Subject: Cost Audit

Assignment -1

1. What is cost Audit?

Cost audit is an important and continuous process that a company

has to execute properly during its entire existence in the market.
It accounts for the complete verification of the cost records of the
company and also takes into consideration the other different
types of accounts. Tracking the cash flow in a company and
correcting the instances where wrong data exists is the main
objective of the cost audit. To understand in-depth what cost
audit is, you have to understand its functions, importance, and
advantages.
Objectives of Cost Audit
If someone has to read about why Cost audits are important, they
have to understand what are the objectives and benefits of cost
audits. Some of the objectives of cost audit are enlisted below:
To maintain the accuracy of the data related to cost.
To ensure coverage of all arithmetic data in any account book. 
It helps in maintaining all cost-related principles and complete
adherence to preparing cost accounts.
It helps in detecting errors, drawbacks, and frauds in accounts
and correcting them immediately.
To observe if all features of cost audit are properly followed.
To check the overall working condition of the cost department
also comes under the process of cost audit.
For ensuring proper management and usage of cost strategies at
the right time. 
To develop correctness among internal auditors of the company. 
If one has to understand what a cost audit is, the best way is to
study its objectives mentioned above. 
Types of Cost Audits
There are several types of cost audit processes. Each one is done
on behalf of some organization. Below are the examples.
 Cost Audit on behalf of the government.
 Auditing on behalf of Assist Management. 
 Cost Audit on behalf of tribunals. 
 Auditing for the trade association. 
 Cost Auditing under the Statute of the company.
However, apart from the above, there are other types of cost
audits that depend on the necessity of the companies. One has to
understand the meaning of cost audit properly to exclusively
design the process for a specific company.

2. Explain in brief the following concepts

a) Efficiency Audit : Efficiency audit is much broader in its
scope. The scholars express two distinct views on this subject.
According to one school of thought, the principal objective of
efficiency audit is to ensure that resources flow into the most
remunerative channels.
Its purposes are basically two fold, which are as follows:

1. That every rupee invested in capital, or in other fields gives

optimum results, and

2. That the balancing of investment between different functions

and the aspects is designed to give optimum results.
Thus, the efficiency audit, according to this school of thought
connotes financial efficiency. According to another school of
thought the term efficiency denotes executive efficiency and
operational efficiency. Efficiency audit according to this school of
thought is concerned with the evaluation of the following qualities
of the executives:
1. Personality: This means and includes honesty, integrity,
aggressiveness, initiative, judgement, leadership, and common
sense.
2. Skill, Knowledge, Techniques, and Experience: These mean and
include leadership qualities human relations approach, technical
knowledge, and the skills.
3. Attitude: This means and includes loyalty, willingness to
соoperate, self-confidence, and job satisfaction.
However, efficiency audit according to some authors covers the
financial efficiency, performance efficiency, and the productivity
efficiency. This view seems to be more appropriate. In this sense,
it possesses some of the characteristics of the enterprise’s self-
audit or management audit.
Efficiency of an enterprise cannot be evaluated by assessing one
or two aspects only. A number of aspects should be properly
assessed in an efficiency audit.

Purposes of Efficiency Audit

Modern managements now-а-days undertake efficiency audit with
а variety of objectives in mind. The principal objectives are:

1. То diagnose the operational weaknesses by а review of the

organization’s environment.

2. То see whether the resources of the business flow into

constructive and profitable channels.

3. То assess how far the measures and techniques adopted are

effective in attaining the goals and objectives of the firm.
4. То highlight the important fact in each of the functions or
operations that are employed.

5. То evaluate and compare the optimum return on capital

invested in the business operations.

б. То suggest and recommend feasible alternative treatments for

improvements in а manner that the heads of the functional or
operational management themselves would do if they have time
for self — introspection (Examination of their own thoughts and
feelings).

Parameters for Measuring Efficiency

The parameters for measuring efficiency include the following:

1. The overall rate of return on capital employed showing both

efficiency of the capital turnover and efficiency of the sales.

2. Capacity utilization.

3. Utilization of natural, functional, physical, and human

resources.

