected with the company or the firm) and obtain his opinion
about the superiority of the component’s quality than those of the other competing firms or
suppliers, and should also enquire from him that such quality component is necessarily
required for the company’s production or for satisfaction of the customers’ specific choice
or preference.
That means, he must arrive at a conclusive evidence that the company’s product will fail to
meet the basic requirements had those quality components not been bought; and
(c) Ask for the information and opinion of the other competitors with respect to the quality
and price of their products in relation to those of the firm.
As regards the extended credit terms availability with the firm, the Cost Auditor should, in
addition to checking the provisions of such terms, scan through previous transactions to
satisfy himself that the extended credit terms facility had actually been enjoyed by the
company, and also compare the effect on cost had the limited credit terms offered not been
considered.
Since this sub-Para stresses on ‘normal price’ for being compared with the ‘actual price’
charged, the ‘normal price’ determination is important. But such
determination/ascertainment of ‘normal price’ is difficult in certain related party
transactions, apart from the assessment of impact on the margin of the product, especially
when 100% of a product variety/class is sold to a related party.
In such situation, the fact must be spelt out by the cost auditor in this sub-Para.
68.SGAGDC (0354) Ph-9491853132

``
Paragraph 3(e):
Areas where the company is incurring losses or where there is considerable decline in
profitability the Cost Auditor should comment on the reasons thereof including indicative
breakeven point. The Cost Auditor shall also comment on the default, if any, on the
payments due to the Government, Financial Institutions and Banks, penal interest levied
thereon and its impact on the Cost of sales and profitability:
This sub-Para has two parts:
(1) Reasons for decline in profitability and
(2) Default in Government dues and penal interest. Its main objective is to identify the
weak spots with a view to bring about improvement of efficiency and results in future.
(a) Decline in profitability:
This may be due to various reasons such as inadequacy of profit/margin, deficiency in the
activities of selling/marketing and production, drop in sales (domestic and/or export),
abnormal increase in one or more cost elements, over-capitalisation, low debtors’ turnover,
higher incidence of interest charges, defective price fixation, and so on.
So, it is for the cost auditor to devise and apply measurement techniques and yardsticks
with regard to costs, profits, productivity, performance efficiency, etc., and make out
systematic analysis and in-depth study of operational results covering all phases of
business activity and of activities concerning the product under reference.
In short, the measurement of effectiveness in the management and utilisation of resources
is called for.
For guidance and ready reference, the pyramid style of Ratio Analysis in an order which
deals with, first, in terms of general business conditions/general management and secondly,
in terms of measurement, is illustrated below.
69.SGAGDC (0354) Ph-9491853132

``
The above nature of analysis would certainly secure a sequential picture of
interdependent factors in business operations to locate reasons. In addition, the
cost auditor should work out certain other ratios for performance measurement so
as to facilitate him to conclude as to the few basic, yet major, reasons that
contributed to a considerable decline in profitability in comparison to previous
years and industry standards.
Performance measurement (illustrative only):
(1) Value of direct material/Value of production.
(2) Cost of raw materials/Quantity produced.
(3) Cost of Scrap or rejects/Cost of production.
(4) Output per worker (labour productivity).
(5) Cost of production per hour.
(6) Contribution/Sales.
(7) Wages cost per employee.
(8) Fringe benefits cost per employee.
(9) Power Cost/Machine hours.
(10) Repairs & maintenance cost/Cost of production.
(11) Selling cost/Net Sales.
(12) Advertising cost/Selling cost, etc.
(b) Indicative breakeven point:
70.SGAGDC (0354) Ph-9491853132

