Paper - 19: Cost and Management Audit: MTP - Final - Syllabus-2016 - June 2020 - Set - 1

MTP_Final_Syllabus-2016_June 2020_Set -1
Paper - 19 : Cost and Management Audit

Paper – 19 : Cost and Management Audit

Full Marks : 100 Time allowed: 3 hours
Answer Question No. 1 which is compulsory and carries 20 marks and any five from Question
No. 2 to 8.
Section - A [20 marks]
1. Choose the correct option among four alternative answers. (1 mark for correct choice, 1
mark for justification.) [10*2=20 marks]
(i) The cost records are to be maintained as specified in __________.

(a) CRA3
(b) CRA1
(c) CRA 4
(d) CRA 2
(ii) There are ________________ to the Act clarifies or indicates that the schedules provide
an illustrative list of acts and omissions constituting “professional or other misconduct
(a) two schedules
(b) three schedules
(c) four schedules
(d) five schedules
(iii) CAS 11 deals with ______________.

(a) Administrative Overhead
(b) Factory Overhead
(c) Selling & Distribution Overhead
(d) Financial Cost
(iv) A manufacturing unit showed, during the Financial Year 2019-20, the following
financial data (in ` lakh): Net Sales 2,400, Export Incentives 150, Other income 175,
Adj. of Finished Stock (+) 125, Materials 725, Salaries 530, Overheads 145, and Tax
126.30. The Value Added as per Rules is (in ` lakh) _____________.
(a) 1275
(b) 1420
(c) 1950
(d) 2675
(v) Remuneration of the Non-Executive Directors is treated as ______________

(a) Employee Costs
(b) Administrative Overheads
(c) Salaries and Wages
(d) Management Expenses
(vi) Which of the following ratios appears as Profitability Ratio in Part D of Annexure to the
Cost Audit Report?
(a) Net Profit to Net Sale
(b) Value added to Net Sales
(c) Profit before Tax to Value Added.
(d) Net Profit to Share Capital.
(vii) Propriety Audit in the context of Government Audit seeks to ensure that _______.
(a) public money are not spent for the benefit of a particular person
(b) public officer should exercise same vigilance as in respect of expenditure of
his/her own money
(c) no authority should pass an order which will be directly or indirectly to its own
advantage
(d) All of the above
(viii) Machinery used in defence, space and atomic energy sector and fulfilling turnover
criteria is under
(a) regulated sector.
(b) unregulated sector.
(c) exempted by different statute.
(d) not applicable category.
(ix) The procedures followed by the cost auditor to reduce the audit risk to an
acceptable level will not detect a misstatement that exists and that could be
material is _____________.
(a) Inherent risk.
(b) Detection risk.
(c) Control risk.
(d) None of the above.
(x) Consumer Service Audit is part of ___________________

(a) Business Activity Audit
(b) Social Audit
(c) Service Audit
(d) None of Above
Answer:
1. (i) (b) CRA 1

Reason: Pursuant to Rule 5(1) of the Companies (Cost Records and Audit)
Rules, 2014, the form CRA 1 prescribes the form in which cost records shall be
maintained.
(ii) (a) two schedules

Reason: As per section 22 of the Cost and Works Accountants Act, 1959 there
are two schedules to the Act clarify or indicate that the schedules provide an
illustrative list of acts and omissions constituting “professional or other
misconduct”.
(iii) (a) Administrative Overheads.

Reason: This standard deals with the principles and methods of classification,
measurement and assignment of administrative overheads, for determination
of the Cost of product or service, and the presentation and disclosure in cost
statements.
(iv) (c) ` 1950 Lakh.

Reason: (Sales 2400 + Export Incentive 150 + Adj of Finished stock 125)-
(Materials 725) = ` 1950 Lakh.
(v) (b) Administrative Overheads

Reason: As per the Generally Accepted Cost Accounting Principles (GACAP),
Remuneration of the non-Executive Directors will not be considered as part of
Employee Costs but will be treated as part of Administrative Overheads.
(vi) (c) Profit before Tax to Value Added

Reason: This is one of the four ratios identified as Profitability Rations in Part D of
Annexure to the Cost Audit Report.
(vii) (d) All of the above

Reason: The objective of Propriety Audit is that public money is not spent for
the benefit of a particular person. Public officer should exercise same
vigilance as in respect of expenditure of his/her own money and no authority
should pass an order which will be directly or indirectly to its own advantage.
(viii) (b) Unregulated sector

Reason: Machinery used in defence, space and atomic energy sector and
fulfilling turnover criteria is under unregulated sector
(ix) (b) Detection risk.

Reason: “Detection risk” is the risk that the cost auditor will not detect a
misstatement that exists in an assertion that could be material, either
individually or when aggregated with other misstatements. Detection risk is a
function of the effectiveness of an audit procedure and of its application by
the auditor.
(x) (b) Social Audit.

Reason: Consumer Service Audit is an audit of public responsibility of business
enterprise in relation to its customers and is a part of social audit. The audit is
based on the philosophy that the role of business should be conducive to
raising the quality of life through its contribution in terms of better product-
quality and services.
Section - B [80 marks]
2. (a) (i) What is the meaning of “Turnover” in relation to the Companies (Cost Records and
Audit) Rules, 2014?
(ii) Whether separate Form CRA-2 is required to be filed by a company having two or
more different types of products covered under cost audit?
3+3
(b) (i) Which information are likely to be provided in Filing Form CRA-4? 6
(ii) The Companies (Cost Records and Audit) Rules, 2014 have not prescribed any
specific formats for the cost statements. In what manner and format would the cost
statements be kept under these Rules? 4
Answer:
2. (a) (i) Sub-section 91 of Section 2 of the Companies Act, 2013 defines “turnover” as “the
aggregate value of the realization of amount made from the sale, supply or
distribution of goods or on account of services rendered, or both, by the company
during a financial year. For the purposes of these Rules, “Turnover” means gross
turnover made by the company from the sale or supply of all products or services
during the financial year. It includes any turnover from job work or loan license
operations but exclude duties and taxes. Export benefit received should be treated
as a part of sales.
(ii) CRA-2 Form (intimation for appointment of cost auditor to Central Government)
has replaced the earlier Form 23C (application seeking approval for appointment of
cost auditor). A single Form CRA-2 is required to be filed providing details of the
sectors/industries covered under cost audit and details of cost auditor. For
Companies appointing multiple cost auditors, only one single Form CRA-2 is required
to be filed. Provision has been made in the Form to accommodate details of multiple
cost auditors.
(b) (i) As per the Companies (Cost Records and Audit) Rules, 2014 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
along with full information and explanation on every reservation or qualification
contained therein, in Form CRA-4. The following information is provided in Filling Form
CRA-4:
(1) Corporate identity number (CIN) or foreign company Registration number (FCRN)
of the company
(2) General Information
(3) Details of Industries/Sectors/Product(s)/Service(s) (CETA heading level, wherever

applicable as per Rules for Regulated and Non-regulated sector) for which the Cost
Audit Report is being submitted
(4) Details of Industries/Sectors/Product(s)/Service(s) (CETA heading level, wherever
applicable as per Rules for Regulated and Non-regulated sector) not covered in the
Cost Audit Report
(5) Details of the cost auditor(s) appointed
(6) Details of observation of the Cost Audit report
(7) Attachment
- XBRL document in respect of the cost audit report and Company’s information
and explanation on every Qualification and reservation contained therein
- Optional attachment, if any.
(ii) Maintenance of records

(1) Every company under these rules including all units and branches thereof,
shall, in respect of each of its financial year commencing on or after the 1st
day of April, 2014, maintain cost records in form CRA-1.
Provided that in case of company covered in serial number 12 and serial
numbers 24 to 32 of item (B) of rule 3, the requirement under this rule shall
apply in respect of each of its financial year commencing on or after 1st day
of April, 2015.
(2) The cost records referred to in sub-rule (1) shall be maintained on regular basis
in such manner as to facilitate calculation of per unit cost of production or
cost of operations, cost of sales and margin for each of its products and
activities for every financial year on monthly or quarterly or half-yearly or
annual basis.
(3) The cost records shall be maintained in such manner so as to enable the
company to exercise, as far as possible, control over the various operations
and costs to achieve optimum economies in utilization of resources and these
records shall also provide necessary data which is required to be furnished
under these rules.
3. (a) “While conducting an audit, the cost auditor shall comply with each of the Cost
Auditing Standards relevant to the audit.” – Discuss. 6
(b) The Cost Accountant of M/s. Suchana Fertilizers Ltd. has arrived at a profit of `
85,25,200 based on Cost Accounting records for the year ended March 31, 2020. As
Cost Auditor, you find the following differences between the Financial Accounts and
Cost Accounts:
(i) Decrease in value of Closing WIP and Finished goods inventory
as per Financial Accounts ` 1,53,35,600
as per Cost Accounts ` 1,56,10,780
(ii) Profit on Sale of Fixed Assets ` 74,800
(iii) Loss on Sale of Investments ` 18,400
(iv) Voluntary Retirement Compensation included in
Salary & Wages in F/A ` 17,50,000
(v) Donation Paid ` 36,000
(vi) Major Repairs & Maintenance written off in F/A ` 14,48,000
(Amount reckoned in Cost Accounts of ` 7,05,950 for this job)
(vii) Insurance Claim relating to previous year received
during the year ` 15,65,000
(viii) Profit from Retail trading activity ` 8,33,500
(ix) Interest Income from Inter-Corporate Deposits ` 8,40,000
You are required to prepare a Reconciliation Statement and arrive at the Profit as per
Financial Accounts.
10
Answer:
3. (a) While conducting an audit, the cost auditor shall comply with each of the Cost
Auditing Standards relevant to the audit. A Cost Auditing Standard is relevant to the
audit when the Cost Auditing Standard is in effect and the circumstances addressed
by the Cost Auditing Standard exist.
Conduct of audit:
(i) The Cost Auditing Standards provide the standards for the cost auditor’s work in
fulfilling the overall objectives of the cost auditor. The Cost Auditing Standards deal
with general responsibilities of the cost auditor, as well as cost auditor’s further
considerations relevant to the application of those responsibilities to specific topics.
(ii) In performing an audit, the cost auditor may be required to comply with legal or
regulatory requirements in addition to Cost Auditing Standards. In such cases in
addition to complying with each of the Cost Auditing Standard relevant to the cost
audit, it may be necessary for the cost auditor to perform additional audit procedures
in order to comply with the legislative and regulatory requirements. The Cost Auditing
Standards do not override law or regulations that govern audit process.
The form of the cost auditor’s opinion will depend upon the applicable cost reporting
framework and any applicable laws or regulations such as Companies Act and Rules
prescribed thereunder.
(iii) The need for the auditor to depart from a relevant requirement is expected to
arise only where the requirement is for a specific procedure to be performed and, in
the specific circumstances of the audit, that procedure would be ineffective in
achieving the aim of the requirement.
In exceptional circumstances, the cost auditor may judge it necessary to depart from
a relevant requirement in a Cost Auditing Standard. In such circumstances, the
auditor shall perform alternative audit procedures to achieve the aim of that
requirement
3. (b)
Particulars Amount (`) Amount (`)
Total Profit as per Cost Accounts 85,25,200
Add: Amount of incomes not considered in cost
accounts
Profit on Sale of Fixed Assets 74,800
Insurance Claim relating to previous year received
during the year 15,65,000
Profit from Retail trading activity 8,33,500
Interest Income from Inter-Corporate Deposits 8,40,000 33,13,300
Less: Amount of expenses not considered in cost

accounts
Loss on Sale of Investments 18,400
VRS included in Salary & Wages 17,50,000
Donation 36,000
Repairs & Maintenance
(` 14,48,000 – ` 7,05,950) 7,42,050 (25,46,450)
Difference in stock valuation as per cost and
Financial records 2,75,180
Profit as per Financial Accounts 95,67,230
4. (a) Define Management Audit. Discuss about the uses of Management Audit.
2+6
(b) (i) What is meant by Corporate Service Audit?
(ii) Describe the areas of Corporate Services Audit, the scrutiny thereof and the
evaluation criteria used in such audit.
2+6
Answer:
4. (a) Management audit is the unique process appraising the performance of directors,
managers or in the other words, appraising the performance of the management. A
working director is included as a manager for purposes of management audit. It is
normally presumed to be a non-routine investigation into a performance of a manager
or group of managers. But in a number of organizations management audit is now a
regular feature to examine and improve managerial effectiveness.
Management audit is the systematic and dispassionate examination, analysis and
appraisal of management’s overall performance. It is a form of appraisal of the total
performance of the management by means of an objective and comprehensive
examination of the organisation structure, its components such as department, its plans
and policies, methods of process or operation and controls, and its use of physical
facilities and human resources. Thus management audit is concerned with evaluation
and appraisal of the control system and information in the entire or in various segments
of the organisation.
The uses of Management Audit are given below:
(i) Management audit is useful in synthesizing, accounting, economic and other data
required by management in constructing basic policy framework.
(ii) Management audit assists in establishing, reviewing and improving the planning
system.
(iii) Management audit makes substantial contribution to system of goal setting in the
organization.
(iv) Management audit ensures that the management is getting the adequate
information for correct decisions.
(v) Management audit ensures that the management properly uses the information that
it is getting.
(vi) Management audit aids in the design and maintenance of adequate authority
structure.
(vii) It helps in the improvement information system to expedite flow of information
among responsibility centres.
(viii) It substantially contributes for improvement of entire communication system.
(ix) It helps management in pinpointing key functions or operations in the profit-making
process.
(x) It helps management in establishing better criterion for measuring results.
(xi) It helps management to avoid wasteful, unnecessary and extravagant use of
resources.
(b) (i) Corporate Services Audit is the audit of social behaviour of the company to assess the
extent to which the company had met the expectations of the customers, employees,
shareholders, suppliers and the community.
The scope of the Corporate Services Audit extends to the critical examination of the
different aspects of services and the extent to which the corporate body has rendered
satisfactory services. It also includes the evaluation of the degrees of responsiveness and
awareness on the part of such enterprise. The performance of the management towards
customers, employees, shareholders, suppliers, the community and government is

studied separately and properly evaluated by management auditor.
(ii) The areas of Corporate Services Audit and the scrutiny and evaluation criteria can
be categorized as follows:
Consumers: Quality of goods in right quantity, right price, right place and right time.
Employees: Pay, Safety, Welfare and Industrial Relations etc.
Shareholders: Safety of investment, satisfactory return and capital appreciation.
Community: Social cost and social benefit, public relation
Fellow- businessmen: Business ethics and fair trade dealings.
State: Compliance with various legislations, fair trade practices, payment of taxes etc.
The concept of Corporate Services Audit is that its appraisal system should consider the
level of contribution a business entity makes to society and its environment towards
raising the quality of life through better product quality and services rather than profit
maximization. The Corporate Services Audit thus attempt to distinguish between the end
and means of business and provides a new dimension to the concept of audit
approach. In Corporate Services Audit, the auditor checks the company’s response to
different social needs
5. (a) Define Audit Committee. Discuss about the role of Audit Committee. 8
(b) (i) Write a short note on the role of Internal Auditor of a company to review
Custodianship and Safeguarding of Assets. 4
(ii) What are the important matters to be considered for conducting Audit of Co-
operative Societies? 4
Answer:
5. (a) Sub-section (5) of section 177 of the Companies Act, 2013 provides that the Audit
Committee may call for the comments of the auditors about internal control systems,
the scope of audit, including the observations of the auditors and review of financial
statement before their submission to the Board and may also discuss any related
issues with the internal and statutory auditors and the management of the company.
The Audit Committee shall have powers to investigate any activity within its terms of
reference, to seek information from any employee, to obtain outside legal or other
professional advice, to secure attendance of outsiders with relevant expertise, if it
considers necessary.
The role of the Audit Committee to
(i) evaluation of internal financial controls and risk management systems;
(ii) reviewing, with the management, performance of statutory and internal
auditors, adequacy of the internal control systems;
(iii) reviewing the adequacy of internal audit function, if any, including the
structure of the internal audit department, staffing and seniority of the official
heading the department, reporting structure coverage and frequency of
internal audit;
(iv) discussion with internal auditors of any significant findings and follow up there
on;
(v) reviewing the findings of any internal investigations by the internal auditors into
matters where there is suspected fraud or irregularity or a failure of internal

control systems of a material nature and reporting the matter to the board;
(vi) discussion with statutory auditors before the audit commences, about the
nature and scope of audit as well as post-audit discussion to ascertain any
area of concern.
The Audit Committee shall mandatorily review the Internal audit reports relating to
internal control weaknesses; and the appointment, removal and terms of
remuneration of the Chief internal auditor shall be subject to review by the Audit
Committee.
5. (b) (i) The Internal Auditor should review the control system to ensure that all assets are
accounted for fully. He/she should review the means used for safeguarding assets
against losses viz, fire, improper of negligent activities, theft, illegal activities etc.
He/she should review the control system for intangible assets, e.g. the procedure
relating to credit control. Where a company uses electronic control equipment, the
physical and system control on processing facilities as well as data storage should be
examined and tested. He/she should review adequacy of the insurance cover for the
various risks involved. He/she should also verify the existence of assets.
Para 30 of the Companies (Cost Records and Audit) Rules, 2014 states that “Records
of physical verification may be maintained in respect of all items held in the stock
such as raw materials, process materials, packing materials, consumables stores,
machinery spares, chemicals, fuels, finished goods and fixed assets etc. Reasons for
shortages or surplus arising out of such verifications and the method followed for
adjusting the same in the cost of the goods or services shall be indicated in the
records.”
(b) (ii) Section 17(2) of the Co-operative Societies Act, 1912 specifically requires the
auditor to conduct an examination of the overdue debts, if any, and a valuation of
the assets and liabilities of the society. The auditor of a co-operative society is also
required to point out various irregularities, improprieties, and departures from the
provisions of the Act, rules framed thereunder, and the bye-laws of the society.
The following matters are to be considered for conducting audit of Co-operative

Societies
1. Examination of overdue debts

2. Overdue Interest
3. Certification of Bad Debts
4. Valuation of Assets and Liabilities
5. Adherence to Co-operative Principles
6. Observations of the Provisions of the Act and Rules
7. Verification of Members’ Register and examination of their pass books
8. Special report to the Registrar
9. Audit classification of society
6. (a) Bhagirathi Sugar Mill Ltd. has a boiler that uses the unit's own by-product, cane waste
(Bagasse), as fuel which has a market price of ` 950 per ton. The steam generated is
first used for the generation of power and the exhaust steam is used in the process of
sugar manufacture. The exhaust steam (after generation of power) transferred to the
sugar manufacturing process is 84% of the cost of production of steam. The mill buys
restricted amount of power from the grid. The following details are extracted from the
Financial Accounts and Cost Accounting Records of the Sugar Mill:
Sugar produced 29,20,000 quintals

Steam generated and consumed 17,82,000 ton
Fuel (Bagasse) consumed for production of steam 8,36,000 ton
Conversion Cost of generation of steam ` 11,15,68,000
Steam used for generation of power 7,48,400 ton
Power purchased from the Electricity Board @ ` 7.50/kWh 68,50,000 kWh
Power generated from the Steam Turbine 5,92,44,000 kWh
Conversion Cost of generation of power (excluding cost of steam) ` 5,08,75,000
Find out (i) Gross Cost of Steam per ton of Steam, (ii) Average Cost of Power per kWh
and (iii) Average Cost of Power per ton of Sugar.
8
(b) M/s. Manoj Ltd. makes a single product, which sells for ` 36 per unit and there is a
great demand for the product.
The variable cost of the product is ` 22 as per details below:

`
Direct Material 10
Direct Labour (` 3/hour) 6
Variable Overhead 6
22
The labour force is currently working at 100% capacity and no extra time can be made
available. A customer has approached the company with a request for a manufacture
of a special order at ` 10,000.
The cost of order would be ` 4,000 for Direct Materials and 600 labour hours will be
required and variable overhead/hr. will be ` 3.
Should the company accept this order?
8
Answer:
6. (a)
(i) Gross Cost of Steam `

Cost of fuel consumed for production of Steam (8,36,000 × 950) 79,42,00,000
Conversion cost of generation of Steam 11,15,68,000
90,57,68,000
Gross cost of Steam / ton (90,57,68,000 / 17,82,000) 508.29
(ii) Average Cost of Power per KWh
Steam for Power (7,48,400 × 508.29) 38,04,04,236
Conversion Cost of generation of Power (including cost of Steam) 5,08,75,000
Grid Power Cost (68,50,000 × 7.50) 5,13,75,000
48,26,54,236
Average cost of Power per KWh 7.30254
48,26,54,236/ (68,50,000 + 5,92,44,000) ` 7.30 (approx.)
(iii) Average cost of Power per ton of Sugar ` 165.2926
(48,26,54,236/ 29,20,000) 165.29 (approx.)
6. (b) Labour time is the key or the limiting factor.
If this order is accepted:
Labour will have to be diverted from the standard products to this special order.
Contribution/labour hour from the standard product will be
`
Product price 36
Less: Variable cost 22
Contribution 14
Contribution/labour hr. = ` 14/2 hours = ` 7
If the order from customer is accepted, its opportunity cost will be 600 hours @ ` 7 =
`4,200.
Comparison of opportunity cost with the contribution from the special order:
`
Direct Material 4,000
Direct Labour (600 hrs. X ` 3) 1,800
Variable Overhead (600 hrs. X ` 3) 1,800
Total variable cost 7,600
Sale price 10,000
Contribution 2,400
Conclusion: Though this order is giving a contribution of ` 2,400, the opportunity cost of
accepting this order is ` 4,200.
Thus, if this order is accepted, there will be a loss of profit of ` 1,800 (i.e. ` 4,200 – 2,400)
So, this order should not be accepted.
7. (a) Prashant Auto Parts Ltd. has received an enquiry for supply of 3,00,000 numbers of
special type of auto components. The Company can execute the assignment
provided a capital investment of ` 5,00,000 and working capital to the extent of 3
months’ cost of sales are made available. The costs estimated are as follows:
Raw Materials - @ ` 4.50 per unit
Direct Labour Hours - 10,000
Labour Rate – ` 5.50 per hour
Factory Overheads – ` 5 per direct labour hour
Selling and Distribution expenses – ` 50,000
Borrowed funds will be available @12% on additional capital outlay. The company
expects a net Return of 25% on Sales. The Managing Director wants a Cost and Price
statement, indicating the price which should be quoted to the customer. 8
(b) There was a strike from 17.08.2019 to 28.10.2019 in a company of which you are Cost
Auditor for the year ending 31.03.2020. Although the Company began working from
29.10.2019 production could effectively begin only from 30.11.2019. The expenses
incurred during the year ending 31.03.2020 were:
` In lakh
Salaries & Wages (Direct) 4,000
Salaries & Wages (Indirect) 3,000
Power (Variable 90%) 1,600
Depreciation 2,000
Other Fixed Expenses 2,800
Repairs and Maintenance 1,600
(Variable ` 1,200 lakhs) ______
Total 15,000
Detailed examination of the records that of the above the following relate to the period
17.08.2019 to 29.11.2019.
` In lakh
Salaries & Wages (Indirect) 900
Depreciation (Non-productive) 700
Other Fixed Expenses 1,000
Repairs and Maintenance (Indirect) 200
Total 2,800
Calculate the amount which in your opinion, should be treated as abnormal for execution
from the product Costs.
8
Answer:
7. (a)
Special type Auto Components: 3,00,000 Nos. ` in’000 ` in ’000

Materials (3,00,000 @ ` 4.50) 13,50,000
Labour 10000 Hrs @ ` 5.50 55,000
Prime Costs 14,05,000
Factory Over Heads (10000 × 5) 50,000
Factory Cost 14,55,000
Selling and Distribution Cost 50,000
Cost of Sales 15,05,000
Interest @12% on [5,00,000 +(15,05,000 x 3/12)] 1,05,150
Total Cost 16,10,150
Profit 5,36,717
Sales 21,46,867
Working Notes : Calculation of Sales

Sales = Total Cost × (1.00-0.25%)= 16,10,150/0.75 = ` 21,46,867
Profit = Sales - Cost = 21,46,867 - 16,10,150 = ` 5,36,717
Quote Per Unit = 21,46,867/300000 = ` 7.16
7. (b) The strike period in the given question is from 17.08.2019 to 28.10.2019.
Therefore the total strike period in the given question is (15+30+28) = 73 days
We can say that the total non strike period for the F.Y. 2019-20 is (366-73) = 293 days
But the production effectively started by the company from 30.11.2019. It means that the
production was shut down for a period of (15+30+31+29) = 105 days.
Statement showing bifurcation of Expenses between Strike and Non-strike days

` In lakh
Particulars Amount Amount
Total expenses incurred during F.Y. 2019-20 15,000.00
Less: Variable Expenses
Power (1,600-160) 1,440
Repairs and Maintenance 1,200 (-) 2,640.00
Total Fixed Cost incurred in the F.Y. 2019-20 12,360.00
Since the strike is for 73 days the total expenses incurred during
strike period is (73/366 x 12,360) 2465.25
The total Cost incurred during the period 17.08.2019 to 29.11.2019

when operations where shut down (Given) 2,800.00
Therefore, the expenses which are incurred from 29.10.2019 to
29.11.2019 are (2,800-2,465.25 as calculated above) 334.75
Therefore, the total fixed expenses incurred in the said period which should be recognised as
abnormal are ` 2465.25 lakhs and not the entire amount of ` 2,800 lakhs.
8. Answer any four. 4x4=16
(a) What do you mean by Internal Check? Is it different from Internal Audit? Explain.
(b) What are the steps of Management Audit?
(c) Describe the needs for capacity determining.
(d) ABC Co. has planned for an investment of ` 800.00 lakh with 50% Loan from Banks at
10% interest.
Direct Cost for the year = ` 480.0 lakhs and 50% of which is Material cost. Other
expenses are at ` 80.0 lakh.
The goods will be sold at 150% of direct cost. Tax rate is assumed at 50%.
Determine (i) Net profit margin (ii) Return on Assets (iii) Assets turnover (iv) Inventory
Turnover.
(e) A company bought a new technology for its auto component unit for two products P
and Q. The condition was to pay a lump of ` 20,00,000 (equally distributable for both
products having a service life of 5 years) and Royalty of ` 5 per unit produced. The
vendor’s technicians were to be paid travelling expenses for maintenance. The
company incurs cost for software services and interest for borrowing of `1,60,000.
The following information is extracted from the Books of the Company for the year ended
March 31, 2020:
Particulars Product P Product Q

Unit produced (Qty.) 50000 40000
Royalty paid on production (`) 5/unit 5/unit
Travelling charges (`)) 20,000 20,000
Design charges (`) 18,000 15,000
Software services charges (`)) 50,000 40,000
Hire charges for special equipment (`)) 12,000 —
Interest on Bank borrowing (`)) 80,000 80,000
You are required to compute the Direct Expenses — keeping in view of CAS - 10.
Answer:
8. (a) Internal Check is a system of instituting checking of the day-to-day transactions as

part of the routine system, whereby the work of one person is checked independently or is
complimentary to the work of another person i.e. resulting in the prevention and early
detection of errors or fraud. Therefore, the systems are so designed that no single individual is
responsible for all the stages involved in a transaction, i.e. duties are allocated in such a way
that no single individual has an exclusive control over any one transaction or a group of
transactions.
Internal Auditing on the other hand is an independent appraisal function established within
an organisation to examine and evaluate its activities as a service to the Organisation. The
objective of Internal Auditing is to assist members of the organisation in the effective
discharge of their responsibilities. Internal auditing furnishes them with analyses, appraisals,
recommendations, counsel and information concerning the activities reviewed.
Internal Check and Internal Audit are two important ingredients of Internal Control. Internal
Checks are procedures in-built in the overall system itself and take place concurrently with
the execution of the transactions, whereas Internal Audit is a distinct function which is carried
out after the transactions have taken place.
8. (b) The steps of management audit are :-

1. Select an area of operation of management
2. Establish what should be the objective, standard or target of the operation.
3. Determine whether the actual results meet the standards, norms or targets. If not, why
not?
(i) Is the target too difficult?
(ii) Is failure to achieve the target costing the organisation?
4. Establish what is done to ensure the achievement of the norms, target and standards.
What steps are taken for –
(i) planning
(ii) operations, execution and implementation e.g. sue of up-to-date technology.
(iii) Measurement of performance and controls?
5. Carryout a detailed investigation, collective evidence as well as document for audit
findings
6. Report the findings of the audit and make recommendations.
8. (c) The need for determining “production capacity” in respect of industrial

organisation in India arises from the following reasons :-
• To meet the requirement under Section 129 of the Companies Act, 2013, that
prescribes the form and contents of the balance sheet as well as profit and loss
account (Schedule III of the Companies Act).
• For purpose of Cost Audit Report under section 148 of the Companies Act, 2013
where a cost audit has been ordered by Government.
• For internal management purpose, to be used
• In planning, scheduling and controlling production, and
• In planning expansion of capacity and correction of imbalances.
• For assessment of capacities for national level planning.
• For fixing the price of product(s) after ascertaining the capacity costs and per unit
incidence thereof etc.
8. (d)
Particulars ` in
lakh
Sales : 480 x 1.5 720
Direct Cost 480
Gross Profit 240
Operating Exp + interest 120
Profit before Tax 120
Net profit after Tax 60
(i) Net Profit Margin (60/720) 8.33%
(ii) Return on Assets (60/800) 7.5 %
(iii) Assets turnover (720/800 ) 0.9
(iv) Inventory Turnover (240/720) ×100 33.33%
8. (e)
Computation of Direct Expenses (as per CAS-10)
(Amount in `)
Particulars Product Product
P Q
Amortized cost for Technical knowhow 2,00,000 2,00,000
Royalty paid on Units Produced 2,50,000 2,00,000
Hire charges of equipment used in A 12,000 —
Travelling Expenses 20,000 20,000
Design charges 18,000 15,000
Software services 50,000 40,000
Direct Expenses 5,50,000 4,75,000
N.B. Interest on bank borrowing shall not form part of Direct Expenses.


No. 2 to 8.
mark for justification.) [10x2=20 marks]
(i) The Cost Auditor appointed has to render the cost audit report to the board of
directors of the Company, as per the specified time limit, in Form ____________.
(a) CRA-3
(b) CRA – 1
(c) XBRL
(d) CRA – 2
(ii) Cost Accounting Standard 8 is a Cost Accounting Standard on ___________ .

(a) Employee Cost
(b) Utilities Cost
(c) Pollution Control Cost
(d) Selling and Distribution Cost
(iii) Operational Audit can lead to better management with the focus on_____________.
(a) Transaction-based analysis for Fraud Prevention
(b) Compliance of Rules
(c) Risk Identification, Process Improvement
(d) Budget Monitoring
(iv) The useful life of an intangible asset, like amount paid on technical knowhow, shall
not exceed _________ from the date it is available for use.
(a) 5 years
(b) 8 years
(c) 10 years
(d) 12 years
(v) Quality costing is used for the purpose of ____________ .

a) Cost Reduction
b) Pricing and decision making
c) Total performance management
d) Cost Control.
(vi) The Management Auditor should evaluate MIS of an organization after ___________ .
(a) studying content, quality and source of information
(b) studying flow of information
(c) studying correlation of information in decision areas

(d) studying all the above
(vii) There is no requirement of Audit Working Papers while conducting audit and they
only result in loss of time.
(a) The Statement is Correct
(b) The Statement is Incorrect
(c) The Statement is Incomplete
(d) None
(viii) Non-Governmental Organizations can be incorporated as a company

a. Section 25 of the Companies Act, 1956.
b. Section 8 of the Companies Act, 2013.
c. Section 28 of the Companies Act, 2013.
d. None of the above
(ix) As per Part D, Para 3 of the Companies (Cost Records and Audit) Rules, 2014, Value
Addition and Distribution of Earnings are to be computed based on
(a) Audited Financial Data
(b) Cost Record Data
(c) Unaudited Financial Data
(d) Both (a) and (b)
(x) _____________ Analysis is evaluation of every resources declared in the industry.

(a) Capacity
(b) Energy
(c) Productivity
(d) Efficiency
Answer:
1. (i) (a) CRA – 3

Reason: Pursuant to rule 6(4)of the Companies (Cost Records and Audit) Rules,
2014 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.
(ii) (b) Utilities Cost

Reason: CAS 8 deals with the Cost Accounting Standard on cost of utilities. The
objective of this standard is to bring uniformity and consistency in the principles and
methods of determining the cost of utilities with reasonable accuracy.
(iii) (c) Risk identification, process improvement

Reason: The objective is to assist the organization in performing functions more
effectively and economically with focus on efficiency and effectiveness of
operations, giving an early warning system for detection of potentially destructive
problems.
(iv) (c) 10 years

Reason: CAS 16 on depreciation and amortization states that useful life of an
intangible asset shall not exceed 10 years from the date it is available for use.
(v) (a) Cost Reduction

Reason: Quality costing is a management accounting tool which is used for the
purpose of cost reduction of the organization.
(vi) (d) Studying all the above.

Reason: The Management Auditor should evaluate MIS of an organization after
studying content, quality and source of information, studying Flow of information,
studying correlation of information in decision areas.
(vii) (b) The Statement is Incorrect.

Reason: Audit working papers are the record of the planning and execution of the
audit engagement. Auditors retain a set of working papers for each audit
engagement for each year.
(viii) (b) Section 8 of the Companies Act, 2013.

Reason: Non-Governmental Organisations are generally incorporated as societies
under the Societies Registration, Act, 1860 or as a trust under the India Trust Act,
1882, or under any other law corresponding to these Acts enforced in any part of
India. NGO’s can also be incorporated as a company under section 8 of the
Companies Act, 2013.
(ix) (a) Audited Financial Data

Reason: As per part D, para 3 of the Companies (Cost Records and Audit) Rules,
2014, Value Addition and Distribution of Earnings are to be computed based on
Audited Financial Accounts.
(x) (c) Productivity

Reason: The Productivity audit is basically an analysis of the productivity of the
resources deployed by any organization. It is generally done to generate
information about the status of productivity in the organization for the purpose of
determining the scale of efficiency and effectiveness of resource utilization.
2. (a) (i) What is the difference between Cost Accounting policy and Cost Accounting
system?
(ii) While accepting the offer of appointment as Cost Auditor of a company, what
certificate should be submitted by the Cost Auditor to the company? Is the Cost Auditor
required to give any certificate with respect to his/her/its independence and ‘arm’s
length relationship’ with the appointing company?
2+6
(b) (i) Write a short note on Code of Ethics in the field of Cost and Management
Accounting.
(ii) Discuss about the punishment of fraud (Section 447 of the Companies Act, 2013).
5+3
Answer:
2. (a) (i) Cost Accounting Policy of a company state the policy adopted by the company for
treatment of individual cost components in cost determination.
The Cost Accounting system of a company, on the other hand, provides a flow of the
cost accounting data/ information across the activity flow culminating in arriving at the
cost of final product/service.
(ii) The Cost Auditor appointed shall submit a certificate that –

(a) The individual or the firm, as the case may be, is eligible for appointment and is not
disqualified for appointment under the Act (the Cost and Works Accountants Act,
1959) and the rules or regulations made thereunder ;
(b) The individual or the firm, as the case may be satisfies the criteria provided in
Section 141 of the Companies Act, 2013 so far as may be applicable ;
(c) The proposed appointment is within the limits laid down by or under the authority of
the Act ; and
(d) The list of proceedings against The Cost Auditor or audit firm or any partner of the
audit firm pending with respect to professional matters of conduct, as disclosed in the
certificate, is true and correct.
Yes, the Cost Auditor of a company is required to give a certificate to the Audit
Committee in respect of his/her/its independence and arm’s length relationship with the
company. Moreover, according to the Second Schedule, Part I, Clause 4 of the Cost and
Works Accountants Act, 1959, it amounts to professional misconduct when a Cost Auditor
expenses his/her/its opinion on cost and pricing statement of any business or enterprise in
which he/she, his/her firm or a partner of his/her firm has substantial interest.
(b) (i) As professionals in the field of Cost and Management Accounting, the members of
the Institute are bound by a code of professional ethics. This code stipulates and binds
them to the highest level of care, duty and responsibility to their employers and clients, the
public and their fellow professionals.
The objectives of the accountancy profession are to work to the highest standards of
professionalism, to attain the highest levels of performance and generally to meet the
public interest requirement. These objectives require four basic needs to be met:
(i) Credibility in information and information systems;
(ii) Professionalism identified by employers, clients and other interested parties;
(iii) Quality of service carried out to the highest standards of performance; and
(iv) Confidence that there is a framework of professional ethics to govern the provision
of services.
(ii) Without prejudice to any liability including repayment of any debt under this Act or any
other law for the time being in force, any person who is found to be guilty of fraud, shall be
punishable with imprisonment for a term which shall not be less than six months but which
may extend to ten years and shall also be liable to fine which shall not be less than the
amount involved in the fraud, but which may extend to three times the amount involved in
the fraud:
Provided that where the fraud in question involves public interest, the term of imprisonment
shall not be less than three years.
3. (a) What is meant by Cost Statement ? Discuss about the responsibilities of a Cost Auditor
for preparing and presenting of a Cost Statement. 6
(b) Following data is available Horizon Ltd. relating to cost of production of a product
subject to Cost Audit. Prepare export Profitability statement to be included in the
annexure to the cost of production of 30000 units.
Particulars `
Sales (Local) 18,000 units 54,00,000

Sales (Export) 12,000 units 33,60,000
Material consumed 150 tonnes at ` 250 per tonne 37,500
Imported components ` 200 per unit 60,00,000
Direct labour 1,25,000
Factory overhead 85,000
Administrative overhead 80,000
Freight & Packing (Local sales) 5,50,000
Packing for export 4,20,000
Handling at port 1,50,000
Opening Work in progress 4,10,000
Closing Work in progress 3,20,000
Additional information:
Export incentive of 12% on FOB is receivable.
Draw back on duty paid on raw materials and components available on export are `
50,000. 10
Answer:
3. (a) The term “Cost Statements” refers to a structured representation of the cost
information, which ordinarily includes accompanying notes, derived from cost accounting
records and intended to communicate an entity’s use of economic resources and the
output obtained in accordance with a Cost reporting framework. The term can refer to for
example, a cost statement, reconciliation with financial accounts and related explanatory
notes.
The cost auditor is responsible for forming and expressing an opinion on the Cost
Statements. The requirements of the Cost reporting framework determine the form and
content of the Cost Statements and what constitutes a complete set of Cost Statements.
For certain Cost reporting frameworks, a single cost statement as such and the related
explanatory notes constitute a complete set of Cost Statements.
The cost auditor shall determine whether the Cost Reporting Framework followed by
management in preparing cost statements is in line with the Companies Act and the Rules
prescribed thereunder. The Cost auditor is not responsible for preparing and presenting the
cost statements in accordance with the applicable Cost reporting framework including
inter-alia:
(1) Designing, implementing and maintaining internal control relevant to the preparation
and presentation of Cost Statements that are free from material misstatement, whether due
to fraud or error;
(2) Selecting and applying appropriate Cost accounting policies; and
(3) Making cost estimates that are reasonable in the circumstances.
(b) Statement showing Cost of Production and cost/unit of production

Particulars Total Cost (`) Cost per unit
(`)
Production = 30,000 units
Direct Materials (150 tons @ ` 250 per ton) 37,500 1.25
Imported Materials (@ ` 200 per unit) 60,00,000 200.00
Direct labour 1,25,000 4.17
Prime Cost 61,62,500 205.42
Factory Overhead 85,000 2.83
Opening WIP 4,10,000 13.67
66,57,500 221.92
Less: Closing WIP 3,20,000 10.67
Works Cost 63,37,500 211.25
Administrative Overhead 80,000 2.67
Cost of Production 64,17,500 213.92
Statement of Cost and profit on Export Sales

Particulars Total Cost Per unit
(`) Cost (`)
Production = 12,000 units
Cost of production 25,67,040 213.92
Export Packing 4,20,000 35.00
Handling at port 1,50,000 12.50
Cost of Sales………………………………………………….(A) 31,37,040 261.42
Particulars Total Cost Per unit

(`) Cost (`)
Export Sales realization 33,60,000 280.00
Export incentive @ 12% on FOB 4,03,200 33.60
Duty drawback on raw materials & components 50,000 4.17
Total Realization …………………………………………….(B) 38,13,200 317.77
Profit on export……………………………………………..(B – A) 6,76,160 56.35
4. (a) What is meant by Management Audit Programme (MAP) ? Which factors should be
considered for framing an efficient Management Audit Programme?
2+6
(b) What is Personnel Management? Discuss about the functional areas of Personnel
Management along with the scope of Human Resources Management.
2+6
Answer:
4. (a) Management audit programme is an essential prerequisite to conducting the audit. It is

a plan of action drawn in advance of taking up the audit, and to help the auditor to cover
the entire area of his function thoroughly.
He should lay down for himself a proper procedure to be followed to complete the work in
time, giving thorough coverage to all aspects.
In order to frame an efficient management audit programme the following factors should
be considered:
(i) Review of the organisational objectives and plans
(ii) Study of the policies and practices of the management
(iii) A critical review of the organizational structure
(iv) Study of the systems and procedures
(v) Evaluation of operations
(vi) Study of the efficiency of the use of physical resources available
(vii) Exercise of proper management control
(viii) Maintain suitable monitoring system through management information system (MIS)
(ix) Check on adherence to the statutory obligation and
(x) Above all, review the efficiency of manpower handling, which ultimately results in the
organisation’s success.
An audit programme is laying down the path in its required details before conducting such
audit.
A management auditor shall shrewdly assess weak and risk areas in the organisation and
deal with such areas in more detail. He has to lay down a programme by making a list of
such weak and risk areas and follow them up in his audit.
4. (b) Personnel Management is that part of the management function which is primarily
concerned with the human relationships within an organization. Its objective is essentially
the maintenance of those relationships, which enable all those engaged in the undertaking
to make their maximum personal contribution to the effective working of that undertaking.
Therefore personnel management is concerned with managing people at work. It is
essentially one of development of efficient, loyal and hard working employees. Personnel
management is concerned with helping the employees to develop their potentialities and
capacities to the maximum possible extent.
The functional areas of Personnel Management along with the scope of human resources
management are indicated below:
(i) Organization review and analysis: Continuous review and analysis of organization’s
operation may be necessary in order to determine and develop appropriate work
structure, roles and responsibilities, inter and intra-department relationship, and levels of
authority.
(ii) Manpower, planning, recruitment and selection: Forecasting and planning is
essential to needs an organization for a sufficient number of qualified personnel for
manning its operations.
(iii) Manpower training and development: Appropriate methods and techniques of
training and development may be adopted. Proper facilities and opportunities are to
be provided for personnel to enable them to acquire necessary skills and knowledge to
perform the jobs for which they are employed.
(iv) Performance appraisal: There should be proper measuring, rating and evaluation of
performance of personnel, guiding employee development and promoting motivation,
communication and equity.
(v) Employee remuneration: This function includes developing and administering
appropriate system of remuneration including job evaluation, wage and salary
structure, incentive payments, fringe benefits and non-financial rewards.
(vi) Employee services: There should be satisfactory services relating to the safety,
health and welfare of all employees, including social security plans and community
development programmes.
(vii) Administration and records: This includes designing, implementing and controlling
of adequate records and administrative procedures to provide useful and pertinent
information for planning purposes and for the documentation for all personnel in
service.
(viii) Industrial relations: It includes establishing appropriate procedures for the resolution
for personnel and institutional differences by means of appropriate measures and
machinery, e.g. standing orders, grievance procedures, conciliation, collective
bargaining, and joint consultation.
(ix) Auditing and research in manpower management: These are the responsibilities of
personnel management, which call for the attention of a management auditor.
5. (a) What is Audit Programme? Discuss about the advantages and disadvantages of an
Audit Programme. 10
(b) Mention the provisions relating to Internal Audit under the Companies Act, 2013. 6
Answer:
5. (a) An audit programme is a detailed plan of the auditing work to be performed,
specifying the procedures to be followed in verification of each item and the financial
statements and the estimated time required. To be more comprehensive, an audit
programme is written plan containing exact details with regard to the conduct of a
particular audit. It is a description or memorandum of the work to be done during an
audit. Audit programme serves as a guide in arranging and distributing the audit work
as well as checking against the possibility of the omissions.
Advantages of audit programme

The main advantages of an audit programme are as follows:
(i) It serves as a ready check list of audit procedures to be performed.
(ii) The audit work can be properly allocated to the audit assistants or the article
clerks.
(iii) The auditor may easily know the extent of work done at any point of time. Thus, the
progress of work done can be under the supervision and control of the auditor.
(iv) Audit programme would not only be useful for the audit assistants in carrying the
audit work but for the principal too as he would be in a position to account for the
individual responsibilities.
(v) A uniformity of the work can be attained as the same programme would be
followed from time to time.
(vi) It is a useful basis for planning the programme for the following year.
(vii) It may be used as evidence by the auditor in the event when any charge is
brought against him. He can prove that there has no negligence on his part and
he exercised reasonable care and skill while performing the task.
Disadvantages of audit programme

The main disadvantages of an audit programme are as follows:
(i) The auditor’s task becomes mechanical and the auditors may lose interest and
initiative.
(ii) Drawing up of an audit programme may be unnecessary for a small concern.
(iii) Though audit programme helps in fixing responsibilities but inefficient staff may
defend themselves by stating that the matter was not contained in the audit
programme.
(iv) Rigid programmes cannot be laid down for each type of business.
Though an audit programme may suffer from the above disadvantages but these can
be removed by taking some initiatives such as consulting the audit assistants, modifying
the programme on the basis of experience gained during audit, etc.
5. (b) Section 138 of the Companies Act, 2013, deals with the provisions relating to Internal
Audit:
(i) Such class or classes of companies as may be prescribed shall be required to
appoint an internal auditor, who shall either be a chartered accountant or a cost
accountant, or such other professional as may be decided by the Board to conduct
internal audit of the functions and activities of the company.
(ii) The Central Government may, by rules, prescribed the manner and the intervals in
which the internal audit shall be conducted and reported to the Board.
Rule 13 of the Companies (Accounts) Rules, 2014 provide that following class of
companies shall be required to appoint an internal auditor or a firm of internal auditor:
(a) every listed company
(b) every unlisted public company having;
(i) paid up share capital of ` 50 crores or more during the preceding financial
year; or
(ii) turnover of ` 200 or more during the preceding financial year; or
(iii) outstanding loans or borrowings from banks or public financial institutions
exceeding ` 100 crore or more at any point of time during the preceding
financial year; or
(iv) which has accepted deposits of ` 25 crore or more at any point of time
during the last financial year; and.
(c) every private company having
(i) turnover of two hundred crore rupees or more during the preceding financial
year; or
(ii) outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the
preceding financial year.
Provided that an existing company covered under any of the above criteria shall
comply with the requirements of section 138 and this rule within six months of
commencement of such section.
6. (a) The following is the abridged comparative Balance Sheets of M/s. Subham Ltd., a
manufacturing company for two years as on March 31, 2020 and 2019:
(Amount in ` Lakh)
2020 2019
Equity & Liabilities
Shareholders’ Fund:
Equity Share Capital 4,000 2,200
Reserves and Surplus 4,200 3,400
Non-Current Liabilities:
Term Loans 3,600 1,800
Debentures 1,800 1,800
Other Long-term Loans 1,500 1,800
Current Liabilities:
Current Liabilities 3,200 1,500
Short-term Provisions 950 750
Total 19,250 13,250
Assets
Non-Current Assets:
Fixed Assets:
Tangible Assets 4,500 4,300
Intangible Assets — —
Capital Work-in-Progress 2,400 —
Non - Current Investments:
Investment in subsidiaries 1,000 600
Current Assets:
Inventories 4,300 2,500
Trade Receivables 5,200 3,600
Cash and Cash equivalents 900 650
Short-term Loans and Advances 950 1,600
Total 19,250 13,250
Additional Information:
(` in Lakh)
Year ended March 31 2020 2019
Profit before Tax (PBT) 1,600 1,450
You are required to compute the following as stipulated in PART-D, PARA-4 to the Annexure
of Cost Audit Report under the Companies (Cost Records and Audit) Rules, 2014 for the year
ended March 31, 2020:
(i) Capital Employed
(ii) Net Worth
(iii) PBT to Capital Employed
(iv) PBT to Net Worth
(v) Debt-Equity Ratio
(vi) Current Assets to Current Liabilities 8
(b) A Company introduced a new product EZY with advanced technology in a product
market where there is huge competition with many competitors having individual market
share 5% to 10%. Survey on the present market estimates that demand will increase of
80,000 units per year. The company is presently targeting 50% of the additional market
demand as competitors will need at least two years to match its product.
The Product EZY passes through three departments. Direct cost per unit of product at present
rate: Material cost ` 65 and Labour Cost ` 45. Overheads are absorbed on the basis of
normal capacity. The following relevant information is given:
Production Unit of Normal monthly Monthly Full Hours
Dept Measurement capacity Allocated Overhead consumed
Fixed cost Rate by
Overheads (`) product
(`)
X Machine Hour 12,500 machine hrs 50,000 10.50 2
Y Labour Hr. 15,000 labour hrs. 60,000 9.00 1.5
Z Labour Hr. 25,000 labour hrs. 75,000 6.00 3
Company has set a target of Selling and Distribution cost of ` 3,00,000 irrespective of sales
volume. The company normally sets a price by adding a mark-up on cost between 30% to
40%.
You are required to suggest the price so as to take care of competition in the right
perspective. 8
Answer:
6. (a)
M/s. Subham Ltd. (Amount in ` Lakh)
Year ended March 31 2020 2019 2020
(i) CAPITAL EMPLOYED:
Total Assets 19,250 13,250
Less: Investment in Subsidiaries 1,000 600
Less: Current Liabilities 4,150 2,250
Less: Capital work in progress 2,400 -
11,700 10,400
Average capital employed for the year
ended March 31 (11,700+10400)/2 11,050
(ii) NET WORTH:
Share Capital 4,000
Reserves and surplus 4,200
8,200
(iii) PBT to Capital Employed 1600/11050 14.48%
(iv) PBT to Net Worth 1600/8200 1951%
(v) Debt- Equity Ratio 6900/8200 0.84:1
(vi) Current Assets to Current Liabilities 11350/4150 2.74 2.74:1
Working Notes:
(` In lakh)
(i) Debt:
Term loans 3,600
Debentures 1,800
Other long Term Loan 1,500
6,900
(` In lakh)
(ii) Current Liabilities:
Current Liabilities 3,200
Short Term Provisions 950
4,150
(` In lakh)
(iii) Current Assets:
Inventories 4,300
Trade Receivables 5,200
Cash and cash equivalents 900
Short term loans & advance 950
11,350
(b)
Department Normal Allocated Fixed Full Variable Fixed Variable

monthly monthly Overhead overhead cost per overhead overhead
capacity Fixed per Hour (`) cost per hour (`) per unit (`) per unit (`)
Overhead hour (`)
(`)
X 12,500 50,000 4.00 10.50 6.50 8.00 13.00
Y 15,000 60,000 4.00 9.00 5.00 6.00 7.50
Z 25,000 75,000 3.00 6.00 3.00 9.00 9.00
50% of the additional demand = 80,000 x 0.50 = 40,000 unit.

Cost of the product:
Direct Material ` 65.00
Direct Labour ` 45.00
Variable Factory Overheads ` 29.50
Fixed Factory Overhead ` 23.00
Selling& Distribution Overheads (` 300,000 ÷40,000) ` 7.50
Total cost ` 170.00
Selling Price will be in the range of ` (170 x 1.3) and ` (170 x 1.4) i.e. between ` 221 and
` 238.
Suggestion:
The company can go for lower price as it covers full cost and ensure good profit. Lower
price will give better penetration in the market and keep competitors away for longer term
to match technology and price.
7. (a) The following figures are extracted from the Cost Accounting Records of Active Ltd. a
single product manufacturing company:
Year ended 31st March 2020 2019
(Amount in ` lakh)
Net Sales 5,400 4,200
Other Income 400 300
Increase in Value of Stock of Finished Goods 30 20
Raw materials Consumed 1,840 1,520
Direct wages, Salaries, Bonus, Gratuity etc. 520 410
Power & Fuel 280 220
Stores and Spares 190 160
Cess and local Taxes 140 120
Other manufacturing Overheads 520 440
Administrative Overheads:
Audit fees 48 40
Salaries & Commission to Directors 54 45
Other Overheads 320 250
Selling and Distribution Overheads:
Salaries & Wages 48 40
Packing and Forwarding 25 20
Total Depreciation 140 140
Interest Charges:
On Working Capital Loans from Bank 90 50
On Fixed Loans from IDBI 120 90
On Debentures 50 40
Provision for Taxes 380 280
Proposed Dividends 500 300
You are required to calculate the following parameters as stipulated PART-D, PARA-3 of
the Annexure to Cost Audit Report under the Companies (Cost Records and Audit)
Rules, 2014 for the year ended March 31, 2020 and March 31, 2019:
(i) Value Addition
(ii) Earnings available for Distribution
(iii) Distribution of Earnings to the different claimants. 10
(b) A unit actually operated 290 days in a year and was stopped for abnormal
circumstances-
(i) 6 days due to power disruption for cyclone and
(ii) 4 days due to heavy breakdown of core machinery.
The rest of the days were weekly off or holidays. Half wages as lay-off compensation
were paid for the stoppage period. During the year, total expenses incurred were
(A) Salaries and wages (including lay-off compensation of ` 95 lakh) ` 4,200 lakh, and
(B) Other fixed costs ` 1,260 lakh.
Find Abnormal Costs (in ` lakh). 6
Answer:
7. (a) M/s. Active Ltd.
Calculation of Value Addition
(Amount in ` lakh)
Value Addition:
Net Sales 5,400 4,200
Add: Export Incentives - -
Add/Less: Adjustment in Finished stocks 30 20
5,430 4,220
Less: Cost of bought out input:
(i) Cost of Raw materials consumed 1,840 1,520
(ii) Consumption of stores and spares 190 160
(iii) Power & Fuel 280 220
(iv) Other overheads 1,303 1050
(520+48+320+25+300+90) = 1,303
(440+40+250+20+250+50) = 1,050
Total cost bought out input 3,613 2,950
(i) VALUE ADDED 1,817 1,270
Add: Other Income 400 300
(ii) Earnings Available for distribution 2,217 1,570
(iii) Distribution of earnings to:
(a) Employees as salaries and wages, bonus, gratuity etc. 568 450
Directors- Salaries and Commission 54 45
(b) Shareholders as dividend 500 300
(c) Company as retained funds (including depreciation) 405 245
(i.e. Net Profit + Depreciation)
(5400+400+30)-
(1840+190+280+1303+568+54+500+520+170+140) + 140 = 405
(4200+300+20)-
(1520+160+220+1050+450+45+300+400+130+140) +140 = 245
(d) Government as taxes
Local Taxes: 140 120
Income Taxes 380 520 280 400
(e) Providers of Capital/Fund as Interest on Debentures
Interest on debentures 50 40
Interest on Fixed loans from IDBI 120 170 90 130
Total distribution of earnings 2,217 1,570
7. (b) As per Cost Accounting Standard on Material Cost (CAS- 6), any abnormal cost shall be
excluded from material cost. So cost of abnormal events such as strike, lock out and
other factors are not included in cost.
The abnormal cost is estimated as below:
Total Fixed Costs Abnormal Costs
Working days 290+6+4 = 300 6+4 = 10
Salaries and Wages (` in lakh) 4,200 95
Other Fixed cost (` in lakh) 1,260 1,260 × (10/300) = 42
Total (` in lakh) 5,460 137
Out of total fixed costs of ` 5,460 lakhs, abnormal costs of ` 137 lakhs will not form part
of cost of production.
8. (a) Write a short note on Manpower Analysis.

(b) A company is facing problem in satisfying customers’ orders leading to backlog of
supply position. How to identify the problem by means of Operational Audit?
(c) Classify the main categories of Internal Control.
(d) Find the Employee Cost of a company for the year 2019-20 as per the CAS 7 from the
following figures:
Particulars (` lakh)
Salaries, wages, allowances and bonus 1,250
Wage award arrears for the previous year 115
Contribution to provident and other funds 210
Employee welfare 60
Abnormal Idle Labour cost due to strike 100
Wages of contractual labour 150
VRS payment for the year 75
(e) The following figures relate to Silver Mountain Ltd. for two years :
31.3.2020 31.3.2019
Gross Profit% 25 20
Average Stock (`) 50,000 70,000
Average Debtors (`) 1,50,000 1,80,000
Stock Turnover (times) 20 25
Income Tax Rate (%) 30 30
Post-tax Income as % of Sales 10 12
Prepare Statement of Profits for two years.
Answer:
8. (a) Manpower Analysis : The depth of analysis of manpower could depend upon the
proportion of manpower cost to the total cost of product or service. The performance
criteria for this area will mainly be related to the costs and efficiency or productivity.
The costs may be categorized into the cost of recruitment, cost of maintaining the
manpower and the cost of separations. Recruitments costs may include position
advertisements, commission paid to recruitment agencies, participation in job fairs or
campus recruitment etc. The maintenance costs may be the training & development costs,
facilities provided over & above the monetary benefits etc. The separation costs would
mostly be implicit costs. These costs as a percentage of the total salaries and wages would
provide an insight into the quality of manpower management. These costs could be further
broken up as per the hierarchies of people. The time taken to recruit important positions
may affect the performance adversely.
The factor returns from the manpower is in terms of growth in production and productivity,
enhancement of skills and knowledge of the organization. The auditor should analyse the
figures of manpower productivity, idle time, overtime worked, absenteeism etc. These
factors could be compared with the respective outputs such as increased production,
increased sales etc. The criteria such as sales per person achieved, production per man
hour etc. will add value to the Report on Performance Analysis.
(b) The Operational Auditor may use the technique of Work Load Measurement to assess
the situation. He/she may draw up a questionnaire to assess the situation so as to include
the following queries:
• Is there a backlog of work and if so whether the same is due to increased volume or
inadequacy of men, material or machines?
• Is the increase in work volume is temporary or may continue?
• Will the situation likely to ease with additional inputs like personnel, machines etc?
• Is the workload of each employee is justified or needs adjustment through improved
supervision or training?
• Will investment in advanced technology will commensurate with benefits derived from
it?
• What control measures exist to assess the work efficiency and what are the remedial
measures?
The operational auditor will proceed to finalise the report and submit to the Management
after collecting and analysing the information received.
(c) The internal controls can be broadly classified into following four main categories:
(i) Administrative control – Administrative controls include all types of managerial
controls related to the decision making process. An example of administrative
controls is the maintenance of records giving details of customers contacted by
the salesmen.
(ii) Operational control – This is exercised through “management accounting”
techniques viz. budgetary control, standard costing etc.
(iii) Financial and Accounting control – This control refers primarily the management
plans, objectives and procedures that are concerned with the safeguarding of
assets, prevention and detection of fraud and error, accuracy and completeness
of accounting records, and timely preparation of reliable financial information.
(iv) Compliance control - These controls aim at ensuring compliance with applicable
laws and regulations. These Controls also help to ensure compliance with laws
regarding the system and intellectual property.
(d) The employee cost for the company for the year 2019-20 is as follows:
Particulars (`in lakh)

Salaries, wages, allowances and bonus 1,250
Employee welfare 60
Total 1,745
Note :
1. As per CAS 7, arrear not related to the current year should not be included in the
Employee Cost.
2. Abnormal idle time cost is charged to Costing Profit & Loss Account
3. It is assumed that the VRS payment does not relate to closure of any section or activity
of the unit.
(e) Statement of Profits of Silver Mountain Ltd.