4. Export performance and import substitution.

5. Cash flow performance.

6. The pay back period of the entire organization (i.е., by dividing

the capital employed by annual cash flow).
The audit, which seeks to review these measurement yardsticks,
and evaluates the overall efficiency, may be called as efficiency
audit. Thus, efficiency audit provides the means to appraise the
performance, and to diagnose the weakness of the enterprise.

b) Propriety Audit: This kind of audit extends beyond scrutinizing

the mere formality of expenditure to its wisdom and economy and
to bring to light, cases of improper expenditure or waste of public
 money. It is an essential and inherent function of audit to bring to
light not only clear and obvious irregularities but also every
matter which, in the judgment of auditors, appears to involve
improper expenditure or waste of public money or stores even
though the accounts themselves may be in order and no obvious
irregularity has been committed. Generally, in companies and
other big organizations, ownership and management are separate.
This means the real owners of the business have to rely on
executives to make the correct decisions and take the due course
of action as per the law. This is where the concept of propriety
audit is born.

Propriety audit has been described as an audit of the actions and

decisions of the executives. The focus of such an audit is on the
financial discipline, the authority structure, efficiency, rules and
regulations and the protection of public interest.

Some of the important aspects of verification during a propriety audit

are as follows

i. Financial records and accounts are accurate and up to the

mark
ii. The assets of the company are safeguarded and not misused
iii. Propriety audit will check the utilization of funds
iv. The results that are budgeted and expected are being met
One of the biggest uses of propriety audit is for government
companies and public organizations as such. In such
organizations, there is heavy involvement of public funds and
deposits.
And so public interest is a concern here. So a propriety audit will
keep a check on improper expenditures, disregard for rules,
wastage of public money and any such irregularities.

c) Social Audit: Social audit as a term was used as far back as the
1950s. There has been a flurry of activity and interest in the last
seven to eight years in India and neighboring countries. Voluntary
development organizations are also actively concerned.

Social audit is based on the principle that democratic local

governance should be carried out, as far as possible, with the
consent and understanding of all concerned. It is thus a process
and not an event.

A social audit is a way of measuring, understanding, reporting and

ultimately improving an organization’s social and ethical
performance. A social audit helps to narrow gaps between
vision/goal and reality, between efficiency and effectiveness. It is
a technique to understand, measure, verify, report on and to
improve the social performance of the organization.

Social auditing creates an impact upon governance. It values the

voice of stakeholders, including marginalized/poor groups whose
voices are rarely heard. Social auditing is taken up for the purpose
of enhancing local governance, particularly for strengthening
accountability and transparency in local bodies.

The key difference between development and social audit is that a

social audit focuses on the neglected issue of social impacts, while
a development audit has a broader focus including environment
and economic issues, such as the efficiency of a project or
programme.

Objectives of social audit

 1. Assessing the physical and financial gaps between needs and
resources available for local development.
2. Creating awareness among beneficiaries and providers of
local social and productive services.
3. Increasing efficacy and effectiveness of local development
programmes.
4. Scrutiny of various policy decisions, keeping in view
stakeholder interests and priorities, particularly of rural
poor.
5. Estimation of the opportunity cost for stakeholders of not
getting timely access to public services.

d) Systems Audits:

In a systems audit of efficiency, the focus is on the management

systems and practices, including systems of internal control, used
by an organization to achieve, maintain, demonstrate, and
improve the efficiency of its services or operations.

In practical terms, systems audit work means examining the key

organizational systems, practices, procedures, and controls
supporting efficiency, such as performance measurement and
reporting systems, costing systems, and management’s systems
for benchmarking organizational performance. The
seven management activities described in this Practice Guide can
provide a useful framework for assessing the quality and
effectiveness of the management systems that foster efficiency.

A systems approach may be used in audits of efficiency in one of

three ways:

1. The audit may examine the entity’s overall strategy and focus
on efficiency.
2. The audit may examine the systems and practices that relate to
efficiency in a particular program or activity.
3. The audit may combine these two options.

The particular option chosen will depend on the knowledge of

business acquired, the auditor’s mandate, and the auditor’s
analysis of significance and risk. Auditing an entity’s overall
strategy on efficiency may be a good entry point into auditing
efficiency. Subsequent audits in particular programs could follow
this first audit. This strategy would provide an audit office with a
good overview of an entity’s central approach to efficiency prior to
undertaking more in-depth audits of the efficiency of specific
programs.