``
This requires a lot of assumptions. Yet, this can be incorporated in terms of capacity
utilisation percentage rather than on absolute figures.
(c) Default in Govt. dues and Penal interest:
In order to comment on them, the cost auditor should better ask for a certificate
(with full details) from the company management, on the basis of which he can
work out their impacts on the ‘Cost of Sales’ and ‘Profitability’.
Paragraph 3(f):
Steps required strengthening the company under the competitive environment,
especially with regard to need for protection from cheaper imports, if any:
(1) Competitive margin against imports.
(2) It is rather difficult for a cost auditor to suggest steps in this regard. So, he
should ask for a detailed ‘writeup’ from the company management.
Such ‘writeup’ should cover at least:
(i) Major exporting countries and their prices for the products imported into India,
(ii) Severity of competition faced,
(iii) Empirical evidences that construe dumping thereby affecting the market share
of Indian manufacturers, and
(iv) Suggestive measures together with specific valid cases.
(3) The cost auditor, on his part, should ensure validity or otherwise of the
management’s assertion keeping in view the ‘Statistical Records’ maintained in
terms of the relevant cost accounting records rules.
Paragraph 3(g):
Export commitments of the company visavis actual exports for the year under
review. Also comment on comparative profitability and pricing policy of the
company for domestic and export sales. Give impact of exports benefits/incentives
offered by the Government on export profitability:
(1) This subPara requires the cost auditor to furnish information and comments on
four parts:
71.SGAGDC (0354) Ph-9491853132

``
(i) Export commitments vs. actual exports in order to show the position of
outstanding export contracts (i.e., yet to be executed),
(ii) Pricing policy/strategy for domestic and export sales,
(iii) Comparative profitability, — export contractwise and domestic sales, and
(iv) Impact of export benefits/incentives on export profitability.
(2) In this connection, it is relevant and important for the cost auditor to
understand/ ascertain
(i) The company’s pricing policy/strategy separately for domestic and export sales;
and
(ii) The kind and type of export benefits/incentives offered by the Government and
availed of by the company, both in relation to the product under reference.
Paragraph 3(h):
The scope and performance of Internal Audit of Cost Records, if any, and comment
on its adequacy or otherwise.
Cost Audit Report: Form # 4. Paragraph 4:
Scope of Cost reduction:
Cost reduction is defined as the achievement of real and permanent reduction in
the unit cost of products manufactured or services rendered without impairing their
suitability for use intended or diminution in the quality of the product or services.
It implies the retention of the essential characteristics and quality of the product
and consequently confined to permanent savings in the cost of manufacture and
sales by elimination of wasteful and nonessential elements from the design of the
product and from the techniques and practices carried out in connection therewith.
In this area, the cost auditor’s suggestions should include value analysis, variety
reduction, standardisation, simplification, improvement in design, organisation
methods or process, marketing, and finance.
The cost auditor should obtain a detailed plan of cost reduction from the company
for the year of cost audit and, for immediate future, study it from the aspects of
cost benefit and suggest specific schemes for further improvement in performance.
72.SGAGDC (0354) Ph-9491853132

``
Since this area is broad and multifaceted, it calls for ingenuity and skill in
marshalling the facts and figures on the part of a cost auditor while presenting his
observations and suggestions on specific area or areas (each area being dovetailed
separately).
Cost Audit Report: Form # 5. Paragraph 5:
Other observations and suggestions, if any, relevant to the cost audit:
It is this paragraph that constitutes the climax of reporting by offering observations
and suggestions on various pertinent matters not covered/highlighted in the earlier
paragraphs.
Under this paragraph, the cost auditor may touch upon or elaborate any or all of
the following pertinent matters/cases based on verified data and documents after
having afforded the company (wherever practicable) an opportunity to comment
on them :
1. If there is any change in the share capitals due to merger, acquisition, buyback
of shares, bonus issue, etc.
2. If there are specific cases where the company’s funds have been used in a
negligent or inefficient manner.
3. If there are certain factors which could have been controlled but have not been
done resulting in an increase in the cost of production/cost of sales.
4. If there is no budgetary control system.
5. If there is no system of internal audit of cost records.
6. If there is general imbalance in production facilities.
7. If there is an underutilisation of installed capacity.
8. If there are key limiting factors causing production bottlenecks.
9. If there is a scope for increased ‘productivity’.
10. If the inventory policies need further improvement.
11. If there is any ‘abnormal nonrecurring cost’ in case of disagreement between
him and the company.
12. Any other matter that the cost auditor may deem necessary.
73.SGAGDC (0354) Ph-9491853132