Particulars 31.3.2020 31.3.2019
a) Gross Profit % 25 20
b) Average Stock (`) 50,000 70,000
c) Average Debtors (`) 1,50,000 1,80,000
d) Stock Turnover (times) 20 25
e) Income Tax Rate (%) 30 30
f) Post-tax Income as % of Sales 10 12
g) Cost of Goods Sold (bxd)(`) 10,00,000 17,50,000
h) Sales [g × 100 /(100-a)] (`) 13,33,333 21,87,580
i) Net Income after Tax [hxf] (`) 1,33,333 2,62,510
j) Profit before Tax [ i × 100/(100-e)] (`) 1,90,476 3,75,014
MTP_Final_Syllabus-2016_December 2019_Set -1
Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
Answer Question No. 1 which is compulsory and carries 20 marks and any five from
Question No. 2 to 8.
Section – A
[20 marks]
1. Choose the correct option among four alternative answers. (1 mark for correct choice, 1 mark
for justification.) [10×2=20 marks]
(i) Cost Audit was initially introduced in India in the year _____________ .
(a) 1949
(b) 1959
(c) 1965
(d) 1975
(ii) The Cost Auditor appointed has to render the cost audit report to the board of directors of
the Company, as per the specified time limit, in Form ____________.
(a) CRA – 1
(b) CRA – 2
(c) CRA – 3
(d) CRA – 4
(iii) Cost Auditing Standard 104 deals with ______________.
(a) knowledge of business , its Process and the Business Environment
(b) planning an Audit of Cost Statements
(c) Cost Audit Documentation
(d) overall objectives of the Independent Cost Auditor
(iv) The Cost Accounting Standard 2 deals with _______.
(a) Direct expenses
(b) Packing material cost
(c) Capacity determination
(d) Classification of cost.
(v) Any casual vacancy in the office of a cost auditor, whether due to resignation, death or
removal to be filled by the Board of Directors within ___________days of occurrence of
such vacancy.
(a) 30 days
(b) 60 days
(c) 90 days
(d) 180 days
(vi) Once the instance document is successfully validated from the tool, the next step is to
________.
(a) download XBRL validation tool
(b) pre-scrutinize the validated instance document
(c) convert to PDF and verify the contents of the instance document
(d) attach instance document to the Form CRA-4
(vii) The Bureau of Energy Efficiency formed Under _______________ .
(a) The Companies Act, 2013
(b) The Energy Conservation Act, 2001
(c) The Income Tax Act, 1961
(d) None of the above
(viii) Which one of the following KPI is used to measure productivity & efficiency of a machine?
(a) % of Idle time to total available time
(b) Machine downtime ratio
(c) Cost per of Break-Down Hour
(d) Contribution per unit of material used.
(ix) Royalty paid on units produced ` 40,000, Hire Charges of equipment used for production `
4,000, Design charges ` 20,000, Software development charges related to production
`26,000. The Direct Expenses is:
(a) ` 40,000
(b) ` 44,000
(c) ` 64,000
(d) ` 90,000
(x) The Cost Accounting Standard 21 deals with _______.
(a) Pollution Control cost
(b) Research and Development cost
(c) Manufacturing cost
(d) Quality Control.
Answer: 1.
(i) (c) 1965
Reason: Cost Audit was first introduced in India in the year 1965, with the introduction
of Sec 233B of Companies Act 1956 for Cost Audit and Sec 209 (1) (d) for
maintenance of Cost Records.
(ii) (c) CRA-3
Reason: 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.
(iii) (a) knowledge of business , its Process and the Business Environment
Reason: The objective of Cost Auditing Standard - 104 is to enable the cost auditor to
have knowledge of the client‘s business which is sufficient to identify and understand
the events, transactions and practices that, in the cost auditor‘s judgment may have
a significant effect on the examination of cost statements or on the preparation of
the cost audit report.
(iv) (c) Capacity determination
Reason: CAS-2 deals with the principles and methods of classification and
determination of capacity of an entity for ascertainment of the cost of product or
service and the presentation and disclosure in cost statements. The objective of this
standard is to bring uniformity and consistency in the principles and methods of
determination of capacity with reasonable accuracy.
(v) (a) 30 days
As per Rule-6 of the Companies (Cost Records and Audit) Rules, 2014, Any casual
vacancy in the office of a cost auditor, whether due to resignation, death or removal
to be filled by the Board of Directors within thirty days of occurrence of such vacancy
and the company shall inform the Central Government in Form CRA-2 within thirty
days of such appointment of cost auditor.
(vi) (b) pre-scrutinize the validated instance document
Reason: Once the instance document is successfully validated from the tool, the next
step is to pre-scrutinize the validated instance document with the help of the same
tool using a working internet connection.
(vii) (b) The Energy Conservation Act, 2001
Reason: The Bureau of Energy Efficiency formed under the Energy Conservation Act
2001. The agency‘s function is to develop programs which will increase the
conservation and efficient use of energy in India.
(viii) (b) Machine downtime ratio
Reason: It is a ratio which indicates the efficiency and productivity of a machine. So, it
is a key performance indicator to measure performance of a machine.
(ix) (d) ` 90,000/-.
Reason: Direct expenses= Royalty paid on units produced+ Hire Charges of

equipment used for production+ Design charges+ Software development charges
related to production = ` 40,000 + ` 4,000 + ` 20,000 + ` 26,000 = ` 90,000/-.
(x) (d) Quality Control.
Reason: CAS-21 deals with the principles and methods of measurement and
assignment of Quality Control cost and the presentation and disclosure in cost
statement. The objective of this standard is to bring uniformity, consistency in the
principles, methods of determining and assigning Quality Control cost with reasonable
accuracy.
Section – B
[80 marks]
2. (a) (i) Which Companies are required to maintain Cost Records?
(ii) Discuss about the applicability of Cost Audit.
(b) What is Cost audit Documentation? Indicate the matters to be included in the Cost Audit
Documentation with respect to smaller entities. [(2+6)+(2+6)]
Answer:
2. (a)
(i) Under section 148 of the Companies Act, 2013, any domestic or foreign company,
falling under regulated or non-regulated sectors and engaged in production of goods
or provision of services with overall turnover from all its products or services is equal or
more than ` 35 crores in preceding financial year is required to maintain Cost Records.
(ii) Applicability of cost audit:
(1) Every company specified in item (A) of rule 3 shall get its cost records audited in
accordance with these rules if the overall annual turnover of the company from all
its products and services during the immediately preceding financial year is rupees
fifty crore or more and the aggregate turnover of the individual product or
products or service or services for which cost records are required to be maintained
under rule 3 is rupees twenty five crore or more.
(2) Every company specified in item (B) of rule 3 shall get its cost records audited in
accordance with these rules if the overall annual turnover of the company from all
its products and services during the immediately preceding financial year is rupees
one hundred crore or more and the aggregate turnover of the individual product
or products or service or services for which cost records are required to be
maintained under rule 3 is rupees thirty five crore or more.
(3) The requirement for cost audit under these rules shall not apply to a company which
is covered in rule 3; and
(i) whose revenue from exports, in foreign exchange, exceeds seventy five per
cent of its total revenue; or
(ii) which is operating from a special economic zone;
(iii) which is engaged in generation of electricity for captive consumption through

Captive Generating Plant. For this purpose, the term ―Captive Generating
Plant‖ shall have the same meaning as assigned in rule 3 of the Electricity
Rules, 2005.
2. (b)
Audit helps to detect errors and frauds and provides suggestions to improve them which intern,
help the management to take corrective action. To complete the audit process one need to
gather the documents related to audit process. Cost Audit Documentation means the material
including working papers prepared by and for, or obtained and retained by the cost auditor in
connection with the performance of the audit. Cost Auditing Standard – 102 deals with Cost
Audit Documentation.
The following matters should be included in the Cost Audit Documentation in respect of smaller
entities:
(i) A description of the entity, the products produced, services provided and other activities
(ii) An organization Chart showing the responsibility centres and the person responsible
(iii) A description, preferably a flow chart of the manufacturing process
(iv) Internal controls over material cost, labour cost and expenses
(v) The risks of material misstatement assessed, for example, in respect of scrap recovery and
disposal
(vi) Tests of materiality used
(vii) The overall audit strategy and audit plan
(viii) Significant matters noted during the audit, and conclusions reached
3. (a) From the following figures extracted from the financial and cost accounting records, you
are required to compute:
(i) Value Added.
(ii) Ratio of Operating Profit to Sales.
(iii) Ratio of Operating Profit to Value Added.
Particulars ` in lakhs
Net Sales 25,000
Increase in Stock of finished goods 500
Expenses:
Raw Materials consumed 4,000

Packing materials consumed 1,800
Stores and spares consumed 600
Power and fuel 5,000
Repairs and maintenance 250
Insurance 150
Direct salaries and wages 500
Depreciation 900
Interest paid 1,500
Factory overhead:
Salaries and wages 250

Others 300
Selling and distribution expenses:

Others 1,800
Administration overheads:

Others 100
(b) Write a short note on Risk of Material misstatement. 10 + 6
Answer:
3. (a) (i)
Computation of Value Added ` in lakhs ` in lakhs

Net Sales+ Increase in Stock of Finished Goods 25,500
Less:
Cost of bought out materials and services:
Raw Materials 4,000
Packing materials 1,800
Stores and spares 600
Power and fuel 5,000
Insurance 150
Other factory overhead 300

Other Selling & distribution overhead 1,800
Other Administration overhead 100 14,000
Value Added 11,500
Composition of Value Added:
Depreciation 900
Interest 1,500
Salaries and wages (500+250+150+150) 1,050 3,450
Profit before tax (balancing figure) 8,050
Operating Profit:
PBT 8,050
Interest paid 1,500
9,550
(ii) Ratio of operating profit to net sales = Operating profit/ Net sale = 9,550/25,000 x 100 =
38.20%
(iii) Ratio of operating profit to value added = Operating profit/ Value Added = 9,550/11,500 x
100 = 83.04%
3. (b) Risk of material misstatement:
Audit risk is a function of the risk of material misstatement and detection risk. The risk of material
misstatement has two components viz. Inherent Risk and Control risk.
(1) Inherent risk: the susceptibility of an assertion about the measurement, assignment or
disclosure of cost to a misstatement that could be material, either individually or when
aggregated with other misstatements, before consideration of any related controls.
(2) Control risk: the risk that a misstatement that could occur in an assertion about the
measurement, assignment or disclosure of cost and that could be material, either individually
or when aggregated with other misstatements, will not be prevented, or detected and
corrected, on a timely basis by the entities internal, operational and management control.
The cost auditor shall identify and assess the risks of material misstatement at the cost statement
level; and at the assertion level including items of cost, cost heads and disclosures thereof.
For this purpose, the cost auditor shall:
(1) Identify risks including relevant controls that relate to the risk of material misstatements or a
risk of fraud;
(2) Assess whether the risk is related to recent significant economic, accounting or other
developments and, therefore, requires specific attention;
(3) Assess whether the risk involves significant transactions with related parties;
(4) Assess the degree of subjectivity in the measurement of information related to the risk.
(5) Assess whether there arises a need for revising the assessment of risk based on additional
audit evidence obtained.
4. (a) (i) Discuss about the requirements of Cost Auditing Standard – 103.
(ii) How would you treat the Idle Time Cost as per the CAS 7 related to Employee Cost?
(b) The Financial Profit and Loss of M/s. PIRON Manufacturing Company Ltd. for the year is
` 32,50,000. During the course of cost audit, it is noticed the followings:
(i) Some Old assets sold off which fetched a profit of ` 1,50,000
(ii) Interest was received amounting to ` 60,000 from outside the business investment.
(iii) Work-in-progress valuation for financial accounts does not as a practice take into
account factory overhead. Factory overhead is ` 2,50,000 in opening W.I.P and
`2,80,000 in closing W.I.P.
(iii) The Company was engaged in Trading activity by purchasing goods of ` 12,30,000
and selling at ` 14,50,000 after incurring ` 60,000 as expenditure.
(iv) A major overhaul of machinery was carried out at a cost of ` 6,00,000 and next such
overhaul will be dome only after five years.
(v) Opening stock of Raw material and finished good was overvalued for ` 2,50,000 and
closing stock was overvalued ` 2,00,000 in financial records.
Work out the profit as per Cost Accounts. [(8+2) +6]
Answer:
4. (a) (i)
The Cost Auditing Standard – 103 deals with the overall objectives of the independent cost
auditor, the nature and scope of a cost audit, the independent auditor‗s overall responsibilities
when conducting an audit of cost statements in accordance with Cost Auditing Standards. It also
explains the requirements establishing the general responsibilities of the independent auditor
applicable in all audits, including the obligation to comply with the Cost Auditing Standards.
The requirements of Cost Auditing Standard – 103 are given below:
(a) The cost auditor shall comply with the relevant ethical requirements including those
pertaining to independence in respect of cost audit engagements
(b) While conducting an audit, the cost auditor shall comply with each of the Cost Auditing
Standards relevant to the audit.
(c) The cost auditor shall have an understanding of the entire text of the Cost Auditing
Standard, including its application and other explanatory material, to understand its
objectives and to apply its requirements properly.
(d) The cost auditor shall plan and perform an audit with an attitude of professional scepticism
recognizing that circumstances may exist that cause the Cost Statements to be materially
misstated.
(e) The auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an
acceptably low level and thereby enable the auditor to draw reasonable conclusions on
which to base the auditor‗s opinion.
(f) The cost auditor shall determine whether the Cost Reporting Framework followed by
management in preparing cost statements is in line with the Companies Act and the Rules
prescribed there under.
(g) The cost auditor shall not be required to perform audit procedures regarding the entity‗s
compliance with laws and regulations governing cost audit in the absence of identified or
suspected non-compliance.
(h) If an objective in a relevant Cost Auditing Standard cannot be achieved, the auditor shall
evaluate whether this prevents the auditor from achieving the overall objectives of the
auditor and thereby requires the auditor, in accordance with the Cost Auditing Standards,
to modify the auditor‗s opinion.
(ii)
Idle Time Cost shall be assigned direct to the cost object or treated as overheads depending on
the economic feasibility and the specific circumstances causing such idle time. Cost of Idle time
for reasons anticipated like normal lunchtime, holidays etc is normally loaded in the employee
cost while arriving at the cost per hour of an employee/a group of employees whose time is
attributed direct to the cost objects.
4. (b)
Reconciliation of Profit between Cost Accounts and Financial Accounts of M/s. PIRON
Manufacturing Company Ltd.

Add: Difference in valuation of W-I-P 30,000
Proportionate charge i.e. four-fifth for overhaul of 4,80,000
machinery
Overvaluation of Opening Stock in the financial
records 2,50,000 7,60,000
Less: Profit on sale of old assets not included in Cost A/cs. 1,50,000
Interest received from outside investment 60,000
Trading profit not included in cost accounts 1,60,000
Overvaluation of closing stock in the financial records 2,00,000 (-) 5,70,000
Profit as per Cost Accounts 34,40,000
5. (a) The management of a very big Public Sector Company suspects on the existence of
―ghost workers‖. You, as an Internal Auditor of the company are required to formulate a
system of Internal Control for payment of wages and salaries.
(b) Opening stock of raw materials (5,000 units) ` 1,80,000; Purchase of Raw Materials (17,500
units) ` 7,00,000; Closing Stock of Raw Materials 3,500 units; Freight Inward ` 85,000; Self-
manufactured packing material for purchased raw materials only ` 60,000 (including
share of administrative overheads related to marketing sales ` 8,000); Demurrage

charges levied by transporter for delay in collection ` 11,000; Normal Loss due to
shrinkage 1% of materials ; Abnormal Loss due to absorption of moisture before receipt of
materials 100 units. Calculate the value of Closing Stock (as per Average Cost Method).
[8 + 8]
Answer:
5. (a)
The following system of Internal Control is suggested, to prevent frauds and payment made to
―Ghost Workers‖, if any:
(i) Every employee should be issued an identity card, containing such particulars as Name,
Employee No., Department with Photo affixed.
Every employee should be told to have their identity card always with them and they should
be able to show that on demand at any time for verification/ checking. One employee
particulars register must be maintained by the Personnel Department with signature of the
Departmental Head and Head of the institution.
At the time of marking attendance and at the time of wage payment, he should show this
card.
(ii) A Bio-metric attendance system may be implemented for recording/checking of proper

attendance.
(iii) A comparison should be made between the attendance time and time booked to the jobs
and this will reveal detection of a dummy worker easily, since there would be no booking in
the job card for the dummy worker.
(iv) The system of internal checks should exist for preparation of wages sheets, such that work of
each person is checked by another person. All the calculations and entries should then be
checked by a responsible person.
(v) Payment of wages should be made in presence of some responsible officers. Shop-floor
Foreman should also be present for identification of workmen. In cases, where possible,
payment should be directly credited to the bank accounts of the employee concerned.
(b) Computation of value of closing stock of raw materials [Average Cost Method]
Particulars Quantity Amount (`)

(Units)
Opening Stock of Raw Materials 5,000 1,80,000
Add : Purchase of raw materials 17,500 7,00,000
Add : Freight inwards 85,000
Add : Demurrage Charges levied by transporter for delay in 11,000

collection
9,76,000
Less: Abnormal Loss of raw materials (due to absorption of (100) (4,549)

moisture before receipt of materials)
= [(7,00,000 + 85,000 + 11000) x 100]/17,500

Less: Normal loss of materials due to shrinkage during transit (175) -
[1% of 17,500 units]
Cost of self-manufactured packing materials for purchased 52,000
raw materials only (60,000 – 8,000)
Cost of raw materials 22,225 10,23,451
Value of Closing Stock (3,500) (1,60,451)
= Total Cost / (Total units – Units of Normal Loss)
[ 10,23,451/(5,000+17,500 – 175) ]x 3,500
Cost of Raw Materials Consumed 18,725 8,63,000
Note:
(i) Units of normal loss adjusted in quantity only and not in cost, as it is an includible item
(ii) Cost of self-manufactured packing materials does not include any share of administrative
overheads or finance cost or marketing overheads. Hence, marketing overheads excluded.
(iii) Abnormal loss of materials arose before the receipt of the raw materials, hence, valuation
done on the basis of costs related to purchases only. Value of opening stock is not
considered for arriving at the valuation of abnormal loss.
(iv) Demurrage charges paid to transporter is an includible item. Since this was paid to the
transporter, hence considered before estimating the value of abnormal loss.
6. (a) Which points are to be considered while conducting audit of Hospital.
(b) Define Local Bodies. What is the basic objective of Local Body and discuss about the
audit programme of the same. [10 + 6]
Answer:
6. (a)
The following points are to be considered necessary for conducting an audit of Hospital:
(i) Check the letter of appointment to ascertain the scope of responsibilities.
(ii) Study the Charter or Trust Deed under which the hospital has been set up and take a
special note of the provisions affecting the accounts.
(iii) Examine, evaluate and verify the system of internal check, internal control and determine
the nature, timing and the extent of the audit procedures.
(iv) Vouch the entries in the Patient‗s Bill Register with a copies of bill issued. Test check the
selected bills to see that these have been correctly prepared taking into consideration the
period of stay of each patient as recorded in the Attendance Schedule.
(v) Vouch the entries in the Patient‗s Bill Register with a copies of bill issued. Test check the
selected bills to see that these have been correctly prepared taking into consideration the
period of stay of each patient as recorded in the Attendance Schedule.
(vi) Vouch the collection from patients with copies of bills and entries in Bills Register. Arrears of
dues should be properly carried forward and where these are deemed to be irrecoverable,
they should be written off under due authorizations.
(vii) Interest and/ or dividend income should be vouched with reference to the Investment
Register and Interest and Dividend warrants.
(viii) In case of legacies and donations which are received for specific purposes, it should be
ensured that any income there from is not utilized for any other purposes.
(ix) Where receipts of subscription show significant deviations from budgeted figures, it should
be thoroughly.
(x) Inquired into and the matter be brought to the notice of the trustees or the Managing
Committee.
(xi) Government grants or grants from local bodies should be verified with the reference to the
correspondence with the concerned authorities.
(xii) Clear distinction should be made between the items of capital and revenue nature.
(xiii) The capital expenditure should be incurred under proper authorization by a valid resolution
of the trustee for the Managing Committee.
(xiv) Verify the system of internal check as regards purchases and issue of stores, medicines etc.
(xv) Examine that the appointment of the staff, payment of salaries etc. are duly authorized.
(xvi) Physically verify the investments, fixed assets and inventories.
(xvii) Check that adequate depreciation has been provided on all the depreciable assets.
6. (b)
Local bodies are institutions of the local self governance, which look after the administration of an
area or small community such as villages, towns, or cities. The Local bodies in India are broadly
classified into two categories. The local bodies constituted for local planning, development and
administration in the rural areas are referred as Rural Local Bodies (Panchayats) and the local
bodies, which are constituted for local planning, development and administration in the urban
areas, are referred as Urban Local Bodies (Municipalities).
The objectives of Local Bodies are:

• To report the content and presentation of financial statements are true and fair
• Detection and prevention of error fraud, misuse of funds
• To ascertain that full value received for money spent
• Legal and administrative requirements fulfilled
The audit programme for Local Bodies includes the following:
• All sanctions are accorded by competent authority
• Expenditure incurred is according to provisions and as per regulations framed by competent
authority
Different schemes, programmes, and projects are running economically and the purpose such
programme is achieved.
7. (a) Supreme Ltd., a manufacturing unit, provides the following extracts from its records for the
year ended March 31, 2019:
The Company’s specifications capacity for a machine per hour 1,600 units
No. of shifts (each shift of 8 hours) per day 3 shifts
Paid Holidays in a year (365 days):
(i) Sunday 52 days

(ii) Other holidays 12 days
Annual maintenance is done within these holidays -
Preventive weekly maintenance for the machine is carried on
during Sundays
Normal idle capacity due to lunchtime, shift changes etc. per shift 1 hour
Production based on sales expectancy in past 5 years (units in 82.50
Lakh):
89.80
76.40
84.30
83.60
Actual Production for the year (units in lakh) 86.50
You are required to calculate:
(i) Installed Capacity
(ii) Practical Capacity
(iii) Actual Capacity (%)
(iv) Normal Capacity
(v) Idle Capacity (%)
(vi) Abnormal Idle Capacity
Keeping in view of the relevant Cost Accounting Standard (CAS-2).
(b) Write a short note on Corporate Development Audit. (10 + 6)
Answer:
7. (a)
Calculation of different capacities of Supreme Ltd.
(i) Installed Capacity: days in year x working hours per day x unit per hour
= 365 x 8 x 3 x 1600
= 140.16 lakh units
(ii) Practical capacity: days available × available hour per shift × shifts × units per hour
= (365 – 52 - 12) x ( 8 - 1) x 3 x 1600
= 101.136 lakh units
(iii) Actual capacity Utilization: Current production / Installed capacity
= (86.50 / 140.16) x 100 = 61.72% (approx)
(iii) Normal capacity: (82.50+89.80+76.40+84.30+83.60) / 5
= 83.32 lakh units
(v) Idle Capacity: Installed capacity – Actual capacity
= 140.16 - 86.50 = (53.66 / 140.16) x 100 = 38.29% (approx)
(vi) Abnormal Idle capacity: (101.136 – 86.50) = 14.636 lakh units
7. (b)
A Corporate Development Audit is an independent objective study of an organization‘s
capabilities. It aims at identifying strengths and weaknesses and moving toward state-of-the-art
performance. A Corporate Development Audit gives a comprehensive picture of the status of
corporate development effectiveness and highlights developmental needs. Many organizations
use the Corporate Development Audit to identify the state-of-the-art in business development in
their industry and determine exactly how much they differ from that ideal. The resulting feedback
report highlights all key findings, with specific recommendations for course correction or
improvement.
Corporate Development Audit is a comprehensive task to assist the corporate management in
various aspects of development through a process of systematic review and evaluation of long-
term strategies of the company. Such corporate development audit assures that –
(a) The various factors and forces constituting a corporate enterprise are the right kind and
quality.
(b) Communication remains the key to the functioning of an enterprise.
(c) The pattern of departmentalization in an enterprise adopted in the past and proposed for
the future for dealing with multidirectional responsibilities is fully responsive to circumstances
and business environment.
(d) The personnel problems are handled appropriately considering the overall objectives of
development of the corporate enterprise.
(e) The responsibilities of planning, coordination, motivation and control at functional
management levels are discharged in proper spirit.
A Corporate Development Audit is best performed by a team consisting of different experts of
different disciplines as it requires multi-disciplinary approach. Large scale corporate enterprises
offer opportunities to the conduct of Corporate Development Audit.
As the Corporate Development Audit is more of an introspective nature, necessary initiation and
support should come from a firm decision taken by the Board of Directors and its chairman.
Moreover, as this audit highlights the corporate strengths and weakness, especially failures,
inefficiencies and bottlenecks, it should be undertaken by a high-powered team with the
corporation and acceptability of all those concerned with it.
(a) Mention at least 4 Professional misconduct in relation to members in practice in terms of

second schedule.
(b) ―Management Audit team should be multidimensional.‖ — Discuss.
(c) Distinguish between Continuous Audit and Final Audit.
(d) Briefly discuss about the contribution of Internal Audit.
(e) Write a short note on creation of XBRL Instance document.
Answer:
(a) A cost accountant in practice shall be deemed to be guilty of professional misconduct, if

he:—
(i) discloses information acquired in the course of his professional engagement to any
person other than his client so engaging him, without the consent of his client, or
otherwise than as required by any law for the time being in force;
(ii) certifies or submits in his name, or in the name of his firm, a report of an examination of
cost accounting and related statements unless the examination of such statements has
been made by him or by a partner or an employee in his firm or by another cost
accountant in practice;
(iii) expresses his opinion on cost or pricing statements of any business or enterprise in which
he, his firm or a partner in his firm has a substantial interest;
(iv) fails to report a material misstatement known to him to appear in a cost or pricing
statement with which he is concerned in a professional capacity;
(v) does not exercise due diligence, or is grossly negligent in the conduct of his professional
duties.
(b) A management auditor handling a large organisation on a continuous basis or a number of

audits at the same time has to build up a competent team of people, who possess the
qualifications attributed to a management auditor.
As a management auditor, he/she is concerned with all aspects of the business and the
organisation, ranging from manufacture, to marketing and finance, the management audit
team should be multi-disciplinary to make multi-dimensional approach to audit function.
A competent management audit team, internal to an organisation, could effectively be

represented by the heads of various departments‘ viz., production, materials management,
maintenance, personnel, marketing, finance, industrial engineering, quality control, etc. Such
a team can competently lead and direct the audit to attain the organisational objectives.
(c) Continuous Audit:
Continuous audit involves the detailed examination of all the transactions by the auditor
continuously throughout the year or at regular intervals, say fortnightly or monthly. A
continuous audit is one which is commenced and carried on before the close of the
financial year to which it relates. It involves the constant engagement of auditor‘s staff at the
client office throughout the period under review. Continuous audit is suitable in cases where
the final accounts are desired to be presented soon after the close of the financial year or
there is great volume of transactions or the system of internal check is weak.
Final audit:
A final audit is also called as Completed Audit or Periodical Audit. Final audit is done after
the close of the financial year, i.e. after the books of accounts have been closed and the
final accounts are drawn up. In this type of audit, the client gives the possession of books of
accounts to the auditor for audit and routine checking and other audit procedures begin
only after that.
(d) Internal Audit is an independent, objective assurance and consulting activity designed to
add value and improve an organization‘s operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control and governance processes.
The internal audit may contribute in the following areas:
(i) Independent review and appraisal of control systems across the organization (both
financial control systems and operational areas where the organization may reap
benefits)
(ii) Ascertainment of the extent of compliance of policies, procedures, regulations and

legislations, checking compliance management systems of an organization.
(iii) Facilitate good practices in management of risk. This requires systems for ascertaining,
measuring, managing and where possible mitigation or dispersion of the risk.
(iv) Achieve savings by identifying waste, inefficiency and duplication of effort across the
organization
(v) Structuring programs and activities such that company assets are safeguarded and
there are internal check systems which minimize the possibility for reducing fraud / early
warning signals for identifying fraud.
(e) The first step for creating the instance document is tagging of the XBRL taxonomy elements
with the information in the Cost audit report of the company by means of mapping of the
taxonomy elements with the Cost audit report. This converts the report into XBRL form. We
need to have a tool to create and xml file and convert it into an instance document. There
are several vendors, who provide sell this application, which has to be acquired for the
purpose.
Mapping is the process of comparing the concepts in the Cost audit report to the elements
in the published taxonomy, assigning a taxonomy element to each costing concept
published by the company. Once the tagging of Cost audit report/ compliance report
elements with the published taxonomy elements is done, the next step is to create the
instance document. An instance document is a XML file that contains business reporting
information and represents a collection of costing information and report-specific
information using tags from the XBRL taxonomy. It is to be noted that no extensions to the
core Taxonomy will be allowed. Separate instance documents need to be created for the
Cost Audit report, for the periods prior to and beginning after 1.04.2014.
Once the instance document has been prepared, it needs to be ensured that the instance
document is a valid instance document and all the information has been correctly captured
in the instance document. MCA Validation Tool provides for ‗human readable‘ PDF printable
form as well as a view of the instance document.
Section – A
[20 marks]
1. Choose the correct option among four alternative answers. (1 mark for correct choice, 1 mark
for justification.) [10×2=20 marks]
(i) Cost Auditing Standard 101 deals with ______________.
(a) knowledge of business , its Process and the Business Environment
(b) planning an Audit of Cost Statements
(c) Cost Audit Documentation
(ii) Management Audit report is submitted to ______________.
(a) Cost Audit Branch
(b) Audit Committee
(c) Central Government
(d) Management of concern.
(iii) The form in which appointment of cost auditor by the company to Central Government is
intimated ______________.
(a) CRA-1
(b) CRA-2
(c) CRA-3
(d) CRA-4
(iv) The Cost Accounting Standard 6 deals with _______.
(a) Material Cost
(b) Employee Cost
(c) Direct Expenses
(d) Administrative Overhead
(v) The length of Corporate Identity Number (CIN) is __________.

(a) 13
(b) 15
(c) 21
(d) 24
(vi) The process of determining the elements which correspond to the lines and the columns
in a financial statement and the elements which must be created by extension is called
as_______________.
(a) Mapping
(b) Name
(c) Concept
(d) Scaling
(vii) Which one of the followings in an example of ―Solvency Ratio?

(a) Debt Equity ratio
(b) Capital turnover Ratio
(c) Debtors Turnover Ratio
(d) None of above
(viii) Position Analysis is one of the techniques used by Management Auditor for evaluation of:
(a) Profit of a Corporate.
(b) Net worth of a Corporate.
(c) Balance Sheet of a Corporate.
(d) Corporate image.
(ix) CAS 19 deals with__________

(a) Pollution Control Cost
(b) Research and Development Cost
(c) Joint Costs
(d) Royalty and Technical Know-How
(x) Items appearing only in Cost Records:

(a) Rent receivable
(b) Notional interest on capital
(c) Good will written off.
(d) Dividends.
Answer: 1.
(i) (b) Planning an Audit of Cost Statement
Reason: The objective of Cost Auditing Standard - 101 is to guide the members in
planning for the audit of cost statements so that it is performed in an efficient and
effective manner. Audit planning shall also include establishing the overall audit
strategy and audit plan for the conduct of the audit.
(ii) (d) Management of concern.
Reason: Management audit undertakes examination of the effectiveness of

management in controlling the total activities of the organisation in the
accomplishment of the organisation objectives.
(iii) (b) CRA-2
Reason: 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.
(iv) (a) Material Cost
Reason: CAS-6 deals with the principles and methods of classification, measurement
and assignment of material cost, for determination of the Cost of product or service,
and the presentation and disclosure in cost statements. The objective of this standard
is to bring uniformity and consistency in the principles and methods of determining the
material cost with reasonable accuracy.
(v) (c) 21
Reason: Corporate Identity Number (CIN) is a unique 21 digit alpha-numeric number

which is assigned by the ROC (Registrar of Companies).
(vi) (a) Mapping
Reason: As per the XBRL, Mapping is the process of determining the elements which
correspond to the lines and the columns in a final statement and the elements which
must be created by extension.
(vii) (a) Debt Equity ratio
Reason: Debt Equity ratio represents the long term solvency position of an entity. It is a
ratio of debt to equity representing ratio of debt in capital structure.
(viii) (d) Corporate image.
Reason: Position Analysis helps in determining market share, market stability, etc.
(ix) (c) Joint Cost
Reason: CAS - 19 deals with the principles and methods of measurement and
assignment of Joint Costs and the presentation and disclosure in cost statement. The
objective of this standard is to bring uniformity, consistency in the principles, methods
of determining and assigning Joint Costs with reasonable accuracy.
(x) (b) Notional interest on capital.
Reason: This does not involve actual outlay of funds but is included in cost records as
an opportunity cost to determine product cost. The other three items are not related
to actual production and this do not form part of cost records.
Section - B
[80 marks]
2. (a) In case of practical audit process, mention the steps to be followed by a cost auditor.
(b) The Companies Act, 2013 has introduced provision regarding rotation of auditors. Is the
provision of rotation of auditors applicable to cost auditors also? [10+6]
Answer:
2. (a)
In order to conduct practical audit, the following steps are to be followed by a cost auditor:
Step I: Objectives of Audit and Management Outlook i.e. cost optimization or cost reduction,
checking parameters of operational efficiency of a unit or any utility or any other function or
department, identifying profit making or loss making products, suggesting changed marketing
strategies, complete review of business strategies etc.
Step II: Pre-conditions i.e. Objectives of cost audit, Area, nature and scope of audit, Number of
cost auditors appointed, the applicable reporting framework, the reporting period, the statutory
deadlines etc.
Step III: Understanding the Company’s Business i.e. the cost auditor is required to understand the
company’s business, its corporate structure and various systems followed like Internal Control
Systems, Internal Audit System, Accounting Systems & Policies , Cost Accounting System & Policies,
Company’s MIS system, risk identification & management system, IT policy, IT data security policy
etc.
Step IV: Planning the Audit which includes timing and duration of audit period, Level and number
of audit personnel to be deployed, audit partner to be deployed, drawing up an overall audit
plan and audit strategy, Formulating appropriate audit procedures etc.
Step V: Execution of Audit i.e. Perform the audit checks and procedures as planned, Collect all
required audit evidence and validate their relevance, reliability and accuracy, Prepare draft
observations & discuss with key management personnel and Prepare final audit report.
Step VI: Audit Documentation i.e. Document audit plan, audit strategy, working papers, draft
observations, final report etc. and preserve all documents in a bound folder/file for the prescribed
period.
2. (b)
The provisions for maintenance of cost accounting records and cost audit are governed by
Section 148 of the Companies Act, 2013. The provisions of Section 148 clearly states that no
person appointed under Section 139 as an auditor of the company shall be appointed for
conducting audit of cost records of the company. Section 148 also provides that qualifications,
disqualifications, rights, duties and obligations applicable to auditors (financial) shall apply to a
cost auditor appointed under this section. The eligibility, qualifications and disqualifications are
provided in Section 141 of the Act and powers and duties are provided in Section 143. Section
143(14) specifically states that the provisions of Section 143 shall mutatis mutandis apply to a cost
auditor appointed under Section 148. There are no other provisions governing the appointment of
a cost auditor.
Section 139(3) of the Act, applicable to appointment of auditors (financial), and Rule 6 of
Companies (Audit and Auditors) Rules, 2014 deals with the provision of rotation of auditors and
these provisions are applicable only to appointment of auditors (financial). The Act does not
provide for rotation in case of appointment of cost auditors and the same is not applicable to a
cost auditor. It may, however, be noted that though there is no statutory provision for rotation of
cost auditors, individual companies may do so as a part of their policy, as being the practice with
Public Sector Undertakings.
3. (a) Z Electronics Co (ZEC) has made an agreement with Tuzuki of Japan for import of kits of
Automatic Washing Machine in completely knocked down (CKD) condition. The terms of
agreement are :
(i) Tuzuki will supply some items keeping 20% margin on cost. These imported items are
of value of 40% of FOB price of Washing Machine and balance 60% will be locally
manufactured.
(ii) ZEC will pay a lump sum of ` 300 lakhs for technical know how and drawing for
manufacturing of 3 lakhs washing machines.
(iii) ZEC will also pay a royalty at 10% of selling price fixed by it in the local market less
landed cost of imported kits and cost of locally procured components.
The following related information is also available :
(i) FOB price for washing machine is ` 8,000.
(ii) Insurance & freight is ` 300 per set of imported items
(iii) Effective custom duty is @ 40% on CIF price
(iv) Assembling & other overhead costs will be ` 1,000 per set.
(v) Expected profit is 20% on selling price
You are required to calculate the selling price of Washing machine (rounded to ` 10)
(b) (i) How to treat Inward Transportation Cost as per the Cost Accounting Standard 5
(ii) How Transportation Cost is to be determined in case the manufacturer is having its own
transport fleet? [10 + (2 + 4)]
Answer:
3. (a) Computation of selling price of Washing Machine
Particulars Amount (`)
FOB price of complete Washing Machine 8,000
Value of imported items (40% of FOB price) 3,200
Value of locally manufactured items (60% of FOB Price) 4,800
A. Cost of imported Items :
(i) FOB price of imported parts 3,200
(ii) Freight & Insurance 300
(iii) CIF value 3,500
(iv) Custom duty 40% on CIF value 1,400
Landed cost of imported kits (iii) +(iv) 4,900
B. Cost of material - both imported + local (4800 +4900) 9,700
C. Assembling cost & other overhead costs 1,000
D. Technical know-how cost per machine 100
E. Total cost excluding royalty (B+ C + D) 10,800
F. Royalty 434
G. Total Cost 11,234
H. Profit ( 25% of Cost) 2,806
Selling Price of Washing Machine (G + H) [rounded to ` 10] 14,040
Working note for calculation of royalty:
Let Royalty = X
Cost = (10,800 + X)
Selling price = (10,800 + X) x 1.25 = (13,500 +1.25 X)
Royalty = (Selling Price – landed cost of imported kits - landed cost of local items) x 0.10
Or X = (13,500 + 1.25 X – 9,700) x 0.10
Or X = 380 + 0.125 X
Or 0.875 X = 380
Or X = 434
3. (b)
(i) As per the Cost Accounting Standard 5, Inward transportation cost is the transportation
expenses incurred in connection with the materials/goods received at factory or place of
use. Inward transportation costs shall form the part of the cost of procurement of materials
which are to be identified for proper allocation/apportionment to the materials/ products.
(ii) In case of a manufacturer having his own transport fleet, proper records shall be maintained
to determine the actual operating cost of vehicles, showing the details of various elements of
cost, such as salaries and wages of driver, cleaners and others, cost of fuel, lubricant, grease,
amortized cost of tyres and battery, repairs and maintenance, depreciation of vehicles,
distance covered and trips made, goods hauled transported to the depot. Separate records
should be maintained as per Appendix 1 to the standard separately for
a. Inward transportation
b. Outward transportation
c. Movement for home consumption and export
d. Separate for production and trading activities
e. Separate for transportation other than by road, viz., by air, etc.
4. (a) Management Audit and Operational Audit are complementary and supplementary to
one another‖. Discuss in brief.
(b) What are the points to be consider by Management Auditor while determining the
adequacy of Budgetary Control System? (8+8)
Answer:
4. (a)
Management Audit is wider in scope compared to Operational Audit.
Management Audit is concerned with quality of managing whereas Operational Audit centres on
the quality of operation. Operational Audit is an audit for the management and Management
Audit is an audit of the management also.
The basic difference between the two audits is not in method, but in the level of appraisal. In
management audit, the auditor is to make his tests to the level of top management, its
formulation of objectives, plans and policies and its decision making. It is not that he just verifies
the operations of control and procedures and fulfilment of plans in conformity with the prescribed
policies.
The auditor is to reach the root i.e., the functions of top management which lay down objectives
and policies, provide means and procedures of implementation and control and which actually
engage in direction and control on a continuous basis. In addition to what would normally be
covered in an operational audit, management audit would also encompass the relevance and
effectiveness of the aims, duties and decisions of management at various levels, plans, policies
and decisions of the top management. Every aspect of the functions of Board of Directors should
be in conformity with the objects set out in the constituting document. Similarly, the managing
director, if any, should act not only in accordance with the mandate he has received but he
should ensure that the decisions he takes are in conformity with the objects of the company and
the policies formulated by the Board. The effectiveness of management under the control of
managing director and the various members of the Board including those in charge of finance,
production, sales etc., should be subject to review of the management auditor.
Therefore, it can be said that the two audits are complementary and supplementary to one
another.
4. (b)
While determining the adequacy of the budgetary control system of an organisation, it is essential
that the Management Auditor should evaluate its coverage and effectiveness, i.e. whether the
system in operation covers all functions rather than an accounting exercise. For this purpose,
he/she should examine whether the system contributes towards accomplishing the basic task of
planning, coordinating and controlling the activities of the organisation in relation to the product
under Management Audit.
The Management Auditor should examine and appraise the points as stated below:
(i) In the area of Planning:
1. Whether it covers all interrelated functions like production, sales, purchasing and
financed
2. Whether it determines the linkage between the budget centres and the responsibility
centres.
3. Whether it establishes definite goals and limits for these functions well in advance
4. Whether there are imbalances in the fixation of performance levels of functional

budgets in relation to sales budgets.
5. Whether a budget monitoring cell exists for operating the system in the right perspective
(ii) In the area of coordination:
1. Whether the budget monitoring cell holds its meeting regularly with a view to ensuring
performance evaluation
2. Whether it helps to prevent waste that results in duplication or cross-purpose activities.
3. Whether it reveals timeline in the process of preparation and approval of all the
functional budgets and the master budget.
(ii) In the area of Control:
1. Whether system exists for measuring, comparing and quantifying the results of all
functional areas.
2. Whether the budget incorporates a degree of flexibility with a provision for its periodical
review.
3. Whether the variance reports are prepared and appropriate corrective actions are
taken on the variances.
5. (a) In the Financial Accounts of Samriddhi Ltd. for the year ended March 31, 2019 the profit
was ` 9,25,80,000. The profit as per Cost Accounting records for the same period was less.
The following details are extracted from the accounting schedules and Cost Accounting
records of the company.
Amount in ` thousand
Particulars Financial A/c Cost A/c
Opening : Semi Finished Goods 45,800 50,900
: Finished Goods 99,300 95,750
Closing : Semi Finished Goods 48,200 52,400
: Finished Goods 1,05,450 97,100
Urea & Transport subsidy 520
Expenses on CSR 72
Profit on sale of Fixed Assets 220
Chemical used internally 425 400
Favourable Exch. Rate variation 350
Post-retirement Medical grant 715
Purchase Tax Refund 580
Litigation Recovery-Prior year 175
You are required to prepare a Reconciliation Statement and arrive at the Profit as per Cost
Records for the year ended March 31, 2019
(b) Discus about the responsibilities of Management with regard to Internal Control. [10+6]
Answer:
5. (a)
Reconciliation of Profit between Cost Accounts and Financial Accounts of M/s. Samriddhi Ltd.
Amount in ` thousand
Particulars Amount Amount

Profit or loss as per Financial Accounts 92,580
A. Less: Incomes not considered in Cost Accounts:
Profit on sale of Fixed Assets 220
Urea & Transport Subsidy 520
Litigation Recovery-Prior year 175
Favorable Exch. Rate Variation 350
Purchase tax Refund 580
Own consumption (chemicals) valuation

difference (425 - 400) 25 (1,870)
B. Add: Expenses not considered in Cost Accounts
Expenses on CSR 72
Post-retirement medical grant 715 787

C. Less: Difference in Valuation of stock between
Financial Accounts and Cost Accounts
(workings) (5,700)
Profit as per Cost Accounts 85,797
Workings:
Current Year (2018-19)
(Amount in ` thousand)
Particulars Financial Cost Accounts

Accounts
Opening Semi finished 45,800 50,900
Finished 99,300 95,750
Total 1,45,100 1,46,650
Closing semi finished 48,200 52,400
Finished 1,05,450 97,100
Total 1,53,650 1,49,500
Variation in inventory 8,550 2,850
Increase in difference of stock valuation towards financial accounts
= ` (85,50,000 – 28,50,000) = ` 57,00,000
5. (b)
The responsibilities of Management with regard to internal Control can be summarized as under:
(i) Creation of system: Management is responsible for maintaining an adequate accounting

system incorporating various internal Controls to the extent appropriate to the size and
nature of the Business. The Management is vested with the responsibility of carrying on the
business, safeguarding its assets and recording the transactions in the books of account and
other records.
(ii) Review of system: The system installed, should be reviewed by the Management to ascertain,
whether-
• The prescribed Management policies are being properly interpreted by the employees
and are faithfully implemented,
• The prescribed procedures need a revision due to changed circumstances or whether

they have become obsolete or cumbersome, and
• Effective corrective measures are taken promptly when the system appears to
breakdown
(iii) Internal Audit: It is desirable that the Management also installs an internal audit System as an
independent function to check, amongst other things, the actual operation of the Internal
Control System and report any deviations or non-compliances.
6. (a) Jyoti Electronics Ltd. is engaged in the manufacture of Refrigerator having its factories at
Bangalore and Chennai. The company manufactures Compressor at Bangalore which is
consumed to produce Refrigerator at Chennai factory. The following information
pertaining to captively consumed Compressors are extracted from the records of the
company for the half year ended March 31, 2019.
(` in Thousand)
Direct material 1,200
Direct wages and salaries 470
Direct expenses 120
Indirect materials 90
Factory overheads 376
Administrative overheads (20% relating to production activities) 720
Quality control cost 150
Research and development cost 150
Selling and distribution expenses 250
Sale of scrap realized 150
Profit margin 15%
You are required to determine:

(i) The cost of production for purpose of captive consumption in terms of Rule 30 of the
Central Goods & Services Tax Rules 2017 and as per CAS-4 (Revised), and
(ii) Also Assessable Value for the purpose of paying GST on applicable transactions.
(b) What are the preliminary information you, as a Cost Auditor, will collect from the
company which is subject to cost audit for the first time? [8+8]
Answer:
6. (a)
Jyoti Electronics Ltd.
Computation of Cost of Production (As per CAS 4)
Direct material 1,200
Direct expenses 120
Factory overheads (90 + 376) 466
Quality control cost 150
Administrative overheads
(to the extent relates to production activities) (720 x 20%) 144
Less: Sale of scrap realized (150)
Cost of production 2,550
Add: 10% as per rule 30 of CGST Rules, 2017 (10% of ` 2,550) 255
Assessable Value as per rule 30 of CGST Rules, 2017 2,805
6. (b)
The following information from the company is generally required by a cost auditor relating to
cost audit:
(i) A brief history of the company and its business activities.
(ii) Memorandum of Association and Articles of Association.
(iii) Annual reports and accounts for the last three to five years.
(iv) A list including addresses of all factories, branch offices and depots with the names
managers-in-charge.
(v) Organization chart with details of key personnel.
(vi) Collaboration agreements, if any, including agreements for payment of royalty.
(vii) Details of manufacturing capacity - installed, licenses and utilization of installed capacity for
the last three years.
(viii) A detailed note indicating the system and procedure followed in -

(a) Cost department
(b) Financial accounting department
(c) Purchase, raw materials/ packing materials stores etc.
(d) Time office
(e) Production department
(f) Sales department
(g) Management Information System
(h) Internal audit department
(ix) Copies of budget manual
(x) Flow charts and description of manufacturing process
(xi) Major raw materials with quantitative details for each; unit of finished output
(xii) Labour incentive schemes, if any
(xiii) Details of budgetary control and standard costing procedures with treatment for variances.
(xiv) Copies of industrial licenses, if any, issued from time to time
(xv) Periodical reports submitted to Government authorities.
7. (a) A nationalized bank which has extended cash credit to a manufacturing company on the
security of the inventory holding, is periodically receiving stock statements from the
company indicating the value of stocks held. The company is sick and the Bank wants to
reassure itself that its loans are fully covered by stocks. You have been appointed by the
Bank to certify the value of the inventory. How would you proceed to conduct the
‗inventory audit‘?
(b) Purchase of Materials ` 3,00,000 (inclusive of GST of ` 15,715); Fee on Board ` 12,000;
Import Duty paid ` 15,000; Freight inward ` 20,000; Insurance paid for import by sea `
10,000; Rebates allowed ` 4,000; Subsidy received from the Government for importation of
these materials ` 20,000. Compute the landed cost of material (i.e. value of receipt of
material). [10+6]
Answer:
7. (a)
In order to conduct Inventory Audit the following aspects should be considered:
(i) Physical verification of stocks.
(ii) Method of valuation adopted.
(iii) Currency of stocks (i.e., movement)
(i) Physical verification of stocks - Physical verification of stocks will normally be 100 percent.
However, depending upon the nature of items and material flows, it may be done by
sampling. This will require proper sampling procedures to ensure the samples verified
represent the characteristics of entire stock. An ABC categorization may be done so that
right emphasis is given to each item of stock.
(ii) Method of valuation adopted - The main thrust of inventory audit is to check the accuracy of
the costs, to verify the market rates and to see that the values adopted for stock valuation
are cost price or net realisable value whichever is lower. Basis of valuation adopted for Raw
Materials, Work-in process, Finished Goods and Spares and Consumables must be examined
and reasonableness verified to ensure the realizable values. For imported items foreign
exchange translation rate for conversion will be:
(a) as per bank debits under LC, or
(b) rate prevalent as evidenced by Bill of Entry or Forward Rate if Forward Contract has
been taken.
(iii) Currency of stocks - Currency of stocks will be ensured by analyzing all items by fast, slow
and non-moving characteristics. In respect of slow and non-moving items, fall in value, if any,
due to obsolescence, deterioration etc. will also have to be examined and reported.
In respect of spare parts, care must be taken to segregate items of spares relating to scrapped or
replaced plant/machinery, as these may not have any value.
In finished goods also, returns from customers for defects in quality must be given special
consideration in valuation.
The basis of the unit rates adopted must be consistent and include:
(a) Freight, insurance, packing, loading and unloading and other incidental charges incurred.
(b) Manufacturing costs upto stages of completion in case of finished product.
The report may be designed by the bank or designed by the Cost Auditor. In any case some
items which need to be highlighted should be shown separately. The report should contain
lacuna, if any, improvements required, and suggestions for improvement. Needless to say the
report should not only be useful to client, i.e. bank but also to the unit whose audit is carried out to
enable them to improve their performance.
7. (b)
Computation of Material Cost Sheet
Particulars Amount (`)

3,00,000
Add: Fee on Board 12,000
Add: Import Duties of purchasing the material 15,000
Add: Freight Inward during the procurement of material 20,000
Add: Insurance paid 10,000
Total 3,57,000
Less: Rebates 4,000
Less: GST Input Tax Credit 15,715
Less: Subsidy received from the Government for importation of 20,000
materials
Value of Receipt of Material 3,17,285
8. Answer any four. 4×4=16
(a) ―The Cost Audit Reports can be termed as propriety audit‖ — Discuss.
(b) Write a short note on Key Performance Indicators (KPIs).
(c) A company is facing problem in satisfying customers‘ orders leading to backlog of supply
position. How to identify the problem by means of Operational Audit?
(d) What is Standard Stripping Ratio as per CAS-23?
(e) Mention the steps involved in the preparation of the Performance Analysis.
Answer:
(a) Propriety audit stands for verification of transactions in the best interest of the public,
commonly accepted customs and standards of conduct. In other words, the propriety audit
seeks to ensure that the planned expenditure would yield the optimum returns and there is
no other better alternative available. It seeks to ensure that the expenditure is not only
appropriate to the circumstances of each case, it has indeed achieved the objectives for
which it has been incurred.
The Cost Audit Reports can be termed as propriety audit as these reports seeks to ensure that
actual expenditure at each stage is appropriate and optimum returns have been achieved.
The cost auditor always aims at ensuring that the actual expenditure should not be prima
facie more than what the occasion demands. The cost auditor has to report on matters
which appear to him to be clearly wrong in principle, cases where the company’s funds
have been used in a negligent or inefficient manner, arm’s length pricing of related party
transactions, etc. These are the areas where the propriety aspect is involved and therefore
cost audit may be in the nature of “propriety audit”.
(b) Key Performance Indicators (KPIs) are simply the variables, independent or interdependent,
in respect of which the goals can be set and performance measured to assess whether it is in
furtherance of the enterprise objectives. Hence, for evaluation of performance the selection
of KPIs must be chosen correctly in tune with the objectives. The KPI measurement should not
be a static computation, but always needs to be compared with a benchmark set.
The KPIs could be:
(i) Quantitative – these can be financial or non-financial
(ii) Qualitative – these are often lead indicators i.e. they influence future performance
(iii) Actionable – those which can be influenced by enterprise actions or controllable
(iv) Trending – those which need to be assessed over a period of time to observe whether
they are improving or not
(c) The Operational Auditor may use the technique of Work Load Measurement to assess the
situation. He/she may draw up a questionnaire to assess the situation so as to include the
following queries:
(i) Is there a backlog of work and if so whether the same is due to increased volume or
(ii) Is the increase in work volume is temporary or may continue?
(iii) Will the situation likely to ease with additional inputs like personnel, machines etc?
(iv) Is the workload of each employee is justified or needs adjustment through improved
(v) Will investment in advanced technology will commensurate with benefits derived from
it?
(vi) What control measures exist to assess the work efficiency and what are the remedial
measures?
(d) The Cost Accounting Standard 23 deals with Overburden Removal Cost. The objective of this
standard is to bring uniformity, consistency in the principles, methods of determining and
assigning Overburden Removal Cost with reasonable accuracy.
Standard stripping ratio is the ratio between the total quantity of overburden to be removed
(in cubic meters) and the total mineral to be extracted (in tonnes) during the Projected life of
the project.
The term Standard stripping ratio and Average stripping ratio denote the same meaning and
are used interchangeably.
The Ratio shall be reviewed periodically, at least every five years, to take into account
changes in geological factors such as actual behaviour of the soil and the ore body. The
ratio shall be reviewed immediately if the geological factors alter radically, for example due
to earthquake.
The reported quantity of overburden is considered in cost statement where the variance
between the reported quantity and the measured quantity is within the permissible limits.
Reported quantity is the quantity of overburden that is necessary corresponding to actual
quantity of mineral raised.
For example, 3:1 stripping ratio means that mining one Ton of ore will require mining three
cubic meters of waste rock (overburden).
(e) The following steps are involved in the preparation of report on Performance Analysis:
(i) Identify and understand the key strategies of the company, both prescriptive and
emergent strategies included.
(ii) Choose strategies that have more visible expressions in costs data maintained by the
company.
(iii) Identify the activities that were impacted by the strategies selected and also
implemented during the year.
(iv) Analyze the cost implications of those activities and link it with the expected results of
the strategies.
(vi) Present the evaluation, in a table or any other easily comprehensible format like
histogram, chart, graph etc.
(vii) Give explanatory notes for the terms used, calculations made, and assumption behind
the evaluations.
(viii) Finalize the finding after a discussion with the concerned operating executives and then
with the management of the company.
SUGGESTED_ANSWERS TO QUESTIONS_SYL2016_DEC2019_PAPER-19
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)
SUGGESTED ANSWERS TO QUESTIONS
DECEMBER- 2019
Paper-19 : COST AND MANAGEMENT AUDIT
Time Allowed : 3 Hours Full Marks : 100
The figures in the margin on the right side indicate full marks.
All Sections are compulsory. Each Section contains instructions regarding
the number of questions to be answered within the Section.
All working notes must form part of the answer
Wherever necessary, candidates may make appropriate assumptions
and clearly state them.
Section-A (20 Marks)