``
Q.24.Steps of Cost accounting system.
Ans:
Definition: A cost accounting system is used by manufacturers to record
production activities using a perpetual inventory
system. In other words, it’s
an accounting
system designed for manufacturers that tracks the flow of inventory
continually through the various stages of production.
The Five Parts of a Cost Accounting System

A cost accounting system requires five parts that include:
1. an input measurement basis,
2. an inventory valuation method,
3. a cost accumulation method,
4. a cost flow assumption, and
5. a capability of recording inventory cost flows at certain intervals.
These five parts and the alternatives under each part are summarized in Exhibit 2-1.
Note that many possible cost accounting systems can be designed from the various
combinations of the available alternatives, although not all of the alternatives are
compatible. Selecting one part from each category provides a basis for developing
an operational definition of a specific cost accounting system.
74.SGAGDC (0354) Ph-9491853132

``
1. Input Measurement Bases

The basis of a cost accounting system begins with the type of costs that flow into
and through the inventory accounts. There are three alternatives including: pure
75.SGAGDC (0354) Ph-9491853132

``
historical costing, normal historical costing and standard costing. These concepts are
illustrated in Exhibit 2-2 and discussed individually below.
Pure Historical Costing

In a pure historical cost system, only historical costs flow through the inventory
accounts. Historical costs refers to the costs that have been recorded. The term actual
costs is sometimes used instead, but the term "actual" seems to imply that there is
one true cost associated with a particular output. But determining the cost of a
product, or service requires many cost allocations, e.g., allocating the cost of fixed
assets to time periods, and allocating indirect manufacturing costs, or overhead to
products. Since there are many alternative allocation methods, (e.g., straight line or
accelerated depreciation) the calculated cost of a unit of product or service simply
represents an attempt to approximate the true cost. A pure historical cost system is
symbolized in the top left section of Exhibit 2-2.
76.SGAGDC (0354) Ph-9491853132

``
Normal Historical Costing

Normal historical costing uses historical costs for direct material and direct labor,
but overhead is charged, or applied to the inventory using a predetermined overhead
rate per activity measure. Typical activity measures include direct labor hours, or
direct labor costs. The amount of factory overhead charged to the inventory is
determined by multiplying the predetermined rate by the actual quantity of the
activity measure. The difference between the applied overhead costs and the actual
overhead costs represents an overhead variance. The concept is represented in the
top right section of Exhibit 2-2. This type of cost system is illustrated in
Chapter 4 and Chapter 5. Predetermined overhead rates and overhead variance
analysis are discussed in those and subsequent chapters.
Standard Costing
In a standard cost system, all manufacturing costs are applied, or charged to the
inventory using standard or predetermined prices, and quantities. The differences
between the applied costs and the actual costs are charged to variance accounts as
shown symbolically in the lower section of Exhibit 2-2. The variances provide the
basis for the concept of accounting control, which is somewhat different from the
statistical control concept discussed in Chapter 1 . This type of basic cost system is
illustrated in Chapter 9 and Chapter 10. Standard cost variance analysis is given
considerable attention in Chapter 10.
2. Four Inventory Valuation Methods
The four inventory valuation methods that appear in Exhibit 2-1 are arranged in the
order of the amount of cost that is traced to the inventory. The throughput method
involves tracing the least amount of cost to the inventory, while the activity based
method includes tracing the greatest amount of costs to the inventory. In direct (or
variable) costing, a greater amount of cost is traced than in the throughput method,
but a lesser amount than in the full absorption method. Direct costing and full
absorption costing are the traditional methods, while the throughput and activity
based methods are relatively new. These inventory valuation methods are very
important because they control the manner in which net income is determined. As
we shall see is this chapter and subsequent chapters, the amount of net income can
77.SGAGDC (0354) Ph-9491853132