Section-A contains Question Number 1.
All parts of this question are compulsory.
1. (a) Choose the correct option from amongst the four alternatives given (1 mark is for the
correct
choice and 1 mark for justification/workings): 2×10=20
(i) SHYAN LTD. has a machine of productive capacity of 1500 unit per hour. It runs 3
shifts with 1 weekly off and 12 holidays per year, each shift has one hour
stoppage due to lunch, change shift etc. Maintenance is done in running time.
The Normal Capacity of the plant as per CAS-2 will be
(A) 131.40 lakh units
(B) 94.815 lakh units
(C) 108.36 lakh units
(D) None of the above
DoS, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
(ii) BORS & Co., a firm of Cost Accountants was appointed as Cost Auditor of PANTEX
LTD on 31.07.2018 for auditing the cost records for the FY 2018-19. The Auditor
appointed as such shall continue in such capacity upto
(A) 31.07.2019, on expiry of one year of appointment.
(B) 30.09.2019, on expiry of six months from close of accounts.
(C) 30.08.2019, date of submission date of Cost Audit Report.
(D) 15.09.2019, date of holding of Annual General Meeting of PANTEX LTD.
(iii) Which one of the following KPI (Key Performance Indicator) is used to measure
efficiency of manufacturing performance?
(A) Production per Machine Hour
(B) Operating Cycle of Materials turnover
(C) Material as % of Total Cost
(D) % of idle time to total available time
(iv) The consumer service audit critically examines:
(A) Outstanding payment of consumers.
(B) Price consumers are ready to pay for particular product/service.
(C) And appraise management of business enterprise of responsibility towards

consumers.
(D) Demand of a product by consumers.
(v) “Related Party” with relation to a party means
(A) a Director or his relative.
(B) a Key Managerial Person or his relative.
(C) a firm, in which a Director, Manager or his relative is a partner.
(D) Either or all of the above
(vi) Once the instance document is successfully validated from the tool, the next step
is to
(A) download XBRL validation tool.
(B) pre-scrutinize the validated instance document.
(C) convert to human readable format and verify correctness of the instance
document.
(D) attach instance document to the Form CRA-4.
(vii) The Bureau of Energy Efficiency is formed under
(A) The Electricity Act, 2003
(B) The Energy Conservation Act, 2001
(C) The Electricity (Supply) Act, 1948
(D) The Electricity Regulatory Commission Act, 1998
(viii) The knowledge of Entity’s Internal Control is to be understood by the Cost Auditor
as required by
(A) Cost Auditing Standard 101
(B) Cost Auditing Standard 102
(C) Cost Auditing Standard 103
(D) Cost Auditing Standard 104
(ix) Profit Reconciliation of the company as a whole is dealt in
(A) Part D para 2 of the Annexure to Cost Audit Report.
(B) Part C para 1 of the Annexure to Cost Audit Report.
(C) Form of the Cost Audit Report.
(D) Part A para 1 of the Annexure to Cost Audit Report.
(x) The following details relating to MENG LTD are given:
Royalty paid on Units produced 25,000
Hire charges on Equipment 20,000
Design Charges 18,000
Software Development Charges for Production 22,000
What will be the Direct Expenses of the Company (as per CAS-10)?
(A) ` 60,000
(B) ` 63,000
(C) ` 65,000
(D) ` 85,000
Answer:
(i) (B) 94.815 lakh units. As per CAS 2, normal capacity is maximum productive capacity
reduced by time lost on preventive maintenance, holidays, Set up delays. Here,
Normal capacity = (365-52-12) x (8-1) x 3 x 1500 = 94.815 lakh unit.
(ii) (B) 30.9.2019. As per Rules, 2014, the Cost Auditor, unless removed or resigned from
office, shall continue till expiry of 180 days from closure of financial year or till he
submits the cost audit report. Here his submission of the report did not go beyond
six months from closure of financial year.
(iii) (B) Operating cycle of Materials Turnover. Key Performance indicator of

manufacturing is the Operating cycle of Materia!, WIP, Finished Goods Turnover.
(iv) (C) An appraise management of business enterprise of responsibility towards

consumers. The audit is based on the philosophy that the role of business should be
conducive to raising the quality of life through its contribution in terms of better
product-quality and services by making available the products and services of the
right qualities at the right time, in right quantity, at the right place and right price.
(v) (D) Either or all of the above. This is as per clause 76 section 2 of the Companies Act
2013.
(vi) (B) Pre-scrutinize the validated instance document.
Reason will be: Once the instance document is successfully validated from the
tool, the next step is to pre-scrutinize the validated instance document with the
help of the same tool using a working internet connection. In the Pre-scrutiny, the
server side validations shall be performed, using the MCA21 data base.
(vii) (B) The Energy Conversation Act, 2001. The Bureau is established by merging Energy
Management Centre and controls energy conservation.
Alternative Reason: The Bureau of Energy Efficiency formed under the Energy
Conservation Act 2001. The agency's function is to develop programs which will
increase the conservation and efficient use of energy in India.
(viii) (D) Cost Auditing Standard 104. The Audit Standard 104 deals with knowledge of
Business, its processes and Business Environment, which includes knowledge on the
Entity’s Internal Control.
(ix) (A) Part D para 2 of the Annexure to Cost Audit Report. This is pursuant to Rule 6(4) of
the Companies (Cost Records and Audit) Rules.
(x) (D) 85,000. Direct expenses = Royalty paid on units produced + Hire Charges of
equipment used for production + Design charges + Software development
charges related to production ` 25,000 + ` 20,000 + ` 18,000 + ` 22,000 = ` 85,000.
Section-B (80 Marks)
Answer any five questions from Question Numbers 2 to 8.
Each question carries 16 marks.
2. (a) (i) Healthcare Equipment Limited is engaged mainly in the production of Cardiac
stents, Catheters, Pacemakers and Intraocular lenses.
State below whether maintenance of Cost Records is applicable if the company

fulfils turnover criteria and is
(I) a foreign company having registered office at Mumbai.
(II) a company classified as a micro enterprise.
(III) a foreign company having only liaison offices at Delhi and Mumbai.
(IV) a domestic company whose average turnover of ` 40 crore for last two years
has dropped to ` 24 crore in FY 2018-19. 4
(ii) How the cost of production of goods and provision of services as per CAS-4 read
with CGST Rules are determined:
(I) where the supply of goods or services is for a consideration not wholly in
money.
(II) where goods are intended for further supply as such by the recipient? 4
(b) (i) A firm of Cost Accountants was appointed by a company to evaluate the costs of
the various products manufactured by it for its information system. One of the
partners of the firm was a Non-Executive Director of the company. Is it permissible?
(ii) A Cost Auditor has reported fraud to the company as required under sec. 143 of
the Companies Act, 2013. What disclosures are to be made by the company in its
Board’s Report? 4+4=8
Answer:
2. (a) (i)
(1) Healthcare Services is in non-Regulated sector (item 33 of B: non-Regulated sector) and

any company, domestic or foreign, having annual turnover of ` 35 crore or more from all
its products or services in the previous year shall maintain cost records. Therefore, the
Rule is applicable to a foreign company.
(2) Nothing contained in Companies (Cost Records and Audit) Rules shall apply to a
company, which is classified as a micro enterprise or a small enterprise as per the
turnover criteria under Micro, Small and Medium Enterprises Development Act.
(3) Nothing contained in serial number 33 shall apply to foreign companies having only
liaison offices in India.
(4) Once maintenance of cost records becomes applicable, it would be maintained on a

continuous basis in the subsequent years also even if the turnover of the company in the
previous year falls below threshold limit.
2. (a) (ii)
Cost Accounting Standard 4 (CAS 4) specifies the principles for determination of cost of
production for valuation of goods based on cost. Where the supplier and the recipient are
not related and price is the sole consideration, the value of supply or services shall be
transaction value. CGST Act and Rules 27, 28, 29 of CGST Rules provide methodologies for
determination of value of supply under certain exceptional situations.
(1) Where the supply of goods or services is for a consideration not wholly in money, the
value shall be the (a) open market value or (b) the value of supply of goods or services
or both of like kind and quality for distinct or related person.
(2) Where goods are intended for further supply as such by the recipient, the value shall be
an amount equivalent to 90% of the price charged for the supply of goods of like kind
and quality to his customer not being a related person. If the value is not determinable,
it will be 110% of cost.
2. (b) (i)
Clause 4 of Part-I of the Second Schedule to the Cost and Works Accountants Act, 1959
states that expressing an opinion on cost and pricing of any business or any enterprise in
which the auditor or his firm or a partner in his firm has a substantial interest would constitute
misconduct, unless he discloses the interest also in his report. As per the facts of the case, the
firm has been retained to evaluate the cost of products manufactured by it for its information
system. Therefore, this amounts to Professional misconduct.
2. (b) (ii)
According to Section 143(12) of the Companies Act 2013, if an auditor of a company, in the
course of the performance of his duties as auditor, has reason to believe that an offence
involving fraud is being or has been committed against the company by officers or
employees of the company, he shall immediately report the matter to the Board/ Audit
Committee/ Central Government within such time and in such manner as may be
prescribed.
As per Rule 13 of the Companies (Audit and Auditors) Rules, 2014, following detailed
disclosures of fraud reported to Audit Committee are to be made in Board’s Report:
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.
3. (a) (i) What are the advantages of Cost Accounting Standards? 4
(ii) Answer the following with reference to Transportation Cost as per Cost Accounting
Standard-5 (CAS-5):
(I) What items of cost shall not be included in Transportation Cost?
(II) For apportionment of outward Transportation Cost, what basis should be

adopted? 2+2=4
(b) The financial Profit and Loss Account of PANWOOD LTD, a manufacturing company for
the year ended 31st March, 2019, was `1,15,71,480. During the course of Cost Audit, it
was noticed the following:
(i) Some discarded assets sold off which fetched a profit of ` 95,000.
(ii) Interest was received amounting to `1,05,000 from outside the business
investment.
(iii) Voluntary Retirement payment of `3,80,000 was not included in the Cost
Accounts.
(iv) Some renovation work was carried out at a cost of `6,20,000 and its useful life was
only for five years.
(v) Donation of `1,28,000 towards CSR commitment was not considered in the Cost
Accounts.
(vi) Insurance claim of ` 18,05,000 relating to previous year received during the year.
(vii) Loss on sale of investments amounts to ` 32,800.
(viii) The closing inventory of raw materials was undervalued `30,600 and that of
finished goods was overvalued `2,30,700 in the financial records.
(ix) Post retirement medical grant to the extent of ` 2,80,000 was not considered in
Cost Accounts.
(x) Profit from Retail trading activity amounting to ` 1,90,000.
You are required to prepare a Reconciliation Statement between two Accounts and
work out the Profit as per Cost Accounts. 8
Answer:
(3) (a) (i)
Cost Accounting Standards are set of standards that are designed to achieve ‘uniformity
and consistency in cost accounting practices.’ The Institute of Cost Accountants of India,
recognizing the need for structured approach to the measurement of cost in manufacture or
service sector and to provide guidance to the user organizations, government bodies,
regulators, research agencies and academic institutions to achieve uniformity and
consistency in classification, measurement and assignment of cost to product and services,
has constituted Cost Accounting Standards Board (CASB) with the objective of formulating
the Cost Accounting Standards. The advantages of Cost Accounting Standards are as
follows:
a. Providing a structured approach to measurement of costs in manufacturing process or

service industry;
b. Integrating, harmonizing, and standardizing cost accounting principles and practices;
c. Providing guidance to users to achieve uniformity and consistency in classification,

measurement, assignment, and allocation of costs to products and services;
d. Arriving at the basis of computing the cost of product, activity, or service where required
by legal or regulatory bodies;
e. Enabling practicing members to make use of Cost Accounting Standards in the

attestation of General Purpose Cost statements; and
f. Assisting in clear and uniform understanding of all the related issues by various user
organizations, government bodies, regulators, research agencies, and academic
institutions.
(3) (a) (ii)
Cost Accounting Standard 5 (CAS-5) on “Determination of Average (Equalized) Cost of

Transportation” deals with the determination of average transportation cost of a product.
(a) Cost of Transportation comprises of the cost of freight, cartage, transit insurance and
cost of operating fleet and other incidental charges whether incurred internally or paid
to an outside agency for transportation of goods. Penalty, detention charges,
demurrage and cost related to break down and expenses abnormal and non-recurring
in nature will not be included in transportation cost.
(b) The following basis may be used, in order of priority, for apportionment of outward
transportation cost depending upon the nature of products, unit of measurement
followed and type of transport used:
(i) Weight
(ii) Volume of goods
(iii) Tonne-Km
(iv) Unit / Equivalent unit
(v) Value of goods
(vi) Percentage of usage of space
Once a basis of apportionment is adopted, the same should be followed consistently
3. (b)
Statement showing the Reconciliation of Profit and Loss between Cost and financial account
for the year ended 31st March, 2019.
Particulars ` `
Profit as per Financial Accounts. 11571480
Add: Expenses/Loss not considered in Cost Accounts
(a) Loss on Sale of Investments 32800
(b) Donation towards CSR Commitment 128000
(c) Post-retirement Medical grant 280000
(d) Voluntary Retirement payment 380000
(e) 4/5 of Renovation Expenses Amortized 496000 1316800
Less: Incomes not considered in Cost Accounts
(a) Profit on Sale of old assets 95000
(b) Interest received from outside investment 105000
(c) Insurance claim for previous year received 1805000
(d) Profit from Retail Trading Activity 190000
(e) Effect of Undervaluation/overvaluation of closing inventory 200100 (2395100)
Profit as per Cost Accounts 10493180
4. (a) You are the Management Accountant of MANGLOW LTD, a large manufacturing
company suffering from Working Capital Crisis. Which areas will you cover to
overcome the Crisis? 8
(b) What is Energy Audit? Briefly state the key-functions of Energy Auditor. 2+6=8
Answer:
4. (a)
Working capital being an indispensable part of operation of business should be evaluated to

point out the inefficiency of either procurement or the application of the working capital. The
analysis of working capital can be done by measuring operational inefficiencies and liquidity
of the company. Furthermore, the cash management in the working capital should be
included in such analysis. Some steps are suggested to establish whether excessive amount is
blocked.
A. Need to make Performance Analysis
To help monitor the variations, a Performance Analysis Report on Working Capital and
Inventory Management is to be made to appraise the management about its current
performance. It would help the organization
(i) to improve profits and profitability,
(ii) to optimize resource allocation,
(iii) to optimize the product and service portfolio.
B. Tools of Measurement
The analysis of working capital components like Current assets and current Liabilities can
be made by various financial ratios like
(a) Receivables Ratio, (Sale/Debtors,)
(b) Inventory Ratios (Raw Materials stock/consumption, Stores & Spares/consumption,

Finished Goods stock/Cost of Sales etc.)
(c) Financial Ratio (Current Ratio, Quick Ratio, Turnover Ratio etc.).
C. Remedial Measure
To avoid misuse of working capital, the policies regarding inventory management
commensurate to the scale of business be reviewed and laid down. This should include
Procurement policy,
Stocking policy,
Inventory valuation method,
Physical verification of inventory policy,
This analysis should be critical for operational inefficiencies and liquidity of the company.
D. Cash Management
The cash management in the working capital should be included in such analysis to
establish whether excessive amount is blocked in the working capital. The cost of working
capital funding should be highlighted especially in their multiple source of working capital
funding. Those costs would include interest paid on cash credits, loans, cost of collection
efforts, cost of inventory carrying etc. The total cost of managing working capital as a
percentage of total working capitalinvested would be a very useful performance
indicator.
In the current situation, the Management Accountant should examine the variations and
identify the blocked capital in slow moving area like Debtors or Inventory. He may
recommend liquidation of slow moving capital and advise measures for preventing
further accumulation.
4. (b)
Energy auditing is an activity that serves the purposes of assessing energy-use, pattern of a
factory or energy consuming equipment and identifying energy saving opportunities. In that
context, energy management involves the basic approaches in reducing avoidable losses,
improving the effectiveness of energy use, and increasing energy use efficiently. The energy
auditor is normally expected to give recommendations on effective improvements leading
to monetary benefits and also advise on energy management issues. Generally, energy
auditor for the industry is an external party. The following are some of the key functions of the
energy auditor?
1. Quantification of energy costs and quantities.
2. To correlate trends of production or activity to energy cost.
3. To devise energy database formats separately by products, departments or energy

consuming departments.
While performing the aforesaid key functions, the energy auditor is required to carry out the
following activities:
1. To analyse the historical energy consumption and cost data.
2. To conduct preliminary energy audit with the objective to identify:
(A) major energy consuming equipment and process.
(B) Obvious inefficiencies and energy wastes.
(C) Priority areas for further detailed investigation.
3. To conduct detailed technical and economic analysis of energy efficiency measures

involving large efficiency measures involving large capital or long pay back periods.
5. (a) (i) For appointment of Internal Auditor by the company under Companies Act, 2013,
state:
(I) Is it mandatory to file documents with ROC on appointment of Internal

Auditors?
(II) Can a Director of a company be appointed as its Internal Auditor? 2+2=4
(ii) Explain briefly the concept of “Adequacy of Internal Control”. 4
(b) You are appointed as Internal Auditor of a Hospital. State your approach for steps to
be taken for conducting the audit. 8
Answer:
5. (a) (i)
(1) The appointment of internal auditor can be done only by means of a resolution passed
at the meeting of the Board as specified under rule 8 of the Companies (Meeting of
Board and its Powers) Rules, 2014 and accordingly, the company is also required to file
Form MGT-14 with the Registrar within 30 days from the date of passing of resolution by
the Board. However, filing of resolutions under section 117 has been exempted for
private companies.
(2) The Internal Auditor shall be either a Chartered Accountant, Cost Accountant, or such
other professional as may be decided by the Board to conduct internal audit of the
functions and activities of the company. The Internal Auditor may or may not be an
employee of the Company. Hence, the Director can be appointed as Internal Auditor if
the Board or Audit Committee considers the person as eligible to be appointed as
Internal Auditor. On ethical grounds, a Director who is Key Managerial Person should not
act as Internal Auditor.
5. (a) (ii)
Adequacy of Internal Controls: The auditor should obtain an understanding of the

accounting system sufficient to identify and understand major classes of transactions,
manner of initiation of transactions, significant accounting records, supporting documents
and specific accounts in the financial statements and the accounting and financial
reporting process. Accounting control comprises of the plan of an organisation and the
procedures and records that are concerned with the safeguarding of assets and the
reliability of financial controls. Internal control, as far as financial and accounting aspects are
concerned, aims at the following:
(i) Flow of work through various stages.
(ii) Segregation of personnel duties
(iii) Adequate documentation.
(iv) The transactions are recorded with appropriate amounts and time
(v) The assets should be properly safeguarded
(vi) Properauthorisation.
(vii) Existence of organisational chart
(viii) System to locate the deviations and departures from the prescribed procedures
(ix) Standardized records and formats. It would ensure availability of right information at
right time.
(x) Efficient Management Information System. Etc.
5. (b)
A hospital belongs to Health Services in non-Regulated sector b; per the Companies (Cost
Records and Audit) Rules. 2014 and is required to maintain cost records in addition to
Financial records if its turnover exceeds = ` 35 crore for a product or services during the
previous year.
An Auditor should conduct the following functions in the course of audit of a Hospital-
• Obtain a list of books, documents, register and other re cords as maintained by the
Hospitals.
• Examine the audit report of last year and note down qualifications, if any, therein.
• Examine the system of receiving grants and donations, whether received through
cheque or otherwise
• Examine the scope of responsibilities according to the overall objectives of audit.
• Note down the important clause of Trust Deed or Charter, which may affect the audit
and accounts of hospital.
• Examine the Minutes of Meetings of the Board of Directors/Trustees or the Managing

Committee, and note down the important decisions concerning the financial
transactions relating to fixed assets, investments and financial powers as required by him
during the audit.
• Examine the Internal Control system reg. purchase of fixed assets, medicines, stores,
consumables, clothing etc.
• Examine the Internal Control System for recording of purchases, issue and storage of all
items and physical verification of them.
• Obtain the rate structure for fees, medicine and other services, power to do concession
or waiver of fees.
• Calculate and examine the requisite input-output ratios.
• Examine Financial and Cost Records as maintainable by statute.
• Verify the system of internal check as regards purchase and issue of stores, medicine, etc.
• Examine that the appointment of the staff, payment of salaries etc., are duly - authorized.
• Physically verify the investments, fixed assets and inventories.
• Check that adequate depreciation has been provided on all the depreciable assets.
6. (a) The following are the summarized Balance Sheet and Income Statement of
GREENCON LTD, a cement manufacturing company.
Income Statement for the year ended March 31,2019
Amount
(in ` lakhs)
Sales 4,000
Less: Cost of Goods sold 3,275
Gross Margin 725
Less: Administrative and Selling Expenses PBIT 120
605
Less: Interest Expenses Profit before Tax (PBT) 90
515
Tax paid Profit after Tax 180
335
Balance Sheet as at 31.03.2019
(Amount in ` lakh)
Equity and Liability ` Assets `
(1) Shareholders’ Fund: (1) Non-Current Assets:
(a) Share Capital: Net Fixed Assets 1,600
Paid up Capital 800 (2) Current Assets:
(80,00,000 Shares of ` 10 600 (a) Inventory 400

each fully paid) (b) Trade Receivables 250
(b) Reserve and Surplus: (c) Marketable Securities 350
Retained Earnings
(d) Cash and Cash Equivalents 400
(2) Non-Current Liabilities:
Long-Term Borrowing
7-5%, Debenture 1,200
(3) Current Liabilities:
(a) Trade payables 260
(b) Bills payable 100
(c) Other Current Liabilities 40
3,000 3,000
Earning per Share (EPS) ` 4.19
Market Price per Share ` 75
Their industry average ratios for the year 2018-19 are given below:
Current ratio 2.5
Quick ratio 1.5
Sales to inventory 8
Average collection period 35 days
Times interest earned 6
Profit margin 7%
Price to earning ratio 15
Return on total assets 10%
Required:
(i) Calculate the financial ratios as stated supra (in Additional information)
(ii) Analyse the financial performance of GREENCON LTD for the year ended March
31,2019. 8
(b) GREENTECH LTD, a cement manufacturing company located at Ajmer (Rajasthan), has
set up its own Power Plant to cater its need in manufacturing process for production of
cement.
The following details are extracted from the Financial and Cost Accounting records of
GREENTECH LTD for the year ended March 31, 2019.
Power Generated : 59885900 KWH of which 4% is used by Power Generating Plant.
Material and Utility used:
(i) Coal consumptions : 1800 MT@ ` 30,000 per MT
(ii) Oil: 30 MT @ ` 1,50,000 per MT
(iii) Water (extraction and treatment): 40 lakh litres @ ` 3 per litre
(iv) Stores and other consumptions : ` 1,60,000
(v) Cost of Boiler Plant is ` 60 lakh with no residual values.
(vi) Cost of Power Generating Plant is ` 100 lakh with no residual values.
(vii) Depreciation is charged on Straight Line Method @ 10% [for (v) and (vi)].
(viii) Wages and Salaries for Power Generating Plant:

80 skilled workers @ ` 20,000 and 120 helpers @ ` 12,000 per month.
(ix) Wages and Salaries for Boiler Plant:

50 semi-skilled workers @ ` 15,000 and 80 helpers @ ` 10,000 per month.
(x) Repairs & Maintenance of Generating Power Plant and Boiler Plant is ` 20 lakh.
(xi) Share of Administrative Overhead Expenses — ` 125 lakh.
(xii) Realization from Sale of Ash disposed is ` 9 lakh.
You are required to prepare a Cost Sheet for Electricity Generating Cost and calculate
the Cost of Power per KWH for the year ended March 31, 2019, as per the Companies
(Cost Records and Audit) Rules, 2014. 8
Answer:
6. (a)
GREENCON LTD.
Calculation of Financial Ratios: (` in Lakh)
Ratio Formula used Value of ratio Industry’s Remarks

of average
ratio
(A) Liquid Ratio
(i) Current Ratio Current Assets 1400/400=3.5 2.5 Above

Current Liabilities standard
(ii) Quick Ratio Current Assets-Inventory 1000/400=2.50 1.5 Above

Current Liabilities standard
(iii) inventory Cost of goods sold 3275/400=8.19 8 Above

Turnover ratio Inventory standard
(iv) Average Trade Receivable x 365 days (250/4000)x365 35 days 12 days

Collection period Sale = 23 days lower from
standard
(B) Profitability
Ratio
(i) Profit margin Net Income after Tax × 100 (335/4000)xl00 7% Above
Sales = 8.38% standard
(ii) Price to Market price per share 75/4.19=17.90 15 Above

earning ratio Earning per share standard
(iii) Return on Net Profit after tax (335/3000) = 10% Above

total assets Total assets 11.17% standard
(C) Coverage
ratio
(i) Interest Profit before interest and tax 605/90=6.72 6 Above

Coverage ratio Interest standard
Evaluation of Financial performance of the company:
(1) Liquidity Position: Current Ratio as well as Quick Ratio is higher than the industry’s
average ratio. So it may be thought the liquidity position of the company is sound and
satisfactory. Inventory turnover Ratio is little bit higher than industry’s average ratio.
Average debt collection period is lower than industry’s debt collection period that
indicates very efficient receivable management. Hence, liquidity position of the
company is very sound. More than half of the total assets are financed out of the owned
funds signifying satisfactory level of debt financing.
(2) Profitability position: Profit margin ratio of GREENCON LTD. is better than industry’s
average ratio. Return on total Assets of the company is little bit higher than the industry’s
average. It indicates that the company is more or less efficient in utilizing its assets. Price
earnings Ratio of the company is higher compared with the industry’s average. It
indicates that investors’ evaluation about the prospect of the company is good.
Interest Payment Capacity:
Interest payment capacity of GREENCON LTD. is satisfactory as interest cover ratio is higher
than industry’s coverage ratio.
So, overall financial performance of GREENCON Ltd. is very sound and impressive.
6. (b)
Statement showing Cost of Power Generated by Power Generating Plant for the year ended
March 31, 2019
(Amount in ` lakh)
Power Generated: 59885900 Cost per
Effective Power Generated (Note): 5,74,90,464 KWH (`)
Coal Consumptions: 1800x30000 540.00 531.00 0.92

Less: Sale of ASH (9.00)
Oil (30 Mt x ` 150000) 45.00 45.00 0.08
Water : (40 lakh x 3) 120.00 120.00 0.21
Stores and other consumptions: 1.60 0.01
Wages and salaries for power generating 192.00 172.80 364.80 0.63
plant: (80 x 20000 x 12): (120 x 12000x12):
Wages and salaries for Boiler plant: 90.00 96.00 186.00 0.32
(50 x 15000 x 12)
(80 x 10000 x 12)
Repair and maintenance for PGP & BP 20.00 20.00 0.03
Depreciation: 10.00 6.00 16.00 0.03

Power Generating Plant: 10% of 100 lakh
Boiler plant: 10% of 60 lakh
Administrative overhead expenses 125.00 0.22
Total cost 1409.40 2,45
Note:
As power generating plant consumes 4% of power, Effective power produced for

manufacturing = 0.96 x 59885900 = 5,74,90,464 KWH.
7. (a) The following parameters are extracted from the Cost Accounting Records of
ALCOBOX Ltd. multi products manufacturing company for two years:
(Amount in ` lakh)
Gross Sales including GST 28,560 27,790
GST 4,130 3,920
Other Income — —
Raw materials consumed 15,960 14,840
Direct wages and salaries 490 450
Power and fuel 350 320
Stores and spares consumed 80 70
Repairs and maintenance 70 60
Depreciation charged to production cost centres 220 210
Factory overheads:
Salaries and wages 70 60
Depreciation 30 30
Rates and taxes 15 14
Other overheads 75 66
Administrative overheads:
Rates and taxes 90 90
Other overheads 2,250 2,100
Selling and distribution overheads:
Packing and forwarding 85 85
Depreciation 15 15
Other overheads 1,730 1,640
Interest 1,160 1,030
Bonus and gratuity 200 150
You are required to compute the following RATIOS as stipulated in PART-D, PARA-4 to
the Annexure of Cost Audit Report under the Companies (Cost Records and Audit)
Rules, 2014 for the year ended March 31, 2019 and March 31, 2018.
(i) Profit before Tax (PBT) to Value Added
(ii) Value Added to Net Sales
(iii) Profit before Tax (PBT) to Net Revenue from Operations 8
(b) KASAUTI MOTORS LTD, a manufacturing company of motor vehicles has, in FY 2019-20,
faced abnormal fall in demand of passenger vehicles. A huge inventory compelled
the company to shut down production operations for 15 working days in the 1st part of
September, 2019. But the plant was running at budgeted level of Utilization except the
shut down period.
In this respect, the company has furnished the following information for the year
Particulars Budget: FY 2019-20

(` in lakh)
No. of working days 305
Contribution (90% capacity) 2,250
Indirect Wages and Salaries 600
Depreciation 240
Other Fixed Expenses 350
Inventory Carrying Cost (Addl.) 15
Required:
(i) Find out expected abnormal loss due to shut down for the 1st six months of the
year 2019-20, from the facts and figures stated supra.
(ii) Write a note to the Management suggesting remedial measures. 4+4=8
Answer:
7. (a)
CALCULATION OF PROFIT BEFORE TAX (PBT) (Amount in ` lakh)
YEAR ENDED 31SI MARCH 2019 2018
Gross Sales inclusive of GST 28560 27790
Less: GST 4130 3920
Net Sales 24430 23870
Net Revenue from Operations 24430 23870
Cost of Sales
Raw material consumed 15960 14840
Direct wages and salaries 490 450
Stores and spares consumed 80 70

Depreciation charged to production centres 220 210
Factory over heads (including depreciation) 190 170
Administration overheads 2480 2320
Selling and distribution overheads (inclusive depreciation) 1930 1820
Interest 1160 1030
Bonus and gratuity 200 150
Total B 23130 21440
Profit before Tax (PBT) (A-B) 1300 2430
CALCULATION OF VALUE ADDED (Amount in ` lakh)
YEAR ENDED 31s1 MARCH 2019 2018
Net Sales (A) 24430 23870
Less: Cost of bought out of inputs:
Direct materials consumed 15960 14840

Stores 8i spares consumed 80 70
Overheads (exclusive salaries, wages,
rates & taxes and depreciation) 4140 3891
Total cost of bought out of inputs (B) 20600 19181
VALUE ADDED (A-B) 3830 4689
(Amount in ` lakh)
YEAR ENDED 31st MARCH 2019 2018
(i) Profit before tax (PBT) to Value Added 1300/3830 2430/4689

As (%) 33.94% 51.82%
(ii) Value Added to Net Sales 3830/24430 4689/23870

As (%) 15.68% 19.64%
(iii) Profit before tax (PBT) to net revenue from 1300/24430 2430/23870
operations 5.32% 10.18%
As (%)
7. (b)
(i) Calculation of Abnormal Cost [` lakh)
Budget FY Suspension of
2019-20* lac work, abnormal
cost
Mo of working days 305 15
Indirect Wages & Salaries 600 29.51
Depreciation 240 11.80
Other Fixed Expenses 350 17.21
Inventory carrying cost (extra) 15.00
Total 1,190 73.52
The estimated abnormal cost is ` 73.52 lakh
(ii) The company in the automotive sector is suffering from slowing demand pattern due to
overall recession across the country and even worldwide. The Management may consider
some of the following steps:
1) Reduction of 5% of workforce by suitable compensation package
2) Change part of product mix to electric cars, Al & Robotics, Commercials.
3) Go for more exports taking advantage of favorable foreign exchange parity.
4) Draw a marketing plan, which is customer friendly and cost effective.
5) Make attractive after sales service addressing common customer issue
6) Brand acquisition to effect synergy.
8. Answer any four out of the following five questions: 4×4=16
(a) Explain “Risk Assessment” with reference to Cost Audit Standard 104 at ‘Cost
Statement’ level.
(b) Write a short note on Internal Audit of Utilization of Resources.
(c) A Corporate Social Responsibility (CSR) audit can identify various management risks.
What are the areas that the audit should cover to mitigate risks?
(d) The following are the process-wise input and output in a Textile Mill:
Department Input (kg) Output (kg)
Blow Room 41,10,169 38,27,662
Carding 38,42,123 35,74,310
Draw Frames 35,48,981 35,07,245
Roving (Simplex) 34,82,360 34,44,054
Ring Frame 35,16,085 32,73,475
Required:
Find the cotton input per 1000 kg of Ring Frame yarn output if initially the cotton under
weight of 0.3% moisture loss from the invoice weight.
(e) From the following figures of Diamond Industrial Components Ltd., a single product
company, Find out Value Addition as defined in the Companies (Cost Records and
Audit) Rules, 2014 for the year ended March 31, 2019.
Year ended 31.03.2019

(` in lakh)
1. Net Sales 4,980
2. Raw Materials 2,990
3. Stores and Spares 21
4. Power and Fuel 105
5. Overheads 377
6. Salaries, Wages 410
7. Bonus, Gratuity 42
8. Packing Forwarding Cost 21
9. Interest 280
10. Depreciation 11
Answer:
(a) As per Cost Auditing Standard 104 on Knowledge of Business, its process and the
Business environment, it is necessary to assess the risks related to material misstatement,
whether due to fraud or error at the overall cost statement and at the assertion level
including items of cost, cost heads and disclosure thereof.
Risks at the cost statement level may derive in particular from a deficient control
environment or adverse economic conditions. The Management’s lack of competence
may have a pervasive effect on the cost statements and may require an overall
response by the Auditor. According to 1SA315, Understanding the Entity and its
Environment and Assessing the Risks of Material Misstatement, “the auditor should
perform risk assessment procedures to obtain an understanding of the entity and its
environment, including its internal control”. The Audit risk has three components:
Inherent Risk, Control Risk and Detection Risk. For identifying and assessing the risk, the
Auditor shall
• Identify risks including relevant controls that relate to misstatement or fraud
• Assess whether the risk is related to recent significant economic, accounting, or

other developments and require specific attention
• Assess risks involving significant transactions with related parties.
• Assess the degree of subjectivity in the measurement of information related to risk.
• Assess the need for revising assessment of risk based on additional evidence.
(b) There is a need over measuring the efficiency of internal resources of the organization.
An internal audit team be entrusted with the task of identifying the weak areas of
resource utilization and suggest remedies for the deficiencies. The auditor should check
whether proper operating standards and norms have been established for measuring
economical and efficient use of resources. They should be detailed enough to be
identifiable with specific operating responsibilities and should be capable of being used
by operating personnel for monitoring and evaluating their performance. The Auditor
should review the methods of establishing the operating standards and norms. He
should carefully examine the assumptions made while setting the standards to ensure
that they are appropriate and necessary. The variances should be examined to
evaluate whether or not the standards and norms are practical. The system of
identification and analysis of deviations from standards should be examined. The auditor
should examine whether analysis of variance is communicated to those concerned in
time. He should also examine whether in communicating the variances, serious matter
are highlighted and communicated more expeditiously than is done in normal course.
As a part of evaluating resource utilization, identifying the facilities, which are under-
utilized, is an important function of the auditor. Such instances may consist of under-
utilized machines, unoccupied storage space, huge cash and bank balances, idle man
power, excess inventory of finished goods, raw materials, stores, work in process, sundry
debtors etc. While commenting on staffing, the auditor may pay special attention to
nonproductive work being performed. Finally, the auditor should review all procedure
with reference to their costs and benefits. One of the factors resulting in inefficiency is
that in many cases, procedure may become hindrance to operations.
(c) Corporate Social Responsibility is a mandatory requirement, and any departure from the
requirements may lead the management into difficulty. A CSR audit program can
identify all or any of the following risks:
• Effectiveness of the operating framework for CSR implementation
• Effectiveness of implementation of specific, large CSR projects
• Adequacy of internal control and review mechanisms
• Reliability of measures of performance
• Management of risks associated with external factors like regulatory compliance,

management of potential adverse NGO attention, etc.
A CSR Audit should cover the following points to find out excellence:
• Maintenance of Human Rights viz: Fundamental Human Rights, Freedom of

association and Collective bargaining, Non-discrimination, Forced labor, Child labor
• Business image: Relations with clients, suppliers and sub-contractors, Prevention of

corruption and anti-competitive practices
• Use of Human Resources with dignity and efficiency : Labor relations, Working
conditions including steps taken for preventing accidents and health hazards,
health and safety measures including compensation in case of any accidents,
career development and training, Remuneration system that motivates the
employees.
• Corporate Governance: Board of Directors, Audit and internal controls, Treatment of

shareholders, Executive remuneration
• Environment: Incorporation of environmental considerations into the manufacturing

and distribution of products, and into their use and disposal effect on pollution,
pollution control measures undertaken,
• Community Involvement: Impacts on local communities, contribution to social and

economic development, General interest causes, creation of socials infrastructure
like roads, schools, hospitals.
(d) Calculation of Department wise waste multiplier:
Department Input Output Input/ Loss% Output (%) Waste
(Kgs) (Kgs) output multiplier
Blow Room 4110169 3827662 0.9313 6.87 93.13 1.18125
Carding 3842123 3574310 0.9303 6.97 86.64 1.09893
Draw Frames 3548981 3507245 0.9882 1.18 85.62 1.08600
Roving 3482360 3444054 0.9890 1.10 84.68 1.07410
(Simplex)Ring 3516085 3273475 0.9310 6.90 78.84 1.00000

frame
The initial Cotton input will be Blow Room Input 1.18125 ×(1/0.997) = 1.18480 (0.3% moisture
loss).
For 1000 kg Ring Frame output cotton requirement will be 1184.80 kgs. based on Invoice
Weight.
Note: Output % = (100 - 6.87) = 93.13, (93.13-93.13 x 6.97%) = 86.64, (86.64-86.64 x 1.18%) =
85.62, (85.62-85.62 x 1.10%) = 84.68 and (84.68-84.68 x 6.90%) = 78.84.
(e) Value Addition:
Year ended 31.03.2019

` lac
1. Net Sales 4,930
2a. Cost of bought out Materials 3,011
2b. Power & Fuel 105
2c. Overheads (including distribution cost) 398
2d. Total cost of bought out materials and services (2a+2b+2c) 3,514
3. Value Addition (1)-(2d)= 1,466

No. 2 to 8.
mark for justification.) [10*2=20 marks]
(i) Cost Auditing Standard 102 deals with ______________.

(a) planning an Audit of Cost Statements
(b) Cost Audit Documentation
(c) knowledge of process and business
(ii) Compensation paid to employees for the past period is _________ in Employee Cost.
(a) included
(b) excluded
(c) based on individual case
(d) partly included
(iii) The Cost Accounting Standard 14 is a Cost Accounting Standard on _______.

(a) Employee Cost
(b) Utilities Cost
(d) Selling and Distribution Overheads Cost
(iv) The figures below are available for Welcome Limited.

Budgeted Production - 1000 units, Standard Hours per unit -10, Actual Production –
900 units and Actual Working - 7500 hours. What is the Efficiency Ratio?
(a) 110%
(b) 120%
(c) 100%
(d) 125%
(v) What is the time limit within which the Cost Auditor of the company should submit his
report?
(a) 90 days
(b) 120 days
(c) 150 days
(d) 180 days
(vi) Under the Generally Accepted Cost Accounting Principles, the cost of cane
supplied from own farm to the sugar mill is treated as ___________.
(a) Direct Materials Cost
(b) Indirect Materials Cost
(c) Production Overhead
(vii) The Cost Accounting Standard 9 deals with _______.

(a) Material Cost
(b) Employee Cost
(c) Packing Material Cost
(d) repairs and Maintenance Cost
(viii) ______________ of the Companies Act 2013 deals with Internal Audit.
(a) Section 137
(b) Section 138
(c) Section 139
(d) Section 140
(ix) The Local bodies in India are broadly classified into ___________ categories.
(a) Two
(b) Three
(c) Four
(d) Five
(x) The first step in audit of Educational Institutions ___________.

(a) Read through the minutes of the meetings of the Managing Committee or
Governing Body
(b) Check admission fees with admission slips signed by the head of the institution
and confirm that the amount had been credited to a Capital Fund
(c) Verify the annual statements of accounts
(d) To examine the Trust Deed or Regulations
Answer:
1. (i) (b) Cost Audit Documentation

Reason: The purpose of the Cost Auditing Standard 102 is to provide guidance
to the members in the preparation of audit documentation in the context of
the audit of cost statements, records and other related documents.
(ii) (b) Excluded

Reason: As per CAS 7, Compensation paid to employees for the past period is
not normal cost and hence is excluded from employee cost.
(iii) (c) Pollution Control Cost

Reason: CAS - 14 deals with the principles and methods of classification,
measurement and assignment of pollution control costs, for determination of
Cost of product or service, and the presentation and disclosure in cost
statements.
(iv) (b) 120 %

Reason: Efficiency Ratio= (Standard Hours of actual Production)/(Actual Hours
worked)×100
= [(900 x 10)/7500] x 100 = 120 %
(v) (d) 180 days

Reason: As per rule 6 (5) of the Companies (Cost Records and Audit) Rules
2014, every Cost Auditor shall forward his signed 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.
(vi) (a) Direct Material Cost

Reason: As per the GACAP, Direct Materials Cost includes cost of
procurement and freight inwards of the materials.
(vii) (c) Packing Material Cost

Reason: CAS – 9 deals with the principles and methods of classification,
measurement and assignment of Packing Material Cost, for determination of
the cost of product, and the presentation and disclosure in cost statements.
(viii) (b) Section 138

Reason: As per Section 138 of the Companies Act , 2013 an internal auditor,
shall either be a Chartered Accountant or a Cost Accountant, or such other
professional as may be decided by the Board to conduct internal audit of the
functions and activities of the company.
(ix) (a) Two.

Reason: The Local Bodies in India are broadly classified into two categories.
The Local Bodies constituted for local planning, development and
administration in the rural areas are referred as Rural Local Bodies
(Panchayats) and the Local Bodies, which are constituted for local planning,
development and administration in the urban areas are referred as Urban
Local Bodies (Municipalities).
(x) (d) To examine the Trust Deed or Regulations

Reason: The first step in audit of Educational Institutions Examine is to examine
the Trust Deed, or Regulations in the case of school or college and note all the
provisions affecting accounts. In the case of a university, refer to the Act of
Legislature and the Regulations framed thereunder.
2. (a) As per Section 143 of Companies Act, 2013 what is the duty of a Cost Auditor to
Report Fraud?
(b) The Cost Accountant of TRINCUS TEXTILES MILLS LTD. has arrived at a Profit of `
20,10,500 based on Cost Accounting Records for the year ended March 31, 2018.
Profit as per Financial Accounts is ` 22,14,100.
As a Cost Auditor, you find the following differences between the Financial Accounts and
Cost Accounts:
Sl. No. Particulars `

1 Profit on Sale of Fixed Assets 2,05,000
2 Loss on Sale of Investments 33,600
3 Voluntary Retirement Compensation included in Salary & Wages in F/A 50,25,000
4 Donation Paid 75,000
5 Insurance Claim relating to previous year received during the year 5,08,700
6 Profit from Retail trading activity 32,02,430
7 Interest Income from Inter-Corporate Deposits 6,15,000
8 Decrease in value of Closing WIP and Finished goods inventory
as per Financial Accounts 3,82,06,430
as per Cost Accounts 3,90,12,500
You are required to prepare a Reconciliation Statement between the two Accounts for
the year ended March 31, 2018. [8 + 8]
Answer:
2. (a) According to Section 143(12) of the Companies Act 2013, if an auditor of a company,
in the course of the performance of his duties as auditor, has reason to believe that
an offence involving fraud is being or has been committed against the company by
officers or employees of the company, he shall immediately report the matter to the
Central Government within such time and in such manner as may be prescribed.
Sub-Section 13 specifies that no duty to which an auditor of a company may be

subject to shall be regarded as having been contravened by reason of his reporting
the matter referred to in sub-section (12) if it is done in good faith.
Sub-Section 14 makes it clear that he provisions of this section shall mutatis mutandis
apply to the cost accountant in practice conducting cost audit under section 148.
According to Sub-Section 15 if any auditor, cost accountant or company secretary in

practice do not comply with the provisions of sub-section (12), he shall be punishable
with fine which shall not be less than one lakh rupees but which may extend to
twenty-five lakh rupees.
Matter to be reported immediately but not later than 2 days of his knowledge
specifying:
(i) Nature of Fraud with description;
(ii) Approximate amount involved; and
(iii) Parties involved.
Following disclosures to be made in Board‟s Report:

Nature of Fraud with description;
Approximate Amount involved;
Parties involved, if remedial action not taken; and
Remedial actions taken.
2. (b)
Reconciliation of Profit between Cost and Financial Accounts
for the year ended March 31, 2018
Particulars ` ` `
Profit as per Financial Accounts: 22,14,100
Add: Loss on sale of investments 33,600
Add: Voluntary Retirement compensation 50,25,000
included in salary and wages in F/A - Not
included in cost A/c
Add: Donation paid 75,000 51,33,600
73,47,700
Less: Profit on Sale of Fixed Assets-Not 2,05,000
considered in cost A/c
Less: Receipts of insurance claim related to 5,08,700
previous year
Less: Profit from Retail trading activity 32,02,430
Less: Interest income from inter-corporate 6,15,000
deposit-not considered in cost accounts
Less: Difference in valuation of stock:
Decrease in inventories as per cost accounts 3,90,12,500
Decrease in inventories as per financial 3,82,06,430 8,06,070 53,37,200
accounts
3. (a)
ABC LTD. has the following Balance Sheet as on March 31, 2018 and March 31, 2017.
(Amount in Lakh)
SOURCES OF FUNDS:
Shareholders' Fund 2,972 1,886
Loan Funds 4,644 4,060
7,616 5,946
APPLICATIONS OF FUNDS:
Fixed Assets 4,279 3,600
Cash and Bank 707 684
Debtors 1,914 1,522
Stock 3,560 3,008
Other Current Assets 2,000 1,805
Less: Current Liabilities (4,844) (4,673)
7,616 5,946
The Income statement of ABC LTD. for the year that ended is as follows:
(Amount in Lakh)
Sales 26,718 16,778
Less: Cost of Goods Sold 25,152 15,173
Gross Profit 1,566 1,605
Less: Selling, General & Administrative expenses 1,242 782
Earnings before Interest & Tax (EBIT) 324 823
Less: Interest Expenses 256 246
Profit before Tax (PBT) 68 577
Less: Tax 28 230
Profit After Tax 40 347
Required:
Calculate for the year 2017-18:
(a) Inventory Turnover Ratio
(b) Return on Net Worth
(c) R OI
(d) ROE
(e) Profitability Ratios
(f) Give brief comments on the financial position of company (1+1+1+2+3+2)=10
(b) What is meant by 'Normal Price' with reference to 'Related Party Transaction' in CRA
1? State the basis adopted to determine 'Normal Price'. 6
Answer:
3. (a)
ABC Ltd
Various Ratios for the year 2017-18
(a) Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory = 25,152/3,284
= 7.66
(b) Return on Net Worth = Profit after Tax / Net Worth = (40/2,972) x 100 = 1.35%
(c) ROI = Net Profit before Interest but after Tax / Average Share Holders‟ Fund
= (296/6,781) x 100= 4.37%
*NP before Interest and tax = 256 + 40 = 296
** Average capital employed = (7,616 + 5,946)/2 = 6,781
(d) ROE = (Profit after Tax available to equity Share Holders / Average Share Holders‟
Funds) x 100 = (40/2429) x 100 = 1.65 %
(e) Profitability Ratios:

Gross Profit Ratio = (1,566/26,718) x 100 = 5.86%
Operating Profit Ratio = [(68+256) /26,718)] x 100 =1.21%
Net Profit Ratio = (40/26,718) x 100 = 0.15%.
(f) Comment: There is a substantial decline in Profitability in the current Year from `
823 Lakhs of previous year to ` 324 Lakhs. This is mainly due to huge increase in the
operating expenses. There has been substantial increase in the Interest charges
also. During the year 2017-18 both fixed financial expenses and operating
expenses have increased. During current year both operating and financial
leverages have been adversely affected. It can be seen that the company is
suffering from a liquidity crisis during the year.
3. (b) As per Para 24 (b) of the CRA 1, ― Normal Price means price charged for
comparable and similar products in the ordinary course of trade and commerce
where the price charged is the sole consideration of sale and such sale is not made
to a related party. Normal Price can be construed to be a price at which two
unrelated and non-desperate parties would agree to a transaction and where such
transaction is not clouded due to the proximity of the parties to the transaction and is
free from influence through the parties may have shared interest.
The basis adopted to determine Normal Price, shall be classified as under:

(i) Comparable Uncontrolled Price method
(ii) Resale Price method
(iii) Cost-plus method
(iv) Profit Split method
(v) Transactional Net Margin method, or
(vi) Any other method, to be specified.
4. (a) What is XBRL and what are the steps to be followed to file the Cost Audit Reports in
XBRL Format?
(b) Standard Material requirement to produce 1000 units of product X is 1200 units of
material at a standard price of ` 60 per unit. The Standard allows for reject of 25% of
input. It is estimated that one third of rejects can be reworked at an additional cost of
` 20 per unit. Scrap units can be sold at ` 5 per unit.
During a particular period, units produced were 19500 with 24000 units of materials at
standard cost of ` 60 per unit, 7000 units were rejected out of which 2500 units were
reworked at a cost of ` 51000. The balance units were sold as scrap for ` 5 per unit.
Calculate Material Quality Variance, Material Usage Variance and Scrap Variance. [8+8]
Answer:
4. (a) XBRL (eXtensible Business Reporting Language) is a language based on XML

(Extensible Markup Language) family of languages. It is an open standards-based
reporting system that is built to accommodate the electronic preparation and
exchange of business reports around the world using internet as a medium. It has
been defined specifically to meet the requirements of business and financial
information.
The following steps are to be followed in sequence to file the Cost Audit Reports in
XBRL Format:
(i) Mapping the individual cost elements of the Company to the elements of costing
taxonomy.
(ii) Populating relevant data in the soft ware/ filing tool.
(iii) Creating instance document.

(iv) Validating the instance document with the validation tool of MCA.
(v) Use available tool to convert the instance document to a human readable
format and check correctness of data.
(vi) Attaching instance document to the e-form and filing on MCA portal.
4. (b) Quality control cost is the cost of resources used for quality control procedures.
Standard Material Cost:

Material 1200 units Standard Cost (`) 72,000
Rejection 300 units
Reworked Unit =100 Rework cost (`) 2,000
Scrap of 200 units Sale value of scrap (`) -1,000
73,000
Unit Produced 1000 (1200 - 200) Std Cost per unit ` 73.00
Actual Material cost :
Material 24000 units Actual Cost (`) 14,40,000
Rejection 7000 units
Reworked Unit = 2500 Rework cost (`) 51,000
Scrap of 4500 units Sale value of scrap (`) -22,500
14,68,500
Unit Produced 19500 (24,000 - 4,500) Actual Cost per unit 75.31
Material Quality Variance = Actual Material cost – Actual Quantity x Std Rate
= ` 14,68,500 – (19500 x 73) = 14, 68,500 – 14,23,500
= ` 45,000 (A)
Material Usage Variance = Actual Quantity x Std Rate - Std Quantity X Std Rate
= Std Rate (Actual Quantity - Std Quantity) = 60 (24,000
–19,500 x 6/5)
= 60 ( 24,000 – 23, 400) = 60 x600 = ` 36,000 ( A)
For Scrap Variance
Actual scrap = ` 22,500
Scrap value as per standard = 19,500 x (1/5) x5 = 19,500
Scrap Variance = ` (22,500 – 19,500) = ` 3,000 (F)
Material cost/unit = ` 72,000/1200 = ` 60/unit.
5. (a) Write a short note on Corporate Development Audit.
(b) What is Productivity Audit? What are the ratios are used in measuring productive
efficiency of the resources deployed and utilised? [6 + 10]
Answer:
5. (a) A Corporate Development Audit is an independent objective study of an

organization‟s capabilities. It aims at identifying strengths and weaknesses and
moving toward state-of-the-art performance. A Corporate Development Audit gives
a comprehensive picture of the status of corporate development effectiveness and
highlights developmental needs. It is a comprehensive task to assist the corporate
management in various aspects of development through a process of systematic
review and evaluation of long-term strategies of the company.
Corporate Development Audit assures that –
i) The various factors and forces constituting a corporate enterprise are the right
kind and quality.
ii) Communication remains the key to the functioning of an enterprise.
iii) The pattern of departmentalization in an enterprise adopted in the past and

proposed for the future for dealing with multidirectional responsibilities is fully
responsive to circumstances and business environment.
iv) The personnel problems are handled appropriately considering the overall
objectives of development of the corporate enterprise.
v) The responsibilities of planning, coordination, motivation and control at functional
management levels are discharged in proper spirit.
Large scale corporate enterprises offer opportunities to the conduct of Corporate

Development Audit. Contrary to other forms of audit – statutory or non-statutory (viz.
Financial Audit, Cost Audit, Efficiency Audit, Propriety Audit, etc.) Corporate
Development Audit plays a vital role not only tying up the loose ends, but also to
forge a link in the knowledge that emanates from different quarters and on the basis
of different types of experiences in dealing with various types of problems.
5. (b) The Productivity Audit is basically an analysis of the productivity of the resources
deployed by any organization. It is generally done to generate information about the
status of productivity in the organization for the purpose of determining the scale of
efficiency and effectiveness of „resource utilization‟. The term „resources‟ here would
include not only “money” but also “men”, “machines”, “materials” and “methods”.
In other words, the objectives of Productivity Audit are – (a) to attain optimum result,
and (b) to improve on the benchmarks.
This audit would generally comprise –

(i) Comparison of expected returns on utilization of the resources vis-à-vis the actual
returns;
(ii) Comparison of optimum returns on utilization of the resources vis-à-vis the actual
returns; and
(iii) The steps taken to improve benchmarks of returns and the utilization.
The following ratios are generally used in measuring productive efficiency of the
resources deployed and utilized:
Resources Deployment
(i) Capital employed per capita
(ii) Capital employed per unit of product
(iii) Gross profit to capital employed
(iv) Net profit to capital employed
(v) Debt equity ratio
(vi) Net worth and long-term debts to gross fixed assets
(vii) Net worth and long-term debts to net fixed assets
(viii) Debts to fixed loans
(ix) Debts to floating loans
(x) Current assets to current liabilities
(xi) Net working capital
(xii) Total inventory to capital employed.
6. (a) What is Internal Audit? Discuss about the necessity of Internal Audit.
(b) What is the role of CMA in Internal Audit? [6 + 10]
Answer:
6. (a) Internal Audit is an independent, objective assurance and consulting activity

designed to add value and improve an organization‟s operations. It helps an
organization accomplish its objectives by bringing a systematic, disciplined approach
to evaluate and improve the effectiveness of risk management, control and
governance processes.
The role of internal audit is to provide independent assurance that an organization‟s

risk management, governance, and internal control processes are operating
effectively. Internal audit is conducted objectively and designed to improve and
mature an organization‟s business practices.
Necessity of Internal Audit
The necessity of internal audit is as follows:

i) Internal Audit assists management to improve internal controls by identifying
weaknesses in systems and provides an opportunity to correct those weaknesses.
Internal auditors deal with issues that are important to the continued existence
and prosperity of any organisation.
ii) It helps to detect errors and frauds and provides suggestions to improve them
which help the management to take corrective action.
iii) It detects the misuse of resources in time which helps to reduce unnecessary
expenses.
iv) It increases the morale of honest staff because evaluation of performance of any
staffs will be made at any time.
v) Internal audit checks the books of accounts, detects errors and frauds and helps
in its correction which makes the act of External/Statutory Auditor easier.
vi) It helps capacity building for organizational effectiveness.
6. (b) Presently, the role of Internal Audit has become more critical. The backdrop and
changing business scenario and the role metamorphosed as technology have
erased global barriers. Customer expectations have increased and compliance
demands are growing both in terms of quantity and complexity. The Enterprise Risk
Management is emerging as the key element in Corporate Management.
The expectations of the Board from Internal Auditors are now to assist the Board in
identification, monitoring and management of business risks and also to offer and
provide insight, advice and assurance on enterprise risks. The Internal Auditors should
also inform directors‟ bout the tone of the organization-culture, ethics, performance
and continuously evaluate the efficiency and effectiveness of operations. They
should also check compliance with laws and regulations and authenticate the
reliability of financial and management reporting. Internal Auditors has the added
role of safeguarding the assets of the company. They should evaluate performance
management and control systems and act as an advisor to the Management. The
role of effective Cost Management involves in waste reduction and enhancing
productivity and process improvement.
The Internal Audit must be synchronized to the expectations of the Board. It must
develop an internal audit strategy that is linked with the organization‟s strategic plan
with a focus on optimizing risks, costs, and value. It must develop dynamic internal
audit plans. The communication must be done frequently with key stakeholders on
their needs, expectations, satisfaction with the internal audit. It should leverage
technology to optimize audit operations and assist management in developing and
maintaining a comprehensive performance management framework. It should
support and facilitate business process improvement and re-engineering and provide
active support in furthering good Corporate Governance. CMAs have a colossal role
to play as they have an unique blend of core competencies in accounting,
management and strategy. CMAs can apply their forward looking insights across the
organization to manage risks, reduce costs and create new opportunities, preserve
and enhance value.
CMAs possess the expertise to evaluate the operational efficiency, productivity and
profitability, wastages, losses, inefficiency. They can apply their knowhow in judging
efficiency of management of resources, capacity utilization, channelling resources
into productive channels, standards of efficiency of performance, production
processes and performance of respective units. Efficiency of business processes,
Enterprise Performance Management, Business risks. Efficiency of Supply Chains,
Efficiency of Utilities / Energy Consumption, Sustainability of Business is critical drivers to
keep the business focused on priority areas.
The perspective of CMAs has changed in the present era of mergers & acquisitions,
new product development and also to climate change and sustainability. The
financial perspective, customer perspective, operational perspective and people
perspective all can be aligned to meet the goal of the business.
7. (a) (i) What is ―Waste Multiplier‖ in Textile Costing?
(ii) The following are the process-wise input and output in a Spinning Mill –
Blow room : Cotton processed 4672563 kgs
Laps produced 4258274 kgs.
Carding : Laps processed 4274362 kgs.
Silvers produced 3976420 kgs.
Draw frames : Silvers processed 3948241 kgs.
Silvers drawn 3901810 kgs.
Roving (Simplex) : Drawn silvers processed 3874125 kgs.
Transferred to Ring frame 3831510 kgs.
Ring frame : Silvers used 3911645 kgs.
Finished Yarn produced 3641741 kgs.
Reeling and Winding : Yarn wound 3635420 kgs.
Salable Yarn produced 3580889 kgs.
Calculate the process wise Waste Multiplier factors. [4 + 6]
(b) There was a strike from 13.09.2017 to 16.11.2017 in a company of which you were the
Cost Auditor for the year ending 31.03.2018. Although the company began working
from 17.11.2017, production could effectively begin only from 5.12.2017. The expenses
incurred during the year ended 31.03.2018 were:
Particulars (` in lakhs)
Salaries & Wages (direct) 450
Salaries & Wages (indirect) 300
Power (variable) 180
Depreciation 270
Detailed examination of the records reveals that of the above, the following relate to
the period 13.09.2017 to 16.11.2017:
Particulars (` in lakhs)
Salaries & Wages (indirect) 105
Depreciation 90
Calculate the amount which in your opinion should be treated as abnormal for
exclusion from the product costs. 6
Answer:
7. (a) (i) "Waste multiplier" is the quantity of output from any process, which will be needed
to get one unit of final output. To arrive waste multiplier processing cost per kg of
output is worked out. These costs are then aggregated to arrive at total yarn cost.
This is done by using a factor known as Waste multiplier.
A Spinning unit of Cotton Textile Industry has a set of processing departments like
Mixing and Blow Room, Carding, Drawing, Combing, Fly Frames and Ring Frames.
Actually spinning unit comes under continuous process industry. Mixing and Blow
Room are the starting point when the raw material cotton enters and comes out
as yarn in the Ring Frame section. Obviously like every processing industry in
spinning mills certain amount of wastage is emerging out of production in each
and every department. It is segregated as usable waste and saleable waste
apart from invisible loss. While the usable waste and saleable waste can
measured physically the invisible loss is found out from the input and output of raw
materials after considering due weightage of usable and saleable waste. The
actual waste which is extracted from the machine process depends upon the
impurities in the cotton. The production process involving wastage has a routine or
cycle.
7. (a) (ii)
Process Input (kgs) Output (kgs) Loss Output Waste Multiplier
% (%) (%)
Total Consumption 100.00 1.3161
Blowroom : 4672563 kgs 4258274 kgs. 8.87 91.13 1.1994
Carding : 4274362 kgs. 3976420 kgs. 6.97 84.78 1.1158
Draw frames : 3948241 kgs. 3901810 kgs. 1.18 83.78 1.1026
Roving (Simplex) : 3874125 kgs. 3831510 kgs. 1.10 82.86 1.0905
Ring frame : 3911645 kgs. 3641741 kgs. 6.90 77.14 1.0153
Reeling and Winding: 3635420 kgs. 3580889 kgs. 1.50 75.98 1.0000
Loss Percentage = (Input-output)/input × 100
7. (b) Calculation of Fixed expenses incurred during the period 17.11.2017 to 04.12.2017
Particulars ` in lakhs
Total expenses 2017 - 18 1,560
Less: Variable expenses (Electricity) 180
Fixed expenses (2017 - 18) 1,380
Less: Fixed expenses during the strike period 330
Fixed expenses during non-strike period 1,050
Since the strike period was for 65 days, the non-strike period is 300 days. Hence, Fixed
expenses attributed to 18 days, i.e., 17.11.2017 to 4.12.2017 is 6% of ` 1,050 lakhs = ` 63
lakhs.
Therefore, Expenses incurred during 13.9.17 to 16.11.17 ` 330 lakhs

For expenses incurred during 17.11.2017 to 04.12.2017 ` 63 lakhs
Total ` 393 lakhs
Hence, ` 393 lakhs is to be treated as abnormal cost and should be excluded from
the product cost.

(a) How value Chain activity can have an impact in performance analysis?
(b) What is the Role of Management with regard to Internal Control?
(c) Briefly state the disclosure and transparency requirements for Corporate Governance.
(d) Distinguish between Management Audit and Internal Audit.
(e) Write a short note on Profitability Analysis.
Answer:
8. (a) Value Chain — many company attempts to gain competitive advantage by

appropriately linking its own activities with those of the suppliers, channels or
customers. Vertical-integration, quality controls on inputs from suppliers, total quality
management strategies, controlling distributors‟ performance through training/
financing etc., collaborative arrangements etc. are some of the ways in which
company‟s own activities are beneficially linked to other organizations. This provides
an avenue for reporting under performance analysis report. What has been the cost
of such coordinating strategies and how much of competitive advantage of the
company has improved or strengthened at present level? If such linkages with other
companies are established as a matter policy, every year, then performance as to
the cost efficiency in such coordinating/cooperating linkages can be an area for
appraisal for the Cost Auditor.
8. (b) The role of Management with regard to internal Control can be summarized as
under-
(i) Creation of system: Management is responsible for maintaining an adequate
accounting system incorporating various internal Controls to the extent
appropriate to the size and nature of the Business. The Management is vested
with the responsibility of carrying on the business, safeguarding its assets and
recording the transactions in the books of account and other records.
(ii) Review of system: The system installed, should be reviewed by the Management
to ascertain, whether- (a) The prescribed Management policies are being
properly interpreted by the employees and are faithfully implemented, (b) The
prescribed procedures need a revision due to changed circumstances or
whether they have become obsolete or cumbersome, and (c) Effective and
corrective measures are taken promptly when the system appears to breakdown.
(iii) Internal Audit: it is desirable that the Management also installs an internal audit
System as an independent function to check, amongst other things, the actual
operation of the Internal Control System and report any deviations or non-
compliances.
8. (c) The company should ensure timely and accurate disclosure on all material matters
including the financial situation, performance, ownership, and governance of the
company.
(i) Information should be prepared and disclosed in accordance with the prescribed
standards of accounting, financial and non-financial disclosure.
(ii) Channels for disseminating information should provide for equal, timely and cost
efficient access to relevant information by users.
(iii) The company should maintain minutes of the meeting explicitly recording
dissenting opinions, if any.
(iv) The company should implement the prescribed accounting standards in letter
and spirit in the preparation of financial statements taking into consideration the
interest of all stakeholders and should also ensure that the annual audit is
conducted by an independent, competent and qualified auditor.
8. (d)
Aspects Management Audit Internal Audit
Definition Management Audit is – Function of internal control with
(a) the systematic independent the objective of determining
appraisal activity, whether other internal controls
(b) within an organisation, are well designed and properly
(c) for a review of the operated.
Management's efficiency,
(d) in its decision-making function.
Relationship It is not a part of Internal Control. It This operates as a part of
to Internal is over and above the regular Internal Control System.
Control internal control system.
Objectives It is concerned with appraising -
 Management's accomplishment  To determine whether internal
of organizational objectives, controls are well designed and
 Management functions of properly operated, and
planning, organizing, directing,  To assist all members of
and controlling, and Management in the objective
 Adequacy of Management's of discharging of their
decisions and action in moving responsibilities by reviewing
towards its objectives. activities and procedures.
Function Constructive Function, i.e. to Protective Function, I.e. to
provide suggestions for safeguard the assets of the
improvement. Enterprise.
Areas All aspects of managerial decision The traditional field of Internal
making are analysed, to see Auditors is restricted to financial
whether they are in tune with accounting and internal
Management policies, objectives control.
and goals.
Aspect Qualitative aspects of decision Internal Audit Function focuses
making are analysed. more on quantitative aspects
when compared to
Management Audit.
8. (e) Profitability analysis is a component of resource planning that allows administrators to

forecast the profitability of a proposal or optimize the profitability of an existing
project. Profitability analysis can anticipate sales and profit potential specific to
aspects of the market such as customer age groups, geographic regions, or product
types.
Profitability analysis helps an enterprise to:

(i) Identify the most and least profitable products or services.
(ii) Discover which sources of information offer the most reliable facts.
(iii) Optimize responses to changing customer needs.
(iv) Evolve the product mix to maximize profits in the medium and long term.
(v) Isolate and remedy the causes of decreasing profit margins.
Profitability Ratio Analysis forms part of Part D of the Annexure to Cost Audit Report.

No. 2 to 8.
mark for justification.) [10x2=20 marks]
(i) Exemptions from application of the Rules are provided to Companies whose
revenue from exports, in foreign exchange, exceeds ________________ of total
revenue and companies operating from Special Economic Zones.
(a) 45%
(b) 50%
(c) 75%
(d) 80%
(ii) Cost Auditing Standard 103 deals with ______________.

(iii) Field Balance Sheet Approach to audit can be applied in audit of —————
(a) Non-Governmental Organisations (NGOs)
(b) Self Help Group
(c) Local Bodies
(d) Commercial Accounts
(iv) Cost Auditor’s observation and suggestions are given in ____________

(a) CRA-3
(b) CRA -2
(c) CRA-1
(d) Annexure
(v) CAS 7 deals with ______________.

(a) Direct Material Cost
(b) Indirect Material Cost
(c) Packing Material Cost
(d) Employee Cost.
(vi) ————— is the evaluation of every resources declared in the industry.

(a) Performance Analysis
(b) Productivity Analysis
(c) Profitability Analysis
(d) Financial Analysis
(vii) _____________ of the Annexure to the Cost Audit Report prescribes the method of
calculation of Value Addition.
(a) Part A
(b) Part B
(c) Part C
(d) Part D
(viii) The main emphasis of Management Audit is ____________

(a) problem solving
(b) problem identification
(c) problem definition
(d) problem avoidance
(ix) CAS 5 deals with__________

(a) equalized cost of transportation
(b) captive consumption
(c) capacity determination
(d) cost classification.
(x) _______________ is sometimes defined as an extension of Financial Audit.

(a) Internal Audit
(b) Management Audit
(c) Operational Audit
(d) Propriety Audit
Answer:
1. (i) (c) 75%.

Reason: The requirement of Cost Audit under these rules shall not apply to
companies whose revenue from exports in foreign exchange exceed 75% of total
revenue and companies operating in special economic zone.
(ii) (d) overall objectives of the Independent Cost Auditor

Reason: This Standard on Auditing deals with the overall objectives of the
independent cost auditor, the nature and scope of a Cost audit the independent
auditor’s overall responsibilities when conducting an audit of cost statements in
accordance with Cost Auditing Standards. It also explains the requirements
establishing the general responsibilities of the independent auditor applicable in
all audits, including the obligation to comply with the Cost Auditing Standards.
(iii) (b) Self Help Group

Reason: The auditor prepares the Field Balance Sheet for the group, as on the
date of the audit, based on the Self Help Group’s (SHG’s) internal records and
then cross checks the correctness of balance sheet items. The primary objective is
to ascertain the retained earnings of the SHG.
(iv) (a) CRA-3.

Reason: This is as per format prescribed by Companies(Cost Records and Audit )
Rules, 2014.
(v) (d) Employee Cost

Reason: This standard deals with the principles and methods of classification,
measurement and assignment of Employee cost, for determination of the Cost of
product or service, and the presentation and disclosure in cost statements.
(vi) (b) Productivity Analysis.

Reason: Productivity involves variables of input resources and the output.
Measuring, identifying and isolating the different input resources and analyzing
their contribution to produce goods and services and their effect on costs and
profitability is imperative of Productivity Analysis.
(vii) (d) Part D
Reason: Annexure to the Cost Audit Report - Part D prescribes the method of
calculation of Value Addition. The term “Value Addition” has been defined under
the Companies (Cost Records and Audit) Rules, 2014 as the difference between
net output value (net sales adjusted for WIP and finished stock) and cost of
bought out materials and services for the product under reference.
(viii) (b)Problem identification.

Reason: Management Audit pinpoints the areas requiring attention of
management. It evaluates the existence of well defined objectives. It seeks to
review appraise and evaluate the corporate plans and policies based on certain
standards of objectivity.
(ix) (a) equalized cost of transportation.

Reason: The objective of the standard is to bring uniformity in the application of
principles and methods used in the determination of averaged/ equalized
transportation cost.
(x) (c) Operational Audit

Reason: An operational Audit is sometimes defined as an extension of a Financial
Audit. The objective of Operational Audit is to assist the organization in performing
functions more effectively and economically with focus on the efficiency and
effectiveness of operations.
2. (a) What is Captive Consumption? What are the different cost components are
considered to determine the Cost of Production for Captive Consumption?
(b) A steel company which produces Iron Casting Pipes and rod iron is covered under
the Cost Audit according to the Companies (Cost Records and Audit) Rules 2014.
From the expenditure data relating to 2017-18, determine the employees cost
according to CAS -7.
Sl. No. Particulars ` In lakh
(i) Salary, wages and other allowances 750
(ii) Bonus 100
(iii) Contribution to Provident Fund 90
(iv) Wages to contractors employees 100
(v) Employees welfare 40
(vi) Abnormal cost due to strike 80
(vii) VRS payment for closure of Rod Iron section of the plant 62
(viii) Arrear Salary (2016-17) 210
(ix) Compensation paid against the past periods against Court order 67
[10 + 6]
Answer:
2. (a) Captive Consumption means the consumption of goods manufactured by one

division and consumed by another division(s) of the same organization or related
undertaking for manufacturing another product(s). Cost Accounting Standard 4
(CAS-4) deals with determination of cost of production for captive consumption.
To determine the cost of production for captive consumption, calculations of

different cost components are given below:
(i) Material Consumed:
Material Consumed shall include materials directly identified for production of
goods.
(ii) Direct wages and salaries: Direct wages and salaries shall include house rent
allowance, overtime and incentive payments made to employees directly
engaged in the manufacturing activities.
(iii) Direct Expenses:
Direct expenses are the expenses other than direct material cost and direct
employees costs which can be identified with the product.
(iv) Works Overheads:
Works overheads are the indirect costs incurred in the production process.
(v) Quality Control Cost:
The quality control cost is the expenses incurred relating to quality control
activities for adhering to quality standard. These expenses shall include salaries
& wages relating to employees engaged in quality control activity and other
related expenses.
(vi) Research and Development Cost:
The research and development cost incurred for development and
improvement of the process or the existing product shall be included in the cost
of production.
(vii) Administrative Overheads:
Administrative overheads need to be analysed in relation to production
activities and other activities. Administrative overheads in relation to production
activities shall be included in the cost of production.
Administrative overheads in relation to activities other than manufacturing
activities e.g. marketing, projects management, corporate office expenses etc.
shall be excluded from the cost of production.
(viii) Packing Cost:
If product is transferred/dispatched duly packed for captive consumption, cost
of such packing shall be included. Packing cost includes both cost of primary
and secondary packing required for transfer/ dispatch of the goods used for
captive consumption.
(ix) Absorption of overheads:
Overheads shall be analysed into variable overheads and fixed overheads.
The variable production overheads shall be absorbed in production cost based
on actual capacity utilisation.
The fixed production overheads and other similar item of fixed costs such as
quality control cost, research and development costs, administrative overheads
relating to manufacturing shall be absorbed in the production cost on the basis
of the normal capacity or actual capacity utilization of the plant, whichever is
higher.
(x) Valuation of Stock of work-in-progress and finished goods:
Stock of work-in-progress shall be valued at cost on the basis of stages of
completion as per the cost accounting principles. Similarly, stock of finished
goods shall be valued at cost. Opening and closing stock of work-in-progress
shall be adjusted for calculation of cost of goods produced and similarly
opening and closing stock of finished goods shall be adjusted for calculation of
goods despatched.
(xi) Treatment of Joint Products and By-Products:
A production process may result in more than one product being produced
simultaneously. In case joint products are produced, joint costs are allocated
between the products on a rational and consistent basis. In case by-products
are produced, the net realisable value of by-products is credited to the cost of
production of the main product.
(xii) Treatment of Scrap and Waste:
The production process may generate scrap or waste. Realized or realizable
value of scrap or waste shall be credited to the cost of production.
2. (b) The following items will not be included according to CAS-7:

VRS paid for closure of a unit
Abnormal cost charges to Profit and Loss A/C
Area salary not related to the current year
Compensation paid against past periods
Wages paid to contractor employees.
[As per explanation (1) of CAS-7 under para-4.7: Contract employees include
employees directly engaged by the employer on contract basis but does not include
employees of any contractor engaged in the organisation.]
Thus, employees cost:

Sl. No. Particulars ` In lakh
(i) Salary and wages 750
(ii) Contribution to PF 90
(iii) Employees welfare 40
(iv) Bonus 100
Total 980
3. (a) (i) A manufacturing firm has up its own power plant to cater its need in
manufacturing process.
It’s one month data is given below:

Number of units produced = 100 lakh units of which 5% is used by generating unit.
Material and utility used :

(i) Coal 300 MT @ ` 30,000 per MT
(ii) Oil 5 MT @ ` 1,60,000 MT
(iii) Cost of Water extraction and treatment : 6 lakh litres @ ` 3 per litre
(iv) Steam boiler cost ` 55 lakh with residual value5 lakhs after life of 10 years.
(v) Cost of Generating Plant is ` 90 lakhs with no residual value. Depreciation is
charged on straight line method @ 10%
(vi) Generating Plant : 100 skilled workers@ ` 30,000 & 150 helpers @ ` 20,000 pm.
(vii) Boiler plant : 60 semi-skilled workers @ ` 25,000 & 100 helpers @ ` 20,000pm
(viii) Repair & Maintenance of generating plant & Boiler is ` 5.0 lakhs
(ix) Share of Administrative charges ` 20 lakh
(x) Realization from Sale of ash disposed is ` 1.5 lakh
Prepare a cost sheet for Electricity Generating Cost and calculate cost per unit.
3. (a) (ii) Tirupati Ltd., a manufacturing unit, produces two products A and B. The following
information is extracted from the Books of the Company for the year ended March
31, 2018:
Particulars Product A Product B

Units Produced (Qty.) 2,10,000 1,68,000
Units sold (Qty.) 1,68,000 1,36,500
Machine hours utilized 1,26,000 84,000
Design charges (`) 1,57,500 1,89,000
Software development charges (`) 2,62,500 3,78,000
Royalty paid on sales ` 6,09,000 [ @ ` 2 per unit sold for both the products].
(i) Royalty paid on units produced ` 3,78,000 [@ Re. 1 per unit produced for both
the products].
(ii) Hire charges of equipment used in the manufacturing process of product PB

only ` 53,000.
Note: No adjustments are to be made related to units held i.e. Closing Stock.
You are required to compute the Direct Expenses—keeping in view of Cost
Accounting Standard (CAS)-10. [6 + 4]
(b) How can the cost audit report and compliance report is converted into the XBRL
format? 6
Answer:
3. (a) (i)
Particulars Calculation ` In lakh
Material Cost
Coal 300 x 30,000 90.00
Oil 5 x 1,60,000 8.00
Water 6x3 18.00
Total Material Cost 116.00
Wages for Generator plant (100 x 30,000) + (150 x 20,000) 60.00
Wages for Boiler plant (60 x 25,000) + (100 x 20,000) 35.00
Depreciation - Generating Plant 90 x 0.10 9.00
Depreciation- Boiler plant (55-5)/10 5.00
Repair &Maintenance 5.00
Administrative Expenses 20.00
Total Cost 250.00
As generating unit consumes 5%, effective unit produced for manufacturing = 95

lakh
Cost per unit = ` 250/95 = ` 2.63 (approx)
3. (a) (ii)
Tirupati Ltd.
Computation of Direct Expenses (As per CAS – 10)
Royalty paid on sale 3,36,000 2,73,000
Add: Royalty paid on units produced 2,10,000 1,68,000
Add: Hire charges of equipment used in the 53,000 -
manufacturing process of product-A only
Add: Design charges 1,57,500 1,89,000
Add: Software development charges related to 2,62,500 3,78,000
production
Direct expenses (total) 10,19,000 10,08,000
3. (b) XBRL (Extensible Business Reporting Language) is an open source technology. Any of
the following methods can be adopted to create the instance document required
for filing of the respective reports.
• XBRL-enabled software packages developed by different software vendors which
support the creation of cost reports in XBRL format can be used to create the
necessary document.
• Various elements of Cost Audit Report and Compliance Report can be mapped
into XBRL tags of the costing taxonomy using specialised XBRL software tools
specifically designed for this purpose.
• Different third party packages can be integrated into the existing accounting
systems to generate XBRL Cost statements.
• There are various web based applications available that take input reports in
various formats viz. Microsoft Excel etc. and transform them into XBRL format.
The methodology adopted by an individual company will depend on its requirements

and the cost accounting software and systems being used and other factors.
4. (a)
Selected statistics of Vijay & Company Limited for two years, are given below:
(Amount in lakh)
Particulars 31.03.2018 31.03.2017
Gross Profit 36% 33.33%
Stock turnover 20 times 25 times
Average Stock ` 38,400 ` 36,000
Average Debtors ` 87,500 ` 1,68,750
Income Tax rate 50% 50%
Net Income after tax as % of Sales 6% 7%
Maximum Credit period allowed to customers 60 Days 60 Days
You are required to:
(i) Prepare a statement of profits in comparative form for all the two years.
(ii) Evaluate the position of the company regarding profitability and liquidity on the
basis of information supplied to you.
(iii) What additional information will you require to evaluate fully the position of the
company on the liquidity fund? 10
(b) You are the Management Auditor of a large manufacturing company suffering from
working capital crisis. Which areas you will cover to overcome the crisis? 6
Answer:
4. (a) (i)
Statement of Profit of Vijay & Company Limited for the year ended 31.03.2018 &
31.03.2017
Particulars 31.03.2018 (`) 31.03.2017 (`)
Sales 12,00,000 13,50,000
Less: Cost of Goods Sold 7,68,000 9,00,000
Gross Profit 4,32,000 4,50,000
Less: Operating Expenses 2,88,000 2,61,000
Profit before taxes 1,44,000 1,89,000
Less: Taxes 72,000 94,500
Net Profit 72,000 94,500
The Profitability of the Company is consistently improving. Its liquidity position,

judged terms of debtors and stock turnover ratios, can be said to be very
satisfactory. The stock turnover ratio being as high as 20 times. The debtors
turnover ratios are also very high.
For 31.03.2018 = ` 12,00,000 ÷ ` 87,500 = 13.7 times

For 31.03.2017 = ` 13,50,000 ÷ ` 1,68,750 = 8.0 times
(iii) The amount of current liabilities and current assets, other than debtors and stock,
are required to evaluate fully the position of the company on the liquidity front.
Workings :
(1) Year 2018,
Cost of Goods Sold = Stock Turnover X Average Stock

= 20 X ` 38,400
= ` 7,68,000
Sales = ` 7,68,000 X 100/ 64 = ` 12,00,000
Net Income = 6% on ` 12,00,000 = ` 72,000
Therefore, Profit before tax ` 1,44,000
(2) Year 2017,
Cost of Goods Sold = Stock Turnover X Average Stock

= 25 X ` 36,000
= ` 9,00,000
Sales = ` 9,00,000 X 100/ 66.67 = ` 13,50,000
Net Income = 7 % on ` 13,50,000 = ` 94,500
Therefore, profit before tax ` 1,89,000.
4. (b) Adequate working capital is required for smooth operation of the company. To
ensure smooth flow of working capital the following action plan may be chalked out
by the Management auditor:
(i) Estimation of working capital: The manager should prepare projected working
capital statement based on the functional budgets such as sales, production,
expenses, capital expenditure and the master Budget consisting of project profit
and loss and balance sheet.
(ii) Cash flow statement/Cash budget: Month-wise cash flow statement showing
inflow and outflow of cash head wise should be prepared to analyse major
inflows and out flows affecting the entity. Any wasteful outflow can be traced
and eliminated. Bank reconciliation statement to be prepared periodically so that
outstanding can be traces and acted upon.
(iii) Inventory/Stock management: Raw material and Inventories should be properly

classified to determine the level of stock material required. The method of
valuation to be determined. To determine the time factor for receipt and
consumption of material. This is required to assess the production schedule and to
avoid wasteful expenditure on account of excess storage capacity and cost of
storage of inventory. In no circumstances the production schedule to hamper .For
this, the Economic Order Quantity procedure to be adopted for spending
minimum cost of capital for maintaining the inventory. The system of inventory
management needs to avoid wastes and scrap generated during storage and
handling. Just in time philosophy may be adopted to reduce processing time,
stock etc which will release the working capital.
(iv) Credit Management: The Company should lay down proper policy for evaluating
customers, determine the credit period and offering discount for an early
payment. An age wise analysis of debtors should also be prepared so as to avoid
credit to defaulters and bad debt. Careful analysis of customers according to
pattern of sales so as to exercise control over debit balances. The Company
should through its purchase department endeavour to avail maximum credit
period from creditors. These actions should increase the working capital.
(v) Funds flow Analysis: The company should prepare a funds flow analysis,
distinguishing between long term short term sources and application of funds.
Long term funds should be utilised for long term purposes and short term funds
should be utilised for short term purposes. Working capital should not be utilised for
capital assets.
(vi) Investment management: The idle funds of the company should be utilised for in
short term securities to earn from idle short term funds.
(vii) WIP analysis: Minimum WIP should be monitored and for the purpose it is
necessary to ensure no bottlenecks develop at any stage during production
process.
5. (a) What is Audit Programme? What are the advantages and disadvantages of Audit
Programme?
(b) Discuss about the salient features of Internal Audit and Operational Audit. [10 + 6]
Answer:
5. (a) An audit programme is a detailed plan of the auditing work to be performed,
specifying the procedures to be followed in verification of each item and the
financial statements and the estimated time required. To be more comprehensive, an
audit programme is written plan containing exact details with regard to the conduct
of a particular audit. It is a description or memorandum of the work to be done during
an audit. Audit programme serves as a guide in arranging and distributing the audit
work as well as checking against the possibility of the omissions.
Advantages of audit programme
The main advantages of an audit programme are as follows:
(i) It serves as a ready check list of audit procedures to be performed.
(ii) The audit work can be properly allocated to the audit assistants or the article
clerks.
(iii) The auditor may easily know the extent of work done at any point of time. Thus,
the progress of work done can be under the supervision and control of the
auditor.
(iv) Audit programme would not only be useful for the audit assistants in carrying the
audit work but for the principal too as he would be in a position to account for
the individual responsibilities.
(v) A uniformity of the work can be attained as the same programme would be
followed from time to time.
(vi) It is a useful basis for planning the programme for the following year.
(vii) It may be used as evidence by the auditor in the event when any charge is
brought against him. He can prove that there has no negligence on his part
and he exercised reasonable care and skill while performing the task.
Disadvantages of audit programme
The main disadvantages of an audit programme are as follows:

(i) The auditor’s task becomes mechanical and the auditors may lose interest and
initiative.
(ii) Drawing up of an audit programme may be unnecessary for a small concern.
(iii) Though audit programme helps in fixing responsibilities but inefficient staff may
defend themselves by stating that the matter was not contained in the audit
programme.
(iv) Rigid programmes cannot be laid down for each type of business.
Though an audit programme may suffer from the above disadvantages but these
can be removed by taking some initiatives such as consulting the audit assistants,
modifying the programme on the basis of experience gained during audit, etc.
5. (b) The salient features of Internal Audit and Operational Audit are given below:
Sl. Internal Audit Operational Audit
No.
1. Compliance objective Risk identification, process improvement
objective
2. Financial accounts focus Business focus
3. Audit focus Efficiency & improvement focus
4. Transaction-based Process-based
5. Policies and procedures focus Risk management focus
6. Cost Centre wise budget Accountability for performance
monitoring improvement results
7. Methodology : Focus on policies, Methodology : Focus on goals, strategies
transactions and compliance and risk management processes
6. (a) How should a Cost and Management Auditor evaluate MIS of an organization?
(b) What are the fields covered by CSR Audit? [10 + 6]
Answer:
6. (a) MIS is an essential managerial tool. It provides for identification of relevant information
needs of managers at various levels, collection of data, processing the same to
become usable to managers and timely dissemination of processed information to
the users to help them to make effective decisions for planning, directing and
controlling the respective operations.
A Cost and Management Auditor should take into consideration the following
aspects while evaluating MIS of an organization:
i) Content, quality and source of information;
ii) Flow of information
iii) Correlation of information in decision areas.
These points are discussed in detail in the below:
i) Content, quality and source of information include the following:
1) Whether the information collected is relevant to the decision problem so as to
improve the quality of decisions?
2) Whether the reporting of MIS is uniform and regular both for financial and
nonfinancial information?
3) Whether the information adequately caters to the needs of the decision
makers?
4) Whether unwanted data is included in the information?
5) Whether the manager uses the data effective or merely as a post mortem
exercise?
ii) Flow of information: A cost auditor has to proceed on the following lines:
I) System organization:
a) Whether the system is centralized or decentralized?
b) How the information flows from various units to the control section?
c) Estimating the volume of data involved, transmission time and cost.
d) Benefit-cost analysis of centralized vs. decentralized information.
II) Data collection and management: Appraisal includes the following points:
a) Data collection methods,
b) Filtration and classification of data.
c) Matching of data with decision problems.
d) Extent of study carried out by management with regard to existing
frequency.
e) Constraints if any in the system design.
III) Correlation of information in decision areas: The cost auditor is required to

appraise this aspect from the following angles:
a) Whether input- output analysis is attempted?
b) Whether MIS helps in reducing uncertainty?
c) Cost effectiveness of MIS.
d) Effectiveness of information supplied to users.
e) Provision of feedback by MIS for corrective action.
f) Ability of MIS to optimize the value of information.
6. (b) A Corporate Social Responsibility Audit is an assessment of company’s performance

on corporate social responsibility objectives. It evaluates measurable goals intended
to help the business meet the expectations stakeholder groups have regarding social
and environmental responsibilities. Balancing social responsibility with business
performance is imperative in today’s business arena.
A Corporate Social Responsibility (CSR) Audit should cover the following points:
i) Human Rights: Fundamental Human Rights, Freedom of association and
Collective bargaining, Non-discrimination, Forced labour, Child labour
ii) Business behaviour: Relations with clients, suppliers and sub-contractors,
Prevention of corruption and anticompetitive practices
iii) Human Resources: Labour relations, Working conditions including steps taken for
preventing accidents and health hazards, health and safety measures including
compensation in case of any accidents, career development and training,
Remuneration system that motivates the employees.
iv) Corporate Governance: Board of Directors, Audit and internal controls, Treatment
of shareholders, Executive remuneration
v) Environment: Incorporation of environmental considerations into the
manufacturing and distribution of products, and into their use and disposal, effect
on pollution, pollution control measures undertaken,
vi) Community Involvement: Impacts on local communities, contribution to social
and economic development.
vii) General interest causes, creation of socials infrastructure like roads, schools,
hospitals.
7. (a) TNT Ltd. has received an enquiry for supply of 2,00,000 numbers of Special Type of
Machine Parts. Capacity exists for manufacture of the machine parts, but a fixed
investment of ` 80,000/- and working capital to the extent of 25% of Sales Value will
be required to undertake the job.
The costs estimated as follows:
Raw Materials - 20,000 Kgs @ ` 2.50 per kg
Labour Hours- 9,000 of which 1,200 would be overtime hours payable at double the
labour rate.
Labour Rate- ` 2 per hour.
Factory Overhead – ` 2 per direct labour hours.
Selling and Distribution Expenses – ` 23,000
Material recovered at the end of the operation will be ` 6,000 (estimated).

The Company expects a Net Return of 25% on Capital Employed.
You are Management Accountant of the Company. The Managing Director requests
you to prepare a Cost and Price Statement indicating the price which should be
quoted to the Customer.
(b) The financial profit and loss account for the year 2017-18 of a company shows a net
profit of ` 29,60,000. During the course of Cost Audit, it was noticed that:
(i) The company was engaged in trading activity by purchasing goods at `
6,00,000 and selling it for ` 7,50,000 after incurring repacking cost of ` 25,000,
(ii) Some discarded assets sold off with no scrap value for ` 90,000,
(iii) Some renovation of machinery was carried out at a cost of ` 6,00,000, having a
productive life of five years, but entire amount was charged to financial
accounts
(iv) Interest was received amounting to ` 1,40,000 from outside investments
(v) Voluntary Retirement payment of ` 3,50,000 was not included in the Cost
Accounts,
(vi) Insurance claim of previous year was received to the extent of ` 2,50,000 but
was not considered in the Cost Accounts.
(vii) Opening stock or raw materials and finished goods was overvalued by `
2,40,000 and closing stock of finished goods was overvalued by ` 1,10,000 in the
financial accounts, and
(viii) Donation of ` 80,000 towards CSR commitment was not considered in the Cost
Accounts.
Work out the profit as per the Cost Accounts and briefly explain the adjustment, if any,
carried out. [8 + 8]
Answer:
7. (a)
Statement of Estimated Cost and Price Quotation

Product: Special Type Machine Parts. Quantity = 2,00,000 units
` `
Materials (20000 Kgs. @ ` 2.50) 50,000
Less: Estimated Scrap value 6,000 44,000
Labour-
(9000 hrs. – 1200 OT hrs.) x ` 2 per hour 15,600
1200 OT hrs. X ` 4 per hour 4,800 20,400
Prime Costs 64,400
Add: Factory overhead (9000 hrs. @ ` 2) 18,000
Factory Cost 82,400
Add: Selling and Distribution Expenses 23,000
Total Cost 1,05,400
Add: Profit 28,360
Sales 1,33,760
Selling Price / unit = ` 1,33,760/2,00,000 units = Re. 0.67
Working Notes:
Calculation of Sales
Let Sales be S
S = Total Cost + 25 % of Capital Employed.
S = 1,05,400 + 25/100 x (80,000+S/4)
S = 1,05,400 + 20,000 + S /16
S – s /16 = 1,25,400
15S = 1,25,400 x 16
15S = 20,06,400
S = 1,33,760
Sales = ` 1,33,760
Profit = Sales – Cost = 1,33,760 – 1,05,400 = ` 28,360
Working Capital = 1/4th of Sales = 1,33,760 x 1/4 = ` 33,440.
7. (b)
Profit Reconciliation as per Cost and Financial Records for the year 2017-18
Sl. No. Particulars ` In '000 ` In '000

1 Profit as per Financial Accounts for Audited Products 29,60,000
2 Less : Incomes not considered in the Cost Accounts
a) Trading Profit (7,50,000-6,00,000-25,000) 1,25,000
b) Profit on Sale of Old Assets 90,000
c) Interest received from Outside Investments 1,40,000
d) Insurance claim for previous year received 2,50,000
Total (-) 6,05,000
3 Add : Expenses not considered in the Cost Accounts
a) Donation towards CSR Commitment 80,000
b) VRS Expenses 3,50,000
c) Renovation (4/5th Outlay of 600000) 4,80,000
Total 9,10,000
4 Add : Valuation of stocks (240000 - 110000) (Over 1,30,000
valuation of opening stock and closing stock in
financial accounts)
5 Other adjustments --- -

Profit as per the Cost Accounts 33,95,000
(a) What are the duties of the companies in relation to provisions of section 148 of the
Companies Act 2013 and Rules framed thereunder?
(b) Write a short note on Marketing Audit and its areas.
(c) Discuss about the mandatory review area of the Audit Committee.
(d) How do you define 'Packing Material' as per the Generally Accepted Cost
Accounting Principle? What is the treatment of such cost?
(e) What is the role of C&AG in the Audit of Government Company?
Answer:
8. (a) Every company required to get cost audit conducted under section 148 (2) of the
Companies Act, 2013 shall:-
(i) Appoint a cost auditor within one hundred and eighty days of the
commencement of every financial year,
(ii) Inform the cost auditor concerned of his or its appointment,
(iii) 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,
(iv) Within a period of thirty days from the date of receipt of a copy of the Cost Audit
Report, furnish the Central Govt. with such report along with full information and
explanation on every reservation or qualification contained therein, in form CRA-4
along with fees specified in Companies (Registration Offices and Fees) Rules,
2014.
8. (b) Marketing audit is an independent examination of the entire marketing effort of a

company, or some specific marketing activities covering objectives, programme
implementation, and organisation for purposes of determining what is being done,

appraising which is being done, and recommending what should be done in future.
The essential feature of marketing audit is that marketing audit is carried out
periodically at regular intervals and not only when the company is facing marketing
problems and difficulties. Such audit covers both marketing place and control and
evaluate the basic framework for marketing action as also the performance within
the framework. It covers the appraisal of the entire system and process of marketing
taking into account all the elements of the marketing operations.
Marketing Audit may be horizontal or vertical. Horizontal Audit covers a major part of
the Marketing Audit and evaluates the total appraisal of the marketing efforts of a
company. Vertical Audit concentrates on single item of function of marketing
operation of a company identified by horizontal audit or otherwise and which
becomes the subject of thorough examination and evaluation.
The Marketing Audit covers the following areas:

(i) Objectives: Marketing objectives should be clearly established. Major of the
companies do not have clearly defined objective except achieving high sales
volume or making high profit on the sales. The search in audit of a clear objective
will make the management aware of the gap between the operational policies.
(ii) Programme: The auditor should carry out an appraisal for the programme which
the company laid down for achieving the objective.
(iii) Implementation: The auditor should take up the examination of the company's
implementation of the marketing programme.
(iv) Organization: A suitable organization assist in a success of a marketing plan. The
audit should appraisal the marketing organization by reviewing the formal lines of
authority and responsibility, delegation of authority, status of marketing head and
his staff, adequacy of the personnel, proper manning of key tasks and assignment
etc.
8. (c) The Audit Committee shall mandatorily review the following information as per Clause
49 of the Listing Agreement:
(i) Management discussion and analysis of financial condition and results of
operations
(ii) Statement of significant related party transactions (as defined by the audit
committee), submitted by management
(iii) Management letters/ letters of internal control weaknesses issued by the statutory
auditors
(iv) Internal audit reports relating to internal control weaknesses; and
(v) The appointment, removal and terms of remuneration of the Chief Internal
Auditor shall be subject to review by the Audit Committee.
8. (d) The Cost Accounting Standard on Packing Material Cost (CAS 9) defines Packing
Materials as materials used to hold, identify, describe, store, protect, display,
transport, promote and make the product marketable.
Packing Materials for the purpose of the standard are classified into primary and
secondary packing materials. Primary Packing Material is that packing material which
is essential to hold and preserve the product for its use by the customer. Secondary
Packing Material is that packing material that enables to store, transport, inform the
customer, promote and otherwise make the product marketable. For example, in
pharmaceutical industry, cartons used for holding strips of tablets and card board
boxes used for holding cartons.
Packing material costs shall be directly traced to a cost object to the extent it is
economically feasible. Where the packing material costs are not directly traceable to
the cost object, these may be assigned on the basis of quantity consumed or similar
measures like technical estimates. The packing material cost of reusable packing
shall be assigned to the cost object taking into account the number of times or the
period over which it is expected to be reused. Cost of primary packing materials shall
form part of the cost of production. Cost of secondary packing materials shall form
part of distribution overheads.
8. (e) Role of C&AG in the Audit of a Government company:
The auditor of a Government company is appointed by the C&AG.
The C&AG have powers under section 143 of the Companies Act, 2013 as follows:
(i) to direct the manner in which the company’s accounts shall be audited by the
auditor and to give such auditor instructions in regard to any matter relating to
the performance of his functions as such;
(ii) to conduct a supplementary or test audit of the company’s accounts by such
person or persons as he may authorise in this behalf; and for the purposes of such
audit, to require information or additional information to be furnished to person or
persons so authorised, on such matters, by such person or persons, and in such
form, as the Comptroller and Auditor-General may, by general or special order
direct.
In addition, the C&AG has a right to comment upon or supplement the audit report in
such manner as he thinks fit.
Suggested Answer_Syl16_June2019_Paper_19
FINAL EXAMINATION
GROUP IV
(SYLLABUS 2016)

JUNE 2019
Paper- 19: COST AND MANAGEMENT AUDIT
Time Allowed: 3 Hours Full Marks : 100
All Sections are compulsory. Each Section contains instructions regarding
the number of questions to be answered within the Section.
All working notes must form part of the answers.
Wherever necessary, candidates may make appropriate assumptions

and clearly state them.
Section-A (20 Marks)

Section-A contain question number 1.
All parts of this question are compulsory
1. Choose the correct option from amongst the four alternatives given (1 mark is for the
correct choice and 1 mark is for the justification/workings): 2x10=20
(i) ORS Ltd. is a multi-product company having annual turnover of `103 crore, Table A
items under CARO being `26 crore, Table B items `8 crore and the rest are not
covered in either of the Tables. Cost Audit will be ___________ .
(A) not applicable to the company
(B) applicable for Table A products only
(C) applicable for all products
(D) applicable for Table A and Table B products only
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
(ii) The wages of employees of contractor engaged in the organization for the past
periodis ___________ Employee Cost.
(A) included in
(B) excluded from
(C) included to the extent of statutory contribution of employer
(D) partly included
(iii) The Cost Accounting Standard 24 is a Cost Accounting Standard on ___________ .
(A) Overburden Removal Cost
(B) Royalty and Technical Know-how Fee
(C) Treatment of Revenue in Cost Statements
(D) Selling and Distributions Overhead Cost
(iv) The figures below are available for Reliable Ltd. Budgeted production - 800 units,
Standard hours per unit 25, Actual production 576 units and actual working— 12000
hours. What is the Efficiency Ratio?
(A) 110%
(B) 120%
(C) 100%
(D) 125%
(v) Machinery used in defense, space and atomic energy sector and fulfilling turnover
criteria is under
(A) regulated sector.
(B) unregulated sector.
(C) exempted by different statute.
(D) not applicable category.
(vi) Cost Auditing Standard 102 deals with ___________ .
(A) knowledge in performing of audit of cost statements, records etc.
(B) ensuring conduct of audit of cost statements
(C) planning on audit of cost statements, records etc.
(D) documentation of audit of cost statements, records etc.
(vii) The abridged cost statement (CRA 3) need not be separate for
(A) each product with separate (CTA) CETA heading
(B) each product having separate industry specific expenses
(C) each product having different unit of measure
(D) self/captive consumption of each product
(viii) The Management Auditor should evaluate MIS of an organization after ___________ .
(A) studying content, quality and source of information
(B) studying flow of information
(C) studying correlation of information in decision areas
(D) studying all the above
(ix) Operational Audit can lead to better management with the focus on
(A) transaction based analysis for fraud prevention.
(B) compliance of Rules.
(C) risk identification, process improvement.
(D) budget monitoring.
(x) The first step in audit of Educational Institutions —
(A) Read through the minutes of the meetings of the Managing Committee or
Governing Body
(B) Check admission fees with admission slips signed by the head of the institution
and confirm that the amount had been credited to a Capital Fund
(C) Verify the annual statement of accounts
(D) To examine the Trust Deed or Regulations
Answer:
(i) (B) (Applicable for Table A products only). Rule 4 to Companies (Cost Audit & Records)
Rules, 2014 states that if the overall turnover of the company is more than ` 100 crore,
only products of Table A will be covered if the sum total of all the products of the
company covered under Table A and Table B is more than `25 crore but less than
`35 crore.
(ii) (B) (Excluded from). CAS 7 on Cost Accounting Standard on Employee Cost excludes
benefits paid or payable for the services rendered by employees of any contractor
engaged in the organization.
(iii) (C) (Treatment of Revenue in Cost Statements). The objective of CAS-24 is to bring
uniformity and consistency in the principles and methods for treatment of revenue in
cost statements with reasonable accuracy.
(iv) (B) (120%) Efficiency Ratio = Actual output (576 units)/ Standard output (12000 hours/25
hours = 480 units); therefore, Efficiency ratio = 576/480 = 1.20 or 120%.
(v) (B) (Unregulated sector). Machinery used in defense, space and atomic energy sector
and fulfilling turnover criteria is under Unregulated sector.
(vi) (D) (Documentation of audit of cost statements, records etc.) The purpose of the Cost
Auditing Standard 102 is to provide guidance to the members in the preparation of
audit documentation in the context of the audit of cost statements, records and
other related documents.
(vii) (D) (Self/Captive consumption of each product). The abridged cost statement need not
be separate for Self/Captive Consumption of each product.
(viii) (D) (Studying all the above). The Management Auditor should evaluate MIS of an
organization after studying content, quality and source of information, studying Flow
of information, studying correlation of information in decision areas.
(ix) (C) Risk identification, process improvement. The objective is to assist the organization in
performing functions more effectively and economically with focus on the
efficiency and effectiveness of operations, giving an early warning system for the
detection of potentially destructive problems.
(x) (D) (To examine the Trust Deed or Regulations). The Trust Deed or Regulation is the basic
document on which the composition of the educational institution is framed.

Answer any five questions from question nos. 2 to 8.
Each question carries 16 marks.
2. (a) (i) During the course of audit as Cost Auditor, you have come across (I) some
material deficiency and (II) significant variation in material consumption over the
previous year. State the provisions of the Companies (Cost Records and Audit)
Rules, 2014 in this regard.
(ii) What is the applicability of Real Estate Development under the Companies (Cost
Records and Audit) Rules, 2014? 4+4=8
(b) (i) ABC Ltd. changed its Stock Valuation Policy from FIFO method to Average Cost
method in the FY 2018-19, as a result of which the profit of the Company was
inflated by ` 25 lakhs. The change in policy and the fact of additional gain were
not disclosed by the Company nor the Cost Auditor in the Audit Report. State
whether the Cost Auditor is deemed to be guilty of professional misconduct.
(ii) In the course of performance of his duties, some fraud against the Auditee
Company gets disclosed to the Cost Auditor.
What is the punishment to Cost Auditor for failing to report to the Authority within
prescribed time? 4+4=8
Answer:
2.(a)(i)
Pursuant to rule 6(4) of the Companies (Cost Records and Audit) Rules, 2014 read with the Cost
Audit Report in form CRA-3, if as a result of the examination of the books of account, the Cost
Auditor desires to point out any material deficiency or give a qualified report, he/she shall
indicate the same against the relevant para (i) to (vii) in the prescribed form of the Cost Audit
Report giving details of discrepancies he/she has come across. The report, suggestions,
observations and conclusions given by the cost auditor under this paragraph shall be based
on verified data, reference to which shall be made here and shall, wherever practicable, be
included after the company has been afforded an opportunity to comment on them.
The prescribed format for Cost Audit Report states that „Wherever, there is any significant
variation in the current year‟s figure over the previous year‟s figure for any item shown under
each para of the annexure to the cost audit Report, reasons thereof shall be given by the cost
auditor. Accordingly, any variation in material consumption during current year over the
previous year shall be clarified in Part B of Annexure to Cost Audit Report.
2.(a)(ii)
Real Estate Development falls under Construction Industry in the Non-Regulated sector (item
21) and has been defined to be corresponding to para no. (5)(a) as specified in Schedule VI
of the Companies Act, 2013. Para (5) of Schedule VI of the Companies Act, 2013 pertains to
“Industrial, commercial and social development and maintenance” and covers “real estate
development, including an industrial park or special economic zone” as per sub-clause (a).
Hence, every construction activity in relation to the above are covered under the Rules. The
rule has been made effective from April 1, 2014 and no CETA Heading is applicable for such
industry.
The Institute (ICAI) has issued Guidance Note on Maintenance of Cost Accounting Records for
Construction Industry including Real Estate and Property Development Activity.
2.(b)(i)
The Second Schedule to the Cost and Works Accountants Act, 1959 stipulates that a Cost
Accountant in practice shall be deemed to be guilty of professional misconduct if he
(Item 5) fails to disclose a material fact known to him in a cost or pricing statement but
disclosure of which is necessary in making such statement;
(Item7) does not exercise due diligence or is grossly negligent in the conduct of his professional
duties;
(Item 9) fails to invite attention to any material departure from the generally accepted
procedure of costing and pricing applicable to the circumstances;
In the given circumstances, the Auditor has failed in his duties and is deemed to be guilty of
professional misconduct.
2.(b)(ii)
According to Section 143(12) of the Companies Act 2013, if an auditor (Cost Auditor is
included) of a company, in the course of the performance of his duties as Auditor, has reason
to believe that an offence involving fraud is being or has been committed against the
company by officers or employees of the company, he shall immediately report the matter to
the Central Government within such time and in such manner as may be prescribed. Sub-
Section 13 specifies that no duty to which an auditor of a company may be subject to shall be
regarded as having been contravened by reason of his reporting the matter referred to in sub-
section (12) if it is done in good faith. According to Sub-Section 15 if any auditor does not
comply with the provisions of sub-section (12), he shall be punishable with fine which shall not
be less than one lakh rupees but which may extend to twenty-five lakh rupees.
3. (a) (i) ‘The Cost Auditor should have adequate knowledge of client’s business, its process
and the business environment’ — Making a reference to relevant Cost Audit
Standard, discuss the areas which the new Auditor is required to understand.
(ii) LMN Textiles Ltd. purchased a ring frame at ` 5 crore and high value spares at ` 1
crore, the whole amount being capitalized.
How should high value spares be treated as per CAS 12 when actual replacement
takes place (I) with or (II) without reconditioning? 4+4=8
(b) The Cost Accountant of BEELON TEXTILES MILLS LTD. has arrived at a profit of ` 22,14,000
based on Financial Accounts for the year ended March 31, 2019.
The Profit as per Cost Accounting records showed a different figure.
As a Cost Auditor, you find the following differences between the Financial Accounts
and Cost Accounts:
(i) Profit on sale of Fixed Assets ` 2,00,000
(ii) Profit on sale of Investments ` 35,600
(iii) Voluntary Retirement Compensation included in
Salary & Wages in F/A ` 60,31,200
(iv) Donation paid ` 80,000
(v) Insurance claim relating to previous year received during the year ` 5,08,000
(vi) Profit from retail trading activity ` 32,05,400
(vii) Interest income from Inter-Corporate Deposits ` 6,10,000
(viii) Goodwill written off in F/A ` 4,00,000
(ix) Increase in value of Closing WIP and Finished goods inventory
as per Financial Accounts ` 360,55,000
as per Cost Accounts ` 390,15,000
You are required to prepare a Reconciliation Statement between Cost and Financial
Accounts and arrive at Profit as per Cost Accounts for the year ended March 31, 2019.
8
Answer:
3.(a)(i)
As per Cost Audit Standard 104 on Knowledge of Business, its Processes and the Business
Environment, the Cost Auditor should obtain an understanding of the following of the client‟s
business which is sufficient to identify and understand the events, transactions and practices
that, in the cost auditor‟s judgment may have a significant effect on the examination of cost
statements or on the preparation of the cost audit report:
• Business processes, major inputs
• Joint & By-Products and Wastages and major outputs etc.
• The entity‟s ownership and governance structure.
• Relevant industry, regulatory, and other external factors including the applicable cost and
financial reporting framework.
• The entity‟s selection and application of cost accounting policies.
• The measurement and review of the entity‟s performance.
• The Entity‟s Internal Control
• The entity‟s risk assessment process
• Cost Information System/ Management Information System
• IT (Information Technology) Environment and Control
• Identify and assess the risks of material misstatement at the cost statement level; and at the
assertion level
• Documentation: The auditor shall document key elements of the understanding obtained
regarding each of the aspects of the entity and its environment specified in paragraph 5.1
& 5.2 of the Standard.
3.(a)(ii)
As per CAS-12 on Repairs and Maintenance Cost, high value Spare, when replaced by a new
spare and reconditioned, should be recognized as property, plant and equipment when they
meet the definition of property, plant and equipment and depreciated accordingly.
Otherwise, such items are to be classified as inventory and recognized in cost as and when
they are consumed.
In the present case, the spares if capitalized, should be depreciated over the years. When
used as replacement, the depreciated value plus conditioning cost, if any, will be treated as
Repair & Maintenance cost, the equivalent value reduced from asset. For example, the spares
of initial value of `1 crore having life or 10 years would have depreciated value of ` 50 lakh.
When it is used as replacement, the said ` 50 lakh will be treated as Repairs and Maintenance
Cost.
3.(b)
STATEMENTSHOWINGTHERECONCILIATIONOFPROFITBETWEENCOSTAND
FINANCIALACCOUNTSANDPROFITASPERCOSTACCOUNTSFORTHEYEARENDEDMARCH31,2019
` `
Profit as per Financial Accounts: 22,14,000
Add: Voluntary Retirement compensation included in salary 60,31,200

and wages in F/A - Not included in cost A/c
Add: Donation paid 80,000
Add: Goodwill written off in F/A- not considered in Cost 4,00,000 65,11,200
Account
87,25,200
Less: Profit on Sale of Fixed Assets-Not considered in cost A/c 2,00,000
Less: Profit on sale of investment- not considered in cost A/c 35,600
Less: Receipts of insurance claim related to previous year-Not 5,08,000

considered in cost A/c
Less: Profit from Retail trading activity- not considered in Cost 32,05,400
A/c
Less: Interest Income from Inter-Corporate deposit- Not 6,10,000 (45,59,000)

considered in Cost A/c
41,66,200
Add: Difference in valuation of stock:
Increase in inventories as per Cost Accounts 390,15,000
Increase in inventories as per Financial Accounts (360,55,000) 29,60,000
ProfitasperCostAccounts 71,26,200
4. (a) ‘The need for Productivity/Efficiency Audit has arisen in order to examine
effectiveness of resource utilization’.— Explain Efficiency Audit.
Mention how Efficiency Audit can be carried out. 2+6=8
(b) MNP Ltd. appoints you as Management Auditor to check internal system in the area
of data processing. List out the areas covered by such study. 8
Answer:
4.(a)
The Efficiency audit is basically an analysis of the productivity of the resources deployed by
any organization. It is generally done to generate information about the status of productivity
in the organization for the purpose of determining the scale of efficiency and effectiveness of
„resource utilization‟. The term „resources‟ here would include not only “money” but also
“men”, “machines”, “materials” and “methods”. In other words, the objectives of productivity
audit is (a) to attain optimum result, and (b) to improve on the benchmarks. Efficiency audit
would generally comprise -
a. comparison of expected returns on utilization of the resources vis-a-vis the actual returns;
b. comparison of optimum returns on utilization of the resources vis-a-vis the actual returns;
c. the steps taken to improve benchmarks of returns and the utilization.
The efficiency audit is actually “productivity of every resource employed”. The tools used for
such audit are -
a. (i) Ratio analysis - Return on capital employed - Return on sales - Turnover ratios of fixed
assets, current assets, inventories, category-wise debtors etc. (ii) Capacity utilization of
plant, machinery and equipment against available capacity.
b. Productivity analysis of man (labor) hours in time and cost.
c. Material consumption against norms and benchmarks.
4.(b)
The study on data processing need emphasize economy, secrecy and prompt reporting. The
questions which be put before the Management relating to present vis a vis an efficient system
are summarized below:
a. What are the level of data processing and e-governance in the organization?
Has the right balance between such methods being achieved over all?
b. Are the job done by people within or is outsourced?
c. Are computer systems used where appropriate, compatible with the software installed.
d. Is the computer installation appropriate in size, workload and staffing?
e. What control is exercised on input to an output from the computer installation, and if by a
control system is this sufficiently independent?
f. What are the hierarchies who have access to the computer installations?
g. How is the amendment/upgradation of such program controlled?
h. Does the systems testing cover operating systems, files management, operation
messages, data management, job control routines and fault detection?
i. Are cloud computing and other sharing of platform are arranged?
j. If so, is the cost justified by the extent of the utilization of the main computer on other data
processing?
k. Is there full documentation of all programs and systems with adequate back up?
I. Is the system security protected by efficient and renowned agencies?
5. (a) (i) The Audit Committee of STR Ltd. has outlined you to cover as Internal Auditor in the
area of asset safeguarding of the Company. How you would proceed?
(ii) State whether a private company is liable to appoint Internal Auditor. Will the
answer differ if the share capital of the company was more than ` 1 crore? 6+2=8
(b) Briefly discuss the Internal Audit program of Non-Government Organization. 8
Answer:
5.(a)(i)
For effectiveness of internal control, the scope of Internal Auditor‟s work is outlined by the Audit
Committee of the Board of Directors. Apart from any direction in general or in case there is no
Audit Committee, the scope of Internal Auditor‟s work must make a review of:
• Internal control system and procedures- if there is no Audit Manual, design the same.
• System regarding custodianship and safeguarding of assets Fixed and Current;
• Compliance with various policies, plan and procedure by the different productive and
service units, at different hierarchies of Management,
• System of collection of data- both monetary and non-monetary, to ensure that the
information given to management is relevant and reliable.
For safeguarding of Assets, a study on asset protection measure be taken to prevent the assets
from theft, burglary, fire, electric and other hazards. This includes obsolete and non-performing
assets which should be removed or replaced. For immovable property, steps be taken to
prevent encroachment or illegal occupation. Proper insurance of the assets be made and the
insurance Matters should cover:
• Examination of Policy Coverages-whether all types of Assets are covered.
• Examination of Adequacy of Policy Coverages; -whether the value covered covers its
costs.
• Insurance Claims & Realization of Insurance Claims;
• Scrutiny of Records pertaining to Insurance Claims;
• Review of Status of outstanding claims.
• Whether guideline issued by the Insurance Authority is followed so that the claim is not
nullified due to lapses on the part of the Company.
5.(a)(ii)
As per sec. 138 of the Companies Act, 2013 read with Rule 13 of Companies (Audit and
Auditors) Rules, 2014, every private company shall be required to appoint Internal Auditor or a
firm of Internal Auditor having
(i) Turnover of two hundred crore of rupees or more during the preceding financial year;
(ii) Outstanding loans or borrowings from Banks or Financial Institutions exceeding one
hundred crore rupees or more at any point of time during the preceding financial year.
The applicability of appointment of Internal Auditor by a private company is not dependent

on the criteria of equity capital.
5.(b)
While planning the audit of a Non-Governmental Organization (NGO), the auditor may
concentrate on the following;
i. Knowledge of the NGO‟s objective, its mission and vision, areas of operations and
environment in which it operates.
ii. Reviewing the legal form of the organization and its Memorandum and Articles of
Association, rules and Regulations.
iii. Reviewing the NGO‟s Organization chart, Financial and Administrative Manuals, Project
and Program Guidelines, Funding Agencies Requirements and Formats.
iv. Examination of minutes of the Board/Managing Committee/Governing

Body/Management and Committees thereof to ascertain the impact of any decisions on
the financial records.
v. Study the accounting system, procedures, internal controls and verify their applicability.
The audit program should include in a sequential order all assets, liabilities, income and
expenditure ensuring that no material is omitted, details vouched and/ or checked particularly
in the following heads:
(i) Corpus fund
(ii) Reserves
(iii) Ear-marked Funds
(iv) Project/Agency Balances
(v) Loans
(vi) Investments
(vii) Cash in Hand
(viil) Bank Balance
6. (a) The following is the abridged comparative Balance Sheets of PRAVISH LTD, a consumer
products manufacturing company for two years as on March 31, 2019 and 2018:
(Amount in ` Lakh)
2019 2018
Equity & Liabilities
Shareholders’ Fund:
Equity Share Capital 3,500 2,000

Reserves and Surplus 3,800 3,000
Non-Current Liabilities:
Term Loans 3,000 1,500

Debentures 1,500 1,500
Other Long-term Loans 1,200 1,500
Current Liabilities 2,600 1,200

Short-term Provisions 860 652
Total 16,460 11,352
Assets
Non-Current Assets:
Fixed Assets:
Tangible Assets 4,000 3,800

Intangible Assets — —
Capital Work-in-Progress 1,700 —
Non - Current Investments:
Investment in subsidiaries 800 400

Current Assets:
Inventories 3,930 2,090

Trade Receivables 4,810 3,258
Cash and Cash equivalents 600 404
Short-term Loans and Advances 620 1,400
Total 16,460 11,352
(` in Lakh)
Profit before Tax (PBT) 1,300 1,150
You are required to compute the following as stipulated in PART-D, PARA-4 to the
Annexure of Cost Audit Report under the Companies (Cost Records and Audit) Rules,
2014 for the year ended March 31, 2019:
(ii) Net Worth
(iii) PBT to Capital Employed
(iv) PBT to Net Worth
(v) Debt-Equity Ratio
(vi) Current Assets to Current Liabilities 8
(b) The bio-gas produced from wash of alcohol in KLM Industrial Alcohol Ltd. is used as a
supplement with fuel oil in generating steam. The steam is used in steam turbine for
production of power and the exhaust of steam turbine is recycled for manufacture of
alcohol. In process, the fall in enthalpy (heat content) value of the steam is 10%. The
following details are extracted from the Cost Accounting records of the Company for
the year ended March 31, 2019:
Boiler (`) Turbine (`)
Cost of Water 6,80,000
Fuel Oil 6,00,00,000
Bio-gas plant expenses 1,68,00,000
Stores and Chemicals 1,80,000
Salaries and Wages 20,00,000 4,80,000

Repairs and Maintenance 44,00,000 1,80,000
Depreciation 12,00,000 4,40,000
Other expenses 26,00,000 80,000
High pressure steam Generated (MT) 24,000
Power Generated (KWH) 18,00,000
Required:
Prepare two Cost Sheets for steam and power as per CAS-8 on cost of utilities for the
yearended March 31, 2019. 8
Answer:
6.(a)
PRAVISHLTD.
(Amount in ` Lakh)

(i) CAPITAL EMPLOYED:
Total Assets 16460 11352

Less: Investment in Subsidiaries 800 400
Less: Current Liabilities 3460 1852
Less: Capital work in progress 1700 -
10500 9100
Average capital employed for the year 9800

ended March 31 (10500+9100)/2
(ii) NET WORTH:

Share Capital 3500
Reserves and surplus 3800
7300
(iii) PBT to Capital Employed (1300/9800) 13.27%
(iv) PBT to Net Worth 1300/7300 17.81%
(v) Debt- Equity Ratio 5700/7300 0.78:1
(vi) Current Assets to Current Liabilities 9960/3460 2.88 2.88:1
Working Notes:
(` In lakh)
(i) Debt: `
Term loans 3000 (iii) CurrentLiabilities:
Debentures 1500 Current Liabilities 2600
Other long Term Loan 1200 Short Term Provisions 860
5700 3460
(ii) Current Assets:
Inventories 3930
Trade Receivables 4810
Cash and cash equivalents 600
Short term loans & advance 620
9960
6. (b)
Cost Sheet of Steam

For the year ended March 31, 2019
Generation : 24,000 MT (` 000) Unit cost/MT `
Cost of water 680 28.33
Fuel Oil 60,000 2,500.00
Biogas plant expenses 16,800 700.00
Stores, chemicals 180 7.50
Salaries, wages 2,000 83.33
Repairs, maintenance 4,400 183.33
Depreciation 1,200 50.00
Other expenses 2,600 108.33
Total 87,860 3,660.83
Cost Sheet of Power (generated) from Steam turbine
For the year ended March 31, 2019
Generation : 18,00,000 KwH (` 000) Unit cost/KwH `
Cost of Steam 87,860 48.81
Salaries, wages 480 0.27
Repairs, Maintenance 180 0.10
Other expenses 80 0.04
Total 89,040 49.47
Less: credit for exhaust steam 90% 80,136 44.52
Cost of power used in manufacture 8,904 4.95
7. (a) The following parameters are extracted from the Cost Accounting records of
MAHAWISH LTD., a multiproduct manufacturing Company:
(Amount in ` Million)
Net sales 3,600 2,880
Other Income 225 150
Increase in value of stock of Finished Goods 15 7
Raw materials consumed 1,320 1,080
Direct Wages, Salaries, Bonus, Gratuity etc. 330 264
Power and Fuel 180 144
Stores and Spares 120 105
Local Taxes 90 75
Other manufacturing Overheads 322 278
Administrative Overheads:
Audit fees 27 22
Salaries and Commission to Directors 36 30
Selling and Distribution Overheads:
Salaries and Wages 27 23
Packing and Forwarding 15 12
Total Depreciation 90 90
Interest Charges:
On Working Capital Loans from Bank 45 37
On Fixed Loans from SBI 68 53
On Debentures 22 22
Provision for Taxes 237 150
Proposed Dividends 315 172
You are required to calculate the following as stipulated PART-D, PARA-3 of the
Annexure to Cost Audit Report under the Companies (Cost Records and Audit) Rules,
2014 for the year ended March 31, 2019 and March 31, 2018:
(i) Value Addition
(ii) Earnings available for Distribution
(iii) Distribution of Earnings to the different claimants. 10
(b) During the period 16.08.2018 to 29.08.2018 (two weekly off in between), the
manufacturing unit of CDE Ltd. had to be closed down due to a widespread agitation
on job reservation by a community of the State. The workmen demanded full wages
but it was negotiated to (i) they will work on weekly off on three chosen weeks without
overtime and (ii) the rest will be with no wages for direct workers and adjusted against
eligible leave for staff and indirect employees. The normal working of the unit is on all
days except 52 weekly off and 11 statutory Holidays. The details of the expenses
incurred for the year ended March 31, 2019 are as follows:
(Amount in ` Lakh)
Indirect/Fixed Cost Whole Year
Indirect Wages and Salaries 675
Power, Boiler, Security partly used during closure 10
Depreciation 355
Total: 1,578
Required:
Calculate the abnormal cost for exclusion from the Product cost. 6
Answer:
7. (a)
MAHAWISHLTD.
CALCULATIONOFVALUEADDITION
(Amount in ` Million)
Year ended March 31, 2019 2018
VALUE ADDITION:
Net Sales 3600 2880
Add: Export Incentives - -
Add/Less: Adjustment in Finished stocks 15 7
3615 2887
Less: Cost of bought out input:
(i) Cost of Raw materials consumed 1320 1080
(ii) Consumption of stores and spares 120 105
(iii) Power & Fuel 180 144
(iv) Other overheads 792 664

(322+27+195+15+188+45)= 792
(278+22+165+12+150+37)= 664
Total cost bought out input 2412 1993
(i)VALUEADDED 1203 894
Add: Other Income 225 150
Add: Extra Ordinary Income 0.00 0.00
(ii)EarningsAvailablefordistribution 1428 1044
(iii)Distributionofearningsto:
(1) Employees as salaries and wages, bonus,gratuity etc. 357 287
Directors- Salaries and Commission 36 30
(2) Shareholders as dividend 315 172
(3) Company as retained funds (includingdepreciation) 303 255
(4) Government as taxes
Local Taxes: 90 75
Income Taxes 237327 150225
(5) Providers of Capital/Fund as Interest:
Interest on debentures 22 22
Interest on Fixed loans from SBI 6890 5375
Totaldistributionofearnings 1428 1044
7. (b)
Abnormal cost due to closure abnormally is not included in the cost production. In the given
case, CDE Ltd has normal working of (365-52-11=) 302 days. The abnormal stoppage consisted
of (16/8/18- 29/8/18 = 14-2 =) 12 working days less 3 compensatory working days i.e. 9 working
days. The percentage of abnormal loss comes to (9/302 =) 3% approximately.
Amounts ` Lakh
Whole Year Closed period
Indirect Wages & Salaries 675 20
Power etc. used during closure excluded 10
Depreciation 355 11
Other Fixed Expenses 538 16
Total Abnormal Cost during closure 57
8. Answer any four out of the following five questions: 4x4=16
(a) Explain ‘Professional Judgment’ and ‘Professional Skepticism’ as per Cost Audit
Standard 103.
(b) Draw an Internal Audit program on Wage Audit.
(c) What are the Functions of Management Audit?
(d) A company bought a new technology for its auto component unit for two products A
and B. The condition was to pay a lump of `10,00,000 (equally distributable for both
products having a service life of 5 years) and Royalty of `3 per unit produced. The
vendor’s technicians were to be paid travelling expenses for maintenance. The
company incurs cost for software services and interest for borrowing of `1,20,000.
The following information is extracted from the Books of the Company for the year
Unit produced (Qty.) 30000 25000
Royalty paid on production (`) 3/unit 3/unit
Travelling charges (`) 10,000 10,000
Software services charges (`) 24,000 20,000
Hire charges for special equipment (`) 8,000 —
Interest on Bank borrowing (`) 60,000 60,000
You are required to compute the Direct Expenses — keeping in view of CAS - 10.
(e) NAVITA LTD., a Manufacturing company provides the following extracts of raw
materials from its records for the year ended March 31, 2019:
Opening stock of raw materials (6000 units) 2,16,000
Purchase of raw materials (21000 units) 8,40,000
Closing stock of raw materials (4000 units) —
Freight Inwards 1,02,000
Self-manufactured Packing material for purchased raw materials 70,000
Demurrage charges levied by transporter for delay collection 14,000
Normal loss due to shrinkage 2% of materials —
Abnormal loss due to absorption of moisture before receipt of —

materials — (150 units)
You are required to calculate the value of Closing Stock of raw materials using
Average Cost Method.
Answer:
(a)
Cost Auditing Standard 103 defines „Professional Judgment‟ as the application of relevant
training, knowledge and experience, within the context provided by cost accounting
standards and ethical requirements in making informed decisions about the courses of action
that are appropriate in the circumstances of the audit engagement. The cost auditor shall
have an understanding of the entire text of the Cost Auditing Standard, including its
application and other explanatory material, to understand its objectives and to apply its
requirements properly. In exceptional circumstances, the cost auditor may apply for
Professional Judgment, if necessary, to depart from a relevant requirement in a Cost Auditing
Standard.
As per Cost Auditing Standard 103, the term „Professional Skepticism‟ is an attitude that
includes a questioning mind, being alert to conditions which may indicate possible
misstatements due to error or fraud, and a critical assessment of audit evidence. An attitude of
professional skepticism is necessary throughout the cost audit process for the auditor to reduce
the risk of overlooking unusual circumstances, of over generalizing when drawing conclusions
from cost audit observations, and of using faulty assumptions in determining the nature, timing
and extent of the cost audit procedures and evaluating the results thereof. When making
inquiries and performing other cost audit procedures, the cost auditor should not be satisfied
with less-than-persuasive audit evidence based on a belief that management and those
charged with governance are honest and have integrity.
(b)
An audit program is a detailed plan of the auditing work to be performed, specifying the
procedures to be followed in verification of each item and the financial statements and the
estimated time required. To be more comprehensive, an audit program is written plan
containing exact details with regard to the conduct of a particular audit. It is a description or
memorandum of the work to be done during an audit.
In Wage Audit program, the first step is to define a checklist of records that need to be
verified. The Internal Audit program on Wage Audit should mainly focus on verification of
Wage Audit Staff allotted Time taken
Attendance records
Job card records, engagement letter
Wage agreements, pay scale, increment orders
PF, ESI and Leave records
Overtime, Incentive, Production Bonus calculations
A comparison of total wage bill for previous period
Vouching of sample calculations.
The work may be allocated to audit assistant on suitable basis. The Auditor may devise a
mechanism to record the progress of work done, modify the program where necessary.
Alternative answer:
An audit programme is laying down the path in its required details before conducting such
audit. it is a detailed plan of the auditing work to be performed, specifying the procedures to
be followed in verification of each item and the financial statements and the estimated time
required. To be more comprehensive, an audit programme is written plan containing exact
details with regard to the conduct of a particular audit. It is a description or memorandum of
the work to be done during an audit.
In Wage Audit Programme, the first step is to define a checklist of records that need to be
verified. The Internal Audit programme on Wage Audit should mainly focus on verification of:
 Payroll package is properly updated with employee„s details and it is properly
functioning.
 Take out the list of employees for the purpose of verification that no entry is bogus i.e.,
Ghost Worker.
 Ensure that all wage payments are made through banks.
 Where payment is made in cash, whether it is done in presence of responsible officer.
 Cross verify wage with some employees, so that there will be assurance with system.
 Checking of Daily Attendance Sheet, Absenteeism Statement, Manpower Planning

and Deployment.
 Checking of Employee Signature at the time of payment in case of cash payment

and Attendance Register.
 Checking of Appointment/Retirement records of Employees.
The work may be allocated to audit assistants on suitable basis. The Auditor may devise a
mechanism to record the progress of work done, modify the programme where necessary.
(c)
FUNCTIONSOFTHEMANAGEMENTAUDIT:
The functions of Management Audit extend to audit of the effective functioning of every area
of operations coming under the management purview from the stage of its planning to proper
implementation and execution. Every manufacturing or service organisation could broadly be
identified into the following functional areas:
(i) Marketing, including selling and distribution
(ii) Manufacturing/servicing, including maintenance of supply chain, machinery and

equipment etc.
(iii) Human resource management from selection to recruitment, training, motivating,

retaining, advancement, etc.
(iv) Personnel policies and industrial relations
(v) Finance including maintenance of accounts and providing accounting information to

guide the management of its performance and position.
(vi) Research and Development including application research and basic research, if any.
An understanding of the objectives of each functional area at every level of the organisation
and effectively achieving such objectives shall be the prime responsibility of management.
Checking of such effective achievement is the function of management audit.
(d)
Computation of Direct Expenses (as per CAS-10) (Amount in `)
Product A Product B
Amortized cost for Technical knowhow 1,00,000 1,00,000
Royalty paid on Units Produced 90,000 75,000
Hire charges of equipment used in A 8,000 —
Travelling Expenses 10,000 10,000
Software services 24,000 20,000
Direct Expenses 2,32,000 2,05,000
N.B. Interest on bank borrowing shall not form part of Direct Expenses.
(e)
ComputationofValueofClosingStockofRawMaterials(AverageCostMethod)
Particulars Qty(Units) Amount(`)
Opening stock of Raw Materials 6000 2,16,000
Add Purchase of raw materials 21000 8,40,000
Add Freight inwards 1,02,000
Add Demurrage charges levied by transporter for delay in 14,000

collection
11,72,000
Less Abnormal loss of raw materials (due to absorption of (150) (6,829)

moisture before receipt of materials
=[840000+102000+14000)x150]/21000
Less Normal loss of materials due to shrinkage during transit (420) 0.00
[2% of 21000 units]
Add Costofself-manufactured packing materials for 70,000

purchased raw materials only
Cost of Raw Materials 26430 12,35,171
Less Value of closing stock (1235171)/(6000+21000-420)]x4000 4000 1,85,880
Cost of Raw Materials Consumed 22430 10,49,291
MTP_Final_Syllabus-2016_December2018_Set -1
1. Choose the correct option among four alternative answer. (1 mark for correct choice, 1 mark
for justification.) [10*2=20 marks]
(i) In Cost Audit Report, auditor’s observations and suggestions are given in:
(A) Part A of the Annexure to Cost Audit Report
(B) Part B of the Annexure to Cost Audit Report
(C) Part C of the Annexure to Cost Audit Report
(D) Form of the Cost Audit Report.
(ii) Company has to upload Cost Audit Report electronically to the MCA through
(A) Form CRA -1
(B) Form CRA-2
(C) Form CRA-3
(D)Form CRA-4
(iii) Financial Position and Ratio Analysis information in Annexure to Cost Audit Report to be
provided for:
(A) Current Year and Previous Year
(B) Current Year and Previous 2 Years
(C) Current Year and Previous 3 years
(D) Current year only.
(iv) CAS 13 deals with:

(A) Pollution Control cost
(B) Cost of Service Cost centre
(C)Cost of Utilities
(D)Direct Expenses.
(v) CAS 5 deals with

(A) Cost of production for captive consumption
(B) Production and Operation Overheads
(C)Average (Equalised Cost of Transportation)
(D) Pollution Control Cost.
(vi) The following is not professional misconduct as per The Second Schedule Part I of the Cost
and Works Accountants Act, 1959
(A) expresses his opinion on cost or pricing statements of any business or enterprise in
which he, his firm or a partner in his firm has a substantial interest;
(B) fails to report a material mis-statement known to him to appear in a cost or pricing
statement with which he is concerned in a professional capacity;
(C) contravenes any of the provisions of this Act or the regulations made there-under or
any guidelines issued by the Council;
(D) does not exercise due diligence, or is grossly negligent in the conduct of his
professional duties;
(vii)XBRL technical term for a table

(A) Hypercube
(B) Imputed Value
(C)Fact
(D)Item.
(viii)Internal Auditing is:

(A)One time activity
(B)Two Time activity
(C)Bi-annual activity
(D) Continuous process.
(ix) T.G Rose developed the concept of:

(A)Cost Audit
(B)Internal Audit
(C)Management Audit
(D)Financial Audit
(x) Audit Working Papers are property of:

(A)Government
(B)Company
(C)Auditor
(D)Public
Answer:
1. (i)- (D) Form of the Cost Audit Report.