``
vary tremendously for different inventory valuation methods. The four methods are
described below.
The Throughput Method
The throughput method was developed to complement a concept referred to as the
theory of constraints. In this method only direct material costs are charged to the
inventory. All other costs are expensed during the period. The concept is symbolized
in the top left section of Exhibit 2-3. Sales, less direct material costs is referred to as
throughput which reflects how the method got its’ name. The throughput method
does not provide proper matching (as defined by GAAP) because all manufacturing
cost, other than direct material are expensed when incurred rather than capitalized in
the inventory. Therefore, the throughput method is not acceptable for external
reporting although advocates argue that it provides many advantages for internal
reporting. The throughput method is described in more detail in Chapter 8 along with
the broader concept referred to as the theory of constraints.
78.SGAGDC (0354) Ph-9491853132

``
The Direct or Variable Method

In the direct (or variable) method, only the variable manufacturing costs are
capitalized, or charged to the inventory. Fixed manufacturing costs flow into
expense in the period incurred as illustrated in the top right section of Exhibit 2-3.
This method provides some advantages and some disadvantages for internal
reporting, (as we shall see in Chapter 8, Chapter 11, and Chapter 13). However, it
does not provide proper matching because the current fixed costs associated with
producing the inventory are charged to expense regardless of whether or not the
output is sold during the period. For this reason direct costing is not generally
acceptable for external reporting.
The Full Absorption Method
Full absorption costing (also referred to as full costing and absorption costing) is a
traditional method where all manufacturing costs are capitalized in the inventory,
i.e., charged to the inventory and become assets. This means that these costs do not
become expenses until the inventory is sold. In this way, matching is more closely
approximated. All selling and administrative costs are charged to expense however,
as indicated in the lower left section of Exhibit 2-3. Technically, full absorption
costing is required for external reporting, although many companies apparently use
something less than a pure full absorption costing system. The full absorption
method is also frequently used for internal reporting. The second major section of
this chapter compares the income statements for full absorption costing with those
used for direct costing because they are by far the dominant methods. Chapter 4,
Chapter 5, Chapter 6, Chapter 9 and Chapter 10 are based on full absorption costing.
Chapters 8 compares all four methods and includes a discussion of the behavioral
implications of using the different methods.
79.SGAGDC (0354) Ph-9491853132

``
Activity based costing is a relatively new type of procedure that can be used as an
inventory valuation method. The technique was developed to provide more accurate
product costs. This improved accuracy is accomplished by tracing costs to products
through activities. In other words, costs are traced to activities (activity costing) and
then these costs are traced, in a second stage, to the products that use the activities.
The concept of ABC is illustrated in the lower right section of Exhibit 2-3. Another
way to express the idea is to say that activities consume resources and products
consume activities. Essentially, an attempt is made to treat all costs as variable,
recognizing that all costs vary with something, whether it is production volume or
some non-production volume related phenomenon. Both manufacturing costs and
selling and administrative costs are traced to products in an ABC system. Note that
treating selling and administrative costs in this way is not acceptable for external
reporting.
80.SGAGDC (0354) Ph-9491853132

``
In traditional full absorption costing and direct (or variable) costing systems, indirect
manufacturing costs are allocated to products on the basis of a production volume
related measurement such as direct labor hours. Thus, the fundamental differences
between traditional systems and activity based systems are: 1) how the indirect costs
are assigned (ABC uses both production volume and non-production volume related
bases) and 2) which costs are assigned to products (in ABC systems, an attempt is
made to assign all costs to products including engineering, marketing, distribution
and administrative costs, although some facility related costs may not be assigned).
At the present time, most of the companies that use the activity based method have
developed stand alone, micro-computer based systems separate from the company's
mainframe cost accounting system used for external reporting.4 The idea is to
develop more accurate product costs than the traditional cost accounting system
provides so that management can make better strategic decisions such as product
introduction, pricing, mix and discontinuance. In these systems, ABC is not used as
an inventory valuation method. Activity based costs are not charged to the inventory
accounts. However, it is used to determine product costs once per year, or more
frequently when changes are made in the production process.
3. Four Cost Accumulation Methods
Cost accumulation refers to the manner in which costs are collected and identified
with specific customers, jobs, batches, orders, departments and processes. The center
of attention for cost accumulation can be individual customers, batches of products
that may involve several customers, the products produced within individual
segments during a period, or the products produced by the entire plant during a
period. The company’s cost accumulation method, or methods are influenced by the
type of production operation (See the Product-Process Matrix below and the Hayes &
Wheelwright summaries for more information), and the extent to which detailed cost
accounting information is needed by management. The four accumulation methods
that appear in Exhibit 2-1 are discussed below.
Job Order
In job order costing, costs are accumulated by jobs, orders, contracts, or lots. The
key is that the work is done to the customer's specifications. As a result, each job
81.SGAGDC (0354) Ph-9491853132