This is pursuant to Rule 6(4) of the Companies (Cost Records and Audit) Rules, 2014
(ii)- (D) Form CRA-4

(iii)- (A) Current Year and Previous Year

(iv)- (B) Cost of Service Cost centre

This standard deals with the principles and methods of classification,
measurement and assignment of Cost of Service Cost Centre, for determination of
the Cost of product or service, and the presentation and disclosure in cost
statements.
(v)- (C) Average (Equalised Cost of Transportation)

The objective of the standard is to bring uniformity in the application of principles
and methods used in the determination of averaged/ equalized transportation
cost.
(vi)- (C) Contravenes any of the provisions of this Act or the regulations made there-under
or any guidelines issued by the Council;
This is a professional misconduct as per The Second Schedule Part II of the Cost
and Works Accountants Act, 1959 which deals with professional misconduct in
relation to members of the Institute generally.
(vii)- (A) Hypercube

This is as per XBRL glossary of terms. Several technical terms are used, that have
specific meanings, in the context of using XBRL.
(viii)- (D) Continuous process.

It is a continuous and systematic process of examining and reporting the
operations and records of a concern.
(ix)- (C) Management Audit

T.G Rose developed the concept of Management Audit as a logical system of
evaluating the quality of Management.
(x)- (C) Auditor

Audit working papers are the documents which record all audit evidence
obtained during audit. Such documents are used to support the audit work done
in order to provide assurance that the audit was performed in accordance with
the relevant Cost Auditing Standards. (Cost Auditing Standard 102 on Cost Audit
documentation)
2. (a) (i) A company is engaged in manufacturing products on its own as well as purchase the
same products from other companies. The outsourced products are treated as trading
activity in the financial accounts. Same products are also manufactured by supply of
materials to converters. What would be treatment of such products for the purposes of
maintenance of cost accounting records and cost audit?
(ii) In the abridged cost statement, what are Industry specific operating expenses? When
should this be used?
(b) Explain whether the following amounts to professional misconduct by a CMA:

(i) P, a practicing CMA Q is a practicing Advocate representing matters in courts of law.
and Q agree to help each other in matters involving their professional expertise.
Accordingly P recommends Q in all tax litigations in courts of law. Q consults P on all
matters relating to costing and related matters, which come to him for arguing in
various courts of law. They agree to ‘share’ the remuneration.
(ii) R, a CMA, certifies a financial forecast of his client which was forwarded to the
client’s bank based on which the bank sanctioned a loan to the client. [8+8]
Answer:
2. (a) (i) Products manufactured by the company as well as conversion activity through third
parties will be covered under the Companies (Cost Records and Audit) Rules 2014
and the company would be required to maintain cost accounting records and get
cost audit conducted subject to threshold limits. The finished products bought from
outside parties (treated as Trading Activity in Financial Accounts) would be reflected
as “Cost of Finished Goods Purchased” in Abridged Cost Statement.
(ii) Industry Specific operating expenses are those which are peculiar to a particular
industry such as Telecommunication Industry which shows expenses such as Network
Operating cost, License fee, Radio Spectrum charges, Microwave charges etc. which
are peculiar to this Industry and should be disclosed separately in the cost statement.
The Industry Specific operating expenses will vary from industry to industry depending
upon the nature of operations. The industry specific operating expenses shall have to
be identified and reported upon in the abridged cost statement.
(b) (i) A CMA in practice shall be deemed to be guilty of professional misconduct if he

either directly or indirectly shares commission or brokerage in the fees or profits of
his professional business to any other than member of the Institute or accepts any
part of the profits of the professional work of a lawyer, broker, etc. who is not a
member of the Institute. Thus, as per Clauses 2 and 3 of Part I of the First Schedule
to the Cost and Works Accountants Act, 1959 a member in practice can neither
share fees or profits with a person who is not a member of the Institute nor he is
permitted to receive and share the fees of other such as lawyers, engineers, etc.
P and Q therefore cannot "share" any remuneration. They may, however,

remunerate each other for "professional" services rendered on any reasonable
basis separately which would be on time basis at rates depending on the extent of
expertise. It is, however, important that care should be taken by the member not
to extend his service beyond the normal sphere of professional practice and any
reports or recommendations should clearly delimit the responsibilities assumed and
services rendered.
(ii) Under Clause (3) of Part I of Second Schedule to the Cost and Works Accountants
Act, 1959, a CMA in practice is deemed to be guilty of professional misconduct if
he permits his name or the name of his firm to be used in connection with an
estimate of cost or earnings contingent upon future transactions in a manner
which may lead to the belief that he vouches for the accuracy of the forecast.
Accuracy does not refer to arithmetical accuracy. All forecasts are estimates
based on certain assumptions duly evaluated on a consideration of various
relevant factors and cannot be ascertained with accuracy. But, first of all, he
should clearly indicate in his report the sources of information, the basis of
forecasts and also the major assumptions made in arriving at the forecasts and,
secondly, he should not vouch for the accuracy of the forecasts. In the instant
case, Mr. R is deemed to be guilty as it appears that he has certified the financial
forecast without taking adequate safeguards.
Under Clause (3) of Part I of Second Schedule to the Cost and Works Accountants
Act, 1959, a CMA in practice is deemed to be guilty of professional misconduct if
he permits his name or the name of his firm to be used in connection with an
estimate of cost or earnings contingent upon future transactions in a manner
which may lead to the belief that he vouches for the accuracy of the forecast.
Accuracy does not refer to arithmetical accuracy. All forecasts are estimates
based on certain assumptions duly evaluated on a consideration of various
relevant factors and cannot be ascertained with accuracy. But, first of all, he
should clearly indicate in his report the sources of information, the basis of
forecasts and also the major assumptions made in arriving at the forecasts and,
secondly, he should not vouch for the accuracy of the forecasts. In the instant
case, Mr. R is deemed to be guilty as it appears that he has certified the financial
forecast without taking adequate safeguards.
3. (a) How would you treat the following as per CAS-11 related to Administrative overheads?
(i) Leased Assets;
(ii) Cost of Administrative Services procured from outside;
(iii) Cost of Software.
(b) The profit as per Financial Accounts of JANARDHAN CEMENT LTD. for the year 2017-18
was `1,54,28,642.
The profit as per Cost Accounting Records for the same period was less.
The following details are collected from the Financial Accounting Schedules and Cost
Accounting records:
Particulars Financial Cost
Accounts(`) Accounts(`)
Valuation of Stock :
Opening: WIP 2562315 2265710
Finished Goods 26547520 29218950
Closing: WIP 4275640 3736346
Finished goods 37259430 43525149
Interest income from inter-corporate deposits 615340

Donations given 485560
Loss on Sale of Fixed Assets 122546
Value of cement taken for own consumption 382960 365426
Cost of power drawn from own Wind Mill
-At EB Tariff 4956325
-At cost 3620370
Non opening income 4536770
Voluntary retirement compensation 1676540
Insurance claim relating to previous year received during 1435620
the year
You are required to prepare a Reconciliation Statement and arrive at the Profit as per Cost
Records. [6+10]
Answer:
3. (a) (i) In case of Leased Assets, if the Lease is an operating lease, the entire rentals shall be
included in the administrative overheads. If the lease is a financial lease, the finance
cost portion shall be segregated and treated as part of finance costs.
(ii) Cost of administrative services procure from outside shall be determined at invoice or
agreed price including duties and taxes, and other expenditure directly attributable
thereto net of discounts (other than cash discount), taxes and duties refundable or to
be credited.
(iii) The Cost of Software (developed in house, purchased, licensed or customized)
including upgradation Cost shall be amortised over its estimated useful life.
(b)
JANARDHAN CEMENT LTD.
Reconciliation of Financial profit and Costing Profit for the year 2017-2018.
Profit as per Financial Accounts 1,54,28,642
Add : Difference in Stock Valuation 33,51,600
Loss on Sale of Fixed Assets 1,22,546
Donation not considered in Cost Accounts Voluntary 4,85,560
retirement compensation not included in cost Accounts
Less : Interest income from inter-corporate deposit 16,76,540
Difference in value of cement taken for own 6,15,340 56,36, 246
Consumption
2,10,64,888
Difference in valuation of windmill power 17,534
Non-operating Income 13,35,955
Insurance claim relating to previous year 45,36,770
Profit as per Cost Accounts 14,35,620 79,41,219
1,31,23,669
Working:
Figure in `
Computation in difference in Valuation of Stock
Financial Accounts Cost Accounts
Opening WIP and FG 2,91,09,835 3,14,84,660
Closing WIP and FG 4,15,35,070 4,72,61,495
1,24,25,235 1,57,76,835
The increase is higher in Cost Accounts and hence Cost Accounts profit would be
more than the financial accounts profit by (`1,57,76,835 - ` 1,24,25,235) i.e. ` 33,51,600.
4. (a) What is meant by ‘Social Responsibility Management’? Briefly list the different types of
Pollution for which a manufacturing Company is responsible.
(b) What do you understand by 'Corporate Image' and 'Branding'? Are they inter-related?
What are the possible approaches to evaluate Corporate Image? [8+8]
Answer:
4. (a) Social responsibility describes the duty of care that corporations, governments, charities
and institutions all have to their stakeholders.
To keep the confidence of customers, employees, shareholders and a growing array of

other organizational stakeholders management need to establish a meaningful
framework embedding responsible decision making into all of activities.
Social responsibility is an ethical or ideological theory that an entity whether it is a

government, corporation, organization or individual has a responsibility to society at large.
This responsibility can be “negative”, meaning there is exemption from blame or liability, or
it can be “positive,” meaning there is a responsibility to act beneficently (proactive
stance).
The term “corporate social responsibility” came into common use in the late 1960s and
early 1970s after many multinational corporations formed the term stakeholder, meaning
those on whom an organization‟s activities have an impact. Development business ethics
is one of the forms of applied ethics that examines ethical principles and moral or ethical
problems that can arise in a business environment. Although the Government have
enacted legislations for prevention of pollution and provision of safety measures, the
company on its own should take measures for community development besides protection
of environment.
The level of pollution varies with the density of population and per capita income and
inversely with the extent of recycling, technology and waste treatment. The different types,
cause and effects of environmental pollution may be as follows:-
(a) Air pollution:

Air pollution is the human introduction into the atmosphere of chemicals, particulates
or biological materials that cause harm or discomfort to humans or other living
organisms or damage the environment. Air pollution is caused by burning coal or
crude oil like naptha in power stations, smoke from factories, exhaust fumes from
automobiles, solvent losses and agricultural chemicals, etc. Air pollution leads to
deaths and respiratory diseases.
(b) Water pollution:

Water pollution is the contamination of water bodies such as lakes, rivers and/or
oceans caused by effluents from breweries and tanneries, coal washeries, chemical
plants, discharge of coolants from nuclear power plants, pesticides and agricultural
chemicals. Water pollution affects public health and safety, causes damage to
property and leads to many economic losses.
(c) Noise pollution:

Noise pollution is a type of energy pollution in which distracting, irritating or damaging
sounds are freely audible and is caused by noise due to running of heavy machines, big
aircrafts, drilling machines, etc. Noise pollution may lead to loss of efficiency at work,
loss of hearing and causes psychological disorders, even insanity.
(d) Smell pollution:

Discharge of industrial products, unclear garbage dumps, open sewers, etc. It affects
physical well being and even causes psychological disorders.
(e) Thermal pollution:

Large inputs of heated water from a single plant or a number of plants using the same
lake or slow- moving stream can have harmful effects on aquatic life. Thermal
pollution is radiation of heat generated by plants in industries. Warmer temperatures
lower dissolved oxygen content and cause aquatic organisms to increase their
respiration rates consume oxygen faster and increases their susceptibility to disease,
parasites, and toxic chemicals. Thermal pollution affects ecological balance and
thereby the inhabitants.
(f) Visual pollution:

Effluents from chemical plants and washeries are discharged into the waterways
causing reduced visibility. Industrial fumes and dust causing loss of landscape
attractiveness and strain to vision of pedestrians and motorists, may cause more road
accidents and traffic deaths.
(g) Climate pollution:

Radiation of heat in highly industrial centres leading to “micro climate zones” causing
deforestation, shortening plants growth and affecting surroundings. It affects ecological
balance and causes damages to plant and surroundings.
(h) Radiation pollution:

Radioactive fallouts, leakage from nuclear reactors and prolonged exposures to
small doses of radiation results in a bio-accumulative process, causes a significant
chronic affect by increasing the rate of genetic mutation.
(i) Soil/land pollution:

Indiscriminate use of fertilizers and pesticides, pollution of soil with man-made
chemicals, indiscriminate disposal of solid use etc. Due to pollution the quality of soil
deteriorates to the extent that they fail to support vegetation. It affects the global
climate also.
(b) Corporate Image:

The term “Image” indicates an idea or procure formed in the mind of a person about an
individual or an institution. Corporations, like individuals, consciously build up images in
the minds of the people with whom they come into contract. In developing a „Corporate
Image‟, an enterprise has to ensure an overall consistency, as regards the quality of the
products, the ethics of its management, employee relations, attitudes towards customers,
quality and service to customers etc. the Public have different perceptions of “Corporate
Image”.
Customers measure it by the product quality, prompt and courteous after sales service,
regularity in maintaining supplies; etc.
Shareholders, measure it by the consistency in financial performance and prospects of
growth.
Supplier measure it by the company‟s liquidity and ability to honour commitments. Banks
and Financial Institutions measure it by the financial health, net worth and history of
servicing debts.
Government looks at it from the point of view of revenue generation and as an honest
tax payer.
Employees look for steady career growth and smooth Industrial Relations.
Corporate Branding:
Corporate branding is the process of creating and maintaining a favourable reputation
of the company and its constituent elements. It is an important organizational resource
that enable to create, strengthen and sustain competitive advantage. It is a strategic
asset that creates competitive advantage and favourable climate for survival and
development of an organization.
The purpose of corporate branding is to:

Make the organization known as unique, distinct and creditable in the mind of potential
customers.
Facilitate the building of relationships and trust.

Portray the benefits of the organization to the customer
Both Corporate Image and Branding are interrelated concepts. The factors which
contribute to build up a “corporate image” also substantially help in building a
“corporate branding”.
Evaluation of Corporate Image

Evaluation of Corporate Image is a very complex process and it involves a critical
examination of events and trends concerning business environment – both internal as well
as external.
The following are the steps to evaluate Corporate Image.
Prepare a list of desirable attributes.
Group them functionally and specify the qualifications
Assign weights to each attribute based on their relative importance.
Involve experts in the respective fields in rating the qualifications and attributes – based
on facts, judgments and interpretations.
Summarise the rating under the selected groups and present a composite evaluation to
the management.
The summary should throw light on what the company has been able to do for itself and
for the public in general.
5. (a) Mr . X, newly appointed CEO of ABC Ltd. engages you as a Management Auditor to give
him a factual report , as to causes of demoralization of his staff .
(b) (i) State which one of the following companies is required to appoint Internal Auditor as
per the Companies Act, 2013, and the Rules made thereunder:
Figures are in ` crore and correspond to the previous year.

Name Nature Equity Turnover Loan from Public
Capital Bank/PFI Deposit
LMN Ltd. LISTED 100 190 50 24
PQR Ltd. UNLISTED PUBLIC 60 190 50 24
XYZ Ltd. UNLISTED PRIVATE 60 190 50 -
(ii) Can the Chief Cost Accounts Officer of the company be given additional charge as
Internal Auditor? [8+8]
Answer:
5. (a) Report on demoralization of Employees:
The investigation reveals that by and large the employees of the organization are
demoralized and dispirited. There is total absence of commitment and initiative on the
part of employees. There is a growing discontentment among the employees. The factors
responsible for grave demoralization amongst the employees are as follows:
i) Insufficient promotion opportunities: There is no system of „Individual career growth

plan‟. Some employees are stagnant and are not getting promotion for long stretch
of time. Such employees are totally frustrated and demoralized. A statement of
employees stagnating for more than 6 years in the same post may be complied and
reason may be looked for.
ii) Preference is given to Direct Recruitment over Internal Promotion. There is no

management succession system and no system of „potential spotting„ amongst
employees. Neither the company is serious about training its Human Resources in their
functional areas. Direct recruitment to senior staff position is resented to by the
employees.
iii) There is considerable imbalance in workload and in overtime opportunities.
iv) There is a system of assignment of personnel to tasks that do not interest/encourage

them.
v) There is no „Employee Participation‟ in management.
vi) The application of management concepts like „job rotation‟ ,„job evaluation‟, „merit
rating‟ are totally absent in the organization.
vii) There is no scientific appraisal system. There is favourism and nepotism by the
management.
viii) Apart from the above, the human aspects of personnel development viz. the
programme of informal education, recreation and culture, community development
etc. to enhance the quality of work life are totally neglected.
ix) There is no transfer policy and employees are transferred at the whims and fancies of
the management.
So it can be concluded that company is pursuing wrong personnel policies and

procedures, leading dissatisfied and demoralized employees.
(b) Every private company having (i) turnover of two hundred crore rupees or more during
the preceding financial year or (ii) outstanding loans or borrowing from banks or public
financial institutions exceeding rupees one hundred crore or more at any pointy of time
during the preceding financial year Shall be required to appoint an Internal Auditor or
Firm of Internal Auditor.
Here,
(1) LMN Ltd. Being listed company has to appoint Internal Auditor in either case.
(2) PQR Ltd. An unlisted company exceeds capital limit of rupees 50 crore though the
minimum turnover, minimum loan and public deposit are not met. The company has
to appoint an Internal Auditor.
(3) XYZ Ltd. An unlisted private company need not appoint Internal Auditor as the limits of
appointment of Internal Auditor are not met.
6. (a) SRIZONI LTD. of Gandhi Nagar producing industrial alcohol generates Bio-gas from the
waste wash of alcohol in its Bio-gas Plant. The said Bio-gas is used as a fuel in generating
steam along with conventional fuel oil. The high pressure steam is first sent to the STEAM
TURBINE and the exhaust steam is used in the process of manufacturing Alcohol.
The following details are extracted from the financial accounts and cost accounting
records of SRIZONI LTD. for the year ended March 31, 2018:
Boiler (`) Steam Turbine (`)

Cost of water 10,48,000 ____
Fuel oil 918,85,000 ____
Bio-gas Plant Expenses 258,02,000 ____
Stores and Chemicals 2,57,000 66,000
Depreciation 17,25,000 6,50,000
Other Expenses 39,95,000 1,21,000
High Pressure Steam generated 34950 MT
Power generated 2550200 KWH
Note: The fall in the enthalpic value of the steam is 10%
Required:
Prepare two separate cost sheets for steam and power as per the Companies (Cost
Records and Audit) Rules 2014 for the year ended March 31, 2018.
(b) The following figures relate to usage of power for a product:
2014 -15 2015-16 2016 -17

Total power consumed to KWH 2402474 2494872 2175677
Rate KWH ` 2.29 2.12 1.90
Total production in million kgs. 337.73 333.084 300.865
Compute necessary productivity measures and compare the efficiency of power

usage during the three years. [8+8]
Answer:
6. (a) (i)
Statement showing Cost of Steam
Quantity produced: 34950 mt

Total amount (`) Cost/Mt (`)
Water 10,48,000 29.98
Fuel oil 9,18,85,000 2629.04
Bio-gas plant expenses 2,58,02,000 738.25
Stores and chemicals 2,57,000 7.35
Salaries and wages 29,58,000 84.64
Repairs and maintenance 65,64,000 187.81
Depreciation 17,25,000 49.36
Other expenses 39,95,000 114.31
13,42,34,000 3840.74
(ii)
Statement showing Cost of Power generated by Steam Turbine
Power Generated: 2550200 KWH
Total amount(`) Cost/Kwh (`)
Steam 13,42,34,000 52.64
Stores and chemicals 66,000 0.02
Salaries and wages 7,33,000 0.29
Repairs and maintenance 2,58,000 0.10
Depreciation 6,50,000 0.25
Other expenses 1,21,000 0.05
13,60,62,000 53.35
Less: Credit for exhaust steam (90%) 12,24,55,800 48.02
Cost of Power used in alcohol manufacture 1,36,06,200 5.33
(b)
2014-15 2015-16 2016-17
Power consumed in Kwh 24,02,474 24,94,872 21,75,677
Rate per Kwh (`) 2.29 2.12 1.90
Total Power cost (`) 55,01,665 52,89,129 41,33,786
Production (in million kgs) 337.730 333.084 300.865
(337730 MT) (333084 MT) (300865 MT)
Power cost/MT (`) 16.29 15.88 13.74
Power usage MT (KWH) 7.11 7.49 7.23
Variances over previous year:

Rate (`) 4,24,128 (F) 4,78,649 (F)
Volume (`) 75,683 (F) 5,11,638 (F)
Usage (`) 2,87,275 (A) 1,65,056 (F)
2,12,536 (F) 11,55,343 (F)
Calculation of variances:
Rate variance:
2014-15 2015-16 2016-17
Total power consumed (Kwh) 24,02,474 24,94,872 21,75,677
Rate per Kwh (`) 2.29 2.12 1.90
Rate variance 24,94,872×(2.29-2.12) 21,75,677×(2.12-1.90)
= `4,24,128 (F) = `4,78,649 (F)
Production in Million Kgs 337.730 333.084 300.865
Volume variance:
2016-17 & 2015-16 (333084 – 300865) × 15.88 = `5,11,638 (F)
2015-16 & 2014-15 (337730 – 333084) × 16.29 = `75,683 (F)
Usage variance:
2016-17 & 2015-16 11,55,343 – 4,78,649 – 5,11,638 = `1,65,056 (F)
2015-16 & 2014-15 2,12,536 – 4,24,128 – 75,683 = `2,87,275 (A)
Total variance:
2016-17& 2015-16 52,89,129 – 41,33,786 = `11,55,343 (F)
2015-16 & 2014-15 55,01,665 – 52,89,129 = `2,12,536 (F)
7. (a) ABC Ltd. has received an enquiry for supply of 2,50,000 numbers of special type of auto
components. The Company can execute the assignment provided a capital investment
of ` 3,00,000 and working capital to the extent of 3 months’ cost of sales are made
available. The costs estimated are as follows:

Labour Rate - ` 4.50 per hour
Factory Overheads - ` 4 per direct labour hour
Selling and Distribution expenses - ` 30,000
Borrowed funds will be available @11.5% on additional capital outlay. The Company
statement, indicating the price which should be quoted to the customer.
(b) The following is a summary of the Profit and Loss Account of M/s. Straw Berry Company
Limited for the year ended 31.03.2018 (` in lakh):
Sales 13,540
Cost of Sales: Raw Materials, Stores, Spares 5,600
Excise Duty 830
Salaries, Wages 1,400
Power and Fuel 470
Repairs: Major Breakdown 35
Regular Maintenance 94
Insurance 56
Rent, Rates and Taxes 97
Printing, Stationery, etc. 437
Travelling 776
Other Administrative expenses 426
Depreciation 391
Interest 1,494
Total expenses 13,146
Profit 394
There was a major breakdown of machinery, resulting in loss of production for 42 days in
June and July, 2017 and there was a labour strike of 97 days from 14.02.2018 to
21.05.2018. The company produced a single product (Steel-Billet) and the production
during the year was 9,42,000 kgs. You are required to compute the amount of abnormal
cost on account of the breakdown and strike and the impact on cost per unit of output.
Where, do these figures find a place in the Cost Audit Report? [8+8]
Answer:
7. (a)
Special type Auto Components: 2,50,000 Nos. (`) in’000 (`) in ’000
Materials (250,000 @ ` 3.25) 812,500
Labour 8000 Hrs @ ` 4.50 36,000
Prime Costs 848,500
Interest @11.5% on 300000 +0.25 × 910,500) 60,677
Total Cost 9,71,177
Profit 323,726
Sales 12,94,903

Sales = Total Cost × (1.00-0.25%)=971177/0.75 = ` 12,94,903
Profit = Sales - Cost = 1294903- 971177 = ` 323726
Quote Per Unit = 12,94,903 /250000 = ` 5.18
(b) Loss of working days due to abnormal situation are:

Breakdown 42 days -Salary Paid
Strike 46 Days (up to 31stMarch, 2018) - No Salary Paid
Total 88 Days
` in Lakh
Income 13,450
Variable Exp : Raw Materials stores 5,600
Excise Duty 830
Power Fuel 470 6,900
Margin 6,640
Fixed Cost (13,146 -6900) 6,246
Salaries amounting to ` 1,400 Lakh is for (365-46) = 319 Days
Abnormal cost comes to
Fixed Cost on PRODUCTION Total (`) Abnormal (`) Normal (`)
Breakdown Repairs 35 35 00
Salaries Wages (in the ratio 42:319) 1400 184 1216
Interest 1494 00 00
Selling Distribution Cost 1040 00 00
Production Fixed Cost (Balance 2277 549 1728
figure in the ratio 88:365)
Total 6246 768 2944
Production Cost Per Kg :(942000 Kg) Variable = Fixed Cost = Abnormal Cost=
6900/9.42 = `732.48 2944/9.42 = `312.52 768/9.42 =`81.52
Note :
1. Interest, Selling charges are not included in the Cost of Production.
2. Abnormal Cost is excluded from Cost of Sales and charged to Profit & Loss Account
3. In the Cost Accounting Policy declared in Annexure to Cost Audit Report „A‟, the
treatment of abnormal or non-recurring cost has to be declared
4. The analysis of value addition and distribution of Earnings show extra ordinary
expenses as post Value Addition.
8. Answer any 4 questions [4×4=16 marks]
(a) How would you treat the following as per CAS-9 related to Packing Material Cost?
(i) Primary and Secondary packing material cost.
(ii) Self manufactured packing material.
(b) Audit of Commercial Accounts with respect to Government.
(c) Objectives of Operational Audit
(d) The following are the process wise wastages on inputs in the year
Process %age of wastage on input
Blow Room 9.18
Carding 7.17
Drawing 1.1
Roving (Simplex) 0.3
Ring Frame (Shinning) Reeling 7.21
and Winding 1.5
Calculate waste multiplier.
(e) ABC Stores is a departmental store, selling goods on retail basis. It makes a gross profit of
20% on net sales. The following figures for the year-end are available: Opening Stock
`62,000, Purchases `4,46,000, Purchase Returns `12,500, Freight Inwards `15,000, Gross
Sales `5,60,000, Sales Returns `14,000 and Carriage Outwards `8,000. Calculate the
estimated cost of the Inventory on the closing date.
Answer:
10. (a) (i) As per CAS-9, the cost of primary materials shall form part of the cost of production.
Cost of secondary packing materials shall form part of distribution overheads.
(ii) Self manufactured packing materials shall be valued including direct material cost,
direct employee cost, direct expenses, job charges, factory overheads including
share of administrative overheads comprising factory management and
administrative and share of research and development cost incurred for
development and improvement of existing process or product.
(b) The government also engages in commercial activities and for the purpose it may
incorporate following types of entities:
(i) Departmental enterprises engaged in commercial and trading operations, which are
governed by the same regulations as other Government departments such as
defense factories, mints, etc.
(ii) Statutory corporations created by specific statues such as LIC, Air India, etc.
(iii) Government companies, set up under the Companies Act, 2013. All aforesaid entities
are required to maintain accounts on commercial basis. The audit of departmental
entities is done in the same manner as any Government department, where
commercial accounts are kept. Audit of statutory corporations depends on the
nature of the statute governing the corporation. In respect of government
companies, the relevant provisions of Companies Act, 2013 are applicable.
(c) Objectives of Operational Audit :

The scope and quality of operational auditing is predominantly dependent upon
management attitudes. An open minded management with broad vision, can
appreciate the need of operational auditing and to give it the necessary freedom and
sanction to perform what it is capable of performing. Also, the qualities and the sense of
perspectives of the operational auditor can mould operational audit in the right shape.
Therefore, there is a possibility of operational auditing having different objectives to
fulfill in different considerations. Generally, operational audit objectives include :
(i) Appraisal of controls: The most significant gain an organization can derive from
operational auditing is probably in the area of appraisal of controls. Internal
controls, because of their unobtrusive omnipresence in the organization, provide the
essential hinges to ensure proper performance in each functional or organizational
area for accomplishing the desired organizational objective.
(ii) Evaluation of performance: In performance appraisal, the operational auditor is basically

concerned not so much with how well technically the operations are going on, but
with accumulating information and evidence to measure the effectiveness,
efficiency and economy with which the operations are being carried on. The
principal basis of performance evaluation can be productivity, personnel, workload,
cost and quality. In the area of productivity, the operational auditor can undertake
such tests as input-output ratios for materials and labour in quantitative terms.
(iii) Appraisal of objectives and plans: Everything in an organization is the product of

basic plans and objectives set by the management. If the management policy
favours installation of controls or specifies the extent of controls whether satisfactory or
not, control would have to stay within the policy frame. Therefore, the basic thing that
should be evaluated is management policies, plans and objectives. Operational
auditor may look into the aspects like whether objectives are clearly spelt out and
properly communicated to the personnel responsible for implementation and whether
the personnel have understood the objectives in the sense meant by the
management. Also, he can take note of any apparent conflict in the objectives for its
effect on operations.
(iv) Appraisal of organizational structure: Organizational structure provides the line of

relationship and delegation of authority and tasks. This is an important element of the
internal control design. Therefore, this is also another important area for appraisal by
the operational auditor. In evaluating organizational structure, the aspects that may
be considered by the operational auditor whether the organizational structure is in
conformity with management objectives and is drawn up on the basis of matching of
responsibility and authority.
(d)
Process % of wastage Net output for 100 units of input Waste
on input multiplier
Total 1.3161
Blow room 9.18 100-9.18 = 90.82 1.1953
Carding 7.17 90.82-7.17/100X90.82 = 84.31 1.1096
Drawing 1.10 84.31-1.10/100X84.31 = 83.38 1.0974
Roving(Simplex) 0.30 83.38-.30/100X83.38 = 83.13 1.0941
Ring Frame(Spinning) 7.21 83.13-7.21/100X83.13 = 77.14 1.0152
Reeling and winding 1.50 77.14-1.50/100X77.14 = 75.98 1.0000
(e) Stores has the following inventory at the end of the year: (figures in ` „000)
1 Opening Stock 62,000
2 Purchases 4,46,000
3 Less Returns 12,500
4 Net Purchases 4,33,500
5 Freight Inwards 15,000
6 Cost of Materials Purchased 4,48,500
7 Total Cost of Materials (1)+(6) 5,10,500
8 Sales 5,60,000
10 Net Sales 5,46,000
11 Profit @ 20% 1,09,200
12 Cost of Sales 4,36,800
13 Carriage Outwards 8,000
14 Closing Stock=(7)-(12)-(13) 65,700
1. Choose the correct option among four alternative answer. (1 mark for correct choice, 1 mark
for justification.) [10*2=20 marks]
(i) The following is not a professional misconduct as per The First Schedule Part I of The Cost
and Works Accountants Act, 1959
(A) solicits clients or professional work, either directly or indirectly, by circular,
advertisement, personal communication or interview or by any other means:
(B) secures, either through the services of a person who is not an employee of such cost
accountant or who is not his partner or by means which are not open to a cost
accountant, any professional business:
(C) accepts or agrees to accept any part of the profits of the professional work of a
person who is not a member of the Institute:
(D) fails to obtain sufficient information which is necessary for expression of an opinion or
its exceptions are sufficiently material to negate the expression of an opinion;
(ii) The Annexure to the Cost Audit Report should be signed by:
(A) The CFO and the Managing Director
(B) One Director and Secretary
(C) The Secretary and the CFO
(D) The Officer –in –charge of Cost Accounts and the Secretary.
(iii) Cost Auditor shall within 180 days from closure of Financial Year forward his duly signed
report to:
(A) Board of Directors
(B)Government
(C) Shareholders
(D)Audit Committee.
(iv) The category of Companies specified in Rule 3 shall appoint Cost Auditor within :
(A)90 days of commencement of Financial Year
(B)60 days of commencement of Financial Year
(C)180 days of commencement of Financial Year
(D)30 days of commencement of Financial Year
(v) Capacity determination is dealt in :

(A) CAS 3
(B)CAS 2
(C) CAS 4
(D) CAS 1
(vi) CAS 10 deals with:

(A) Direct Expenses
(B)Indirect Expenses
(C)Administrative overheads
(D)Selling and Distribution overheads.
(vii)XBRL is a language based on :

(A)XBL family of languages.
(B)XRL family of languages.
(C)XML family of languages
(D) XGL family of languages.
(viii)Profit reconciliation for the company as a whole is dealt in :

(A)Part D para 2 of the Annexure to Cost Audit Report.
(B) Part C para 1 of the Annexure to Cost Audit Report.
(C) Form of the Cost Audit Report.
(D) Part A para 1 of the Annexure to Cost Audit Report.
(ix) The forex component of imported material is converted at the rate on:
(A)Date of transaction
(B) Date of payment
(C)Date of advance
(D)Any of the above.
(x) Outward Transportation cost shall form part of:

(A)Cost of direct material
(B)Administrative overhead
(C) Cost of sale
(D)Cost of indirect material
Answer:
1. (i)- (D) fails to obtain sufficient information which is necessary for expression of an opinion
or its exceptions are sufficiently material to negate the expression of an opinion;
This is professional misconduct as per the Second Schedule Part I of The Cost and
Works Accountants Act, 1959.
(ii)- (B) One Director and Secretary

This is pursuant to Rule 6(3B) of the Companies (Cost Records and Audit) Rules,
2014.
(iii)- (A) Board of Directors

This is pursuant to Rule 6(5) of the Companies (Cost Records and Audit) Rules,
2014.
(iv)- (C) 180 days of commencement of Financial Year

2014.
(v)- (B) CAS 2

This standard deals with the principles and methods of classification and
determination of capacity of an entity for ascertainment of the cost of product or
service, and the presentation and disclosure in cost statements.
(vi)- (A) Direct Expenses

This standard deals with the principles and methods of classification,
measurement and assignment of Direct Expenses, for determination of the cost of
product or service, and the presentation and disclosure in cost statements.
(vii)- (C) XML family of languages

XBRL belongs to Extensible Markup Language family. It has been defined
specifically to meet requirements of business and financial information
(viii)- (A) Part D para 2 of the Annexure to Cost Audit Report.

2014.
(ix)- (A) Date of transaction

This is as per CAS 6 and GACAP.
(x)- (C) Cost of sale

This is as per CAS 5 on Cost Accounting Standard on determination of average
cost of transportation.
Section – B [80 marks]
2. (a) (i) What types of Health Services are covered under the Companies (Cost Records and
Audit) Rules 2014?
(ii) Is there any obligation on the part of cost auditor to report offence of fraud being or
has been committed in the Company by its officers or employees?
(b) Explain whether the following amounts to professional misconduct by a CMA:

(i) Mr. X, a CMA was invited by the Chamber of Commerce to present a paper in a
symposium on the issues facing Indian Jute Industry. During the course of his
presentation he shared some of the vital information of his client‘s business under
the impression that it will help the Nation to compete with other countries at
international level.
(ii) A firm of Cost Accountants was appointed by a company to evaluate the costs of
the various products manufactured by it for its information sys tem. One of the
partners of the firm was a Non-Executive Director of the company. [8+8]
Answer:
2. (a) (i) The Companies (Cost Records and Audit) Rules 2014 covers “Health services, namely
functioning as or running hospitals, diagnostic centres, clinical centres or test
laboratories”. Any company engaged in providing Health services through
functioning as or running hospitals, diagnostic centres, clinical centres, test
laboratories, physiotherapy centres and post-operative/treatment centres are
covered within the ambit of the Companies (Cost Records and Audit) Rules 2014.
Further, companies running hospitals exclusively for its own employees are excluded
from the ambit of these Rules, provided however, if such hospitals are providing
health services to outsiders also in addition to its own employees on chargeable basis,
then such hospitals are covered within the ambit of these Rules. It is clarified that
companies engaged in running of Beauty parlours/beauty treatment are not covered
under these Rules.
(ii) Sub-rule (7) of Rule 6 of the Companies (Cost Records and Audit) Rules 2014 states
that “the provisions of subsection (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”. As per sub-section (12)
of section 143 of the Companies Act 2013, extract of which is given above, it is
obligatory on the part of cost auditor to report offence of fraud which is being or has
been committed in the company by its officers or employees, to the Central
Government as per the prescribed procedure under the Rules. As per the proviso to
above sub-section, it has been stated that in case of a fraud involving lesser than the
specified amount, the auditor shall report the matter to the audit committee
constituted under section 177 or to the Board in other cases within such time and in
such manner as may be prescribed.
(b) (i) Clause (1) of Part I of the Second Schedule to the Cost and Works Accountants
Act, 1959 deals with the professional misconduct relating to the disclosure of
information by a CMA in practice relating to the business of his clients to any
person other than his client without the consent of his client or otherwise than as
required by any law for the time being in force would amount to breach of
confidence. The Code of Ethics further clarifies that such a duty continues even
after completion of the assignment. The CMA may, however, disclose the
information in case it is required as a part of performance of his professional
duties. In the given case, Mr. X has disclosed vital information of his client‟s
business without the consent of the client under the impression that it will help the
nation to compete with other countries at International level. Thus it is a
professional misconduct covered by clause (1) of Part I of Second Schedule to the
Cost and Works Accountants Act, 1959.
(ii) Clause 4 of Part I of the Second Schedule to Cost and Works Accountants Act, 1959
states that expressing an opinion on cost and pricing of any business or any enterprise
in which the auditor, his firm or a partner in his firm has a substantial interest would
constitute misconduct, unless he discloses the interest also in his report. As per facts of
the case, the firm has been retained to evaluate the cost of products manufactured
by it for its information system. So this amounts to professional misconduct.
3. (a) ‗Research and Development Costs shall include all the costs that are directly
traceable to research and/or development activities‘.
On what basis these costs can be assigned to Research and Development activities as
per CAS-18?
(b) The Cost Accountant of SOVANA SUGAR MILLS LTD. has arrived at a profit of `73,24,150
based on Cost Accounting records for the year ended March 31, 2018. As Cost Auditor, you
find the following differences between the Financial Accounts and Cost Accounts:
(i) Decrease in value of Closing WIP and Finished goods inventory as per 128,21,995
Financial Accounts
as per Cost Accounts 131,04,220
(ii) Profit on Sale of Fixed Assets 61,500
(iii) Loss on Sale of Investments 11,200
(iv) Voluntary Retirement Compensation included in Salary & Wages in F/A 16,75,000
(v) Donation Paid 25,000
(vi) Major Repairs & Maintenance written off in F/A (Amount reckoned in 13,26,000
Cost Accounts of ` 6,08,420 for this job)
(vii) Insurance Claim relating to previous year received during the year 14,29,000
(viii) Profit from Retail trading activity 7,12,300
(ix) Interest Income from Inter-Corporate Deposits 6,15,000
You are required to prepare a Reconciliation Statement and arrive at the Profit as per
Financial Accounts. [7+9]
Answer:
3. (a) Research, and Development Costs shall include all the costs that are directly traceable to
research and/or development activities or that can be assigned to research and
development activities strictly on the basis of (i) cause and effect or (ii) benefits received.
Such costs shall include the following elements:
1. The cost of materials and services consumed in Research, and Development
activities.
2. Cost of bought out materials and hired services as per invoice or agreed price
including duties and taxes directly attributable thereto net of trade discounts, rebates,
taxes and duties refundable or to be credited.
3. The salaries, wages and other related costs of personnel engaged in Research, and
Development activities;
4. The depreciation of equipment and facilities, and other tangible assets, and
amortisation of intangible assets to the extent that they are used for Research, and
Development activities;
5. Overhead costs, other than general administrative costs, related to Research, and
Development activities.
6. Costs incurred for carrying out Research, and Development activities by other entities
and charged to the entity; and
7. Expenditure incurred in securing copyrights or licences
8. Expenditure incurred for developing computer software
9. Costs incurred for the design of tools, jigs, moulds and dies
10. Other costs that can be directly attributed to Research, and Development activities
and can be identified with specific projects.
(b)
SOVANA LTD
RECONCILIATION OF COST AND FINANCIAL ACCOUNTS AS ON 31/3/2018

Profit as per cost accounting records 73,24,150
(1) Add: Incomes not considered in Cost Accounts:
(i) Profit and sale of Fixed Assets 61,500
(ii) Insurance claim received relating to previous year 14,29,000
(iii) Profit from retail trade activity 7,12,300
(iv) Interest income from Inter-Cooperative deposits 6,15,000 28,17,800
(2) Less: Expenses not Considered in Cost Accounts

(i) Loss and sale of investments 11,200
(ii) Voluntary Retirement Compensation included in Salary &
Wages 16,75,000
(iii) Donation Paid 25,000
(iv) Part of repairs and maintenance cost excluded in Cost
Accounts (1326000-608420) 7,17,580 (24,28,780)
(3) Add: Difference in valuation of stock

Decrease in inventory as per Cost Accounts Decrease in inventory
as per Financial A/c Valuation in Financial Accounts in higher 1,31,04,220
PROFIT AS PER FINANCIAL ACCOUNTS (1,28,21,995)
2,82,225
79,95,395
4. (a) As a Management Auditor of a large organization, you have been asked to carry out the
review of ―MARKETING POLICIES: as a part of Corporate Development.
Prepare a questionnaire for carrying out such a review.
(b) State briefly the adequacy of Budgetary Control System

(i) in area of planning,
(ii) in the area of Co-ordination; and
(iii) in the area of Control [10+6]
Answer:
4. (a) A questionnaire for review of 'Marketing Policies' of the company:
(i) Consumer needs assessment -

 Is the policy rationable in terms of marching customers' needs with the firm's
offering and capabilities?
 What is the likely consumer reaction?
 What are the evaluation studies undertaken to assess consumer reaction,
particularly, in respect of product features, price, distribution outlets, new product
concept, new product introduction?
(ii) Market segmentation -

 What is target market conceived?
 Is market segmentation based on empirical data, such as-usage, demographic,
benefits sought, consume characteristics etc.?
(iii) Competition and product position -

 How many are competitive producers?
 What is company's share in the total market?
 How many competitors have left the market over the last few years?
 What is the general competitive environment?
 What particular product characteristics does the firm possess that contribute to
the market place?
 What is the relative market position of the products at different stages of their life
cycle?
(iv) Marketing mix -

 How is the optimum mix of pricing, distribution and promotional policy for each of
the products of firms determined?
 What are the company's approaches to issue like product Design, products
Positioning, Price-range, advertising and promotion media etc.?
(v) Marketing programme

 Is the marketing program of the company designed to emphasise lower price,
mass distribution channels and mass advertising to reach numerous market
segments?
(vi) Resource Allocation

 Does the marketing program take into account the interdependencies among
the various options and a resource allocation procedure to direct the company's
commitment of resources among products, markets segments and the related
marketing strategies to accomplish the objectives?
 If so, how is the resource allocation procedure has been established for different
marketing decisions?
(b) (i) In the area of planning:

(1) Where it covers all interrelated functions like production, sales, purchasing and
finance.
(2) Whether it determines the linkage between budget centres and responsibility
centres.
(3) Whether it establishes definite goals and limits for these function well in advance.
The system must answer the questions such as “what they are expected to
operate?” What will be the financial requirement for the functional areas? What
would be the potential problems in the key areas?
(4) Whether there are imbalances in the fixation of performance levels of functional
budgets in relation to sales budgets.
(5) Whether budget monitoring cell exists for operating the system in right
perspective.
(ii) In the area of coordination:

(1) Whether the Budget monitoring committee holds the meetings regularly with a
view to ensure performance evaluation.
(2) Whether it helps to prevent waste that results in duplicate or gross purpose
activities.
(3) Whether it reveals time lines in the process of preparation and approval of all
functional Budgets and Master Budgets.
(iii) In the area of control:

(1) Whether system exists for measuring, comparing and qualifying the results of all
functional areas;
(2) Whether the Budget incorporates a degree of flexibility with a provision of its
periodical review;
(3) Whether the various reports are issued in time and appropriate corrective action is
taken on their variances.
5. (a) Draft an internal control questionnaire for ‘Account Receivables‘.
(b) What is the objective of purchase management? What are the main points to be taken into
account while preparing a set of questionnaire to evaluate purchase management function?
[9+7]
Answer:
5. (a) The duties of accounts receivable record keeping should be segregated from the
custodial and authorization functions. Further, adequate receivable sub-ledgers should
be maintained and reconciled to applicable general ledger accounts. Finally
receivables should be aged and reviewed, whereby established procedures should be
followed for the collection of past due accounts and subsequent write-off of
uncollectible receivables.
The internal control questionnaire for „Accounts Receivables„may be drafted as follows:
Questions Yes No N/A Remarks

1. Are credit and collection and write off policies and
procedures current and in writing?
2. Are these policies and procedures clearly stated and
systematically communicated?
3. Do these policies and procedures support internal control?
4. Are the responsibilities for maintaining detailed accounts
receivable records segregated from collections,
disbursement, and general ledger posting functions?
5. Are disputed liabilities handled by person(s) other than
those receiving payment and record keeping functions?
6. Do controls in the system exist that provide assurances
that individual receivable records are posted only from
authorized source documents?
7. Are controls maintained that provide assurances that
customer database and, where appropriate, usage records
are accurately maintained to ensure that amounts due are
billed?
8. Are billings controlled and properly accounted for?
9. Is there adequate control over the mailing of statements
to prevent interception prior to mailing?

10. Are statements of account balance mailed on a timely
basis, where appropriate (for example, in proprietary funds)?
11. Are aggregate collections on accounts receivable
reconciled against postings to individual receivable
accounts?
12. Are all valid receivables promptly recorded?
13. Is the total of departmental accounts receivable
outstanding reconciled to Advance periodically?
14. Are letters of credit reviewed for accuracy?
15. Are aged accounts receivable balances periodically
reviewed by supervisory personnel?
16. Do adequate procedures exist for follow-up and
collection of delinquent accounts?
17. Are there controls to insure that individuals with
delinquent accounts are precluded from receiving
additional credit?
18. Are delinquent accounts reviewed and considered for
charge-off on a timely basis?
19. Are write-offs or other reductions of receivables, including
non-cash credits, credit memos, and allowances, formally
approved by senior officials not involved in the collection
and recording function?
20. Do procedures exist that ensure that interest and
penalties are properly charged on delinquent accounts?
21. Are credit balances periodically reviewed?
22. Does internal control appear adequate for the accounts
receivable system overall?
(b) The primary objective of purchase management is to procure raw materials, packing
material etc of the requisite quantity of required quality at reasonable cost at the right
time. A management accountant may make a model questionnaire for evaluation of
purchase management:-
(a) What is the organization for purchase function?

(b) Whether the purchase policy is realistic?
(c) Whether the purchase requirements are related to production schedules and
dependent upon the level of invention?
(d) How are suppliers selected and eliminated?
(e) Whether regular and dependable suppliers are ensured?
(f) Is there any system of purchase authorization?
(g) Whether latest market information automatically collected regarding new spares, etc.
(h) Whether proper information is kept about price trends?
(i) Whether regular comparison is made between average price paid and the
corresponding average market price?
(j) What are built-in-controls against misutilisation of purchasing powers?
(k) How effective is the system of follow-up?
(1) What is the system of executing emergency purchase?
(m) What is the procedure followed for impact of raw materials?
(n) Is there any proper coordination between purchase, stores and production?
6. (a) MEGLOW TECHNO LTD. is a manufacturer of Ball and Roller bearings. In the Company four
operations are carried on simultaneously in the manufacture of components.
The input/output data and Direct Wages Cost relating to the year 2014-15 for one
component are as follows:
Operations Gross Input (Tonnes) Scrap (Tonnes) Direct Wages (`)

PM 48000 8000 12,40,000
QN 50000 10000 12,50,000
RA 72000 12000 23,60,000
SB 55000 5000 32,70,000
Material is introduced at start of Operation PM at a cost of ` 6,000 per tonne. Scrap can
be sold at ` 500 per tonne. Overheads are absorbed at 150% on Direct Wages.
You are appointed as a cost consultant of Meglow Techno Ltd. The company has not
maintained cost records so far and seeks your advice in the matter.
Show your computation of the total cost per tonne of finished component so that the
company can adopt the same in future.
(b) PARTHAN CO. LTD. a single product manufacturing company has following four operations
undergone by a product under Cost Audit.
The Process wise Input, Output, Direct Employee Costs and Direct Material Costs for the
year ended March 31, 2018 are given below:
Process Input Unit Output Unit Direct employee cost of Direct Material cost of the
the process (`) process (`)
MP-I 312000 280800 8,42,400 11,23,200
MP-2 330000 297500 11,90,000 13,38,750
MP-3 414000 397500 19,87,500 16,89,375
MP-4 390000 361000 28,88,000 23,82600
You are required to calculate:
(i) Direct Employee Cost per unit of the product,
(ii) Direct Material Cost per unit of the product, under reference as required in (PART-B,
PARA-2) of the Annexure to Cost Audit Report under the Companies (Cost Records
and Audit) Rules, 2014. [8+8]
Answer:
6. (a)
MEGLOW TECHNO LTD.
It is a fact that the company is not maintaining proper records. Cost per tonne of
finished component is required to be worked out within the existing constraint of stage
wise conversion cost and raw material identification to operation -PM
Stage-wise conversion cost, therefore to be converted to final cost using the multiplier or
weightage factor. For converting direct wages to conversion cost from the given data,
following steps should be followed:
Let us assume, Direct wages =`100
Overheads (150% of Direct wages =`150
Total conversion cost =`250
Conversant cost is 2.50 times of Direct Wages:

Operatio Input Output Multiplier Conversion Conversion Cumulative
n tonnes in tonnes in factor cost (` in cost per conversion
thousand thousand (2/3) lakh) D.W. Tonne (5/3) cost per
x 2.5 (`) tonne (`)
1 2 3 4 5 6 7
PM 48 40 1.20 31.00 77.50 77.50
QN 50 40 1.25 31.25 78.12 175.00
RA 72 60 1.20 59.00 98.33 308.33
SB 55 50 1.10 81.75 163.50 502.66
Calculations:
(a) Cumulative conversion costs are:
Operation QN = (` 77.50x 1.25) + 78.12 = ` 175.00

Operation RA= (` 175.00x1.20) +98.33 = ` 308.133
Operation SB = (` 308.33 × 1.10) + 163.50 = ` 502.66
` 502.66 per tonne is the final stage conversion cost.
(b) Raw material cost is:

= Cost of material quantity introduced at operation
= Material quantity x Rate per Tonne
= Product of multiplier factors x rate per tonne
= (1,20 x 1.25 x 1.20 x 1.10 x ` 6000
= 1.98 x ` 6000 = ` 11880

Thus input = 1.98 tonnes Output = 1.00 Tonne Scrap = 0.98 Tonne
(c) Value of Scrap = 0.98 tonne x ` 500 = ` 490
Thus input = 1.98 tonnes Output = 1.00 Tonne Scrap = 0.98 Tonne
Computation of Total cost per Tonne of finished component

Material cost `11,880
Less: scrap value (-) 490
`11390
Add: Conversion cost (table above) `502.66
Total cost `11,892.00
(b) Total employee cost per unit and total material cost per unit of the product under Audit
mist be an aggregation of process-wise employee cost and material costs after taking
into account the good units occurring in each process.
Process Input(unit) Output (unit) Factor
Mp-1 312000 280800 312000÷280800=1.1111
MP-2 330000 297500 330000÷297500=1.1092
MP-3 414000 397500 414000÷397500=1.0415
MP-4 390000 361000 390000÷361000=1.0803
A) Processwise Employee costs per unit of B) Processwise material cost per unit of
output ( Product) are: output (product) are:
MP-1= 842400÷280800= `3 1123200÷280800= `4.00
MP-2= 1190000÷297500= `4 1338750÷297500= `4.50
MP-3= 1987500÷397500= `5 1689375÷397500= `4.25
MP-4= 2888000÷361000= `8 2382600÷361000= `6.60
(i) Aggregating all above (A) employee cost to the finished product form process MP-4
will be:
Process MP-1 = `3.00
Process MP-2 = `3×1.1092+4 = `7.3276
Process MP-3 = `7.3276×1.0415+5 = `12.6317
Process MP-4 = `12.6317×1.0803+8 = `21.6460
Direct employees cost per unit of finished product (output) in `21.65
(ii) Aggregating all above (B), material costs to the finished product from process MP-4
will be:
Process MP-1 = `4.0000

Process MP-2 = `4.00×1.1092+4.50 = `8.9368
Process MP-3 = `8.9368×1.0415+4.25 = `13.5577
Process MP-4 = `13.5577×1.0803+6.60 = `21.2464
Hence, Direct material cost per unit of finished product (output) is `21.25
7. PHIMPEX LTD. in the business of Real Estate and Consumer Goods shows the following
financial position for the year ending March 31, 2018:
(Amount in ` crore)
Year ended 31st March
2018 2017
Liabilities
Share Capital 33 33
Securities Premium Account 931 928
General Reserve 57 44
Capital Redemption Reserve 42 40
Profit & Loss Account 595 390
Long Term Borrowings 1013 670
Deferred Tax Liability 25 39
Short Term Borrowing 782 676
Trade Payable 715 747
Miscl. Provisions 77 73
Total: 4270 3640
Assets:
Fixed Assets (Tangible) 647 614
Capital WIP 667 383
Non-Current Investments 2378 2048
Long Term Loans 53 66
Inventories 167 232
Trade Receivables 104 94
Cash and Bank Balance 107 69
Other Current Assets 25 30
Advance for Equipment 122 104
Total: 4270 3640
Profit before tax for the year 2015-16 was `326 crores (Previous year `397 Crores)
You are required to compute the following figures/ratios as stipulated in PART-D, PART-4 to
Annexure of Cost Audit Report under the Companies (Cost Records and Audit) Rules, 2014 for
the year ended 31st March, 2016:
(ii) Net Worth
(iii) Debt Equity Ratio
(iv) PBT to Capital Employed
(v) PBT to NET Worth
(vi) Current Assets to Current Liabilities (5+3+2+2+2+2)=16
Answer:
7.
PHIMPEX LTD.
(Amount in ` crore)
(i) Capital Employed:
Fixed assets (Tangible) 614 647
Non-current investments 2048 2378
Particulars Previous Current 2662 3025
Year 2017 Year 2018
Current Assets: (A)
Inventories 232 167
Trade Receivables 94 104
Cash and Bank Balance 69 107
(A)
425 403
Short term borrowings 676 782
Trade payables 747 715
Misc. Provision 73 77 (1071) (1171)
(B) 1591 1854
1496 1574
Working Capital (A-B)
CAPITAL EMPLOYED
Average capital employed for the year ended March (1591+1854)÷2 1722.5
31,2016
(ii) Net Worth: (For the year ended Mar 31,18
Share capital 33
Securities premium a/c 931
General reserve 57
Capital redemption reserve 42
Profit and loss account 595 1658
(iii) Debt (For the year ended March 31,2018)
Long Term Borrowings 1013
Deferred Tax Liabilities 25 1038
Debt Equity Ratio: (1038/1658) = 62.60% (1038÷1658) 62.6:100
= 62.6:100 or 0.63:1 =62.60% Or 0.63:1
Profit before tax (PBT) for the year ended March 31, 326
2018
(iv) PBT to Capital Employed: (326÷1722.5)×100 18.93%
(v) PBT to Net Worth (326÷1658)×100 19.66%
(vi) Current Assets to Current Liabilities: for 2018 (CA/CL) 0.256
= (403/1574) Or 0.26:1
(a) Answer the following questions with respect to CAS 23, Cost Accounting Standard on
Overburden Removal Cost.
(i) What do you understand by Standard Stripping ratio?
(ii) How do you treat overburden removal cost attributable to a development phase of a
mine area?
(b) Write short not on concurrent audit.
(c) Explain the basic differences between: ―Management Audit‖ and ―Operational Audit‖.
(d) TROMA LTD., a manufacturing unit, produces two products PB and PS. The following
information is extracted from the Books of the Company for the year ended March 31,
2018:
Particulars Product PB Product PS
Units Produced (Qty.) 2,10,000 1,68,000
Units sold (Qty.) 1,68,000 1,36,500
Machine hours utilized 1,26,000 84,000
Design charges (`) 1,57,500 1,89,000
Software development charges (`) 2,62,500 3,78,000
(i) Royalty paid on sales `6,09,000 [@ ` 2 per unit sold for both the products].
(ii) Royalty paid on units produced `3,78,000 [@ `1 per unit produced for both the
products].
(iii) Hire charges of equipment used in the manufacturing process of product PB only
`53,000.
Note: No adjustments are to be made related to units held i.e. Closing Stock.
You are required to compute the DIRECT EXPENSES—keeping in view of Cost Accounting
Standard (CAS)-10.
(e) During the Energy Audit of Reliable Engineering Ltd., the following figures relating to
usage of power were placed before the Auditor:
2017-18 2016-17 2015-16

Total Power consumed (kWh) 2642720 2744360 2393250
Rate per kWh (`) 6.29 5.42 4.90
Total Production (in million kg.) 422.16 416.36 376.08
Compute the necessary productivity measures and (i) Price Variance and (ii) Volume
Variance of power usage during these years.
Answer:
8. (a) (i) Standard stripping ratio: this is the ratio between the total quantity of overburden to
be removed (in cubic meters) and the total mineral to be extracted (in tonnes) during
the Projected life of the project.
The term Standard stripping ratio and Average stripping ratio denote the same
meaning and are used interchangeably.
(ii) The overburden removal cost attributable to a development phase of a mine area
shall be capitalised as non-current asset when it is probable that future economic
benefits to the area will flow to the entity and such cost can be identified and
measured separately.
(b) Concurrent audit is a systematic examination of financial transactions on a regular basis

to ensure accuracy, authenticity and compliance with procedures and guidelines. It is an
examination, which is contemporaneous with the occurrence of transactions or is carried
out as near thereto as possible. The main focus of this audit is to ensure that transactions
adhere to the system and laid down procedures. It serves the purpose of effective
internal control as it reduces the time gap between occurrence of a transaction and its
overview or checking. The concurrent audit is similar in nature to internal audit as both are
generally initiated by the management itself. However, there is basic difference between
the two i.e. concurrent audit is regular audit of financial transactions whereas internal
audit is a periodic audit.
Sound internal controls are essential to the prudent operation of banks and to promote
stability in the financial system as a whole. Concurrent Audit ensures that adequate
internal controls within banking organizations are supplemented by an effective internal
audit function, which independently evaluates the control systems within the
organization. Concurrent Audit of Bank Branches involves checking of all aspects of
banking and other operations on an ongoing daily basis to ensure that the Branch is
adhering to the Bank‟s laid down systems and procedures. The Concurrent Auditors are
responsible to examine and comment on all the areas specified by the Bank/RBI from
time to time in regard to concurrent audit of branches. A copy of guidelines on the
manner of conduct of audit is also provided at the time of allotment of concurrent audit
and from time to time thereafter. Therefore, it ensures that all errors and frauds, if any are
generally detected immediately after their occurrence to control the damage, if any.
(c) Operational Audit concentrates on seeking out aspects of operations in which

waste, inefficiency and excessive costs and would be subject to reduction by the
introduction of improvement of operating controls. It is the audit of the performance at
mainly operating level i.e., supervisory level. It is also termed as micro level Management
Audit.
Operational Audit is an organized search for ways of improving efficiency and

effectiveness. The objective is to assist the organization in performing functions more
effectively economically with focus on the efficiency and effectiveness of operations. It is
also stated to be an early warning system for the detection of potentially destructive
problems.
Management Audit extends to the entire management decision making areas and has a
broader time- frame to analyze past, present and future. Hence it becomes a qualitative
audit and not audit of only value and quantity. Management Audit brings out errors or
policy, decisions and action with recommendations to avoid them. Management Audit
extends beyond Operations Audit.
Management Audit is the total examination of all transactions of an organization and

includes checks on the effectiveness of managers and their compliances with company
on professional standards. It undertaken examination of the effectiveness of
management in controlling the total activities of the organization in the accomplishment
of the organization objectives. It does not concentrate on financial matters alone as in
case of financial audit. It looks into the efficiency and effectiveness of performance in an
organization.
(d)
TROMA LTD.
Computation of Direct Expenses (As per CAS – 10)
(Amount in `)
Particulars Product PB Product PS
Royalty paid on sale 336000 273000
Add: Royalty paid on units produced 210000 168000
Add: Hire charges of equipment used in the manufacturing 53000 --------
process of product-PB only
Add: Design charges 157500 189000
Add: Software development charges related to production 262500 378000
Direct expenses (total) 1019000 1008000
(e) The power usage of Reliable Engineering Ltd. is given below along with the productivity
measures and Price Variance and Volume Variance.
2017-18 2016-17 2015-16
1. Power consumed (KWh) 26,42,720 27,44,360 23,93,250
2. Production (in million kg.) 422.16 416.36 376.08
3. Rate per KWh (`) 6.29 5.42 4.90
4. Power Cost (`) [1 x 3] 16,622,709 14,874,431 11,726,925
5. Power Cost/‟000 kg. (`) 39.375 35.725 31.182
6. Price Variance (`) 22,99,166 14,27,067
7. Volume Variance (`) 2,28,375 14,39,003
Workings:
2017-18 2016-17
Price Variance : 26,42,720 x (6.29 – 5.42) 22,99,166
: 27,44,360 x (5.42 – 4.90) 14,27,067
Volume Variance : 39.375 x (422.16 – 416.36) 2,28,375
: 35.725 x (416.36 – 376.08) 14,39,003
Suggested Answer_Syl16_Dec2018_Paper_19
FINAL EXAMINATION
GROUP IV
(SYLLABUS 2016)

DECEMBER 2018
Paper- 19: Cost and Management Audit

Time Allowed: 3 Hours Full Marks :100
Answer Question No. 1 which is compulsory and carries 20 marks and
any five questions from Question Nos. 2 to 8
SECTION – A (20 Marks)
1. Choose the correct answer with short justification/workings. (1 mark for correct choice
and 1 mark for justification/working) 2x10= 20
(a) Before submission to the Auditor for Report, the Form CRA 3 should be signed by
__________.
(A) The Secretary and the Chief Finance Officer of the company.
(B) The Secretary and the Cost Accounts Officer of the company.
(C) The Secretary and one Director of the company.
(D) The Chief Finance Officer and the Managing Director of the company.
(b) Cost of self-generation utilities for own consumption shall comprise ___________.
(A) Administrative overheads.
(B) Distribution cost
(C) Factory overheads
(D) None of the above.
(c) The useful life of an intangible asset, like amount paid on technical knowhow, shall
not exceed _________ from the date it is available for use.
(A) 5 years
(B) 8 years
(C) 10 years
(D) 12 years
(d) Product and Profitability Statement (for audited products/services) is shown under
____________ of Annexure to the Cost Audit Report.
(A) Part A
(B) Part B
(C) Part C
(D) Part D
(e) Cost Audit Documentation is dealt in the ____________

(A) Cost Auditing Standard 101
(B) Cost Auditing Standard 102
(C) Cost Auditing Standard 103
(D) Cost Auditing Standard 104
(f) Amember of The ICAI shall be deemed to be guilty of other misconduct, if he/she
is held guilty by any civil or criminal court of an offence which is punishable with
imprisonment ___________.
(A) For a term exceeding 3 years
(B) For a term exceeding 3 months
(C) For a term exceeding 6 months
(D) For a term exceeding 2 years
(g) Costing Taxonomy is best defined as a _________________.
(A) Dictionary
(B) Made Easy
(C) Tax Ready Reckoner
(D) Referencer
(h) The Consumer Service Audit critically examines ______________
(A) Outstanding payment of consumers
(B) The price consumers are ready to pay for a particular product/service.
(C) and appraises management of a business enterprise of responsibility
towards consumers.
(i) Which of the following ratios appears as Profitability Ratio in Part D of Annexure to
the Cost Audit Report ?
(A) Net Profit to Net Sale
(B) Value added to Net Sales
(C) Profit before Tax to Value Added.
(D) Net Profit to Share Capital.
(j) CAS 24 deals with ____________.
(A) Overburden Removal Cost
(B) Interest and Financing Charges.
(C) Royalty and Technical Knowhow Fee.
(D) Treatment of Revenue in Cost Statements
Answer : 1
(a) (C) the Secretary and one Director of the company
Annexure to the Cost Audit Report in CRA 3 shall be approved by the Board of
Directors and by signed by the Company Secretary and a Director authorized by the
Board before submission to the Auditor for Report.
(b) (C) factory overheads
As per CAS 8, the cost of self-generated utilities for own consumption shall comprise
direct material cost, direct employee cost, direct expenses and factory overheads.
(c) (C) 10 years
CAS 16 on depreciation and amortization states that useful life of an intangible asset
shall not exceed 10 years from the date it is available for use.
(d) (D) Part D
This is per Rule 6(4) of the Companies (Cost Records and Audit) Rules, 2014
(e) (B) Cost Auditing Standard 102
CAS 102 deals with Cost Audit Documentation
(f) (C) for a term exceeding 6 months

Part III of the Second Schedule to the Cost & Works Accountants of India Act, 1959
finds a member guilty of other misconduct if he/she is held guilty by a court for
offences punishable with imprisonment for a term exceeding 6 months.
(g) (A) Dictionary
Cost Taxonomy is a Dictionary of all cost elements required in the Cost Audit Report
and Compliance Report.
(h) (C) and appraises management of a business enterprise of responsibility towards

consumers.
Consumer Services Audit is an appraisal on the availability of a company’s products
to consumers in right quantity, right price, right place and right time.
(i) (C) Profit before Tax to Value Added

This is one of the four ratios identified as Profitability Rations in Part D of Annexure to
the Cost Audit Report.
(j) (D) Treatment of Revenue in Cost Statements

Effective from 1st April, 2017, CAS 24 on Treatment of Revenue in Cost Statements has
become applicable.
Section- B (80 marks)
2. (a) (i) While accepting the offer of appointment as Cost Auditor of a company, what
certificate should be submitted by the Cost Auditor to the company ? Is the Cost
Auditor required to give any certificate with respect to his/her/its independence
and ‘arm’s length relationship’ with the appointing company ?
(ii) A company has units in SEZ and in non-SEZ areas. What would be the applicability
of the Companies (Cost Records and Audit) Rules, 2014 on such a company with
respect to maintenance of cost accounting records and Cost Audit ? (3+2)+3=8
(b) (i) Mr. Arunmaya, a practicing Cost Accountant engaged two trainees, undergoing
training under his guidance for audit job. Since the job was voluminous, he
agreed to pay them, in addition to stipend, an amount of 10% of the audit fees.
Does the action of Mr. Arumaya amount to professional misconduct ?
(ii) State the ethical requirements of a Cost Auditor for ensuring the conduct of the
audit of Cost Statements as per the Cost Auditing Standard 103. 4+4=8
Answer : 2(a)(i)
The Cost Auditor appointed shall submit a certificate that –

(a) The individual or the firm, as the case may be, is eligible for appointment and is not
disqualified for appointment under the Act (the Cost and Works Accountants Act,
1959) and the rules or regulations made thereunder ;
(b) The individual or the firm, as the case may be satisfies the criteria provided in
Section 141 of the Companies Act, 2013 so far as may be applicable ;
(c) The proposed appointment is within the limits laid down by or under the authority
of the Act ; and
(d) The list of proceedings against The Cost Auditor or audit firm or any partner of the
audit firm pending with respect to professional matters of conduct, as disclosed in
the certificate, is true and correct.
Yes, the Cost Auditor of a company is required to give a certificate to the Audit
Committee in respect of his/her/its independence and arm’s length relationship with the
company. Moreover, according to the Second Schedule, Part I, Clause 4 of the Cost
and Works Accountants Act, 1959, it amounts to professional misconduct when a cost
Auditor expenses his/her/its opinion on cost and pricing statement of any business or
enterprise in which he/she, his/her firm or a partner of his/her firm has substantial interest.
Answer : 2(a)(ii)
Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 is specific and it has
mandated maintenance of cost accounting records for all products/activities listed under
Table- A and Table- B subject to threshold limits. No exemption is available to any
company from maintenance of cost accounting records one it meets the threshold limits.
Hence, the above company would be required to maintain cost accounting records for
all its units including the ones located in the special economic zone.
However, in view of the provisions of Rule 4(3) (ii) of the Companies (Cost Records and
Audit) Rules, 2017, the units located in the special economic zone would be outside the
purview of Cost Audit and the company would not be required to include particulars of
such units in its Cost Audit Report. The other units of the company located outside the
special economic zone would be covered under Cost Audit subject to the prescribed
threshold limits.
Answer : 2(b)(i)
As per Part I of the First Schedule of the Cost and Works Accountants Act, 1959, a Cost
Accountant in practice shall be deemed to be guilty of professional misconduct, if he/she
pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or
brokerage in the fees or profits of his/her professional work, to any person other than a
member of the Institute or a partner or a retired partner or the legal representative of a
deceased partner.
Under such circumstances, any payment to trainees as a percentage of audit fees is a
professional misconduct. He may, if necessary, pay a lump sum stipend to the trainees.
Answer : 2(b)(ii)
The Application Guidance of Cost Auditing Standard 103 lays down that the Cost Auditor
should comply with relevant ethical requirements as per the code of ethics issued by the
Institute of Cost Accountants of India. This code establishes fundamental principles of
professional ethics relevant to the Cost Auditor while conducting an audit and provides a
conceptual framework for applying these principles. The fundamental principles which
the Cost Auditor is required to comply with are given below.
(a) Independence
(b) Integrity
(c) Objectivity
(d) Professional Competence
(e) Due Care
(f) Confidentiality
(g) Professional Conduct.
3. (a) (i) What items of expenses are to be included as Employee Cost as per the revised
CAS 7 guidelines ?
(ii) What is the basis adopted to determine normal price with respect to related party
transactions ? 4+4= 8
(b) The Financial Profit and Loss Account for the year 2017-18 of a company shows a net
profit of Rs. 56,44,000.
During the course of Cost Audit, it was noticed that :
(i) The company was engaged in trading activity by sale of brads other than its
own through its retail outlets and thus earned a profit of Rs. 2,85,000 during the
year.
(ii) The claim on fire to the extent denied by the insurance company amounted to
Rs. 3,50,000.
(iii) An amount of Rs. 6,00,000 was charged in the Cost Accounts an notional rent
for the plant premises owned by the company.
(iv) Interest received on inter-corporate deposits amounted to Rs. 5,60,000
(v) VRS payment to the extend not amortized in the Financial Accounts amounted
to Rs. 4,50,000.
(vi) Unabsorbed assets value due to scrap of machine Rs. 4,10,000 was charged in
the Financial Accounts and
(vii) Stock valuation of finished and semi-finished goods was as given below.
Financial Accounts Rs. Cost Accounts Rs.
Opening Stock 27,79,000 29,56,200
Closing Stock 40,92,000 45,15,900
Work out the profit as per the Cost Accounts. 8
Answer : 3(a)(i)
The revised CAS 7 Guidelines lay down that the following items of expenses are to be
included in Employee Cost (for all employees whether temporary, part-time or
contractual)
Employee Cost (payable in cash or kind excluding prior period costs)

Salaries, wages, allowances, bonus/incentive
Contribution to provident and other funds
Employee welfare
Other benefits.
Employee Cost (future benefits)
Gratuity
Leave encashment
Other retirement/separation benefits
VRS/other deferred employee cost
Other future benefits.
Benefits generally include
Paid holidays
Leave with pay
Statutory provisions for insurance against accident or health scheme
Statutory provisions for workman’s compensation
Medical benefits to the employees and dependents.
Free or subsidized food
Free or subsidized housing
Free or subsidized education to children
Free or subsidized canteen, crèches and recreational facilities
Free or subsidized conveyance
Leave travel concession
Interest-free or subsidized loans
Any other free or subsidized facility
Cost of employees’ stock option
Answer :3(ii)
As per item 24 of CRA 1, normal price means price charged for comparable and similar
products in the ordinary course of trade and commerce where the price charged in the
sole consideration of sale and such sale is not made to a related party. Normal price can
be construed to be a price at which two unrelated and non-desperate parties would
agree to a transaction and where such transaction is not clouded due to the proximity of
the parties to the transaction and free from influence though the parties may have
shared interest. The basis adopted to determine normal price shall be classified as under :
(i) Comparable uncontrolled price method
(ii) Resale price method
(iii) Cost plus method
(iv) Profit split method
(v) Transactional net margin method
(vi) Any other method, to be specified.
Answer :3(b)
Reconciliation of Profit as per Cost Accounts with Profit as per Financial Accounts for the
year 2017 - 18
Amount Rs. Amount Rs.
Add :
1) Loss on scrapping of machine 4,10,000
2) Difference in Closing and Opening value of Stock
in Cost Accounts (45,15,900 – 29,56,200) 15,59,700
3) Insurance claim denied 3,50,000
4) VRS expenses not amortized 4,50,000
(+) 27,69,700
Less :
1) Trading Profit not included in Cost Accounts 2,85,000
2) Interest from Inter-corporate Deposits 5,60,000
3) Notional Rent Income provided in Cost Accounts 6,00,000
4) Difference in Closing and Opening value of Stock
in Financial Accounts (40,92,000 – 27,79,000) 13,13,000 (-) 27,58,000
4. (a) Explain Management Audit and state its uses. 8

(b)(i) You are appointed as the Energy Auditor of a medium-sized manufacturing
company. Suggest some areas for conserving energy at the plant level.
(ii) Briefly discuss the concept of Propriety Audit.4+4= 8
Answer:4(a)
Management Audit is the unique process appraising the performance of directors and
managers or, in other words, appraising the performance of the management. In a
number of organizations, Management Audit is now a regular feature to examine and
improve managerial effectiveness. It is the systematic and dispassionate examination,
analysis and appraisal of management’s overall performance. It is a form of appraisal of
the total performance of the management by means of an objective and
comprehensive examination of the organization structure, its components, its plans and
policies, its processes and controls and its use of physical facilities and human resources.
As per the CIMA, Management Audit is an objective and independent appraisal of the
effectiveness of the managers and effectiveness of the corporate structure in the
achievement of the company objectives and policies. It aim is to identify existing and
potential management weakness within an organization and to recommend ways to
rectify these weaknesses.
Uses of Management Audit
(i) Management Audit is useful in synthesizing accounting, economic or other data
required by the management in constructing the basic policy framework.
(ii) It assists in establishing, reviewing and improving the planning system.
(iii) It makes substantial contribution to the system of goal-setting in the organization.
(iv) It ensures that management is getting adequate information for correct decisions.
(v) It ensures that management property uses the information that it is getting.
(vi) It aids in the design and maintenance of adequate authority structure.
(vii) It helps in improvement in the information system to expedite flow of information
among responsibility centres.
(viii) It substantially contributes for improvement of the entire communication system.
(ix) It helps management in pinpointing key functions or operations in the profit-making
process.
(x) It helps management in establishing better criteria for measuring results.
(Xi) It helps management to avoid wasteful, unnecessary and extravagant use of
resources.
Answer :4(b)(i)
Energy Audit means monitoring the energy efficiency of different equipment and
processes in a plant and looking into ways by which the total sum of energy consumed
can be cut down without affecting production or its efficiency. A few illustrations of
possible sources for conserving energy are given below.
(A) Steam generation & distribution: Selecting boilers to achieve fuel economy,
evaluating the efficiency of steam generation, fixing up the cost of steam generation
and improving the efficiency.
(B) Steam utilization: Proper insulation, reducing hot water wastage, recycling hot air by
economic means, and scheduling of processes/operations to achieve fuel economy.
(C) Electrical energy utilization: Minimize maximum demand by tripping loads, use
standby electric generation equipment for on-peak high load periods.
(D) Installation of energy efficient system: Install (a) automatic control system, (b) thermal
solar system for warm water, (c) temperature effective humidification.
(E) Diesel exhaust recovery: Turning up diesel-generating sets for highest efficiency.
The list is illustrative and leaves scope for many areas for economic use.
Answer :4(b)(ii)
Propriety Audit stands for verification of transactions in the best interests of the public,
commonly accepted customs and standards of conduct. The term ‘propriety’ has been
defined by Kholer as ‘that which meets the tests of public interest, commonly accepted
customs and standards of conduct and particularly as applied to professional
performance, requirements of Government regulations and professional codes’. The tests
boil down to consideration of financial prudence and economy instead of too much
dependence on documents, vouchers, etc. It shifts the emphasis to finding the
appropriateness of expenditure, rather than verifying whether it has been duly authorized
or evidenced by proper vouchers, etc.
In other words, Propriety Audit seeks to ensure that the planned expenditure would yield
the optimum returns and there is no other better alternative available. It seeks to ensure
that the expenditure is not only approp0raite to the circumstances of each case but also
has indeed achieved the objectives for which it has been incurred. The audit of public
sector undertakings as undertaken by the Comptroller and Auditor General of India is an
example of Propriety Audit.
5. (a) Write a note on the provisions relating to Internal Audit under the Companies Act, 2013.
8
(b) State the important steps to be taken in the internal audit of institutions providing
Educational Services. 8
Answer :5(a)
Section 138 of the Companies Act, 2013, deals with the provisions relating to Internal
Audit.
Section 138
(i) Such class or classes of companies as may be prescribed shall be required to appoint
an internal auditor, who shall either be a Chartered Accountant or a Cost
Accountant or such other professional as may be decided by the Board to conduct
internal audit of the functions and activities of the company.
(ii) The Central Government may, by Rules, prescribe the manner and the intervals in
which the internal audit shall be conducted and reported to the Board.
Rule 13 of the Companies (Accounts) Rules, 2014
The following class of companies shall be required to appoint an internal auditor or a firm
of internal auditors, namely,
(a) every listed company ,
(b) every unlisted public company having –
(i) paid up share wealth of rupees fifty crore or more during the preceding
financial year, or
(ii) turnover of rupees two hundred crore or more during the preceding financial
year, or
(iii) outstanding loans or borrowings from banks or public financial institutions
exceeding rupees one hundred crore or more at any point of time during the
preceding financial year, or
(iv) outstanding deposits of rupees twenty-five crore or more at any point of time
during the preceding financial year, and
(c) every private company having –
(i) turnover of rupees two hundred crore or more during the preceding financial
year, or
(ii) outstanding loans or borrowings from banks or public financial institutions
exceeding rupees one hundred crore or more at any point of time during the
preceding financial year.
Provided that an existing company covered under any of the above criteria shall
comply with the requirements of Section 138 and this Rule within six months of
commencement of such section.
Answer :5(b)
The important steps involved in the internal audit of an educational institution are stated
below.
(i) to examine the Trust Deed or Regulations of the educational institution and note
all the provisions affecting accounts.
(ii) to read through the minutes of the meetings of the Managing Committee or the
Governing Body, noting the resolutions affecting accounts to see that those have
been duly complied with
(iii) to check names entered in the Students’ Fees Register and test check the amount
of fees charged and to verify that a system of internal check is in operation.
(iv) to check fees received by comparing counterfoils of receipts granted to confirm
that the revenue from this source has been duly accounted for
(v) to check admission fees, hostel caution money, etc., and confirm that the amount
had been credited to a Capital Fund.
(vi) to see that free studentships and concessions have been granted as per
prescribed Rules.
(vii) toconfirm that hostel expenses were recovered before students’ accounts were
closed and their deposits of caution money refunded.
(viii) to verify rental income from landed property with the rent rolls, etc., vouch income
from endowments and legacies, as well as interest and dividends from investments
and also inspect the securities in respect of investments held.
(ix) to verify any government or local authority grant with the relevant papers of grant;
if any expense has been disallowed for the purposes of grant, ascertain the
reasons and compliance thereof.
(x) to confirm that caution money and other deposits paid by students on admission
have been shown as liability; investments representing endowment funds for prizes
are kept separate and any income in excess of the prizes has been accumulated
and invested along with the corpus.
(xi) to verify that the Provident Fund money of the staff have been deposited with the
appropriate authorities.
(xii) to vouch donations, if any, and ensure that donations for any specific purpose
were utilized for such purpose.
(xiii) to vouch all capital expenditure in the usual way and verify the same with the
sanction of the committee as contained in the minute book.
(xiv) to vouch all establishment expenses and enquire into any unduly heavy
expenditure under any head.
(xv) to verify the inventories of furniture, stationery, clothing, provision and all
equipment, etc.; these should be checked by reference to the Stock Register and
values applied to various items should be test checked.
(xvi) to confirm that the refund of taxes deducted from various incomes have been
claimed and recovered since these institutions are generally exempted from the
payment of income tax.
(xvii) To verify the annual statements of accounts and, while doing so, see that separate
statements of accounts have been prepared as regards specific Funds, viz., Poor
Boys Fund, Games Fund, Hostel Fund, Provident Fund of staff. Etc.
6. (a) In a factory, running single shift, two products M and N, are manufactured.
M N
Man hours/unit 3 7
Production/month (units) 1,500 1,000
Month means 26 working days and 8 hours a day. The company employs 60
workers and the budgeted man-hours are 1,32,000 for the year. You are required to
work out the (i) Capacity Ratio (ii) Activity Ratio and (iii) Efficiency Ratio. 8
(b) A chemical unit generates in-house power to meet its shortfall from grid supply. It has
20% surplus power which it can supply to the adjacent units. From the cost data
given below, how would you compute the cost of power as per CAS 8 is the
following circumstances ?
(i) Power generated for the purpose of inter-unit transfers.
(ii) Power generated for the inter-company transfers.
Power generated 29,76,500 Kwh

Particulars Total Amount (Rs.) (Rs.)/’00 kwh
Coal Consumed less Ash Sale 15,80,000 53.08
Diesel Oil 1,85,000 6.22
Water 16,40,000 55.10
Stores 65,000 2.18
Salaries of Power House Staff 13,94,800 46.86
Repairs & Maintenance 2,96,000 9.94
Deprecation of Plant and Boiler 2,06,000 6.92
Share of Administration 2,05,000 6.89
Overheads
Interest on Asset Purchase 1,40,000 4.70
Distribution Cost 1,80,000 6.05
Total Power House Cost 58,91,800 197.94
8
Answer :6(a)
Budgeted man-hours for the year = 1,32,000
Budgeted man-hours for the month = 1,32,000/12 = 11,000 (maximum possible)
Actual man-hours hours worked = 26 × 8 × 60
= 12,480
Standard man-hours produced = 11,500
For Product P : 1500 × 3 = 4,500
For Product Q : 1000 × 7 = 7,000
(i) Capacity Ratio = Actual man-hours worked / Budgeted man-hours
= 12,480 /11,000 = 113.45%
(ii) Activity Ratio = Actual production in Standard man-hours/ Budgeted man-hours
= 11,500 / 11,000 = 104.54%
(iii) Efficiency Ratio = Actual Production in Standard man-hours /Actual man-hours
= 11,500 / 12,480 = 92.15%
Activity Ratio = Capacity Ratio x Efficiency Ratio = 113.45% × 92.15% = 104.54%
Answer:6(b)
(i) Cost of power generated for the purpose of inter-unit transfers shall comprise direct
material cost, direct employee cost, direct expenses, factory overheads and
distribution cost. Interest on asset purchase and share of administration over heads
will not form part of the cost. This is calculated as below :
Particulars Total Amount (Rs.)
Coal Consumed less Ash Sale 15,80,000
Diesel Oil 1,85,000
Water 16,40,000
Stores 65,000
Salaries of Power House Staff 13,94,800
Repairs & Maintenance 2,96,000
Depreciation of Plant, Boiler 2,06,000
Distribution Cost 1,80,000
Total 55,46,800
Therefore, cost of power generated for the purpose of inter-unit transfers
= 55,46,800 / 29765 = Rs. 186.35 per 100 Kwh
(ii) Cost of power generated for the inter-company transfers shall comprise direct
material cost, direct employee cost, direct expenses, factory overheads, distribution
cost and share of administrative overheads. Interest on asset purchase will not form
part of the cost. This is calculated as below.
Particulars Total Amount

(Rs.)
Coal Consumed less Ash Sale 15,80,000
Diesel Oil 1,85,000
Water 16,40,000
Stores 65,000
Salaries of Power House Staff 13,94,800
Repairs & Maintenance 2,96,000
Depreciation of Plant, Boiler 2,06,000
Share of Administration Overheads 2,05,000
Distribution Cost 1,80,000
Total 57,51,800
Therefore, cost of power generated for the purpose of inter-company transfers

= 57,51,800 / 29765 = Rs. 193.24 per 100 kwh
7. (a) From the following figures extracted from the financial and cost accounting records,
you are required to compute :
(i) Value Added
(ii) Ratio of Operating Profit to Net Sales, and
(iii) Ratio of Operating Profit to Value Added.
Particulars Rs. in lakh

Net sales excluding Excise Duty 50,400
Increase in Stock of Finished Goods 600
Expenses :
Raw Materials Consumed 6,240
Packing Materials Consumed 2,880
Stores and Spares Consumed 1,344
Power and Fuel 11,040
Repairs and Maintenance 480
Insurance 288
Direct Salaries and Wages 1,152
Depreciation 2,124
Interest Paid 3,355
Factory Overheads :
Salaries and Wages 576
Others 600
Selling and Distribution Expenses :
Additional Sales Tax 1,097
Others 4,080
Administration Expenses :
Others 192
10
(b) A unit actually operated 291 days in a year and was stopped for abnormal
circumstances –
(i) 6 days due to power disruption for cyclone and flood, and
(ii) 4 days due to heavy breakdown of core machinery.
The rest of the days were weekly off or holidays. Half wages as lay-off
compensation were paid for the stoppage period. During the year, total
expenses incurred were
(A) Salaries and wages (including lay-off compensation of Rs. 65 lakh) Rs.
3,360 lakh, and
(B) Other fixed costs Rs. 1,050 lakh.
Find Abnormal Costs (in Rs. lakh) 6
Answer :7(a)
(i) Value Added = Rs. 23,856
Computation of Value Added Rs. in lakh Rs. in lakh
Sales + increase in Stock of Finished Goods 51,000
Less
Cost of Materials and Services
Raw materials consumed 6,240
Packing materials consumed 2,880
Stores and spares consumed 1,344
Power and Fuel 11,040
Insurance 288
Other Factory Overheads 600
Other Selling and Distribution Expenses 4,080
Other Administration Expenses 192 27,144
Value Added 23,856
(51,000 – 27,144)
Composition of Value Added
Depreciation 2,124
Interest 3,355
Additional Sales Tax 1,097
Salaries and Wages (1,152+576+288+288) 2,304 8,880
Profit before Tax 14,976
Operating Profit
Profit before Tax 14,976
Interest paid 3,355 18,331
(ii) Ratio of Operating Profit to Net Sales = Operating Profit = 18,331/50,400 = 36.37%
Net Sales
(iii) Ratio of Operating Profit to Value Added = Operating Profit = 18,331/23,856 = 76.84%
Value Added
Answer :7(b)
As per Cost Accounting Standard on Material Cost (CAS- 6), any abnormal cost shall be
excluded from material cost. So cost of abnormal events such as strike, lock out and
other factors are not included in cost. The abnormal cost is estimated as below.
Total Fixed Costs Abnormal Costs
Working days 291+6+4 = 301 6+4 = 10
Salaries and Wages (Rs. in lakh) 3,360 65
Other Fixed cost (Rs. in lakh) 1,050 = 1050 × (10/301)
= 34.88
Total 4,410 99.88
Out of total fixed costs of Rs. 4,410 lakhs, abnormal costs of Rs. 99.88 lakhs will not form
part of cost of production.
8. Answer any four questions.
(a) Write a note on adjustment of cost variances in working out total cost.
(b) How do you assess the adequacy of the Internal Audit function ?
(c) How is the operational efficiency of a unit highlighted in the report by the Cost
Auditor as per the Companies (Cost Records and Audit) Rules, 2014 ?
(d) Fortune Textiles is using water for production and consumption purposes and raises
water from a water body nearby and through recycling process. The water is
treated through two processes and is transferred to the reservoir of the plant to
supply for Boiler. Washroom, Humidification, Weaving, etc. A part of such water is
transferred for human consumption in office, canteen and quarters through a
branded Purifier. The initial water collection cost, inclusive of fees to local
authorities, is. Rs. 1/kl and the other costs, including process waste, are shown
below:
Particulars Process 1 Process 2 Domestic
Water Raised (kl) 26,000 24,700 6,500
Water Transferred (kl) 24,700 23,400 6,500
Cost of Water Raised Rs. 1/kl
(Rs.)
Processing Cost (Rs.) 57,460 39,700 15,000
Calculate the cost of water transferred from source to the Plant and the Domestic
area.
(e) The following figures relate to Walmat Street Ltd. for two years :
31.3.2018 31.3.2017
Gross Profit% 30 25
Average Stock (Rs.) 45,000 60,000
Average Debtors (Rs.) 1,20,000 1,55,000
Stock Turnover (times) 20 25
Income Tax Rate (%) 30 30
Post-tax Income as % of Sales 8 9
Prepare Statement of Profits for two years. 4 × 4 = 16
Answer :8(a)
The guidelines laid down in CRA 1 state that ‘Where the company maintains cost records
on any basis, other than actual, such as Standard Costing, the records shall indicate the
procedure followed by the company in working out the cost of the goods or services
under such system. The cost variances shall be shown against separate heads and
analysed into material, labour and overheads and further segregated into quantity, price
and efficiency variances. The method followed for adjusting the cost variances in
determining the actual cost of the goods or services shall be indicated clearly in the cost
records. The reasons for the variances shall be duly explained in the cost records and
statements.’
Answer :8(b)
Sometimes it is required to assess the adequacy of internal audit function of an
organization. The questionnaire given below will help assess the adequancy of the
internal audit function.
1. What is the organizational set up of the department ?
2. Is the staff employed in the department adequate ?
3. Are the qualifications of the staff adequate ?
4. Is the staff competent ?
5. Is the staff independent ?
6. To whom do they report frequently and with what effect ?
7. Is there any internal audit manual ?
8. Is a programme of internal audit drawn up before the commencement of the
financial year ?
9. Does the programme cover the audit of all the important transactions and records of
the company including statutory cost accounting records ?
10. Is the scope of internal audit wide enough to extend to areas such as, management
audit, operational audit and system analysis ?
11. What is the system of reporting irregularities noticed during internal audit ?
12. Is prompt corrective action taken by the management on the basis of internal audit
reports ?
13. Is there much duplication of work between the statutory audit and internal audit ?
Answer :8(c)
(1) The Cost Auditor has a report, as per CRA 3, whether the Cost Accounting System
followed in a manufacturing unit is adequate for determination of the fair cost of
production.
(2) He/She/It has to report on the financial performance of the company as well as of
the product under Cost Audit, along with various ratios, and offer comments on the
ratios.
(3) He/She/it has to indicate the percentage of production in relation to the installed
capacity expressed in appropriate units of measurement and also to state reasons
for the shortfall in production, bringing out clearly the extent to which those are
controllable both in the short-term and the long-term.
(4) He/she/it has to give observations as regards variations, if any, in the rate of major
raw materials, power and fuel, etc. in terms of rate per unit as compared to the
previous year.
(5) He/she/it has to give details of wages and salaries including direct labour cost per
unit of output and as compared to the previous year.
(6) He/she/it has to indicate the amount of overheads along with reasons for any
significant variations in expenditure incurred against the items of factory,
administration, selling and distribution overheads as compared to the previous two
years.
(7) The cost auditor has also to mention any abnormal features affecting the
production, indicating their effect on the unit cost of production.
Again the Cost Auditor may offer suggestions as regard the following matters for
improvement in performance of the company under audit with reference to :
(a) Rectification of general imbalance in production facilities,
(b) fuller utilization of installed capacity,
(c) concentration on areas offering scope for cost reduction, increased productivity
and key limiting factors causing production bottlenecks, and
(d) suggesting improved inventory policies.
Answer :8(d)
Cost of Water transferred from source to Plant and Domestic area
Particulars Process 1 Process 2 Domestic
A. Water Raised (KI) 26,000 24,700 6,500
B. Water Transferred (KI) 24,700 23,400 6,500
C. Cost of Water Raised (Rs.1/KI) 26,000 83,460 @5.26/KI=34,200
(approx)
D. Processing Cost (Rs.) 57,460 39,700 15,000
E. Total Cost (Rs.) [C+D] 83,460 1,23,160 49,200
F. Unit Cost of Water Transferred (Rs.) 3.38/kl 5.26/kl 7.57/KI
[E÷B]
Answer :8(e)
Statement of Profits of Walmat Steel Ltd.
31.3.2018 31.3.2017
a) Gross Profit % 30 25
b) Average Stock (Rs.) 45,000 60,000
c) Average Debtors (Rs.) 1,20,000 1,55,000
d) Stock Turnover (times) 20 25
e) Income Tax Rate (%) 30 30
f) Post-tax Income as % of Sales 8 9
g) Cost of Goods Sold (bxd)(Rs.) 9,00,000 15,00,000
h) Sales [g × 100 /(100-a)] (Rs.) 12,85,715 20,00,000
i) Net Income after Tax [hxf] (Rs.) 1,02,857 1,80,000
j) Profit before Tax [1 × 100/(100-e)] (Rs.) 1,46,939 2,57,143
SUGGESTED_ANSWERS TO QUESTIONS_SYL2016_JUNE2018_PAPER-19
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)
JUNE - 2018
any five questions from Question Nos. 2 to 8.
Section – A (20 Marks)

1. Choose the correct answer with short justification/working. (1mark for correct choice, 1
mark for justification/workings. 2x10=20
(i) In which CRA Form, is the Cost Audit Report of a company filed with the Central
Government?
(a) CRA-4
(b) CRA-3
(c) CRA - 1
(d) CRA-2
(ii) CAS 23 deals with .........................................

(a) Quality Control
(b) Manufacturing Cost
(c) Overburden Removal Cost
(d) Treatment of Revenue in Cost Statements
(iii) As per the Cost Auditing Standard 101, the risk of Material Misstatements has two
components, viz., ……………………………..
(a) Inherent Risk and Control Risk
(b) Detection Risk and Audit Risk
(c) Material Risk and Implicit Risk
(d) Financial Risk and Explicit Risk
(iv) As per Part D, Para 4 of the Companies (Cost Records and Audit) Rules, 2014, Value
Addition and Distribution of Earnings are to be computed based on
(a) Audited Financial Data
(b) Cost Record Data
(c) Unaudited Financial Data
(d) Both (a) and (b)
(v) The audit of data or information, depicting social performance of a business in

contrast to its normal economic performance as measured in financial audit, is
(a) Energy Audit
(b) Efficiency Audit
(c) Social Audit
(d) Propriety Audit
(vi) The figures below are available for Good Luck Limited.
Budgeted Production - 900 units, Standard Hours per unit -10, Actual Production - 720
units and Actual Working - 6000 hours. What is the Efficiency Ratio?
(a) 110%
(b) 120%
(c) 100%
(d) 125%
(vii)Which of the following is not a Professional Misconduct as per the First Schedule of The
CWA Act, 1959, in relation to the Cost Accountants in Practice?
(a) Pays or allows or agrees to pay or allow, directly or indirectly, any share,
commission or brokerage in the fees or profits of his/her professional work, to any
person other than a member of the Institute or a partner or a retired partner or the
legal representative of a deceased partner.
(b) Enters into a partnership, in or outside India, with any person other than a Cost
Accountant in Practice or such other person who is a member of any other
professional body having such qualifications as may be prescribed.
(c) Advertises his/her professional attainments or services or uses any designation or
expression other than Cost Accountant on professional documents, visiting cards,
letter heads or sign boards, unless it is a degree of a University established by law
in India or recognised by the Central Government or a title indicating
membership of The ICAI or any other institution that has been recognised by the
Central Government or may be recognised by the Council.
(d) Expresses his/her opinion on cost or pricing statements of any business or
enterprise in which, he/she, his/her firm or a partner in his/her firm has substantial
interest.
(viii) Remuneration of the Non-Executive Directors is treated as ....................

(a) Employee Costs
(b) Administrative Overheads
(c) Salaries and Wages
(d) Management Expenses
(ix) The process of determining the elements which correspond to the lines and the
columns in a financial statement and the elements which must be created by
extension is called as
(a) Mapping
(b) Name
(c) Concept
(d) Scaling
(x) As per the CAS 23, the activity of Overburden Removal that benefits the identified
component of an ore to be mined by the entity is called as ......
(a) Mining Activity
(b) Overburden Removal
(c) Stripping Activity
(d) Advance Stripping
Answer:
1. (i) (a) Reason: Pursuant to Section 148 (6)of the Companies Act, 2013, and Rule 6
(6)of the Companies (Cost Records and Audit) Rules, 2014, the Cost Audit
Report is to be filed in Form CRA-4 with the Central Government.
(ii) (c) Reason: Cost Accounting Standard (CAS) 23 is issued by the Council of The
Institute of Cost Accountants of India on "Overburden Removal Cost". It is
applicable from 1st April, 2017.
(iii) (a) Reason: As per the Cost Auditing Standard (CAS-101) on Planning an Audit of
Cost Statements, the risk of material misstatement has two components, viz.,
Inherent Risk and Control Risk.
(iv) (a) Reason: As per part D, para 3 of the Companies (Cost Records and Audit)
Rules, 2014, Value Addition and Distribution of Earnings are to be computed
based on Audited Financial Accounts.
(v) (c) Reason: Social Audit is generally defined to be the audit of data or
information depicting social performance of a business in contrast to its
normal economic performance as measured in financial audit. A lot of
research and experimentation have been conducted to devise techniques or
models, which can measure the contribution of an enterprise to the Society.
(vi) (b) Reason: Efficiency ratio=(Standard Hours of actual Production)/(Actual Hours

(720 ×10)
Worked)×100 = ×100 = 120%
6,000
(vii) (d) Reason: As per the Second Schedule Part 1 of the Cost and Works
Accountants Act,1959, a Cost Accountant in Practice shall be deemed to be
guilty of Professional Misconduct, if he/she expresses his/her opinion on cost or
pricing statements of any business or enterprise in which, he/she, his/her firm or
a partner in his/her firm has substantial interest.
All the other options are Professional Misconduct as per the First Schedule of
The Cost and Works Accountants Act, 1959 in relation to the Cost
Accountants in Practice.
(viii) (b) Reason: As per the Generally Accepted Cost Accounting Principles (GACAP),
Remuneration of the non-Executive Directors will not be considered as part of
Employee Costs but will be treated as part of Administrative Overheads.
(ix) (a) Reason: As per the XBRL, Mapping is the process of determining the elements
which correspond to the lines and the columns in a final statement and the
elements which must be created by extension.
(x) (c) Reason: As per the Cost Accounting Standard on Overburden Removal Cost,
the Stripping Activity refers to the activity of overburden removal that benefits
the identified component of an ore to be mined by the entity.
Section - B (80 marks)
2. (a) (i) A Company meets the threshold limits for both maintenance of Cost Records and
Cost Audit in 2015-16 and, consequently, comes under the purview of the Rules in
the year 2016-17. If the turnover of the company gets reduced to lower than the
prescribed threshold limit in 2016-17, state whether the Rules relating to Cost
Records and Cost Audit will be applicable for the year 2017-18?
(ii) What would be the treatment of cost of consumption of electricity from a captive
generating plant and the applicability of Cost Audit to such captive generating
plants? 4+4=8
(b) Explain whether the following activities amount to Professional Misconduct on the part
of a Cost Accountant:
(i) Mr. Arun, a CMA, is working as Manager-Cost Accounts of PQR Ltd. He accepts
10% of profits from his friend, Mr. Raju, a lawyer and a legal consultant for PQR Ltd.
He is doing the job on retainership basis.
(ii) Mr. S, a CMA in Practice, certifies a cost and pricing statement of manufacturing of
pipes for the supply relating to a contract. The statement is prepared by Mr. T, who
is not a CMA or an employee of Mr. S. 4+4=8
Answer:
2. (a) (i) Rule 3 of the Companies (Cost Records and Audit) Rules, 2014, states that a
company engaged in the production of the goods and/or rendering of the
services as prescribed, having an overall turnover from all its products and/or
services of Rupees thirty five crore or more during the immediately preceding
financial year, shall include cost records for such products and/or services in their
books of account. Since the threshold limit for applicability of maintenance of
Cost Accounting Records is met in 2015-16 (Previous Year), the Cost Records are
required to be maintained from 2016-17. Once the maintenance of Cost Records
becomes applicable, it would be maintained on a continuous basis in the
subsequent years also. Following the same line, Cost Audit will be applicable from
2016-17 and for every year thereafter. So Cost Audit is applicable in 2017-2018
also.
(ii) As per Rule 3(A)(2), of the Companies (Cost Records and Audit) Rules, 2014
amendment dated 14th July, 2016 dealing with generation, transmission,
distribution and supply of electricity, all companies having captive generation of
electricity, whether covered under Audit or not shall be required to maintain Cost
Records. It may be noted that, in case of a company whose product(s)/service(s)
are covered under the Rules and it consumes electricity from the captive
generating plant, determination of cost of generation, transmission, distribution
and supply of electricity as per CRA-I would be mandatory since the cost of
consumption of electricity has to be at Cost. Hence, maintenance Cost Records
for generation, transmission, distribution and supply of electricity would be
applicable. However, Cost Audit will not be applicable to such captive plants,
provided the entire generation is consumed captively and no portion is sold
outside.
(b) (i) As per provisions of Clause 2 of Part II of The First Schedule of The Cost and Works
Accountants Act, 1959, stipulates the Professional Misconduct in relation to Cost
Accountants in Service. As per the provisions of Part II of the First Schedule of the
Act, a Cost Accountant in Service shall be deemed to be guilty of Professional
Misconduct, if he/she "accepts or agrees to accept any part of fees, profits or
gains from a lawyer, a cost accountant or a broker engaged by such a
company, firm or person or agent or customer of such company, firm or person
by way of commission or gratification".
In the given case, Mr. Arun, who is working as a Manager—Cost Accounts of PQR
Ltd., accepts 10% of profits from Mr. Raju, who is a legal consultant of the same
company. This amounts to Professional Misconduct.
(ii) As per provisions of Clause 2 of Part I of The Second Schedule of The Cost and
Works Accountants Act, 1959, stipulates, the Professional Misconduct in relation to
Cost Accountants in Practice. As per the provisions of the Part I of the Second
Schedule of the Act, a Cost Accountant in practice shall be deemed to be guilty
of professional misconduct, if he/she "certifies or submits in his/her name, or in the
name of his/her firm, a report of an examination of cost accounting and related
statements unless the examination of such statements has been made by him/her
or by a partner or an employee in his/her firm or by another Cost Accountant in
Practice".
In the given case, Mr. S. certifies the cost and pricing statement of a company,
which is manufacturing pipes. The statement is to be submitted for a Contract
and is not prepared by him. It is prepared by Mr. T. who is neither a CMA nor an
employee of Mr. S. Hence, this amounts to Professional Misconduct.
3. (a) As the per CAS - 21, explain

(i) Quality Control.
(ii) Treatment of Quality Control Costs. 2+6=8
(b) ABC company is manufacturing Building Bricks and Fire Bricks. Both the products
required two processes: Brick Forming and Heat Treating.
Time requirements for the two bricks Building Bricks Fire Bricks
Forming per 100 bricks 4Hrs. 3Hrs.
Heat Treatment per 100 bricks 3Hrs. 6Hrs.
Total Cost of the two departments in one month

Forming ` 40,000
Heat Treatment ` 90,000
Production during the month

Building Bricks 1,40,000 Nos.
Fire Bricks 80,000 Nos.
Prepare a Statement of Manufacturing Cost for the two varieties of Brick. 8
Answer:
3. (a) (i) Quality Control:

As per CAS 21, Quality Control is a procedure or a set of procedures exclusively
designed to ensure that the manufactured products or performed service(s)
adhere to a defined set of quality criteria or meet requirements of the client or
the customer.
(ii) Treatment of Quality Control Cost:

a) Quality Control Costs incurred in-house shall be the aggregate of the costs of
resources consumed in the Quality Control activities of the entity. The costs
of resources procured from outside shall be determined at invoice or agreed
price, including duties and taxes, and other expenditure directly attributable
thereto, net of discounts (other than cash discounts), taxes and duties
refundable or to be credited by the Tax Authorities. Such costs shall include
Cost of Conformance to Quality: (a) Prevention Cost and (b) Appraisal Cost.
b) Identification of Quality Control Costs shall be based on traceability in an
economically feasible manner.
c) Quality Control Costs, other than those referred to above, shall be
determined on the basis of amount incurred in connection therewith.
d) Finance Costs incurred in connection with the self-generated or procured
resources shall not form part of the Quality Control Costs.
e) Quality Control Costs do not include imputed costs.
f) Any Subsidy/Grant/Incentive or any such payment received/receivable with
respect to any Quality Control Cost shall be deducted for ascertainment of
the cost of the cost object to which such amounts are related.
g) Any abnormal portion of the Quality Control Costs where it is material and
quantifiable shall not form part of the Costs of Quality Control.
h) Penalties and damages paid to statutory authorities or other third parties shall
not form part of the Quality Control Cost.
i) Any change in the cost accounting principles applied for the measurement of
the Quality Control Costs shall be made only if it is required by law or for
compliance with the requirements of a Cost Accounting Standard or the
change would result in a more appropriate preparation or presentation of
cost statements of an organization.
(b) Working Notes:

Brick forming:
(a) Time required for Building Bricks (140000x4)/100 5600 Hrs
(b) Time required for Fire Bricks (80000x3)/100 2400 Hrs.
Total 8000 hrs.
Total Cost for Brick Forming ` 40000
Cost per Hour of Brick Forming (40000/8000) `5
Heat Treatment:
a) Time required for Building Bricks (140000x3)/100 4200 Hrs
b) Time required for Fire Bricks (80000x6)/100 4800 Hrs.
Total 9000 Hrs.
Total Cost for Heart Treatment ` 90,000
Cost per Hour of Heat Treatment (90000/9000) ` 10
Statement Showing Manufacturing Cost of Building Bricks

Units-1,40,000
Process Time for 100 Rate per hour Cost per 100 units Total cost
units (Hrs) (`) (`) (`)
Brick Forming 4 5 20 28000
Heat Treatment 3 10 30 42000
Total 70000
Statement Showing Manufacturing Cost of Fire Bricks

Units-80000
Process Time for 100 Rate per Hr. Cost per 100 units Total cost
units (Hrs.) (`) (`) (`)
Brick Forming 3 5 15 12,000
Heat Treatment 6 10 60 48,000
Total 60,000
4. (a) (i) What do you mean by Key Performance Indicators (KPIs)? What are the Key
Performance Indicators for a company?
(ii) What are the additional references for a Cost Auditor available for Management
Reporting? 4+4=8
(b) Explain Corporate Development Audit. Prepare a checklist for various areas of
Corporate Development, which may be helpful in appraising the structural aspect of
a corporation. 8
Answer:
4. (a) (i) Key performance indicators (KPIs) are simply the variables, independent or
interdependent, in respect of which the goals can be set and performance can
be measured to assess whether these are furthering the enterprise objectives.
Hence, for evaluation of performance, the selection of KPIs must be made
correctly in tune with the objectives.
The KPI measurement should not be a static computation. It always needs to be

compared with a benchmark set.
The key performance indicators for a company could be as below:

a) Quantitative - These can be financial or non-financial
b) Qualitative - These are often lead indicators i.e. these influence future
performance
c) Actionable - Those which can be influenced by enterprise actions or are
controllable.
d) Trending- Those which need to be assessed over a period of time to observe
whether they are improving or not.
(ii) Additional References for a Cost Auditor available for Management Reporting
are enumerated below:
1. Annual Reports of the Company for the current year and the past years.
2. Guidance given by the company to the stock markets.
3. Written policy documents of the company.
4. Company Websites.
5. Website of the industry associations.
6. Macro-economic data from the RBI, Ministry of Finance, Ministry of Commerce
and Industry, etc.
7. Management Accounting Tools and Techniques- references and hand books.
8. Cost Accounting Standards issued by The ICAI.
9. Generally accepted cost accounting principles (GACAP) published by The
ICAI.
10. Stock market information on prices, market capitalisation, market returns.
11. Minutes of the board meetings to the extent relevant.
12. Personal meetings with the CEO/MD of the organisation and members of the
Audit Committee and the Board.
13. The cost accounting policy of the company.
14. The cost accounting system of the Company-costing methods.
15. GST records maintained by the Company.
16. The monthly MIS reports- particularly exceptional reports.
(b) Corporate Development Audit is an independent objective study of an organization's

capabilities. It aims at identifying strengths and weaknesses and moving toward the
state of the art performance. Corporate Development Audit gives a comprehensive
picture of the status of corporate development effectiveness and highlights the
developmental needs.
Checklists in the areas of Corporate Development Audit:
Checklists on various areas of Corporate Development may be helpful in appraising

the structural aspect of a Corporation are stated below:
A. Check list on Corporate Planning:

a) Whether SWOT Analysis has been made?
b) What are the corporate strengths and weaknesses in relation to price, quality,
market share, distribution network, after-sales services, technology
improvement, corporate structure and qualities of members?
c) What are the opportunities and threats in relation to rivalry among the existing
firms, threat of new entrants, threat or opportunity of technical know-how,
and strategy of suppliers?
d) How were the threats overcome and opportunities availed of in the past?
e) Whether the "corporate image} is going to improve in the near future?
f) What specific techniques are applied by the management for corporate
planning (long term and short term)?
g) Whether the corporate objectives and goals are clearly defined?
h) Whether the corporate planning premises and plans have been drawn up
based on adequate information?
B. Check list on Corporate Objectives:

a) Whether the corporate objectives are clear and explicit?
b) Whether the different component of the enterprise have separate objectives?
c) Whether these objectives are clearly defined?
d) Is there sufficient flexibility in the organizational design in the form of the
responsiveness to changes taking place from time to time?
C. Checklist on Delegation of Authority:

a) Whether there are clear lines of authority from top to bottom in the corporate
enterprise?
b) Whether accountability has been properly coupled with corresponding
authority?
c) Whether responsibility and authority in each position are clearly defined in
writings?
d) Whether the number of levels of authority have been kept minimum?
e) Whether the duties assigned to the subordinates are indicative of the exact
activities expected of them?
f) Whether responsibility via Delegation of Authority has been created among
the subordinates to complete the given task?
g) Whether the methods of Delegation of Authority are Compatible with the
organization structure?
D. Checklist of span of Management

a) Whether span of Management has been recognised in the organization?
b) Whether everybody in department reports only to one supervisor?
c) Whether the accountability of the higher authority for the acts of its
subordinate is in accordance with the current practices?
d) Whether the corporate management recognizes the following factors that
affect the span of Management?
(i) Degree of interaction between the units or the personnel being supervised
(ii) The incidence of new problems in any department
(iii) The extent of standard procedures adopted
(iv) The extent of non-managerial responsibilities
e) Whether the different activities and functions are grouped together in order
to:
(i) Obtain the most effective use of men and facilities
(ii) Meet the objective in the optimum way
(iii) Run the operation most economically
f) Whether responsibilities are grouped, wherever possible, so that the overall

control of a function can be established so as to hold the superior manager
accountable?
5. (a) Prepare an Internal Control Questionnaire relating to Inventory. 8
(b) What are the important points to be considered for conducting Audit of a Hospital? 8
Answer:
5. (a) Internal control questionnaire relating to inventory:

1. Is the storage accommodation adequate to provide protection against
- deterioration?
- access by unauthorized persons?
- any other local hazards?
2. Are issues from the stores made only against properly authorized requisition(s)?
3. Who are authorized to sign requisition? Specify name, position, etc.
4. Are bin cards or similar records maintained at the stores location?
5. Are continuous stock records maintained for
- raw materials?
- bought out components?
- consumable stores?
- finished goods?
- stocks held on behalf of third parties?
6. Are these records maintained