``
tends to be different. For example, job order costing is used for construction
projects, government contracts, shipbuilding, automobile repair, job printing,
textbooks, toys, wood furniture, office machines, caskets, machine tools, and
luggage. Accumulating the cost of professional services (e.g., lawyers, doctors and
CPA's) also fall into this category. Chapter 4 illustrates a cost accounting system that
includes normal historical costing as the basic cost system, full absorption costing as
the inventory valuation method and job order costing as the cost accumulation
method.
Process
In process costing, costs are accumulated by departments, operations, or processes.
The work performed on each unit is standardized, or uniform where a continuous
mass production or assembly operation is involved. For example, process costing is
used by companies that produce appliances, alcoholic beverages, tires, sugar,
breakfast cereals, leather, paint, coal, textiles, lumber, candy, coke, plastics, rubber,
cigarettes, shoes, typewriters, cement, gasoline, steel, baby foods, flour, glass, men's
suits, pharmaceuticals and automobiles. Process costing is also used in meat packing
and for public utility services such as water, gas and electricity. Chapter 5illustrates a
cost accounting system that includes normal historical costing as the basic cost
system, full absorption costing as the inventory valuation method and process
costing as the cost accumulation method.
Back Flush
Back flush costing is a simplified cost accumulation method that is sometimes used
by companies that adopt just-in-time (JIT) production systems. However, JIT is not
just a technique, or collection of techniques. Just-in-time is a very broad philosophy,
that emphasizes simplification and continuously reducing waste in all areas of
business activity. JIT systems were developed in Japan and depend on the
communitarian concepts of teamwork and continuous improvement. In fact, many of
the assumptions, attitudes and practices of communitarian capitalism are included in
the JIT philosophy. One of the many goals of JIT systems is zero ending inventory.
In a backflush cost system, manufacturing costs are accumulated in fewer inventory
accounts than when using the job order or process cost methods. In fact, in extreme
backflush systems, most of the accounting records are eliminated. The production
facilities are also arranged in self contained manufacturing cells that are dedicated to
82.SGAGDC (0354) Ph-9491853132

``
the production of a single, or similar products. In this way more of the

manufacturing costs become direct product costs and fewer cost allocations are
necessary. Thus, more accurate costing is obtained in spite of the fact that the cost
accumulation method is simplified. The just-in-time philosophy and related
accounting methods are discussed in Chapter 8.
Hybrid, or Mixed Methods
Hybrid or mixed systems are used in situations where more than one cost
accumulation method is required. For example, in some cases process costing is
used for direct materials and job order costing is used for conversion costs, (i.e.,
direct labor and factory overhead). In other cases, job order costing might be used
for direct materials, and process costing for conversion costs. The different
departments or operations within a company might require different cost
accumulation methods. For this reason, hybrid or mixed cost accumulation methods
are sometime referred to as operational costing methods.
4. Four Cost Flow Assumptions
A cost flow assumption refers to how costs flow through the inventory accounts, not
the flow of work or products on a production line. This distinction is important
because the flow of costs is not always the same as the flow of work. The various
types of cost flow assumptions include: specific identification (e.g., by job), first in,
first out, last in, first out and weighted average. Costs flow through the inventory
accounts by the job in a job order cost system which represents an example of
specific identification. The requirements of the various jobs determines the timing of
the cost flows. Simple jobs tend to move through the system faster than more
complex jobs. The first-in, first-out (FIFO) and weighted average cost flow
assumptions are used in process costing. Since costs are accumulated by the process
or department in a process cost environment, a cost flow assumption is needed to
determine the treatment of the beginning inventory. When FIFO is used, it is
assumed that the units of product in the beginning inventory are finished first and
transferred to the next department before any of the units that are started during the
period. The group of units in the beginning inventory maintain their separate identity
and prior period costs. However, when the weighted average cost flow assumption is
used, the beginning inventory units lose their separate identity because they are
lumped together with the units of product started during the period. Process costing
83.SGAGDC (0354) Ph-9491853132

``
tends to be fairly challenging, therefore you may find these introductory concepts to
be confusing. Don’t worry, these concepts will be easier to understand when we
consider an operational process cost accumulation system in Chapter 5.
Although last-in, first-out (LIFO) is frequently used for tax reporting purposes, it is
not normally used in the accounting records. For this reason, we consider the FIFO
and weighted average cost flow assumptions in Chapter 5, but leave the LIFO cost
flow assumption for courses that emphasize financial and tax reporting.
5. Recording Interval Capability
Inventory records can be maintained on a perpetual or a periodic basis.
Conceptually, the perpetual inventory method provides a company with the
capability of maintaining continuous records of the quantities of inventory and the
costs flowing through the inventory accounts. The periodic method, on the other
hand, requires counting the quantity of inventory before inventory records can be
updated. In the past, manufacturers tended to keep perpetual inventories, while
retailers used the periodic method. However, today a variety of modern point of sale
devices and dedicated microcomputer software are readily available to provide any
company with perpetual inventory capability.
Q.26.Audit Procedures for Expenses.

Ans:A financial audit is a chance for your business to double-check your
books for accuracy and proper documentation of expenses. Consider it the
company version of "making a list and checking it twice." When reviewing
company expenses, auditors evaluate expenditures to make sure they were
necessary and in line with internal policies. Expenses can be anything the
company paid money for in return for income — rent, invoiced expenses like
the cost of supplies and reimbursable expenses such as travel charges
incurred by an employee.
Internal Controls Companies have many types of internal controls related to

expenses. Some invoices may require certain levels of signatures, and others may require
a written contract. One of the first steps in an audit is to evaluate paid expenses against
how closely they follow the internal controls. An offshoot of this step is for the auditor to
recommend changes should he find loopholes within the controls that may allow an
employee to abuse or misuse the process of paying expenses.
84.SGAGDC (0354) Ph-9491853132

``
Reasonableness Check
A reasonableness check involves checking expenses to see if they are in line with what is
considered ordinary. For example, an invoice of $100 for a small box of pencils would not
be reasonable and should raise a red flag. An additional reasonableness step is to make
sure that only expenses that are necessary are incurred. Having a bill from two electric
companies for one location should also cause an audit flag, as most locations only have
one electricity supplier.
Timely Expense Processing

Expenses must be being received in a timely manner. The last thing a company wants is
for expenses to be turned in for something that occurred a year or two ago. A wide time
gap makes it harder for companies to make sure the expenses are legitimate and
reasonable. The older the invoice, the harder it is to ensure it is legitimate.
Accuracy and Documentation

Auditors will often randomly select invoices and ask to see all the original paperwork,
including contracts if they exist, invoices and signatures. They compare all the original
documentation against the amounts paid to find mistakes. Sometimes, this is a simple
keying error that may require employee retraining, and in other cases, this could be a
payment prior to work being completed.
Vendor Verification
A final check is to ensure that all vendors exist and are real businesses. One of the ways
fraudulent transactions occur is for an employee to set up a nonexistent vendor and
submit made-up bills. This may mean that the vendor has to exist in a business database,
such as Dun and Bradstreet, or that verifiable proof of work is submitted with payment
requests.
Q.27.What Are the Audit Procedures for the Sales &
Collection Cycle?
Ans:
Definition: The Sales Audit is the comprehensive, systematic, periodic, analysis,
evaluation and interpretation of business environment, objectives, strategies,
principles to determine the areas of problem or opportunities and recommending
the plan of action to improve the sales performance.
The sales audit is performed by the sales auditor, who can be from within the
organization or from outside the firm.
85.SGAGDC (0354) Ph-9491853132