- in quantity only?
- in value only?
- in both quantity and value?
7. Are stores records maintained by a person independent of
- the store keepers?
- those responsible for physically counting or checking stocks?
8. Are independently maintained control accounts kept for each category of stock
mentioned in 5?
9. Is the counting system fully integrated with the financial records?
10. If not are totals of various categories of costs (including overheads) regularly
reconciled with the actual costs in the financial records?
11. Are work orders issued
- against specific orders?
- on the basis of pre-determined production targets?
- on some other basis?
12. How are work orders authorized? Specify.
13. On what basis are materials, labour and other direct costs charged to the work-in-
progress accounts? Specify.
14. Are Overheads clearly divided into fixed and variable overheads?
15. What is the basis of allocation of overheads to costs and recovery of overheads ?
Specify.
16. Does the system ensure that excess or abortive costs are written off and not
carried forward in the work in progress?
(b) Audit of Hospitals:

The points stated below are to be considered for conducting audit of a hospital.
(i) Check the letter of appointment to ascertain the scope of responsibilities .
(ii) Study the Charter or Trust Deed under which the hospital has been set up and
take a special note of the provisions affecting the accounts.
(iii) Examine, evaluate and verify the system of internal check and internal control
and determine the nature, timing and extent of the audit procedures.
(iv) Vouch the entries in the Patient's Bill Register with the copies of the bills issued. Test
check the selected bills to see that these have been correctly prepared taking
into consideration the period of stay of each patient as recorded in the
Attendance schedule.
(v) Vouch the collection from patients with the copies of the bills and entries in Bills
Register. Arrears of dues should be properly carried forward. Where these are
deemed to be irrecoverable, these be written off under due authorizations.
(vi) Interest and /or dividend income should be vouched with reference to the
Investment Register and the interest dividend warrants.
(vii)In case of legacies and donations which are received for specific purposes, it
should be ensured that any income therefrom is not utilized for any other
purposes.
(viii)Where receipts of subscription show significant deviations from the budgeted
figures, these should be thoroughly inquired into and the matter should be
brought to the notice of the trustees or the Managing Committee.
(ix) Government grants or grants from local bodies should be verified with reference
to the correspondence with the concerned authorities.
(x) Clear distinction should be made between the capital and revenue items.
(xi) The capital expenditure should be incurred under the proper authorization of a
valid resolution of the trustees or the Managing Committee.
(xii) Verify the system of internal check as regards purchase and issue of stores,
medicine, etc.
(xiii)Examine that the appointment of the staff, payment of salaries etc., are duly -
authorized.
(xiv)Physically verify the investments, fixed assets and inventories.
(xv)Check that adequate depreciation has been provided on all the depreciable
assets.
6. (a) The financial statements of PQR Ltd. contain the information given below for the years
ended on 31st March, 2017 and 31st March, 2018.
Particulars 31.03.17 (`) 31.03.18 (`)

Cash 1,50,000 1,75,000
Sundry Debtors 4,20,000 4,50,000
Short-term Investment 3,35,000 3,75,000
Stock 21,72,000 22,80,000
Prepaid Expenses 15,000 22,000
Total Current Assets 30,92,000 33,02,000
Current Liabilities 10,50,000 12,72,000
10% Debentures 18,00,000 18,00,000
Equity Share Capital 25,00,000 25,00,000
Retained Earnings 9,00,000 10,00,000
Statement of Net Profits for the years ended on 31st March, 2017 and 31 March, 2018.
Particulars 31.03.2017 31.03.2018

Sales (20% cash sales) 48,00,000 51,60,000
Less : Cost of Goods Sold 33,60,000 36,12,000
Profits before Interest and Tax 14,40,000 15,48,000
Less: Interest 1,80,000 1,80,000
Profits before Tax 12,60,000 13,68,000
Less: Tax @ 30% 3,78,000 4,10,400
Profits after Tax 8,82,000 9,57,600
You are required to calculate the following for the years ending 31.03.2017 and
31.03.2018:
(i) Quick Ratio
(ii) Current Ratio
(iii) Debt-Equity Ratio
(iv) Return on Capital Employed
(v) Average Collection period (assuming 360 days a year) 10
(b) The following are the process-wise wastages on inputs in a Spinning Mill in the year
2017-18:
Process % of Wastages on Input
Blow Room 9.13
Carding 7.14
Drawing 1.20
Roving (Simplex) 0.25
Ring Frame (Spinning) 7.11
Reeling and Winding 1.35
From the above, calculate the process-wise Waste Multiplier Factor. 6
Answer:
6. (a) (i) Quick Ratio = Quick Assets/Current Liabilities

Quick Assets = Current Assets - Stock-Prepaid Expenses
31.03.2017 = (30,92,000-21,72,000-15,000)/10,50,000
= 9,05,000/10,50,000 = 0.86:1
31.03.2018 =(33,02,000-22,80,000-22,000)/12,72,000
= 10,00,000/12,72,000 = 0.79:1
(ii) Current Ratio:
= Current Assets/Current Liabilities
31.03.2017 = 30,92,000/10,50,000 = 2.94:1

31.03.2018 = 33,02,000/12,72,000 = 2.60:1
(iii) Debt-Equity Ratio:

= Long Term Debt/Shareholder's Fund
31.03.2017 = 18,00,000/34,00,000 = 0.53:1

31.03.2018 = 18,00,000/35,00,000 = 0.51:1
(iv) Return on Capital Employed = (Profit after tax +Interest)/Capital Employed) x 10
31.03.2017: (882000+180000)/5200000) x 100 = 20.42%

31.03.2018: (957600+180000)/530000) x 100 = 21.46%
Alternative Answer
(iv) Return on Capital employed:

(Profit after Tax+ Interest- Tax Advantage on Interest)/Capital employed × 100
31.03.2017: [(882000+180000-54000)/5200000/ x 100 = 19.38%

(957600+180000-54000)/5300000] x 100 = 20.45%
(v) Average Collection Period:

=(Sundry Debtors/Credit Sales) × 360
31.03.2017 = (4,20,000/38,40,000) × 360 = 39 days

31.03.2018 = (4,50,000/41,28,000) × 360 = 39 days
(b)
Process % of Wastages Net output for 100 Waste multiplier
in input units of input factor
Total 100 1.3122
Blow room 9.13 100 - 9.13 = 90.87 1.1924
Carding 7.14 90.87 - 6.49 = 84.38 1.1072
Drawing 1.20 84.38 – 1.01 = 83.37 1.0940
Roving (Simplex) 0.25 83.37 - 0.21 = 83.16 1.0912
Ring frame (spinning) 7.11 83.16 - 5.91=77.25 1.0136
Reeling and winding 1.35 77.25 - 1.04 =76.21 1.0000
7. (a) ABC Ltd. is engaged in the manufacture of an electronic gadget. It produces 30,000
gadgets per annum. The company also manufactures the component needed for
gadgets - 30,000 units of component.
The departmental expenses per annum are as follows:

Direct Material 39,60,000
Direct Labour 14,48,000
Indirect Labour 8,40,000
Inspection and Testing 4,70,000
Lighting 45,000
Power 4,90,000
Insurance 30,000
Depreciation (fixed) 98,000
Miscellaneous Fixed Expenses 56,000
If the company stops manufacturing the components and buys the same from
market, the saving in the departmental budget will be as under.
Direct Material 20%
Direct Labour 25%
Indirect Labour 20%
Inspection and testing 25%
Power 25%
The purchase price of each component is ` 60.
Required :
(i) State whether the company should make or buy the component.
(ii) The company has received an export order of 15000 units of the electronic
gadget at a price of ` 270 each. If the offer is accepted by the company, the
capacity will be fully utilised and the component will have to be purchased.
Should the company then make or buy the component? 10
(b) The following data are available for Limelight Limited:

Particulars 2015-16 2016-17 2017-18
Installed Capacity (tonnes) 320 320 320
Production (tonnes) 310 300 160
Cost Per tonne (`) 1,000 1,070 1,641
The poor capacity utilisation in 2017-18 was due to abnormal power cut. The
escalation in costs were 5% in 2016-17 and 7% in 2017-18 (based on 2015-16).
Required:
(i) Calculate the abnormal costs due to power cut.
(ii) How would you treat the Abnormal Cost? 6
Answer:
7. (a) (i) Departmental Expenses Budget

Particulars Total (`) Allocation Gadgets Components
Ratio (`) (`) (`)
Direct Material 39,60,000 80:20 31,68,000 7,92,000
Direct Labour 14,48,000 75:25 10,86,000 3,62,000
Indirect Labour 8,40,000 80:20 6,72,000 1,68,000
Inspection and Testing 4,70,000 75:25 3,52,500 1,17,500
Power 4,90,000 75:25 3,67,500 1,22,500
72,08,000 56,46,000 15,62,000
Fixed Costs: `
Lighting 45,000
Insurance 30,000
Depreciation 98,000
Miscellaneous fixed expenses 56,000
2,29,000
Total Cost 74,37,000
Cost per unit = 7437000/30000 = ` 247.90.
Variable Cost per unit:

Gadgets = 56,46,000/30000 = ` 188.20
Components = 15,62,000/30000 = ` 52.07
The variable cost per unit of the component is ` 52.07. The purchase price of the
component is ` 60 per unit. For each unit additional cash out flow will be ` 7.93.
Therefore, the company should take decision to make/manufacture the
component.
(ii) Evaluation of decision for Export:
Inflow `
(i) Additional Profit due to export order [15,000 units × (270 - 247.90)] 3,31,500
(ii) Saving in variable cost of components (30000 × 52.07) 15,62,000
18,93,500
Less: Outflow
Payment to be made to supplier (30,000 × ` 60) 18,00,000
Net Cash inflow (Net profit) 93,500
Hence the export order should be accepted and the components should be
bought/purchased.
(b) Statement showing calculation of abnormal costs due to power cut:

Particulars 2015-16 2016-17 2017-18
Installed capacity (Tonnes) (a) 320 320 320
Production (Tonnes) (b) 310 300 160
Percentage of Capacity utilization (b/a x 100) 97% 94% 50%
Cost per unit (`/tonne) 1000 1070 1641
Escalation Factor 100 105 107
Cost (at base year price) 1000 1019 1534
Total cost of production 310000 305700 245440
Variable cost per Tonne (working note 1) 430 430 430
Fixed cost 570 589 1104
Fixed cost @ 100% utilization 552
Increase in Fixed Cost 552
Note: Hence increase in Fixed Cost/Tonne due to abnormal power cut resulting in
poor capacity utilization in 2017-18 is 1104-552= ` 552. Working note 1: Calculation of
Variable Cost:
Particulars 2016-17 2017-18
Difference in total cost 3,10,000 3,10,000
-3,05,700 -2.45,440
4,300 64,560
Difference in Production 10 150
Variable Cost=difference in cost/difference in production 430 430
(i) Total abnormal costs due to power cut= 160 × 552= ` 88,320/-
(ii) The abnormal costs must be excluded from the computation of Product Cost.
Such abnormal costs are charged directly to Costing Profit and Loss Account.
(a) As per the CAS-12, how should high value spare, when replaced by a new spare and
reconditioned, be treated? 4
(b) What do you mean by Internal Check? Is it different from Internal Audit? Explain. 4
(c) Explain the Adequacy of Budgetary Control System. 4
(d) PQR Ltd. has received an enquiry for supply of 2,50,000 special type of machine parts.
Capacity exists for manufacture of the machine parts but a fixed investment of `
1,20,000 and working capital to the extent of 25% of sales value will be required to
undertake the job.
The cost estimated is as follows:

Raw Materials - 25000 kgs. at ` 3.00 per kg.
Labour Hours - 10000 hrs. of which 1500 would be overtime hours payable at double
the labour rate.
Labour Rate – ` 3 per hour

Factory overheads – ` 3.50 per direct labour hour
Selling and Distribution overheads – ` 32,000
Materials recovered at the end of the operation will be ` 10,000 (estimated).
The company expects a net return of 25% on capital employed.
You are the Management Accountant of the company. The Managing Director
requests you to prepare a cost and price statement, indicating the price which should
be quoted to the customer. 4
(e) The following figures are taken from the accounts of Best Ltd. for the year ended on
31.03.2018:
Particulars ` (in lakh)
Gross Fixed Assets 5,600
Cumulative Depreciation 1,300
Investment in Shares and Debentures 650
Inventories 545
Sundry Debtors 347
Advances for Purchase of Capital Equipment 38
Other Loans and Advances 72
Other Current Assets 37
Sundry Creditors 229
Provision for Expenses 34
Net Sales 4,152
Depreciation 54
Interest 704
Profits before Tax 318
Compute the following under the Companies (Cost Records and Audit) Rules:
(i) Profit as a percentage of capital Employed
(ii) Profit as a percentage of Net Sales 4
Answer:
(8) (a) As per CAS-12 on Repairs and Maintenance Cost, high value Spare, when replaced
by a new spare and reconditioned, should be recognised as property, plant and
equipment when they meet the definition of property, plant and equipment and
depreciated accordingly. Otherwise, such items are to be classified as inventory and
recognised in cost as and when they are consumed.
Example: A Company purchased equipment for `10 crore and the insurance spare
was ` 1 crore. If the company is covered under INDAs, such spare is capitalized as
Property,/Plant and/equipment. After use for five years, the equipment broke down
and a part was replaced with the aforesaid insurance spare. After 5 years, the
depreciated value of equipment is `5 crore. As property, plant and equipment are
depreciated when they are available for use, accordingly the depreciated value of
new spare is `50 lakh. The old spare was reconditioned and the cost of reconditioning
is `10 lakh. As per the estimated life of the old spare for future economic benefits, the
current market value of the reconditioned old spare has been estimated at `25 lakh.
The amount to be treated in repairs and maintenance is ` 35 lakh as follows:
(` In Crores)
A. Equipment Cost 10.00
B. Cost of New Spare 1.00
Total Cost 11.00
Depreciation for 5 years 5.50
Depreciated value of equipment and spare 5.50

Reconditioning cost of old spare 0.10
Depreciated value of old spare 0.50
Book value reconditioned spare 0.60
Current market value of reconditioned spare to be restated in
Books of Account 0.25
Amount to be treated in Repairs and Maintenance 0.35
(b) Internal Check is a system of instituting checking of the day-to-day transactions as

part of the routine system, whereby the work of one person is checked independently
or is complimentary to the work of another person i.e. resulting in the prevention and
early detection of errors or fraud. Therefore, the systems are so designed that no
single individual is responsible for all the stages involved in a transaction, i.e. duties are
allocated in such a way that no single individual has an exclusive control over any
one transaction or a group of transactions. Internal Auditing on the other hand is 'an
independent appraisal function established within an organisation to examine and
evaluate its activities as a service to the Organisation. The objective of Internal
Auditing is to assist members of the organisation in the effective discharge of their
responsibilities. Internal auditing furnishes them with analyses, appraisals,
recommendations, counsel and information concerning the activities reviewed.
Internal Check and Internal Audit are two important ingredients of Internal Control.
Internal Checks are procedures in-built in the overall system itself and take place
concurrently with the execution of the transactions, whereas Internal Audit is a distinct
function which is carried out after the transactions have taken place.
(c) Adequacy of Budgetary Control System:

While determining the adequacy of the budgetary control system of an organisation,
it is essential that the Management Auditor should evaluate its coverage and
effectiveness, i.e. whether the system in operation covers all functions rather than an
accounting exercise. For this purpose, he/she should examine whether the system
contributes towards accomplishing the basic task of planning, coordinating and
controlling the activities of the organisation in relation to the product under
Management Audit.
The Management Auditor should examine and appraise the points as stated below:
a) In the area of Planning:

1. Whether it covers all interrelated functions like production, sales, purchasing
and financed
2. Whether it determines the linkage between the budget centres and the
responsibility centres.
3. Whether it establishes definite goals and limits for these functions well in
advance
4. Whether there are imbalances in the fixation of performance levels of
functional budgets in relation to sales budgets.
5. Whether a budget monitoring cell exists for operating the system in the right
perspective
b) In the area of coordination:

1. Whether the budget monitoring cell holds its meeting regularly with a view to
ensuring performance evaluation
2. Whether it helps to prevent waste that results in duplication or cross-purpose
activities.
3. Whether it reveals timeline in the process of preparation and approval of all
the functional budgets and the master budget.
c) In the area of Control:
1. Whether system exists for measuring, comparing and quantifying the results of
all functional areas.
2. Whether the budget incorporates a degree of flexibility with a provision for its
periodical review.
3. Whether the variance reports are prepared and appropriate corrective
actions are taken on the variances.
(d) Statement of Estimate Cost and Price to be quoted:

Product Quantity - 2,50,000
Amount (`)
Materials(25,000×3) 75,000
Less: Estimated Scrap Value 10,000 65,000
Labour: 8,500 hrs × 3 25,500
1,500 hrs × 6 9,000 34,500
Prime Cost 99,500
Add. Factory Overheads (10,000x3.50) 35,000
Add. Selling and Distribution overheads 32,000
Total Cost 1,66,500
Profit 43,100
Sales 2,09,600
Calculation of Sales:
Let Sales be S
S= Total Cost +25% of Capital Employed
S=1,66,500+0.25x(120000+0.25S)
= l,66,500+30000+0.0625S
Or, S-0.0625S=196500
Or, 0.9375S= 196500
Or S=(196500)/(0.9375)=209600
Sales= ` 2,09,600
Profit = (172400x0.25) = ` 43,100
Working Capital = (0.25x209600)= ` 52,400
(e)
Statement showing Computation of Capital Employed (` in Lakh)
Gross Fixed Assets 5600
Less: Depreciation 1300
Net Fixed Assets (A) 4300
Gross Current Assets:
Inventories 545
Sundry Debtors 347
Advance for Purchase of Capital Equipment 38
Total current assets 1039
Total current liabilities 263
Net Current Assets (B) 776
Total Capital Employed (A+B) 5076
Profit before tax (PBT) 318
Net Sales 4152
(i) Profit as percentage of Capita Employed: = (318/5076)×100 =6.26%

(ii) Profit as percentage of Net Sales: = (318/4152)×100 = 7.66%
Alternative Answer to Question (e):
Statement showing Computation of Capital Employed (` in Lakh)

Gross Fixed Assets 5,600
Less: Depreciation 1,300
Net Fixed Assets (A) 4,300
Gross Current Assets:
Inventories 545
Sundry Debtors 347
Total current assets 1,001
Total current liabilities 263
Net Current Assets (B) 738
Total Capital Employed (A+B) 5,038
Profit before tax (PBT) 318
Net Sales 4,152
Working notes: Capital works in progress, investment outside business and Advance
for purchase of Capital equipment do not enter into the calculation of capital
employed.
(i) Profit as percentage of Capita Employed: = (318/5038)×100 = 6.31%

(ii) Profit as percentage of Net Sales: = (318/4152)×100 = 7.66%
MTP_Final_Syllabus 2016_June 2018_Set 1
Paper – 19 – Cost and Management Audit
Full Marks: 100 Time allowed: 3 hours
Questions No. 2 to 8.
Section A [20 marks]
Answer the following questions:
1. (a) Choose the correct option among four alternative answer. (1 mark for correct choice, 1
mark for justification.) [10 ×2 = 10]
(i) The cost records are to be maintained as specified in:

(A) CRA3
(B) CRA1
(C) CRA 4
(D) CRA 2
(ii) The excisable goods not sold but used for consumption for manufacture in the
production of other articles should be valued at_____________________of cost.
(A) 100%
(B) 90%
(C) 110%
(D) 95%
(iii) 'Sugar and Industrial Alcohol' belong to __________________ sector for the purpose of
Application of Cost Records.
(A) Regulated
(B) Non-regulated
(C) Both depending on circumstances
(D) None of the above statements are correct.
(iv) Administration Overheads is dealt in CAS--------------.

(A) 12
(B) 11
(C) 10
(D) 9
(v )”Related party”, with reference to a company, means—

(A) a director or his relative;
(B) a key managerial personnel or his relative;
(C) a firm, in which a director, manager or his relative is a partner;
(D) All the above are correct.
(vi) Part D of the Annexure to Cost Audit Report shows profit reconciliation for :
(A) Product group
(B) Service group
(C) Company as a whole.
(D) Individual product/services.
(vii) Items appearing only in Cost Records:

(A) Rent receivable
(B) Notional interest on capital
(C) Good will written off.
(D) Dividends.
(viii) The Balance Sheet of X Ltd. As on 31st March 2017 showed the following
information:
Capital -`1500 lacs, Reserves-`696 lacs, Loans-`600 lacs, Sundry Creditors 774 lacs,
Total assets -`3570 lacs. For the year 16-17, PBT-`900 lacs, provision for tax is `360 lacs
and proposed dividend is `300 lacs.
Return on Networth is:
(A) 30.41%
(B) 29.41%
(C) 28.41%
(D) 27.41%
(ix) Royalty paid on units produced ` 20,000, Hire Charges of equipment used for
production `2,000, Design charges ` 15,000, Software development charges related
to production ` 22,000. The Direct Expenses is:
(A) `57000/-
(B) `59000/-
(C) `37000/-
(D) `44000/-
(x) Which one of the following is not a professional misconduct in relation to Cost
Accountants in Practice as per the First Schedule of The CWA Act, 1959?
(A) expresses his opinion on cost or pricing statements of any business or enterprise in
which he, his firm or a partner in his firm has a substantial interest;
(B) allows any person to practise in his name as a cost accountant unless such
person is also a cost accountant in practice and is in partnership with or
employed by himself
(C) accepts or agrees to accept any part of the profits of the professional work of a
person who is not a member of the Institute:
(D) secures, either through the services of a person who is not an employee of such
cost accountant or who is not his partner or by means which are not open to a
cost accountant, any professional business:
Answer: 1(a)
(i) (B) CRA1. Pursuant to Rule 5(1) of the Companies(Cost Records and Audit) Rules, 2014
(ii)(C)110%. According to the Central Excise Valuation (Determination of Price of Excisable

Goods) Rules 2000, the assessable value of goods used for captive consumption is
110% w.e.f. 05-08-2003 of cost of production of such goods, and as may be prescribed
by the Government from time to time.
(iii)(A) Regulated. As per Rule 3 of the Companies(Cost Records and Audit )Rules , 2014
Table A.
(iv) (B)11. CAS 11 deals with the principles and methods of classification, measurement and
assignment of administrative overheads, for determination of the Cost of product or
service, and the presentation and disclosure in cost statements.
(v) (D) All the above are correct. This is as per clause 76 section 2 of the Companies Act
2013
(vi)(C)Company as a whole. As per Form CRA-3, pursuant to Rule 6(4) of the

Companies(Cost Records and Audit) Rules, 2014.
(vii)(B) Notional interest on capital. This does not involve actual outlay of funds but is
included in cost records as an opportunity cost to determine product cost. The other
three items are not related to actual production and this do not form part of cost
records.
(viii) (B)29.41%
Networth =Capital +Reserves-Revaluation reserve (if any)-accumulated losses(if any)-
deferred expenditure(if any)-misc. expenditure not written off(if any)
Networth =`1500+`696-`360=`1836
Total Earning =`900-`360=`540
Return on Networth =`540/`1836=29.41%
(ix)(B)`59000/-
Direct expenses= Royalty paid on units produced+ Hire Charges of equipment used for
production+ Design charges+ Software development charges related to
production=`20000 + `2000 + `15000 + `22000 = `59000/-
(x) (A) It is a misconduct as per the Second Schedule, Part I of the CWA Act, 1959
Section B [80 marks]
2 (a) (i) KPI Ltd. is engaged in construction of residential housing, offices, industrial units, Roads,
Bridges, Marine facilities etc. having sites in India and abroad. The company also has
Joint venture projects in India and abroad. Whether Companies (Cost Records and Audit)
Rules 2014 would be applicable to the company?
(ii) Is a Cost Auditor required to audit and certify monthly, quarterly, half-yearly and yearly
Cost Statements? [4+4 marks]
2 (b) Explain whether the following amounts to professional misconduct by a Cost Accountant:
(i) ABC and Company, Cost Accountants, a firm maintains branch offices in India – each
under the separate charge of a member of the Institute of Cost Accountants of India/The
Institute of Chartered Accountants of India.
(ii)CMA P, a practicing Cost Accountant engages in personal
discussions/correspondences with prospective clients relating to achievement and
capabilities. [4+4 marks]
Answer: 2(a)(i)
All companies engaged in construction business either as contractors or as
subcontractors, who meet with the threshold limits laid down in the Companies (Cost
Records and Audit) Rules, 2014 and undertake jobs with the use of own materials [whether
self-manufactured/produced or procured from outside] shall be required to maintain Cost
Records and get Cost Audit conducted as per the provisions of the Companies (Cost
Records and Audit) Rules, 2014.
The provisions of the Companies (Cost Records and Audit) Rules, 2014 would also apply
for construction activities undertaken under BOT/BOOT mode, or the projects undertaken
as EPC contractor or the projects undertaken abroad by a company incorporated in
India.
The Companies (Cost Records and Audit) Rules, 2014, do not make any distinction
between the Contractor and Sub-Contractor and accordingly all such companies will be
included within the ambit of the Rules.
Answer: 2(a)(ii)
As per Rule 5, every company under these Rules including all units and branches thereof
are required, in respect of each of its financial year, to maintain Cost Records in form
CRA-1. The Cost Records are required to be maintained on regular basis in such manner
so as to facilitate calculation of per unit cost of production or cost of operations, cost of
sales and margin for each of its products and activities for every financial year on monthly
or quarterly or half-yearly or annual basis. The Cost Auditor is appointed to conduct audit
of the Cost Records and make report thereon for the financial year for which he is
appointed. It is not incumbent upon the Cost Auditor to certify monthly, quarterly, half-
yearly Cost Statements.
Answer: 2(b)(i)
According to First Schedule, Part 1 Clause 4 of the CWA Act , 1959, a Cost Accountant in
Practice shall be deemed to be guilty of professional misconduct , if he/she enters into
partnership, in or outside India, with any person other than a Cost Accountant in practice
or such other person who is a member of any other professional body having such
qualifications as may be prescribed, including a resident who but for his residence abroad
would be entitled to be registered as a member under clause (iv) of sub-section (1) of
section 4 or whose qualifications are recognised by the Central Government or the
Council for the purpose of permitting such partnerships;
In the given case if charge of branch office is given to a member of the Institute of Cost
Accountants of India it is not a professional misconduct but if given to member of any
other Institute it is professional misconduct.
Answer: 2(b)(ii)
According to First Schedule, Part 1 Clause 6 of the CWA Act , 1959, a Cost Accountant in
Practice shall be deemed to be guilty of professional misconduct if he/she solicits clients
or professional work, either directly or indirectly, by circular, advertisement, personal
communication or interview or by any other means.
In the given case personal discussions with clients cannot be construed as advertisement
and thus does not amount to professional misconduct.
3 (a) (i) Opening stock of raw materials (10,000 units) ` 1,80,000; Purchase of Raw Materials
(35,000 units) ` 7,00,000; Closing stock of Raw Material 7,000 units; Freight Inward ` 85,000;
Self-manufactured packing material for purchased raw materials only ` 60,000 (including
share of administrative overheads related to marketing sales ` 8,000); Normal Loss due to
shrinkage 1% of materials; Abnormal Loss due to absorption of moisture before receipt of
materials 100 units.
Calculate cost of raw materials consumed.
3 (a) (ii) How do you determine manufacturing overheads as per CAS 22? [6+2 marks]
3 (b) The financial profit and loss account for the year 2016-17 of a company shows a net profit
of ` 29,60,000. During the course of Cost Audit, it was noticed that:
(i) The company was engaged in trading activity by purchasing goods at ` 6,00,000 and
selling it for ` 7,50,000 after incurring repacking cost of `25,000,
(ii) Some discarded assets sold off with no scrap value for ` 90,000,
(iii) Some renovation of machinery was carried out at a cost of ` 6,00,000, having a
productive life of five years, but entire amount was charged to financial accounts,
(iv) Interest was received amounting to ` 1,40,000 from outside investments,
(v) Voluntary Retirement payment of ` 3,50,000 was not included in the Cost Accounts,
(vi) Insurance claim of previous year was received to the extent of ` 2,50,000 but was not
considered in the Cost Accounts,
(vii) Opening stock or raw materials and finished goods was overvalued by ` 2,40,000 and
closing stock of finished goods was overvalued by `1,10,000 in the financial accounts,
and
(viii) Donation of ` 80,000 towards CSR commitment was not considered in the Cost
Accounts.
Work out the profit as per the Cost Accounts and briefly explain the adjustment, if any,
carried out. [8 marks]
Answer: 3(a)(i)
Particulars Quantity Amount(`)

(units)
Opening Stock of raw materials 10000 180000
Add Purchase of Raw Materials 35000 700000
Add Freight inward 85000
965000
Less Abnormal loss of Raw Material(due to absorption of 100 (2243)
moisture before receipt of
material)=[700000+85000]/35000*100
Less Normal loss due tom shrinkage during transit(1% of 350
35000 units)
Add Cost of self manufactured packing materials(60000- 52000
8000)
Cost of raw materials 44550 1014757
Value of Closing stock= Total cost/(Total units – Units of (7000) (159446)
Normal Loss) =1014757/(10000+35000-100-350)
Cost of raw material consumed 37550 855311
3(a)(ii) Manufacturing Overheads for excisable goods representing procurement of resources

shall be determined at invoice or agreed price including duties and taxes, and other
expenditure directly attributable thereto net of discounts; taxes and duties refundable or
to be credited as input credit. manufacturing overheads other than those referred to
above shall be determined on the basis of cost incurred in connection therewith.
3(b) Profit Reconciliation as per Cost and Financial Records for the year 2016-17
Particulars ` in "000 ` in "000

1 Profit as per Financial Accounts for Audited Products 29,60,000
2 Less : Incomes not considered in the Cost Accounts
a) Trading Profit (7,50,000-6,00,000-25,000) 1,25,000
b) Profit on Sale of Old Assets 90,000
c) Interest received from Outside Investments 1,40,000
d) Insurance claim for previous year received 2,50,000
Total 6,05,000
3 Add : Expenses not considered in the Cost Accounts
a) Donation towards CSR Commitment 80,000
b) VRS Expenses 3,50,000
c) Renovation (4/5th Outlay of 600000) 480000
Total 9,10,000
4 Valuation of stocks (240000-110000)(Overvaluation of 1,30,000
opening stock and closing stock in financial accounts)
5 Other adjustments ---
4 (a) You are appointed by Mr. K who wants to join DEF & Co , partnership firm as an
investigating accountant. List out the steps involved in conducting the same
4 (b) What do you understand by Corporate Services Audit? Describe the areas covered by
Corporate Services Audit. [9+7 marks]
Answer: 4(a)
The general approach of the investigating accountant in this type of investigation
would be more or less similar, irrespective of the nature of business of the firm-
manufacturing, trading or rendering a service. Primarily, an incoming partner would be
interested to know whether the terms offered to him are reasonable having regard to
the nature of the business, profit records, capital distribution, personal capability of
existing partners, socio-economic setting, etc. and whether he would be capable for
services to be rendered, which can be justified by the overall economic conditions
prevailing and other considerations considering his own personality and achievements.
In addition, he would be interested to ascertain whether the capital to be contributed
by him would be safe and applied usefully. Broadly, the steps involved are as under :
(i) Ascertaining the history of the firm since inception and growth of the firm.
(ii) Studies of the provisions of the Deed of Partnership, particularly for composition of
partners, their capital contribution, drawing rights, retirement benefits, job allocation,
etc.
(iii)Scrutiny of the record of profitability of the firm’s business over a suitable number of
years, with usual adjustments that are necessary in ascertaining the true record of
business profits. Particular attention should, however, be paid to the nature and
profitability of the business, qualification and expertise of the partners and such
others as may be relevant.
(iv)Examination of the asset and liability position to determine the tangible asset,
partners, investment, appraisal of the value of intangibles like goodwill, knowhow,
patents, etc impending liabilities including contingent liabilities and those for
pending tax assessment.
(v)Assess position of order at hand and the range and quality of clientle should be
thoroughly examined under which the firm is presently operating.
(vi)Scrutinise terms of loan finance to assess its usefulness and the implication for the
overall financial position.
(vii)Study important contractual and legal obligations should be ascertained and their
nature studied. It may be the case that the firm has standing agreement with the
employees as regards salary and wages, bonus, gratuity and other incidental
benefits. Full import of such standing agreements would be gauged before a final
decision is reached.
(viii)Study the composition and quality of key personnel employed by the firm and any
likelihood of their leaning the organisation.
(ix)Ascertain reasons for the offer of admission to a new partner and it should be
determined whether the same synchronizes with the retirement of any senior partner
whose association may have had considerable impact having on the firm’s
successes.
(x) Appraisal of the record of capital employed and the rate of returns. It is necessary to
have a comparison with alternative business avenues for investments and evaluation
of possible results on a changed capital and organisation structure.
(xi)Ascertain manner of computation of goodwill on admission as also on retirement, if
any.
(xii)Examine whether any special clause exist in the Deed of Partnership to allow
admission in future a new partner.
4(b) Corporate Services Audit

The term ‘Corporate Services’ is a generic term, which implies service oriented obligations
of a corporate body to different interested 'Public' such as consumers, shareholders,
community, fellow-businessmen, government etc. It includes the social responsiveness of a
business enterprise.
Corporate Services Audit is the audit of social behavior of the company to assess the
extent to which the company had met the expectations of the customers, employees,
shareholders, suppliers and the community.
The scope of the Corporate Services Audit extends to the critical examination of the
different aspects of services and the extent to which the corporate body has rendered
satisfactory services. It also includes the evaluation of the degrees of responsiveness and
awareness on the part of such enterprise. The performance of the management towards
customers, employees, shareholders, suppliers, the community and government is studied
separately and properly evaluated by management auditor.
The areas of Corporate Services Audit and the scrutiny and evaluation criteria can be
categorized as follows:
(i) Consumers: Quality of goods in right quantity at right price, right place and right time.
(ii) Employees: Pay, Safety, Welfare and Industrial Relations etc.
(iii)Shareholders: Safety of investment, satisfactory return and capital appreciation.
(iv)Community: Social cost and social benefit, public relation
(v) Fellow-businessmen: Business ethics and fair trade dealings.
(vi)State: Compliance with various legislations, fair trade practices, payment of taxes etc.
5 (a)(i) Which companies are required to constitute Audit Committees? What is its
responsibility regarding internal audit.
(ii) What are the qualities of a good internal auditor? [5+3 marks]
(b) You have been appointed as a Management Auditor by KFC Bank. The Bank has
recently launched a scheme of ‘Gold Card’ issuing credit card to all savings account
holders with average of ` 50000/- in the account. How will you evaluate the internal
control system in the area of credit card operations of the bank? [8 marks]
Answer: 5(a)(i)
The Board of directors of every listed company and the following classes of companies,
as prescribed under Rule 6 of Companies (Meetings of Board and its powers) Rules, 2014
shall constitute an Audit Committee:
(a) all public companies with a paid up capital of `10 Crores or more;
(b) all public companies having turnover of `100 Crores or more;
(c) all public companies, having in aggregate, outstanding loans or borrowings or
debentures or deposits exceeding `50 Crores or more.
The paid up share capital or turnover or outstanding loans, or borrowings or debentures
or deposits, as the case may be, as existing on the date of last audited Financial
Statements shall be taken into account for the purposes of this Rule.
Responsibility of audit committee is to review adequacy of internal audit function and
internal audit reports.
5(a)(ii) According to ‘Technical Guide on Internal Auditing’ by The Institute of Cost
Accountants of India, Internal Auditor should have following three traits:
• Technical Expertise
• Right Attitude
• Communication and other soft skills.
An Internal Audit team has to have representation from diverse professional fields in
order to understand the organization better, audit its function better and making
internal audit recommendation better. Carrying ‘right attitude’ is most sought after skill
of Internal auditor. Communication skills of Internal Auditor should be so strong to fit him
in different roles while providing suggestion and consultancy to the Audit Committee,
top Management and Auditees. Other soft skills include optimistic mindset, emotion
regulation and presentation skills.
5(b) The evaluation of internal control system in the area of credit operations in the bank
would have to be done in respect of following aspects:
i. Segregation of Responsibilities: The activities relating to credit card operations can
be divided in specific areas, namely, beginning from the receipt of application form,
evaluating the credit assessment, sanctioning the issuance of card, making and
despatch of card would form part one of operations. Later on, particularly, from the
accounting view, the significant operations would include receipt of statement from
vendors/merchants, raising bills to customers, realisation either by directly debiting the
customers’ accounts or payment received through cheques, periodic reconciliation,
etc. While evaluating internal controls, it would have to be seen that adequate division
of responsibilities have been carried out to avoid any collusion and independent
checks have been built in the system. While evaluating the internal control, it may also
be considered whether some part of the operations have been outsourced or
performed in-house.
ii. Credit Assessment System: Each application is scrutinised with reference to different
parameters for assessing the credit limits to be awarded. The system must be able to
generate exception reports at this stage itself. In fact, at the application stage itself,
the system must ensure that the applicant was holding one card earlier or has
defaulted in respect of any other agency.
iii. Control Over Issuance of Cards: The internal control system must ensure that the
cards are under the control of responsible official. A detailed record alongwith
relevant pin codes, etc. have been kept. See that the system has built-in features that
it is almost impossible to make counterfeit cards as also photographs are affixed to
prohibit any unauthorised use of the same.
iv. Reconciling Merchant Records: It is to be checked whether the system has built-in
flexibility of reporting of the payments to be made to merchants and making prompt
payment to them. Simultaneously, it should be seen that customer statements are also
generated automatically and despatched to them.
v. Periodic Reconciliation and follow-up: It may be seen whether periodic
reconciliation of customers’ accounts is done and regular follow-up of overdue
accounts takes place. The person who are responsible for maintaining customers’
records are not entrusted with the responsibility of reconciliation and follow-up.
6 (a) The following figures relate to usage of power for a product:
2014 -15 2015-16 2016 -17
Total power consumed to KWH 2402474 249487 2175677
Rate KWH ` 2.29 2 1.90
Total production in million kgs. 337.73 333.084 300.865
Compute necessary productivity measures and compare the efficiency of power
usage during the three years.
6 (b) The following particulars pertaining to Product-A are extracted from the record of
PROTECT LTD. for the Half year ended March 31, 2017:
(Amount in `
thousand)
Direct Material Cost per unit inclusive of Excise Duty ` 191 thousand 1,740
Direct Wages & Salaries 1,260
Direct Expenses 200
Indirect Materials 253
Factory Overheads- 677
Administrative Overheads (25% relating to Production activities) 1,240
Quality control Cost 525
Research and Development Cost 360
Sale of scrap realized 180
You are to determine the cost of production for purpose of captive consumption in
terms of Rule 8 of the Central Excise Valuation (DPE) Rules 2000 and as per CAS-4 and
Assessable Value for purpose of paying excise duty on captive consumption.
[8+8 marks]
Answer:
6(a)
2014-2015 2015-2016 2016-17
Power consumed in Kwh 2402474 2494872 2175677
Rate per Kwh (`) 2.29 2.12 1.90
Total Power cost (`) 5501665 5289129 4133786
Production (in million kgs) 337.730 333.084 300.865
(337730 MT) (333084 MT) (300865 MT)
Power cost/MT (`) 16.29 15.88 13.74
Power usage MT (KWH) 7.11 7.49 7.23
Variances over previous year:

Rate (`) 4,24,128 (F) 4,78,649 (F)
Volume (`) 75,683 (F) 5,11,638 (F)
Usage (`) 2,87,275 (A) 1,65,056 (F)
2,12,536 (F) 11,55,343 (F)

Calculation of variances:
Rate variance:
2014-15 2015-16 2016-17
Total power consumed (Kwh) 24,02,474 24,94,872 21,75,677
Rate per Kwh ` 2.29 2.12 1.90
Rate variance 24,94,872×(2.29-2.12) 21,75,677×(2.12-1.90)
= `4,24,128 (F) = `4,78,649 (F)
Production in Million Kgs 337.730 333.084 300.865
Volume variance:
2016-17 & 2015-16 (333084 – 300865) × 15.88 = `5,11,638 (F)
2015-16 & 2014-15 (337730 – 333084) × 16.29 = `75,683 (F)
Usage variance:
2016-17 & 2015-16 11,55,343 – 4,78,649 – 5,11,638 = `1,65,056 (F)
2015-16 & 2014-15 2,12,536 – 4,24,128 – 75,683 = `2,87,275 (A)
Total variance:
2016-17 & 2015-16 52,89,129 – 41,33,786 = `11,55,343 (F)
2015-16 & 2014-15 55,01,665 – 52,89,129 = `2,12,536 (F)
Answer: 6(b)
Protect Ltd
Computation of Cost of Production (as per CAS - 4)
Particulars (Amount in `
Thousand)
Direct Material excluding Excise duty ( 1740-191) 1,549
Direct wages and salaries 1,260
Direct Expenses 200
Works Overhead ( 253+677) 930
Quality Control C-cost 525
Administrative Overhead ( relating production activities) 310
Less: Sale of scrap 180
Cost of Production 4,954
Add: 10% as per rule -8 of CEV (DPE) Rules 495.40
Assessable value as per Rule 8 of the CE valuation Rules of 2000 5,449.40
7(a) The following figures are extracted from the statement prepared by the Cost Accountant
and the Trial Balance of ABC Ltd., which is a single product company:
(` In lakhs)
31.03.2017 31.3.2016 31.03.2015
Gross sales inclusive of Excise Duty 2,040 1,985 1,875
Excise Duty 295 280 265
Raw Materials consumed 1,140 1,060 975
Direct Wages 35 32 27
Power and Fuel 30 27 24
Stores and Spares 6 5 4
Depreciation charged to production cost centres 16 15 13
Factory overheads:
Salaries and wages 5 4 3
Depreciation 2 2 2
Rates and Taxes 1 1 1
Other overheads 6 5 4
Administrative overheads:
Salaries and Wages 10 9 8
Rates and Taxes 2 2 2
Selling and distribution overheads:
Salaries and Wages 7 6 5
Packing and Forwarding 6 6 5
Depreciation 1 1 1
Interest 85 74 68
Bonus and Gratuity 12 10 9
Gross Current Assets 840 724 640
Current Liabilities and Provisions 324 305 246
You are required to compute the following ratios as per requirement of PART D in the
Annexure to Companies(Cost Records and Audit) Rules, 2014
(i) Operating Profit as percentage of Value Addition.
(ii) Value Addition as percentage of Net Sales.
Note: The computation should be based on EBDIT as Operating Profit
7 (b) The following data have been available of Sunflag Dolon Limited:
2014 - 15 2015 - 16 2016 - 17
Installed Capacity—Ton 250 250 250
Production—Ton 240 230 125
Cost Per Ton (`) 1,000 1,077 1,660
The poor capacity utilisation in 2016-17 was due to abnormal power-cut. The escalation in
costs were 5% in 2015-16 and 7% in 2016-17 base on 2014-15
(i) Calculate the abnormal cost due to power cut.

(ii) How would you treat these abnormal cost? [10+6 marks]
Answer: 7(a)
Year Ending (` In lakhs)
31.3.17 31.3.16 31.3.15
Gross sales inclusive of Excise Duty 2,040 1,985 1,875
Excise Duty 295 280 265
Net sales (A) 1,745 1,705 1,610
Cost of Sales excluding depreciation & Interest

Raw Material consumed 1,140 1,060 975
Direct Wages 35 32 27
Power and Fuel 30 27 24
Stores and Spares 6 5 4
Factory overheads (excluding depreciation) 12 10 8
Administrative overheads (excluding depreciation) 174 165 158
Selling and distribution overheads (excluding 137 130 118
depreciation)
Bonus and Gratuity 12 10 9
Total (B) 1,546 1,439 1,323
Operating Profit (A) - (B) = 199 266 287
Value addition is defined in Part D, Para 3 of Annexure to Cost Audit report as per the
Companies (Cost Records and Audit)Rules, 2014 as "the difference between the net
output value (Net Sales) and cost of bought out materials and services for the product
under reference".
The working will be:
Year Ending
31.3.17 31.3.16 31.3.15
(X) Net sales 1,745 1,705 1,610
Less : (i) Cost of Bought Out Materials & Service 1,146 1,065 979
(Raw Materials and Stores & Spares)
(ii) Power & Fuel, other bought out services 30 27 24
(iii) Over heads (excluding Salaries & Wages, Rates 298 283 265
& Taxes and depreciation)
(Y) =(i)+(ii)+(iii) 1,474 1,375 1,268

Value Addition : (X) - (Y) = 271 330 342
Year Ending
31.3.17 31.3.16 31.3.15
Hence,
(a) Operating profit as % of Value Added 199/271 266/330 287/342
i.e. 73.43% 80.6% 83.92%
=84%
(b) Value Addition as % of Net Sales 271/1745 330/1705 342/1610
i.e. 15.53% 19.35% 21.24%
7(b)
2014-15 2015-16 2016-17
Installed Capacity - Ton 250 250 250
Production - Ton 240 230 125
% of Capacity Utilisation 96 92 50
Cost per Unit (`/Ton) 1,000 1,077 1,660
Escalation factor 100 105 107
Cost at base year price 1,000 1,026 1,551
Total cost of production (`) 2,40,000 2,35,980 1,93,875
Variable Cost/Ton (`) 402 402 402
Fixed Cost/Ton 598 624 1,149
Fixed Cost @ 100% utilisation(`) 574
Hence, increase in Fixed Cost/Ton due to poor capacity utilization in 2016-17

=(1,149-574)= ` 575
i) Total abnormal cost due to power cut = 575 x 125 = ` 71,875

ii) The abnormal cost must be excluded from computation of cost of
production.

(a) The risk of material misstatement has two components. What are the components?
(b) Discuss the role of C&AG in the Audit of a Government company.
(c) Discuss the risks that can be covered by a CSR Audit programme.
(d) Following figures are available for Good Luck Ltd.:
Budgeted Production-880 units, Standard Hours per unit-10, Actual Production-750 units
and Actual working hours-6000
Calculate (i) Efficiency ratio (ii) Activity ratio and (iii) Capacity ratio
(e) Basic pay ` 5,00,000; Lease rent paid for accommodation provided to an employee
`2,00,000, amount recovered from employee ` 40,000, Employer’s Contribution to P.F.
`75,000, Employee’s Contribution to P.F. ` 75,000; Reimbursement of Medical expenses
`67,000, Hospitalisation expenses of employee’s family member borne by the employer
`19,000, Festival Bonus ` 20,000, Festival Advance ` 30,000. Compute the Employee
cost.
Answer:
8(a) According to Cost Auditing Standard -101, the risk of material misstatement has two
components viz. Inherent Risk and Control risk.
(1) Inherent risk: the susceptibility of an assertion about the measurement, assignment
or disclosure of cost to a misstatement that could be material, either individually or
when aggregated with other misstatements, before consideration of any related
controls.
(2) Control risk: the risk that a misstatement that could occur in an assertion about the
measurement, assignment or disclosure of cost and that could be material, either
individually or when aggregated with other misstatements, will not be prevented, or
detected and corrected, on a timely basis by the entity’s internal, operational and
management control.
8(b) The auditor of a government company is appointed by the C&AG. The C&AG have
powers under section 143 of the Companies Act, 2013 as follows:
(i) to direct the manner in which the company’s accounts shall be audited by the
auditor and to give such auditor instructions in regard to any matter relating to the
performance of his functions as such;
(ii) to conduct a supplementary or test audit of the company’s accounts by such
person or persons as he may authorise in this behalf; and for the purposes of such
audit, to require information or additional information to be furnished to person or
persons so authorised, on such matters, by such person or persons, and in such form,
as the Comptroller and Auditor-General may, by general or special order; direct.
In addition, the C&AG has a right to comment upon or supplement the audit report in
such manner as he thinks fit.
8 (c) A CSR audit program can cover all or any of the following risks: -
• Effectiveness of the operating framework for CSR implementation
• Effectiveness of implementation of specific, large CSR projects
• Adequacy of internal control and review mechanisms
• Reliability of measures of performance
• Management of risks associated with external factors like regulatory compliance,
management of potential adverse NGO attention, etc.
8(d) Efficiency Ratio:
=Standard Hours of Actual production/Actual Hours worked*100
= (750 units*10 hours)/6000*100=125%
Activity Ratio:
= Standard Hours of Actual production/Budgeted Hours*100
= [(750 units*10 hours)/(880 units*10 hours)]*100=85.23%
Capacity Ratio:
=Actual hours worked/Budgeted Hours*100
= [6000 hours/(880 units*10 hours)]*100= 68.18%
8(e)
Particulars Amount
(`)
Basic Pay 500000
Add Net cost to employer towards lease rent paid for 160000
accommodation provided to an employee [lease rent paid
less amount recovered from employee] [2,00,000 (-) 40,000]
Add Employer’s Contribution to PF 75000
Add Reimbursement of Medical Expenses 67000
Add Hospitalisation expenses of employee’s family member paid by 19000
the employer
Add Festival Bonus 20000
Employee Cost 841000
Note:
(i)Festival advance is a recoverable amount, hence not included in employee cost.
(ii)Employee’s contribution to PF is not a cost to the employer, hence not considered
Full Marks: 100 Time allowed: 3 hours
Questions No. 2 to 8.
Section A [20 marks]
Answer the following questions:
1. (a) Choose the correct option among four alternative answer. (1 mark for correct choice, 1
mark for justification.) [10 ×2 = 10]
(i) The Annexure to Cost Audit Report should be signed by:

(A) The secretary and the Finance Officer
(B) The Secretary and the CFO of the company
(C) One Director and one secretary
(D) The CFO and the Managing Director
(ii) Financial Position and Ratio Analysis as required are to be stated in :

(A) Para 4 , Part D of the Annexure to Cost Audit Report.
(B) Para 3, Part D of the Annexure to Cost Audit Report.
(C) Para 2, Part D of the Annexure to Cost Audit Report.
(D) Para 1, Part D of the Annexure to Cost Audit Report.
(iii) Which of the following is not a professional misconduct as per the First Schedule of the
CWA Act, 1959 in relation to Cost Accountants in practice:
(A) accepts or agrees to accept any part of the profits of the professional work of a
person who is not a member of the Institute
(B) secures, either through the services of a person who is not an employee of such cost
accountant or who is not his partner or by means which are not open to a cost
accountant, any professional business
(C) solicits clients or professional work, either directly or indirectly, by circular,
advertisement, personal communication or interview or by any other means.
(D) does not exercise due diligence, or is grossly negligent in the conduct of his
professional duties;
(iv) In case of machinery involving technical help in installation, such expenses for
installation are part of:
(A) Selling and Distribution Overheads
(B) Cost of production
(C) Any of the above.
(D) None of the above.
(v) CAS 16 deals with :
(A)Pollution control cost
(B) Packing material cost
(C) Depreciation and Amortisation
(D)Interest and Financing charges
(vi) Cost Auditing Standard 101 deals with:

(A) Planning an audit of cost statements;
(B) Cost audit documentation;
(C) Overall objectives of the independent cost auditor
(D) Knowledge of business, its processes and the business
(vii) A cotton textile mill had cumulative waste percentage of 8% in Blow Room, 6% in
Carding, 4% in Drawing, 4% in Simplex and 9% in Ring Frame. For an input of 1000 kg. of
cotton in Blow Room, the output at Ring Frame is _________.
(A) 735.27 kg.
(B) 725.27 kg.
(C) 745.27 kg.
(D) 755.27 kg.
(viii) Gross Sales `16500 lacs, Excise Duty `1240 lacs, Increase in stock `42lacs, Cost of raw
materials`6250lacs, Power `2220 lacs, other overheads` 215 lacs, Value Added is:
(A) `15260 lacs
(B) `6617 lacs
(C) `6533 lacs
(D) `15302 lacs.
(ix) Management Audit report is submitted to :

(A) Cost Audit Branch
(B) Audit Committee
(C) Central Government
(D) Management of concern.
(x) The consumer service audit critically examines:

(A) Outstanding payment of consumers.
(B) Price consumers are ready to pay for particular product/service
(C) And appraise management of business enterprise of responsibility towards
consumers.
Answer: 1(a)
(i) (C) One Director and one secretary. Pursuant to Rule 6(4)of the Companies(Cost Records
and Audit)Rules, 2014 - Form CRA3
(ii) (A)Para 4 , Part D of the Annexure to Cost Audit Report. Pursuant to Rule 6(4) of the
Companies(Cost Records and Audit)Rules, 2014 - Form CRA3
(iii) (D) does not exercise due diligence, or is grossly negligent in the conduct of his
professional duties; this is professional misconduct as per Second schedule Part 1 of the
CWA Act 1959.
(iv) (B) Cost of production. This is as per CAS 15 related to Selling and Distribution
Overheads.
(v) (C) Depreciation and Amortisation. 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.
(vi) (A) Planning an audit of cost statements; The objective of this Standard is to guide the
members in planning for the audit of cost statements so that it is performed in an
efficient and effective manner.
(vii) (B)725.27 kg.Output at Ring Frame = 1000 × (100-92)% × (100-94)% × (100-96)% × (100-
96)% × (100-91)% = 725.27 kgs.
(viii) (B)`6617 lacs. Value Addition= Gross sales less Excise Duty Add Increase in stock less
Cost of Raw materials less Power less Other Overheads=`16500 – `1240+ `42 - `6250 -
`2220 - `215 lacs= `6617 lacs.
(ix) (D)Management of concern. Management audit undertakes examination of the

effectiveness of management in controlling the total activities of the organisation in the
accomplishment of the organisation objectives.
(x) (C) And appraise management of business enterprise of responsibility towards

consumers. The audit is based on the philosophy that the role of business should be
conducive to raising the quality of life through its contribution in terms of better product-
quality and services by making available the products and services of the right qualities
at the right time, in right quantity, at the right place and right price.
Section B [80 marks]
2 (a) (i) What types of Health Services are covered under the Companies (Cost Records and
Audit) Rules 2014?
(ii) ABC Ltd. is engaged in manufacturing products on its own as well as purchase the
same products from other companies. The outsourced products are treated as trading
activity in the financial accounts. Same products are also manufactured by supply of
materials to converters. What would be treatment of such products for the purposes of
maintenance of Cost Accounting Records and Cost Audit?
[4+4 marks]
2 (b) Explain whether the following amounts to professional misconduct by a Cost Accountant:
(i) CMA Q gave press publicity(not an advertisement)regarding appointment as an Cost

Auditor.
(ii) A firm of Cost Accountants was appointed by a company to evaluate the costs of the
various products manufactured by it for its information system. One of the partners of the
firm was a Non-Executive Director of the company. [4+4 marks]
Answer:
2(a)(i) The Companies (Cost Records and Audit) Rules 2014 covers “Health services, namely
functioning as or running hospitals, diagnostic centres, clinical centres or test
laboratories”. Any company engaged in providing Health services through functioning as
or running hospitals, diagnostic centres, clinical centres, test laboratories, physiotherapy
centres and post-operative/treatment centres are covered within the ambit of the
Companies (Cost Records and Audit) Rules 2014. Further, companies running hospitals
exclusively for its own employees are excluded from the ambit of these Rules, provided
however, if such hospitals are providing health services to outsiders also in addition to its
own employees on chargeable basis, then such hospitals are covered within the ambit of
these Rules.
It is clarified that companies engaged in running of Beauty parlours / beauty treatment
are not covered under these Rules.
(ii) Products manufactured by the company as well as conversion activity through third
parties will be covered under the companies (cost Records and audit) Rules 2014 and the
company would be required to maintain cost accounting records and get cost audit
conducted subject to threshold limits. The finished products bought from outside parties
(treated as Trading Activity in Financial Accounts) would be reflected as “Cost of Finished
goods Purchased” in Abridged Cost Statement.
2(b)(i) According to First Schedule, Part 1 Clause 6 of the CWA Act , 1959, a Cost Accountant
in Practice shall be deemed to be guilty of professional misconduct if he/she solicits clients
or professional work, either directly or indirectly, by circular, advertisement, personal
communication or interview or by any other means.
In the given case press publicity even if not an advertisement will be construed as a
misconduct if as CMA Q notified his appointment as an Auditor.
(ii) Clause 4 of Part I of the Second Schedule to Cost and Works Accountants Act,
1959 states that expressing an opinion on cost and pricing of any business or any
enterprise in which the auditor, his firm or a partner in his firm has a substantial interest
would constitute misconduct, unless he discloses the interest also in his report.
As per facts of the given case, the firm has been retained to evaluate the cost of
products manufactured by it for its information system. So this amounts to professional
misconduct.
3 (a) (i) What disclosures are required to be made in Cost statement as per CAS-8 as regards
to utility?
(ii) Define direct expenses as per CAS 10. How are they identified? [5+3 marks]
3 (b) The profit as per financial accounts of M/s Kalingpong Himalaya Private Company for
the year 2016-2017 was ` 1,54,28,642/-. The profit as per Cost Accounting Records for
the same period was less. You are required to prepare a reconciliation statement and
arrive at the profit as per Cost Records. The following details are collected from the
financial schedules and cost accounting records:
[ 8 marks]
Financial Cost
Accounts Accounts
Valuation of Stock
Opening: WIP 25,62,315 22,65,710
Finished Goods 2,65,47,520 2,92,18,950
Closing : WIP 42,75,640 37,36,346
Finished Goods 3,72,59,430 4,35,25,149
Interest income from inter-corporate deposits 6,15,340 —
Donations given 4,85,560 —
Loss on Sale of Fixed Assets 1,22,546 —
Value of cement taken for own consumption 3,82,960 3,65,426
Cost of Power drawn from own Wind Mill
—At EB tariff — 49,56,325
—At cost 36,20,370 —
Non-operating income 45,36,770. —
Voluntary retirement compensation 16,76,540 —
Insurance claim relating to previous year received
during the year 14,35,620 —
Answer: 3(a)(i)
Disclosure in cost statements as regards to Utility as per CAS-8 are as follows-:
1. The basis of distribution of Cost of Utility to the consuming centres.
2. The cost of purchase, production, distribution, marketing and price with reference
to sales to outside parties.
3. Where cost of utilities is disclosed at standard cost, the price and usage variances.
4. The cost and price of Utility received from/supplied to related parties.
5. The cost and price of Utility received from/supplied as inter unit transfers and inter
company transfers
6. Cost of utilities incurred in foreign exchange.
7. Any Subsidy/Grant/Incentive and any such payment reduced from Cost of utilities.
8. Credits/recoveries relating to the Cost of utilities.
9. Any abnormal cost excluded from Cost of utilities.
10. Penalties and damages paid etc excluded from cost of utilities.
Further any change in the cost accounting principles and methods applied for the
measurement and assignment of the Cost of u t i li ti es during the period covered by
the cost statement which has a material effect on the Cost of u t i l i ti es . Where the
effect of such change is not ascertainable wholly or partly the fact s h a l l be
indicated.
Disclosures shall be made only where material, significant and quantifiable.
Disclosures shall be made in the body of the Cost Statement or as a foot note or as a
separate schedule.
3(a)(ii) Direct Expenses are expenses relating to manufacture of a product or rendering

a service, which can be identified or linked with the cost object other than direct
material cost and direct employee cost. Examples of Direct Expenses are royalties
charged on production, job charges, hire charges for use of specific equipment for a
specific job, cost of special designs or drawings for a job, software services specifically
required for a job, travelling Expenses for a specific job.
Identification of Direct Expenses shall be based on traceability in an economically
feasible manner.
Direct expenses incurred for the use of bought out resources shall be determined at
invoice or agreed price including duties and taxes, and other expenditure directly
attributable thereto net of trade discounts, rebates, taxes and duties refundable or to
be credited.
Direct expenses other than those incurred for the use of bought out resources shall be
determined on the basis of amount incurred in connection therewith.
Direct Expenses paid or incurred in lump-sum or which are in the nature of ‘one – time’
payment, shall be amortized on the basis of the estimated output or benefit to be
derived from such direct expenses.
3(b) Working:
Computation in difference in Valuation of Stock
Financial Accounts Cost Accounts
Opening (WIP & FG) 2,91,09,835 3,14,84,660
Closing (WIP & FG) 4,15,35,070 4,72,61,495
1,24,25,235 1,57,76,835
Reconciliation of Financial Profit and Costing Profit