``
The sales and collections cycle in a business refers to the set of processes that
begin when a customer purchases goods or services and ends when your
business receives payment in full. As part of the yearend audit of your
financial statements, external accountants test sales transactions and the
internal controls over those transactions to ensure your company is not
materially misstating its revenues or accounts receivable.
Test of Controls
An auditor tests the controls you have set up for the sales cycle to determine
how strong and reliable they are. If they are strong, the auditor can reduce the
amount of transaction testing he must do. Common internal controls over
the sales cycle include numbered sales invoices, purchase order authorization
over a certain limit and authorization over receivables writeoffs.
The auditor selects a random sample of transactions and examines the related
purchase orders, invoices and customer statements. If the control being tested
is numbered salesinvoices, for example, the auditor ensures that all numbers
in a section are accounted for and that none are missing. If the control is that
all purchase orders are approved by management, the auditor checks for a
manager's signature on each document. If control errors are found, the auditor
increases the amount of transactional testing he must do.
Transactional Testing
An auditor determines if the financial statement amounts of sales and
accounts receivable are correct by verifying individual transactions. Accounts
receivable balances are tested by sending confirmation letters to customers to
obtain objective assurance that the balance is correct. The auditor also
chooses sales transactions from the sales ledger and verifies that there are
legitimate sales receipts to back up the transaction. To test the accuracy of
the sales figure, the auditor reviews sales transactions in the ledger close to
the financial statement date to ensure that the company only
included sales prior to that date.
86.SGAGDC (0354) Ph-9491853132

``
Fraud Checks
The purpose of an external financial statement audit is to provide assurance
on the numbers and not to uncover employee or owner fraud. However, many
of the sales cycle audit procedures can lead to the discovery of fraud. A
common employee scheme is to steal customer payments and write them off in
the accounting system so that the receivable no longer shows. If an employee
has access to both the accounting system and the incoming mail, the auditor
spends more time reviewing receivable writeoffs to ensure that they were
authorized and legitimate. A review of purchase orders often can uncover
another common fraud where an employee creates sales to fictitious companies
and steals the product.
Internal Auditing
You can also audit your own procedures and transactions to ensure controls
are strong and effective. An internal audit is more likely to focus on employee
fraud, and internal auditors design controls over processes that thwart the
opportunity for it. Sales cycle examples include separating job duties that
otherwise would allow theft and coverup and implementing a mandatory
vacation policy so fraud.
The sales auditor takes the following points into consideration while
conducting the Sales Audit.
1.The sales audit begins with the analysis of the Hiring Procedure of the sales staff.
Here, the complete records of the personnel, their backgrounds, experience,
method of selection, is checked to ensure the correctness of the hiring procedure
followed by the company. Also, the training programs are checked to make sure
that these are well designed and increases the efficiency of the sales staff.
2.Also, the Market Conditions are also checked to see whether the company’s sales
targets are feasible or not. The auditor generally performs the SWOT (strengths,
weakness, opportunities, threats) analysis, in which he analyze the opportunities
and threats that exist in the external environment and have a huge impact on
the sales strategy. He checks the prospective threats from the competitor and also
determines the opportunities that can give a first mover advantage to the firm.
3.The auditor checks the Sales Procedure followed to facilitate the sales. The
discounts or any other promotion scheme offered to the customer should be in line
with the company’s profit objective. Thus, the auditor compares the
87.SGAGDC (0354) Ph-9491853132

``
ideal Sales Procedure as written on the paper with the actual operations performed
by the firm.
4.The Auditor also checks, the quality of the Customer Services offered once when
the product was sold or at times when the problems were encountered.The
repurchase of the product solely depends on the after sales service offered by the
company. Thus, the auditor analyses the performance of the company in terms of
its services and give the recommendations for the improvement, if any.
5.The Office Environment, wherein the sales staff, operates play a significant role
in achieving the sales targets. The business environment should be created in such
a way that it should be in the best interest of the workers so that they can work up
to their potential. The relation with the managers, Coworkers, and other
department’s personnel also affects the efficiency of the sale staff and thus
the auditor checks all these perspectives and prepares the sales audit report
accordingly.
Thus, the sales audit involves the analysis of the entire sales process starting from
the sales objectives set for the ultimate sales done by the company’s sales staff.
Believing in yourself
•Cultivating a success mindset
•Overcoming procrastination
•Hard work
•Not making excuses
•Perseverance
88.SGAGDC (0354) Ph-9491853132

``
89.SGAGDC (0354) Ph-9491853132

Mca 3RD Semestermod

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Mca 3RD Semestermod

Uploaded by

Copyright:

Available Formats

``

MANAGEMENT AND COST AUDIT

S.G.A Government PG&Degree College

MANAGEMENT AND COST AUDIT

M.COM 3rd SEMESTER

Mail id: gelli.santhoshkumar@gmail.com

1.SGAGDC (0354) Ph-9491853132

1. Explain about management audit and objectives ,scope ,advantages

According to L. R. Howard, "Management audit is an investigation of business from the highest

Scope of Management Audit:

2. Implementation of Principles and Policies of the Management: Management auditreview

Need and Objectives of Management Audit:

2.SGAGDC (0354) Ph-9491853132

4. Helps to Increase Profitability: Management audit helps the management to increase

Advantages or Importance of Management Audit:

1. Evaluates Efficiency of the Management: Management audit is a method of

3.SGAGDC (0354) Ph-9491853132

7. Helps to Increase Profitability: Management audit helps the management to increase

Limitations of Management Audit:

4.SGAGDC (0354) Ph-9491853132

Objectives of Cost Audit

Advantages of Cost Audit:

5.SGAGDC (0354) Ph-9491853132

Disadvantages of Cost Audit:

(ii) Cost Audit on Behalf of a Customer:

(iii) Cost Audit on Behalf of Government:

6.SGAGDC (0354) Ph-9491853132

(v) Cost Audit on Behalf of the Trade Association:

An auditor, whether of cost accounts or of financial accounts, is very much concerned

7.SGAGDC (0354) Ph-9491853132

5. The Cost Auditor is concerned with the scrutiny of reliability or otherwise of

8.SGAGDC (0354) Ph-9491853132

Q.6Management Audit, Purpose, Scope, Advantages, Disadvantages.

9.SGAGDC (0354) Ph-9491853132

Definition of Management Audit:

Purpose of Management Audit

Scope of Management Audit

10.SGAGDC (0354) Ph-9491853132

1. Evaluate the Efficiency of the Management: Management· audit evaluates and

2. Implementation of Principles and Policies of the Management: Management

5. Recommend Suggestions for Improvement: It gives suggestions for

11.SGAGDC (0354) Ph-9491853132

1.Verifying the Efficiency: Management audit aims at to assess the

2.Gives Suggestion for Increase in

3.Asses the Effectiveness of Planning and

4. Helps to Increase Profitability: Management audithelps

5.Helps to Co­Ordinate Activities: Management audit detects the

6.Gives Valuable Advice: By scanning the management efficiency and

1.Evaluates Efficiency of the Management: Management audit is a

12.SGAGDC (0354) Ph-9491853132

3.Helps for Correction of Plans, Policies and

4.Aids for Decision Making: Management audit asses the ability of the

7.Helps to Increase Profitability: Management audit helps

13.SGAGDC (0354) Ph-9491853132

5.The management audit:team as selected by the management may not look,

Though there is an accountant in all organizations to record the financial

14.SGAGDC (0354) Ph-9491853132

Q.8.Five Elements of an Effective Audit Planning Process.

1. Research the Audit Area

15.SGAGDC (0354) Ph-9491853132

Rights and Powers of a Cost Auditor:

16.SGAGDC (0354) Ph-9491853132

The rights and powers of a cost auditor may be summarised as follows:

5.Helps to CoOrdinate Activities: Management audit detects the