` `
Profit as per Financial Accounts 1,54,28,642
Add: Difference in Stock Valuation 33,51,600
Loss on Sale of Fixed Assets 1,22,546
Donation not considered in Cost Records 4,85,560
Voluntary retirement compensation not
included in cost 16,76,540 56,36,246
Less: Non-operating income 45,36,770 2,10,64,888
Less: Interest income from inter-corporate deposit 6,15,340
Difference in value of cement taken for own
consumption 17,534
Difference in valuation of windmill power
(` 49,56,325 – 36,20,370) 13,35,955
Insurance claim relating to previous year 14,35,620 79,41,219
Profit as per Cost Accounts 1,31,23,669
4 (a) XYZ Ltd. engaged in manufacturing of engineering goods is consistently recording
higher sales turnover, but declining net profits since the last 5 years. As an management
consultant appointed to find out the reasons for the same, what are the points you would
verify?
4 (b) Certain requirements of audit based on principles of propriety are stipulated in Cost
Audit report. Explain the meaning of propriety audit and how this aspect is covered by
Cost Audit.
[8+8 marks]
Answer:
4(a) As per the facts that there has been consistently high turnover but declining net
profits is an anomalous situation. It may be attributed to one or more following reasons
requiring further investigation:
(i) Unfavourable Sales mix: Where the company sells different engineering products
with different product margins, the product with the maximum PV ratio/margin should
have a higher share in the total sales. If due to revision of sales mix, more quantities of
unprofitable products are sold, profits will be reduced inspite of an increase in sales.
(ii) Negative Impact of Financial Leverage: Where the company does not have
sufficient own funds (equity) but has a higher debt-equity ratio, the interest
commitments will be higher. As the volume of its operation increases, higher debt and
interest charges would result in lower profits.
(iii)Other Items Included in Sales: The figure of sales as per Profit and Loss Account may
include incidental revenues, e.g., freight, excise duty, sales-tax, etc. where the amount
of excise duty goes up considerably the total sales may show an increase which is not
represented by a real increase in sales quantity/value.
(iv) High Administrative and Selling Expenses: Administrative and selling costs are
generally period costs which are fixed in nature. Their increase is generally not
proportional to sale increase. However, a reduction in profit could also be due to
increase in administrative overheads and sales overheads at a rate higher than the
rate of increase in sales.
(v)Cost-Price Relationship: If the increases in cost of raw materials and labour has not
been compensated by a corresponding increase in the sales price this would also result
in higher sales and declining profits. Inspite of same sales quantity, for the increasing
cost of raw materials and other services, per unit values of the product has been
increased which is however unmatched by the increase in cost.
(vi)Competitive Price: Where sales have been made at cut-throat prices in order to
eliminate competition from the market, the profits would be in the declining trend in
the short-run.
(vii) Additions to Fixed Assets: Where there are heavy additions to fixed assets and
consequent depreciation charges in the initial years of additions, there may be
reduction in profits in spite of increased sales.
4(b) The term ‘propriety’ has been defined by Kholer as “ that which meets the tests of public
interest , commonly accepted customs and standards of conduct and particularly as
applied to professional performance, requirements of Government regulations, and
professional codes.” Thus propriety audit is verification of transactions in best interest of
public, commonly accepted customs and standards of conduct. Thus propriety audit
seeks to ensure that expenditure is not only appropriate to the circumstances, the
objectives for which it was incurred are also achieved. The principal standards adopted
are as follows:
i) The expenditure should not be the prima facie more than what is required for the
purpose and the person authorizing the expenditure should exercise the same degree of
vigilance as he would when dealing with his own money.
ii) No person having power to authorize expenditure should exercise the power to his own
advantage directly or indirectly.
iii) The funds should not be utilized for benefit of a particular person or group.
iv)Apart from agreed remuneration /computerization , these should not be left open to
any other avenue to indirectly benefit the executives or other employees , and allowances
should not be a source of profit for them.
In this context, Cost Audit may be termed as propriety audit as it also seeks to ensure that
actual expenditure incurred at each stage of production is appropriate and optimum
returns are achieved .The cost auditor has to report on matters which appear to him to be
clearly wrong in principle, cases where company’s fund have been used in negligent
manner etc. These are the areas where the propriety aspect is involved and therefore the
aspect is covered by cost audit.
5 (a) KPC Pvt. Ltd took a consortium loan in 2016-17 amounting to `80 crores of which State
Bank of India is the leading Bank for setting up a new plant in Haldia. During the year
2015-16 its outstanding loan was `70 crores of which repayment was made in the year
2016-17 to the extent of `20 crores. Should KPC Pvt . Ltd conduct internal audit as per
Companies Act 2013?
5 (b) How will you evaluate the internal control system in the area of credit card operations in
a bank?
[8+8 marks]
Answer: 5(a)
Section 138 of the companies act 2013 deals with provisions of internal audit. Section 138
of the Companies Act 2013 read with Rule 13 - Companies(Accounts) Rules, 2014 states
that the following class of companies shall be required to appoint an internal auditor or a
firm of internal auditors, every private company having-
(i) turnover of two hundred crore rupees or more during the preceding financial year; or
(ii) outstanding loans or borrowings from banks or public financial institutions exceeding
one hundred crore rupees or more at any point of time during the preceding financial
year:
Provided that an existing company covered under any of the above criteria shall comply
with the requirements of section 138 and this rule within six months of commencement of
such section.
Outstanding loan of KPC Pvt Ltd is `130 crores as on 31st March 2017. So the Company is
required to appoint internal auditor as per Companies Act 2013 read with Rule 13-
Companies(Accounts) Rules, 2014.
5(b) The evaluation of internal control system in the area of credit operations in the bank
would have to be done in respect of following aspects:
i. Segregation of Responsibilities: The activities relating to credit card
operations can be divided in specific areas, namely, beginning from the receipt of
application form, evaluating the credit assessment, sanctioning the issuance of card,
making and despatch of card would form part one of operations. Later on,
particularly, from the accounting view, the significant operations would include
receipt of statement from vendors/merchants, raising bills to customers, realization
either by directly debiting the customers’ accounts or payment received through
cheques, periodic reconciliation, etc. While evaluating internal controls, it would
have to be seen that adequate division of responsibilities have been carried out to
avoid any collusion and independent checks have been built in the system. While
evaluating the internal control, it may also be considered whether some part of the
operations have been outsourced or performed in-house.
ii. Credit Assessment System: Each application is scrutinised with reference to
different parameters for assessing the credit limits to be awarded. The system must be
able to generate exception reports at this stage itself. In fact, at the application
stage itself, the system must ensure that the applicant was holding one card earlier or
has defaulted in respect of any other agency.
iii. Control Over Issuance of Cards: The internal control system must ensure that
the cards are under the control of responsible official. A detailed record along with
relevant pin codes, etc. have been kept. See that the system has built-in features that
it is almost impossible to make counterfeit cards as also photographs are affixed to
prohibit any unauthorized use of the same.
iv. Reconciling Merchant Records: It is to be checked whether the system has
built-in flexibility of reporting of the payments to be made to merchants and making
prompt payment to them. Simultaneously, it should be seen that customer statements
are also generated automatically and dispatched to them.
v. Periodic Reconciliation and follow-up: It may be seen whether periodic
reconciliation of customers’ accounts is done and regular follow-up of overdue
accounts takes place. The person who are responsible for maintaining customers’
records are not entrusted with the responsibility of reconciliation and follow-up.
6(a) The following is the Balance Sheet of Jamuna Sing Ltd. of Chandigarh as on 31st
March, 2017 and 31st March 2016:
31.03.17 31.03.16
Non Current Assets
Fixed Assets - Tangible Assets 4,45,000
Non Current Investments 30,000
Long Term Loans and Advances 85,000
Current Assets
Stock in trade 1,50,000
Sundry Debtors 1,50,000
Bills Receivable 20,000
Advance Payment to contractors 3,000
Cash and Bank 15,000
8,98,000
Equity and Liabilities
Shareholders' Fund 3,80,000 3,80,000
Reserves and Surplus 2,75,000 2,20,000
Non Current Liabilities
Long term Borrowings 50,000 50,000
Deferred Tax 20,000 20,000
Current Liabilities
Sundry Creditors 1,90,000 1,80,000
Bills Payable 60,000 48,000
9,75,000 8,98,000
You are required to prepare a schedule showing the followings:
(i) Change in Working Capital
(ii) Liquidity and proprietary ratios for the two years.
6 (b) A company has following four operations undergone by a product under cost audit.
The input, output and labour costs process-wise are given below:
Process Input M.T. Output M.T. Direct Labour cost of

the process(Rs.)
A 72000 64800 194400
B 75000 66000 264000
C 108000 99360 496800
D 90000 83250 666000
Calculate “Direct labour cost per unit of the product under reference”. [10+6 marks]
Answer: 6(a) Schedule of changes in Working Capital:

31.03.16 31.03.17 Increase Decrease
Current Assets
Stock in trade 1,50,000 2,30,000 80,000
Sundry Debtors 1,50,000 1,60,000 10,000
Bills Receivable 20,000 35,000 15,000
Advance Payment to contractors 3,000 10,000 7,000
Cash and Bank 15,000 25,000 10,000
3,38,000 4,60,000
Current Liabilities
Sundry Creditors 1,80,000 1,90,000 10,000
Bills Payable 48,000 60,000 12,000
2,28,000 2,50,000
Net working capital 1,10,000 2,10,000 1,22,000 22,000
Increase 1,00,000 1,00,000
2,10,000 2,10,000 1,22,000 1,22,000
(ii) Liquidity Ratios:

(a) Current Ratio 31.03.2013 = 338000/228000 = 1.48
31.03.2012 = 460000/250000 = 1.84
(b) Acid Test Ratio 31.03.2013 = 188000/228000 = 0.82
31.03.2012 = 230000/250000 = 0.92
(c) Proprietary Ratio 31.03.2013 = 655000/975000 = 0.67
31.03.2012 = 600000/898000 = 0.67
6(b) The total labour cost per tonne of the product under audit must be an aggregation of
process-wise labour costs after taking into account the good units occurring in each process.
Process Input Output Factor

A 72000 64800 72000/64800=1.1111
B 75000 66000 75000/66000=1.1364
C 108000 99360 108000/99360=1.0870
D 90000 83250 90000/83250=1.0811
Process wise labour costs per M.T of output are:
A 194400/64800= Rs. 3
B 264000/66000= Rs. 4
C 496800/99360= Rs. 5
D 666000/83250= Rs. 8
Charging all the above to the finished product from process D,
Process A = Rs. 3
Process B= (Rs. 3*1.1364)+Rs.4 =Rs. 7.4092
Process C= (Rs7.4092*1.0870)+Rs.5 =Rs.13.0538
Process D= (Rs.13.0538*1.0811)+Rs.8 =Rs.22.1125
Direct Labour cost per M.T. of Finished Product = Rs.22.11
7 (a) Harish is an employee of M/s. Prix Co. and gets following emoluments and benefits
(i) Salary ` 2,500 per month

(ii) Dearness allowance
On first ` 1,000 of salary ` 4,000
On next ` 1,000 of salary ` 1,000
On balance of every ` 1,000 ` 500 or @ 50% of part thereof
(iii) Employers Contribution to Provident Fund 8% of Salary and D.A.

(iv) Employer’s Contribution to ESI 4% of Salary and D.A.
(v) Bonus 20% of Salary and D.A.
(vi) Other allowance ` 2,725 per annum
Harish works for 2400 hours per annum, out of which 400 hours are non-productive but
treated as normal idle time. A worker works for 18 effective hours in job No. 11, where
the cost of direct labour is @ effective hourly cost of Harish and direct material equal to
direct labour cost, overhead applied is 100%, of Prime Cost. The sale value of the job is
quoted to earn a profit of 15%. You are requested to find out:
(A) Effectively Hourly cost of Harish, and
(B) The effective sale value of job No. 11.
7 (b) The following information pertains to REACON CEMENT LTD., a manufacturing

cement company for the year that ended as follows:
The year ended March 31. 2016-17 2015-2016
Rated Capacity per Hr (in MT) 80 80
Break down (Hrs) 2,177 1,015
Planned Maintenance (Hrs) 247 422
Power restrictions (Hrs) 1,237 1,481
Shortfall (there are no orders) (Hrs) 792 677
Want of wagons (Hrs) 495 635
Total stoppage (Hrs) 4,948 4,230
Total running (Hrs) 3,888 4,582
Total available Hours 8,836 8,812
Production during the year (in MT) 2,48,844 3,29,928
Hourly Rate of Production (in MT) 64 72
Capacity Utilization (%) 62.21 82.48
Annual Installed Capacity (in MT) 4,00,000 4,00,000
Based on information stated above, you as a Cost Auditor are required to offer
your comments on
(i) The performance of the company
(ii) Your suggestion for improvement. [8+8 marks]
Answer: 7(a)
Harish’s Earnings:
1 Salary `2,500 per month
2 D.A.
On first ` 1000 `4,000
On next `1000 of salary `1,000
On balance `500 of Salary `250 `5,250 per month
3 Total Salary and D.A. `7,750 Per month
4 Annual salary and D.A. `93,000 per annum
5 Employer's contribution to PF(8% Of 4) 7,440

6 Employer's contribution to ESI(4% Of 4) 3,720
7 Bonus (20% of 4) 18,600
8 Other allowance 2,725
9 Total annual earnings 1,25,485
10 Annual working hours 2,400
11 Less normal idle time 400
12 Effective annual working hours 2,000
13 Effective hourly cost of Harish ` 1,25,485/2,000 hr
=`62.74 per hour
(B) Statement showing effective sales value of job no. 11.

Direct labour cost (`62.74X18 hrs) 1,129.32
Direct material cost 1,129.32
Prime Cost 2,258.64
Overhead (100% of prime cost) 2,258.64
Total cost 4,517.28
Profit (Balancing Figure) 797.17
Sale value (4517.28 x 100/85) 5,314.45
7(b) Performance of the Company:
(a) Rated capacity = 80 MT/Hr: Rated capacity achieved in 2015-16=(72/80)x100 =90%

Rated capacity achieved in 2016-17= (64 /80)x100 = 80%
The capacity achievement as % of rated capacity has declined from 90% to 80% in
2016-2017
Further the Capacity Utilization has gone down to 62.21% in 2016-17 from 82.48% of
previous year; a reduction of 20.27%
(b) From the data available the following observations are noted:-
1. Breakdown hours have gone up from 1,015 hours to 2,177 hrs, an increase by
114.48%
2. Planned Maintenance hrs has reduced from 422 hrs to 247 hrs i.e. by 41.47%
3. Shortfall hrs due to lack of orders has increased from 677 hrs to 792 hrs i.e. by
16.99%
4. The total stoppage hrs. has increased from 4,230 hrs to 4,948 hrs i.e. by 16.97%
5. The total running hrs has come down from 4,582 hrs to 3,888 hrs i.e. by 15.15%
6. The production has come down from 3,29,928 Mt to 2,48,844 Mt i.e. by 24.58%
From the above findings, it can be pointed out that the under utilization of
capacity to the extent of little over 20% can be attributed mainly to:-
• Increased total stoppage hours of 4,948 of 2016-17 as against that of 4,230 hrs
in 2015-16 and
• The net increase of 718 hrs (4,948-4,230) is again due to increase of break
down by 1,162 hrs (2,177-1,015) in the year 2016-17
(ii) Suggestion:
Therefore, the Company should look into the aspect of proper maintenance,
securing sufficient orders to avoid lost time. Better utilization of capacity can be also
be achieved by improving availability of wagons. The company may also carry out
a cost-benefit analysis to have captive source of power.
8. Answer any 4 questions [4x4=16 marks]

(a) Discuss the concept of ‘Common Cost’ as per GACAP.
(b) Discuss the points to be included in audit programme of Local Bodies.
(c) State the essential qualities required of a Management Auditor.
(d) From the following particulars make out a monthly cost sheet of Coke Oven Company
Limited for the Financial Year ended 31.03.2017.
Coal used 7,000 Tonnes @ ` 28 per tonne

Coke Produced and Sold (main product) 4,900 Tonnes, Selling Price being ` 56 per
tonne
Tar produced 280 Tonnes @ ` 60 per tonne
Sulphuric, etc. 70 Tonnes @ ` 210 per tonne
Benzole etc. produced 67 Tonnes @ ` 95 per tonne
Raw Material used ` 54,600
Wages paid ` 20,500
Repairs and Renewals ` 12,000
Salary and General Charges ` 7,500
(e) The capacity usage ratio and the capacity utilization ratio in respect of machine for a
particular month is 80% and 90% respectively. The available working hours in a month is
200 hours. The break-up of idle time is as follows: Waiting time for job - 5 hours; breakdown
- 4 hours; waiting time for tools - 3 hours. Calculate the cost and present the same in a
tabular form when the hourly fixed cost of running the machine is `8.00.
Answer:
8(a) Common Costs
1. A common cost is the cost of operating a common facility, activity or service or
that is shared by two or more cost objects.
2. The common cost is generally lower than the stand-alone individual cost to each
cost object was the facility not shared.
3. Common costs are therefore allocated to each cost object based on the
individual costs of the cost object
(b) The audit programme for local bodies include the following:
• All sanctions are accorded by competent authority
• Expenditure incurred are according to provisions and as per regulations framed by
competent authority
• Different schemes, programmes, and projects are running economically and the
purpose such programme is achieved.
(c) The Essential Qualities Of A Management Auditor are:
(i) Ability to grasp business problems.
(ii) Ability to determine or assist the progress of the organization.
(iii) Knowledge of the principles of delegation of authority and control and the
preparation of different budgets.
(iv) Power of grasping and understanding different internal control devices.
(v) General understanding of different laws.
(vi) Sufficient knowledge and experience in preparing various reports for submission
to different levels of management including the top management.
(vii) Tactfulness, perseverance, pleasing and dynamic personality.
(d) Monthly Cost Sheet of Coke Oven Company Limited for the Financial Year ended 31st
March 2017
Particulars Total cost(`) Cost per ton(`)
Coal used (7,000 tonnes x ` 28) 196000
Raw Material used 54600
Wages 20500
Repairs and renewals 12000
Salaries and general charges 7500
290600
Less: Value of byproduct:
Tar produced (280 tonnes x ` 60) 16,800
Sulphur etc. (70 tonnes x ` 210) 14,700
Benzole etc. (67 tonnes x ` 95) 6,365 37865
Cost of Coke Produced (4900 tonnes) 252735 51.58
Profit(balancing figure) 21665 4.42
Sales Revevnue(4900 tonnes*`56) 274400 56.00
(e)
Hours
Available working hours in a month 200
Capacity usage @ 80% 160
Idle time unavoidable 40
Capacity utilization ratio = 90%
Actual hours worked = 160 hrs. x (90/100) = 144 hrs.
Idle time = 160 hrs. – 144 hrs. = 16 hrs.
Breakup of Idle Time Hrs.
Waiting for job 5
Breakdown 4
Waiting for tools 3
Miscellaneous causes 4
Total idle time 16
Calculation of Idle Time Cost

Particulars Hours Rate per hr. (`) Amount (`)
Cost of unavoidable idle time 40 8 320
Cost of avoidable idle time:
Waiting for job 5 8 40
Breakdown 4 8 32
Waiting for tools 3 8 24
Other reasons 4 8 32
Total cost of idle time 16 128
56 448
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)

DECEMBER - 2017
1. Choose the correct answer with short justification /working. (1 mark for correct choice
and 1 mark for justification/working) 2×10=20
(i) The Cost Accounting Standard 15 is a Cost Accounting Standard on _______.
(a) Employee Cost
(b) Utilities Cost
(d) Selling and Distribution Overheads Cost
(ii) Overall Objectives of the independent Cost Auditor and conduct of an Audit in
accordance with Cost Auditing Standard is dealt in _____________.
(a) Cost Auditing Standard 101
(b) Cost Auditing Standard 102
(c) Cost Auditing Standard 103
(d) Cost Auditing Standard 104
(iii) A company, engaged in construction business, is covered under the Companies

(Cost Records and Audit) Rules, 2014 but does not include _____________.
(a) outsourcing by a sub-contracting company
(b) a company working on BOT (Build, Operate, Transfer) mode
(c) a company working in a Special Economic Zone
(d) a project undertaken as EPC (Eng., Procurement, Constn.) contract
(iv) A manufacturing unit showed, during the Financial Year 2016-17, the following
financial data (in ` lakh): Net Sales 1,250, Export Incentives 85, Other income 106,
Adj. of Finished Stock (+) 95, Materials 634, Salaries 425, Overheads 101.8, and Tax
52.6. The Value Added as per Rules is (in ` lakh) _____________.
(a) 946
(b) 796
(c) 755
(d) 688
(v) Royalty paid on production ` 35,000, Job Charges ` 20,000, Special Design Charges
` 20,000, Software Development Charges related to Production ` 27,000, and
Travelling abroad for Training ` 25,000 The Direct Expenses as per CAS 10 is
` _____________.
(a) 92,000
(b) 1,00,000
(c) 1,02,000
(d) 1,27,000
(vi) Operational Audit can lead to better management with the focus on_____________.
(a) Transaction-based analysis for Fraud Prevention
(b) Compliance of Rules
(c) Risk Identification, Process Improvement
(d) Budget Monitoring
(vii) Penalty paid to PF authorities is _____________ in Employee Cost.
(a) included
(b) excluded
(c) based on individual case
(d) partly included
(viii) Item appearing only in Cost Records is _____________.
(a) Profit on Sale of Assets
(b) Interest Received
(c) Loss on Sale of Assets
(d) Notional Interest on Capital
(ix) _____________ Analysis is evaluation of every resources declared in the industry.
(a) Capacity
(b) Energy
(c) Productivity
(d) Efficiency
(x) Which one of the following is not a professional misconduct in relation to Cost
Accountants in Practice as per the Second Schedule of The CWA Act, 1959?
(a) He/she fails to invite attention to any material departure from the generally
accepted procedure of costing and pricing applicable to the circumstances.
(b) He/she does not exercise due diligence or is grossly negligent in the conduct
of his/her professional duties.
(c) He/she fails to report a material misstatement known to him/her to appear in a

cost or pricing statement with which he/she is concerned in a professional
capacity.
(d) In the opinion of the Council, he/she brings disrepute to the Profession or the
Institute as a result of his/her action whether or not related to his/her
professional work.
Answer 1.
(i) (d) Selling and Distribution Overhead Cost.

CAS 15 deals with the principles and methods of classification, measurement and
assignment of Selling and Distribution Overheads, for determination of the cost of
sales of product or service, and the presentation and disclosure in cost statements.
(ii) (c) Cost Auditing Standard 103.
Cost Auditing Standard 103 deals with the overall objectives of the independent
cost auditor, the nature and scope of a cost audit and independent auditor‟s
overall responsibilities when conducting an audit of cost statements in accordance
with cost auditing standards. It also explains the requirements establishing the
general responsibilities of the independent auditor applicable in all audits, including
the obligation to comply with the cost auditing standards.
(iii) (c) A Company working in Special Economic Zone.

As per Rule 4(3) (ii) of the Companies( Cost Records and Audit) Rules 2014 such units
would be outside the purview of cost audit.
(iv) (b) ` 796 Lakh.
(Sales 1250 + Export Incentive 85 + Adj of Finished stock 95)-(Materials 634) = ` 796
Lakh.
(v) (d) ` 1,27,000

[direct expenses as per CAS 10 = royalty paid on production + Job charges +
Special Design Charges + Software development charges related to production +
Travelling abroad for training = ` (35,000 + 20,000 + 20,000 + 27,000 + 25,000) =
` 1,27,000 ]
(vi) (c) Risk identification, process improvement: The objective is to assist the organization in
performing functions more effectively and economically with focus on efficiency
and effectiveness of operations, giving an early warning system for detection of
potentially destructive problems.
(vii) (b) Excluded
Penalty paid to PF authorities is not normal cost and hence is excluded as per CAS 7
from employee cost.
(viii) (d) Notional interest on capital
This does not involve actual outlay of funds but is included in cost records as an
opportunity cost to determine product cost. The other three items are not related to
actual production and this do not form part of cost records.
(ix) (c) Productivity
The Productivity audit is basically an analysis of the productivity of the resources

deployed by any organization. It is generally done to generate information about
the status of productivity in the organization for the purpose of determining the
scale of efficiency and effectiveness of „resource utilization‟.
(x) (d) Bringing disrepute to the profession or the institute is not considered a misconduct as
per the Second Schedule of the CWA Act 1959. It is a misconduct as per the First
Schedule, Part IV of the Act.
2. (a) (i) What are ‘Books of Accounts’ as per the Companies Act, 2013? Do ‘Cost Records’
become part of Books of Accounts?
(ii) Is maintenance of Cost Accounting Records mandatory for a multi-product

company where all the products are not covered under the Rules, even if the
turnover of the individual products, which are covered under the Rules, is less
than rupees thirty five crore? 4+4=8
(b) (i) Mr. X, the Cost Auditor of a company, contributes articles in various papers or
journals, discussing matters of professional interest. In the course of such
discussion, he mentions various data which include some vital, but unpublished,
data relating to his client company without its tacit approval. State whether there
is punishment, if any, of the Cost Auditor for such contravention.
(ii) A member of the Institute, whether in practice or not, is liable for disciplinary
action if he/she is found guilty of professional and other misconduct. Explain the
term ‘other misconduct.” 4+4=8
Answer 2. (a)
(i) Section 2(13) of Companies Act, 2013 states that: “Books of Accounts” includes records
maintained in respect of-
(i) All sums of money received and expended by a company and matters in relation to
which receipts and expenditure take place;
(ii) All sales and purchases of goods and services by the company
(iii) The assets and liabilities of the company and
(iv) The items of cost as may be prescribed under section 148 in the case of company
which belongs to any class of companies specified under that section.
Section 148 of Companies Act 2013 empowers the “central government to specify audit
of items of costs in respect of certain companies”.
As per Rule 2 (e) of the Companies (Cost Records and Audit ) Rules 2014, “cost records”
means books of accounts relating to utilization of materials, labour and other items of
cost as applicable to the production of goods or provision of services as provided in
Section 148 of the Act and such rules.
(ii) The Rules provide threshold limits for the company as a whole irrespective of whether all
it‟s products are as per the prescribed industry /sector provided under Table A or Table
B. The Rules do not provide any minimum product specific threshold limits for
maintenance of Cost Accounting Records and consequently the company would be
required to maintain Cost Accounting Records for the products covered under table A
or Table B or both , even if the turnover of such products is below rupees thirty five crore.
Answer 2. (b)
(i) Clause (1) of Part I of the Second Schedule to the Cost and Works Accountant‟s Act
1959 deals with the professional misconduct relating to the disclosure of information by a
CMA in practice relating to the business of his /her clients to any person other than
his/her without the consent of the client or otherwise than as required by any law for the
time being in force would amount to breach of confidence .The code of ethic further
clarifies that such duty continues even after completion of the assignment. The CMA
may, however, disclose the information in case it is required as a part of performance of
his/her professional duties. In the given case Mr X has disclosed vital information of his
client‟s business without the consent of the client under the impression that it will help the
profession and the industry at large it is a professional misconduct covered by Clause (1)
of Part (I) of the Second Schedule of the Cost and Work Accountant‟s Act 1959.
(ii) As per Part IV first schedule to the Institute of Cost and Work Accountant‟s Act 1959 a
member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct if-
1. He /She is held guilty by any civil or criminal court for an offence which is punishable
with imprisonment for a term not exceeding 6 months and
2. In the opinion of the Council he/she brings disrepute to the profession or the Institute
as a result of the action whether or not related to his /her professional work.
3. (a) (i) How would you treat the following as per the CAS 7 related to Employee Cost?
I. Separation Cost due to voluntary retirement, retrenchment termination, etc.
II. Idle Time Cost
(ii) Find the Employee Cost of a company for the year 2016-17 as per the CAS 7 from
the following figures:
Particulars (` lakh)
Salaries, wages, allowances and bonus 950
Wage award arrears for the previous year 85
Employee welfare 56
Abnormal Idle Labour cost due to strike 95
4+4=8
(b) The following particulars pertaining to production of yarn are extracted from the
records of Balarampur Textiles Ltd. for the year ended March 31, 2017:
Particulars ` ‘000
Direct Material Cost per unit inclusive of Excise Duty ` 280 thousand 2,560
Direct Wages & Salaries 1,540
Direct Expenses 450
Factory Overheads 897
Administrative Overheads (40% relating to Production activities) 1,250
Quality Control Cost 565
Research and Development Cost 600
Interest on Working Capital 350
Sale of Scrap Realised 460
You are to determine the cost of production for the purpose of captive
consumption in terms of the Rule 8 of the Central Excise Valuation (DPE) Rules 2000
and as per the CAS-4 and the Assessable Value for the purpose of paying Excise
Duty on captive consumption. 6+2=8
Answer 3. (a) (i)

I Separation costs related to voluntary retirement, retrenchment, termination etc, shall be
amortised over the period benefiting from such costs. The amortised separation costs for
the period shall be treated as indirect cost and assigned to the cost objects in an
appropriate manner. However unamortised amount related to discontinued operations,
shall not be treated as Employee Cost but should be charged to Profit and Loss
account.
II Idle Time Cost shall be assigned direct to the cost object or treated as overheads
depending on the economic feasibility and the specific circumstances causing such
idle time. Cost of Idle time for reasons anticipated like normal lunchtime, holidays etc is
normally loaded in the employee cost while arriving at the cost per hour of an
employee/a group of employees whose time is attributed direct to the cost objects.
Answer 3. (a) (ii)

The employee cost for the company for the year 2016-17 is as follows:
(` Lakh)
Salaries, Wages, allowances and bonus 950
Contribution to provident fund and other funds 188
Employee Welfare 56
Total 1385
Note : 1. As per CAS 7, arrear not related to the current year should not be included in the
Employee Cost.
2. Abnormal idle time cost is charged to Costing Profit & Loss Account
3. It is assumed that the VRS payment does not relate to closure of any section or
activity of the unit.
Answer 3. (b)
According to the Central Excise Valuation (Determination of price of Excisable Goods) Rules
2000, the assessable Value of goods used for captive consumption is 110% (w.e.f 5-8-2003) of
cost of production of such goods. The manner of determination of cost of production for
captive consumption is laid down in CAS 4.
Particulars ` in ‘000
Direct Material 2560
Direct expenses 450
Factory Overheads 897
Administrative Overheads(40% on `.1250) 500
Quality Control Cost 565
R& D Cost 600
Total cost 7645
Less: realisation of scrap 460
Cost of production as per CAS 4 7185
Note : 1. The cost of Working Capital Interest is not chargeable to Cost of Production
2. Assessable value as per Excise Rules is ` 7903500 (110 % × 71,85,000)
4. (a) A company manufacturing various packing ingredients is not covered under the
Companies (Cost Records and Audit) Rules, 2014. The Managing Director of the
company wants to introduce costing system and wants your advice for coverage of
various areas of Management Accounting Control. Discuss. 8
(b) What do you mean by ‘Productivity Audit’? Mention some major ratios which are used
for measuring productive efficiency. 8
Answer 4. (a)
The management Accountant during the course of the study will thoroughly review and
stress upon the areas as follows :
(i) Nature of Industry - Batch, Job, Process etc
(ii) Locate and Fixation of cost centres
(iii) Procedures for accounting of materials and spares etc
(iv) Method of accounting treatment of wastes, rejections and defectives
(v) Systems of recording of wages, salaries and overtime and find out their judicial
allocation
(v) Incentive schemes in Vogue
(vii) Find out an optimum mechanism of allocation / apportionment of utilities
(viii) Method of accounting of depreciation and charging depreciation to the designed cost
centres
(ix) Method of apportionment of service department expenses to production departments
(x) Fix a basis of absorption of overheads to products

(xi) Basis of absorption interest, bonus, gratuity and selling and distribution overheads
(xii) Introduction to budgetary control systems
(xiii) Find whether internal audit system exists or not and if not advise suitably
(xiv) Draw a method of accounting of Production and Sales.
(xv) Advise suitable treatment of Research and Development expenses
Answer 4. (b)
The Productivity audit is basically an analysis of the productivity of the resources deployed by
any organization. It is generally done to generate information about the status of
productivity in the organization for the purpose of determining the scale of efficiency and
effectiveness of „resource utilization‟. The term „resources‟ here would include not only
“money” but also “men”, “machines”, “materials” and “methods”.
In other words, the objectives of productivity audit is - (a) to attain optimum result, and (b) to
improve on the benchmarks. This audit would generally comprise - (a) comparison of
expected returns on utilization of the resources vis-a-vis the actual returns; (b) comparison of
optimum returns on utilization of the resources vis-a-vis the actual returns; and (c) the steps
taken to improve benchmarks of returns and the utilization.
The term „Productivity‟ is normally attributed only to the “productivity of labour” or

“efficiency of labour” alone. But productivity audit is actually “productivity of every resource
employed”. Productivity audit is done by - (a) Ratio analysis - Return on capital employed -
Return on sales -Turnover ratios of fixed assets, current assets, inventories, category-wise
debtors etc. (a) Capacity utilization of plant, machinery and equipment against available
capacity, (b) Productivity analysis of man (labour) hours in time and cost, (c) Material
consumption against norms and benchmarks.
The following ratios are generally used in measuring productive efficiency of the resources
deployed and utilized:
Resources Deployment:
(i) Capital employed per capita
(ii) Capital employed per unit of product
(iii) Gross profit to capital employed
(iv) Net profit to capital employed
(v) Debt equity ratio
(vi) Net worth and long-term debts to gross fixed assets
(vii) Net worth and long-term debts to net fixed assets
(viii) Debts to fixed loans
(ix) Debts to floating loans
(x) Current assets to current liabilities
(xi) Net working capital
(xii) Total inventory to capital employed.
Resource Utilisation:
(i) Capacity utilisation - Installed capacity: Utilised capacity of machines (by units)
(ii) Capacity utilisation - Installed capacity: Utilised capacity of machines (by machine
hours)
(iii) Machine time available : Machine time utilized
(iv) Machine time consumed : Per unit of product (individually)
(v) Machine time consumed : Per capita
(vi) Gross fixed assets : Turnover
(vii) Net fixed assets : Turnover
(viii) Inventories : Turnover (inventory turnover)
(ix) Raw materials : Turnover (No. of days of stock)
(x) Work in process : Turnover (No. of days of stock v. cycle time)
(xi) Finished goods : Turnover (No. of days of stock v. lead time)
(xii) Labour time consumed : Division-wise
(xiii) Labour time consumed : Product-wise
(xiv) Labour time consumed : Product group-wise
(xv) Turnover per capita
(xvi) Value added : per capita
(xvii) Indirect labour: Direct labour number
(xviii) Indirect labourcosts : Direct labour costs
(xix) Levels of management
5. (a) (i) State which one of the following companies is required to appoint Internal
Auditor as per the Companies Act, 2013, and the Rules made thereunder:
Figures are in ` crore and correspond to the previous year.
Name Nature Equity Turnover Loan from Public

Capital Bank/PFI Deposit
LMN Ltd. LISTED 100 190 50 24
PQR Ltd. UNLISTED 60 190 50 24
PUBLIC
XYZ Ltd. UNLISTED 60 190 50 -
PRIVATE
(ii) Can the Chief Cost Accounts Officer of the company be given additional charge
as Internal Auditor? 6+2=8
(b) You are the Internal Auditor of Atlas Manufacturing Ltd. The Audit Committee desires
to enquire into the cause of abnormal rise in raw materials costs during the previous
month when there was no significant change in the production programme. How will
you proceed? 8
Answer 5. (a)
(i) Section 138 of the Companies Act 2013 deals with provisions of Internal Audit. Rule 13 of
the Companies (Accounts) Rules, 2014 requires
(a) Every listed company
(b) Every unlisted company having (i) paid up share wealth of rupees fifty crore or
more during the preceding financial year or (ii) turnover of two hundred crore or
more during the preceding financial year or (iii) outstanding loans or borrowings
from banks or public financial institutions exceeding rupees one hundred crore or
more at any point of time during the preceding financial year or (iv) outstanding
deposits of twenty five crore or more at a point of time during the preceding
financial year and
(c) Every private company having (i) turnover of two hundred crore rupees or more
during the preceding financial year or (ii) outstanding loans or borrowing from
banks or public financial institutions exceeding rupees one hundred crore or more
at any pointy of time during the preceding financial year
Shall be required to appoint an Internal Auditor or Firm of Internal Auditor.
Here, (1) LMN Ltd. Being listed company has to appoint Internal Auditor in either
case.
(2) PQR Ltd. An unlisted company exceeds capital limit of rupees 50 crore
though the minimum turnover, minimum loan and public deposit are not
met. The company has to appoint an Internal Auditor.
(3) XYZ Ltd. An unlisted private company need not appoint Internal Auditor
as the limits of appointment of Internal Auditor are not met.
(ii) Rule 13 of the Companies (Accounts) Rules, 2014 states that Internal Auditor may or may
not be an employee of the company. There is no mandate in the law that the post of
Internal Auditor needs to be full time. The Chief Cost Accountant officer being otherwise
eligible can be appointed as Internal Auditor in addition to his present job, if the Audit
committee or the Board of Directors consider the same. Additional duties given to the
Chief Cost Accountant Officer to act as Internal Auditor of the company is therefore
permissible under Rules.
Answer 5. (b)
The Internal Auditor has a duty to inquire into the cause of financial disorder and report to
the Management. The abnormal rise in raw material costs in the previous month without any
significant change in production programme must raise concern. Hence, it may be
considered as abnormal cost and the auditor should proceed on the following lines:
1. Variable Analysis: A variance analysis of the actual cost with that if the standard or if
there is no Standard Costing System, proceed with that of the previous month. The
analysis will highlight (a) Price Variance (b) Volume Variance (c) Usage.
In case of abnormality in price:
(i) Procure a list of raw materials, showing the names and detailed qualities of each
raw material
(ii) Enquire whether there is any change which will affect material usage e.g changes in
(a) source of supply of raw materials
(b) methods or process
(c) market rates
(d) alternative material cost in substitution of the original.
(iii) Enquire whether any new production line was taken up during the month in respect
of which Standard Input-Output ratio is yet to be set up.
(iv) Purchase of various lots
(v) Identification of each lot with production results.
2. Usage Figures:
(i) Obtain the standard consumption figures and ascertain the basis of computation of
normal usage figures
(ii) Examine whether the basis adopted for usage calculation is the same as that
adopted for the previous months
(iii) See the breakup of normal wastage (a) transit (b) storage (c) handling and (d)
processing
(iv) obtain a statement showing break up of actual material consumption and
(v) Ascertain actual wastage figures for the month under review and compare the
results of the analysis for some of the previous months.
3. Abnormal process loss:
(i) Material Quality: Examine inspection and testing reports to find out if raw materials
purchased are of poor quality or sub-standard. This will be most useful if it is possible
to identify the consumption out of each lot that has been purchased.
(ii) Machine Utilisation: Machine breakdown, power failure etc. may also result in loss of
materials in process. Check machine utilisation statements.
(iii) lnspection: A high rate of rejection in the finished lots may also be responsible for
abnormal wastage. Examine the Inspection Reports for the inspection carried out on
the completion of each stage of work or process.
(iv) Old Lot Consumption: It is possible that the wastage may have occurred because
the particular lot out of which issues were made in was lying in the store for a
longtime.
(v) Previous Period Comparison: Compare the wastage figures of this year with that of
the corresponding period last year and see whether there is any correlation.
4. Abnormal Storage and handling Loss: This can happen due to write-offs on the account
of reconciliation of physical and book stocks. In case of periodical physical stocktaking,
such write offs will be reflected only in the month in which reconciliation takes place.
There can be accidental theft or fire losses in storage. The Auditor should examine such
possibilities.
6. (a) The following are the summarised Balance Sheet and Income Statement of Ambica
Cement Co. Ltd. which is selling Cement & Clinkers. The Management wants to know
how its financial leverage appears vis-a-vis the norm of the industry.
Income Statement for the year ended 31.03.2017 (in ` ‘000) (5)
Sales 9,800
Cost of Goods Sold 7,460
Less: Administrations & Selling Overheads 750
Interest 280
Tax 330
Earnings after Tax 980
Balance Sheet as on 31.03.2017 (in ` ‘000)
Equity & Liabilities Assets

Share Capital 1,500 Net Fixed Assets 6,550
Reserves, Retained Earnings 3,700 Current Assets
Loan from IDBI 1,800 Inventory 1,600
Short-term Loan 1,200 Trade Receivables 1,100
Trade Payables 1,100 Cash 800
Other Current Liabilities 750
10,050 10,050
(b) A unit generates bio-gas out of the waste of industrial alcohol. The unit generates
power from diesel oil and, in addition, the said bio-gas so generated is used as a fuel
in generating steam for power. The high pressure steam is first sent to the STEAM
TURBINE and the exhaust steam is used in the process of manufacturing alcohol. The
following details are extracted from the financial accounts and the cost accounting
records of the unit for the year ending 31.03.2017:
Boiler (`) Steam Turbine (`)

Cost of Water 13,10,000
Fuel Oil 11,50,05,800
Bio-gas Plant expenses 3,20,60,500
Stores and Chemicals 3,10,000 79,200
Depreciation 21,56,250 7,80,000
Other expenses 48,95,500 1,45,200
High Pressure Steam generated (mt.) 43,690
Power generated (kWh.) 30,60,500
Note: The fall in the Enthalpy value of the steam is 8%. Prepare two separate cost
sheets for steam and power as per the Companies (Cost Records and Audit) Rules,
2014 for the year ended March 31, 2017. 8
Answer 6. (a)
For assessing financial health of the company, it is preferable to analyse
(i) Current Ratio
(ii) lnventory Turnover Ratio
(iii) Return on Total assets and
(iv) Interest Coverage Ratio
(Figures otherwise not stated are in ` „000)
1. Current Ratio = Current Assets /Current Liabilities 1.15

(1600+1100+800)/(1200+1100+750) = 3500/3050
2. Inventory Turnover Ratio = Cost of Goods Sold /lnventory = 7460/1600 4.66
3. Return on TOTAL ASSETS = Profit after Tax /Total Assets = 980/10050 9.75%
4. Interest Coverage Ratio = Profit before Tax and Interest/Interest 5.68
= (980+330+280)/280
5. Debt Equity Ratio = Long Term Debt/Shareholders Funds 0.35 :1
=1800/(1500+3700)=1800/5200= 0.35:1 (Favourable)
The current Ratio is nearly 1 times which is on an average nearing the industry average in
cement industry. The inventory Turnover ratio is good considering low inventory holding
compared to the level of turnover.
Return on total assets is satisfactory considering high capital base of the company mostly
financed by its own finance. Interest coverage ratio is satisfactory since the interest cost is
low which indicates that the company availed partial limit of working capital loan during the
whole year. The company is financed by its own capital which means financial leverage is
low.
Answer 6. (b)
(i) Cost of Steam Quantity Produced : 43,690 Metric Ton
Total amount (``) Cost/Mt(``)

Water 1310000 29.98
Fuel Oil 115005800 2632.31
Bio -gas Plant expenses 32060500 733.81
Stores and Chemicals 310000 7.1
Salaries and Wages 3710000 84.92
Repairs and Maintenance 7515400 172.02
Other Expenses 4895500 112.05
Total 166963450 3821.55
(ii) Cost of Power generated by Steam Turbine

Power Generated : 30,60,500 KWH
Total amount(``) Cost/Kwh (``)
Steam 166963450 54.55
Stores and chemicals 79200 0.03
Salaries and wages 879600 0.29

Repairs and maintenance 309600 0.1
Other expenses 145200 0.05
Total 169157050 55.27
Less: Credit for exhaust steam(92%) 155624486 50.85
Cost of power used in alchohol manufacture 13532564 4.42
7. (a) Southern Auto Components Ltd. has received an enquiry for supply of 2,50,000
numbers of special type of auto components. The Company can execute the
assignment provided a capital investment of ` 3,00,000 and working capital to the
extent of 3 months’ cost of sales are made available. The costs estimated are as
follows:

Labour Rate - ` 4.50 per hour
Factory Overheads - ` 4 per direct labour hour
Selling and Distribution expenses - ` 30,000
Borrowed funds will be available @11.5% on additional capital outlay. The company
statement, indicating the price which should be quoted to the customer. 8
(b) The following is a summary of the Profit and Loss Account of M/s. Straw Berry
Company Limited for the year ended 31.03.2017 (` in lakh):
Sales 13,540
Cost of Sales: Raw Materials, Stores, Spares 5,600
Excise Duty 830
Salaries, Wages 1,400
Power and Fuel 470
Repairs: Major Breakdown 35
Regular Maintenance 94
Insurance 56
Rent, Rates and Taxes 97
Printing, Stationery, etc. 437
Travelling 776
Other Administrative expenses 426
Depreciation 391
Interest 1,494
Total expenses 13,146
Profit 394
There was a major breakdown of machinery, resulting in loss of production for 42 days
in June and July, 2016 and there was a labour strike of 97 days from 14.02.2017 to
21.05.2017. The company produced a single product (Steel-Billet) and the production
during the year was 9,42,000 kgs. You are required to compute the amount of
abnormal cost on account of the breakdown and strike and the impact on cost per
unit of output. Where, do these figures find a place in the Cost Audit Report? 8
Answer 7. (a)
Special type Auto Components: 2,50,000 Nos ` in’000 ` in ’000

Materials (250,000 @ ` 3.25) 812,500
Labour 8000 Hrs @ ` 4.50 36,000
Prime Costs 848,500
Interest @11.5% on 300000 +0.25 × 910,500) 60,677
Total Cost 9,71,177
Profit 323,726
Sales 12,94,903

Sales = Total Cost × (1.00-0.25%)=971177/0.75 = ` 12,94,903
Profit = Sales - Cost = 1294903- 971177 = ` 323726
Quote Per Unit = 12,94,903 /250000 = `5.18
Answer 7. (b)
Loss of working days due to abnormal situation are :
Breakdown 42 days -Salary Paid
Strike 46 Days (up to 31stMarch , 2017) - No Salary Paid
Total 88 Days, ` in Lakh
Income 13,450
Variable Exp : Raw Materials stores 5,600
Excise Duty 830
Power Fuel 470 6,900
Margin 6,640
Fixed Cost (13,146 -6900) 6,246
Salaries amounting to ` 1,400 Lakh is for (365-46) = 319 Days
Abnormal cost comes to
Fixed Cost on PRODUCTION Total(` ) Abnormal (`) Normal (`)

Breakdown Repairs 35 35 00
Salaries Wages (in the ratio 42:319) 1400 184 1216
Interest 1494 00 00
Selling Distribution Cost 1040 00 00
Production Fixed Cost (Balance 2277 549 1728
figure in the ratio 88:365)
Total 6246 768 2944
Production Cost Per Kg : (942000 Variable = Fixed Cost Abnormal Cost
Kg) 6900/9.42 2944/9.42 = 768/9.42
= ` 732.48 = ` 312.52 = ` 81.52
Note :
1. Interest, Selling charges are not included in the Cost of Production.
2. Abnormal Cost is excluded from Cost of Sales and charged to Profit & Loss Account
3. In the Cost Accounting Policy declared in Annexure to Cost Audit Report „A‟, the
treatment of abnormal or non-recurring cost has to be declared
4. The analysis of value addition and distribution of Earnings show Extra ordinary expenses
as post Value Addition.
(a) How to treat Inward Transportation Cost as per the Cost Accounting Standard 5? How
Transportation Cost is to be determined in case the manufacturer is having its own
transport fleet? 4
(b) Write a short note on the role of Internal Auditor of a company to review
Custodianship and Safeguarding of Assets. 4
(c) A company is facing problem in satisfying customers’ orders leading to backlog of

supply position. How to identify the problem by means of Operational Audit? 4
(d) From the following information, find the Economic Value Added (EVA) of a company
for the previous year 2016-17:
Particulars Amount (` ’000)

Value added as per the Annexure to the Cost Audit Report-Part D 30,00,000
Distribution of Earning to Wages 12,50,000
Interest 3,30,000
Dividend @ 12% 3,60,000
Taxes 3,50,000
Capital Employed (as in the Cost Audit Report) 65,00,000
The Dividend at 12% of paid up capital is normal as per the market norms for the
industry.
Taxes and all expenses are considered on cash basis. 4
(e) From the following figures of Systematics Polytex Ltd., compute the landed cost of
Egyptian Cotton for the year 2016-2017:
Particulars Amount
Materials `35,000
Import Duty ` 3,35,000
Freight Inward ` 1,62,000
Insurance of Import by sea ` 48,000
Cash Discount ` 33,000
Bank Interest for Import Credit ` 15,000
CENVAT Credit refundable ` 37,000
Weight Reduction due to Moisture Loss 0.6%
Parity value of US $ :
On the date of Contract ` 64.40
On the date of Import ` 64.60
On the date of Payment ` 65.20 4
Answer 8. (a)
As per the Cost Accounting Standard 5, Inward transportation cost is the transportation
expenses incurred in connection with the materials/goods received at factory or place of
use. Inward transportation costs shall form the part of the cost of procurement of materials
which are to be identified for proper allocation/apportionment to the materials/ products.
In case of a manufacturer having his own transport fleet, proper records shall be maintained
to determine the actual operating cost of vehicles, showing the details of various elements
of cost, such as salaries and wages of driver, cleaners and others, cost of fuel, lubricant,
grease, amortised cost of tyres and battery, repairs and maintenance, depreciation of
vehicles, distance covered and trips made, goods hauled transported to the depot.
Separate records should be maintained as per Appendix 1 to the standard separately for
(i) Inward transportation
(ii) Outward transportation
(iii) Movement for home consumption and export
(iv) Separate for production and trading activities
(v) Separate for transportation other than by road, viz, by air, etc.
Answer 8. (b)
The Internal Auditor should review the control system to ensure that all assets are accounted
for fully. He/ she should review the means used for safe guarding assets against losses viz, fire,
improper or negligent activities, theft, illegal activities etc. He/she should review the control
system for intangible assets, e.g, the procedure relating to credit control. Where a company
uses electronic control equipment, the physical and system control on processing facilities as
well as data storage should be examined and tested. He or she should review
adequacy of the insurance cover for the various risks involved. He/she should also verify the
existence of assets. Para 30 of the Companies(Cost Records And Audit) Rules, 2014 states
that “records of physical verification may be maintained in respect of all items held in the
stock such as raw materials, process materials, packing materials, consumable stores,
machinery spares, chemicals, fuels, finished and then assets etc. Reasons for shortages or
surplus arising out of such verifications and the method followed for adjusting the same in
the cost of the goods or services shall be indicated in the records.”
Answer 8. (c)
The Operational Auditor may use the technique of Work Load Measurement to assess the
situation. He/She may draw up a questionnaire to assess the situation so as to include the
following queries:
• Is there a backlog of work and if so whether the same is due to increased volume or
• Is the increase in work volume is temporary or may continue?
• Will the situation likely to ease with additional inputs like personnel, machines etc?
• Is the workload of each employee is justified or needs adjustment through improved

• Will investment in advanced technology will commensurate with benefits derived from it?
• What control measures exist to assess the work efficiency and what are the remedial
measures?
Answer 8. (d)
Economic value added (EVA) is a measure of a company‟s financial performance based on

the residual wealth calculated by deducting its cost of capital from its operating profit
adjusted for taxes on a cash basis. EVA can also be referred to a s economic profit.
Particulars `
Value Added as per the Annexure to the Cost Audit Report-Part D 3000000
Less: Distribution of Earnings to Wages 1250000
Operating profit 1750000
Less: Interest 330000
PBT 1420000
Tax 350000
PAT 1070000
Dividend 360000
EVA 710000
Capital Employed(as in the Cost Audit Report) 6500000
EVA as a % of Capital Employed 10.92
Note: Dividend Distribution is not an expense but is considered as a Notional cost of Capital
depending on the nature of Industry, Location, Legal Provisions etc. Here dividend payment
made by the company is considered as an optimum cost of equity capital and is deducted
from the margin to determine Economic profit.
Answer 8. (e)
Landed Cost of Material `
Materials Cost (35,000 × 64.40) 22,54,000

Import Duty 3,35,000
Freight Inwards 1,62,000
Insurance by Sea 48,000
Total 27,99,000
Less: Cash Discount 33,000
Less: Cenvat Credit 37,000
Landed cost of Materials 27,29,000
Unit cost increased by 100/99.4 times (due to weight loss)
Note : 1. Exchange Loss, finance costs are not allowable for inclusion in the Material Cost
2. Weight Loss does not affect the total cost, but the unit cost is enhanced by the
percentage of weight loss.
Suggested Answer_Syllabus 2016_Jun2017_Paper 19
FINAL EXAMINATION
GROUP - IV
(SYLLABUS 2016)

JUNE - 2017

1. Choose the correct answer with short justification/working. (1 mark for correct choice, 1
mark for justification/workings. 2x10=20
(i) Part C of the Annexure to the Cost Audit Report in CRA 3 deals with ________.
(a) Manufacturing Sector
(b) Service Sector
(c) Regulated Sector
(d) Unregulated Sector
(ii) Cost Accounting Standard 8 is a Cost Accounting Standard on ___________ .
(a) Employee Cost
(b) Utilities Cost
(d) Selling and Distribution Cost
(iii) Under the Generally Accepted Cost Accounting Principles, the cost of cane supplied
from own farm to the sugar mill is treated as ___________.
(a) Direct Materials Cost
(b) Indirect Materials Cost
(c) Production Overhead
(iv) Constitution of Audit Committee by the Board of Directors is mandatory for _________.
(a) all companies
(b) all listed companies only
(c) all listed companies and those prescribed under the Companies (Meetings of
Board and its Powers) Rules only
(d) all public companies having turnover of `100 crore or more only
(v) Cost Auditing Standard 102 deals with ______________.
(vi) As per the Central Excise Valuation Rules 2000, the assessable value of goods used
for captive consumption is __________.
(a) at actual cost of production of such goods
(b) at marginal cost of production of such goods
(c) at 110% of cost of production of such goods
(d) at market price of such goods
(vii)A cotton textile mill had cumulative waste percentage of 8% in Blow Room, 6% in
Carding, 4% in Drawing, 4% in Simplex and 9% in Ring Frame. For an input of 1000 kg.
of cotton in Blow Room, the output at Ring Frame is _________.
(a) 730.27 kg.
(b) 725.27 kg.
(c) 742.27 kg.
(d) 749.97 kg.
(viii)Operational Audit can lead to better management with the focus on ________.
(a) transaction-based analysis for fraud prevention
(b) compliance of rules
(c) risk identification, process improvement
(d) budget monitoring
(ix) A shoe manufacturing company has a plant capacity of producing 700 shoes per
shift. During the year of 300 working days, 3 shifts of 8 hours with half-hour recess per
shift, it produces 35.91 lakh shoes. The Normal Capacity Utilization percentage is ____.
(a) 82%
(b) 76%
(c) 74%
(d) 78%
(x) Propriety Audit in the context of Government Audit seeks to ensure that _______.
(a) public money are not spent for the benefit of a particular person
(b) public officer should exercise same vigilance as in respect of expenditure of
his/her own money
(c) no authority should pass an order which will be directly or indirectly to its own
advantage
(d) All the above
Answer:
1. (i) (B) Service Sector

Reason: Part C of the Annexure to the Cost Audit Report in Form CRA 3
pursuant to the Rule 6(4) of the Companies (Cost Records and Audit) Rules,
2014, gives quantitative information and abridged cost statement for services
in the Service Sector.
(ii) (B) Utilities Cost
Reason: CAS 8 deals with the Cost Accounting Standard on cost of utilities.
(iii) (A) Direct Material Cost
Reason: As per the GACAP, Direct Materials Cost includes cost of
procurement and freight inwards of the materials.
(iv) (C) All listed companies and those prescribed under the Companies (Meetings of
Board and its Powers) Rules only
Reason: The Rule covers all listed companies, public companies having
capital of `10 crore and more, annual turnover of `100 crore and more,
outstanding deposits, loans and borrowings of `50 crore or more.
(v) (B) Cost Audit Documentation
Reason: The Cost Auditing Standard 102 is to provide guidance to the
members in the preparation of audit documentation in the context of the
audit of cost statements, records and other related documents.
(vi) (C) At 110% of cost of production of such goods
Reason: Liability of Excise Duty arises as soon as the goods covered under the
Excise Duty are manufactured but the Excise Duty is collected at the time of
removal or clearance from the place of manufacture even for captive
consumption.
(vii) (B) 725.27 kgs.
Reason: Output at Ring Frame = 1000 × (100-92)% × (100-94)% × (100-96)% ×
(100-96)% × (100-91)% = 725.27 kgs.
(viii) (C) risk identification, process improvement
Reason: The objective is to assist the organization in performing the functions
more effectively and economically with focus on the efficiency and the
effectiveness of the operations, giving an early warning system for the
detection of the potentially-destructive problems.
(ix) (B) 76%
Reason: Available capacity = 300 × (8-0.5) × 3 × 700 = 47.25 lakh units
Actual Capacity Utilization % = 35.91/47.25 = 76%
(x) (D) All the above
Reason: The objective of Propriety Audit is that public money is not spent for
the benefit of a particular person. Public officer should exercise same
vigilance as in respect of expenditure of his/her own money and no authority
should pass an order which will be directly or indirectly to its own advantage.
Section - B (80 marks)
2. (a) What is meant by 'Normal Price' with reference to 'Related Party Transaction' in CRA
1? State the basis adopted to determine 'Normal Price'. 8
(b) Mr. P. Swamy, the Cost Auditor of PQR Ltd. for the FY 2016-17, was offered an
assignment of Investment Consultant of RST Ltd., a subsidiary of PQR Ltd., for the same
year.
(i) Whether the acceptance of the assignment amounts to violation of law and
professional misconduct?
(ii) What are the penal provisions, if any? (Mention the relevant provisions.) 4+4=8
Answer:
2. (a) As per Para 24 (b) of the CRA 1, ―Normal Price‖ means price charged for
comparable and similar products in the ordinary course of trade and commerce
where the price charged is the sole consideration of sale and such sale is not made
to a related party. Normal Price can be construed to be a price at which two
unrelated and non-desperate parties would agree to a transaction and where such
transaction is not clouded due to the proximity of the parties to the transaction and is
free from influence through the parties may have shared interest.
In the context of the basis adopted to determine Normal Price, the methods stated
below are relevant.
(i) Comparable Uncontrolled Price method
(ii) Resale Price method
(iii) Cost-plus method
(iv) Profit Split method
(v) Transactional Net Margin method
(vi) Any other method, to be specified
(b) (i) Any person who is engaged in consulting and providing specialized services to a
company and its subsidiary companies is not eligible to act as Cost Auditor
[Section 141 of the Companies Act, 2013, read with Companies (Audit and
Auditors) Rules, 2014]. The Cost Auditor cannot accept the assignment as long as
he/she remains appointed as the Cost Auditor of the company.
A member of the institute, whether in practice or not, shall be deemed to be guilty

of other misconduct, if— (1) he is held guilty by any civil or criminal court for an
offence which is punishable with imprisonment for a term not exceeding six months;
(2) in the opinion of the Council he brings disrepute to the profession or the institute
as a result of his action whether or not related to his professional work.[Part IV, The
First Schedule]
A member of the Institute, whether in practice or not, shall be deemed to be guilty

of other misconduct, if he is held guilty by any civil or criminal court for an offence
which is punishable with imprisonment for a term exceeding six months.[Part III,
The Second Schedule]
(ii) If an auditor has contravened the provisions of the Companies Act, 2013, he/she
shall be punishable with fine which shall not be less than twenty five thousand
rupees but which may extend up to five lakh rupees. When the auditor has
contravened knowingly or willfully with the intention to deceive the company or
its shareholders or creditors or tax authorities, he/she shall be punishable with
imprisonment for a term which may extend to one year and with fine, which shall
not be less than one lakh rupees but which may extend up to twenty-five lakh
rupees. When the auditor has been convicted as above, he/she shall be liable to
refund the remuneration received and pay for the damages to the company,
statutory body or to any other person for the loss arising out of incorrect statement
made in his/her report [Section 147 of the Act].
A member of the Institute, whether in practice or not, shall be deemed to by

guilty of other misconduct, if he/she is held guilty by any civil or criminal court for
an offence which is punishable with imprisonment for a term exceeding six
months [The Second Schedule, Part III of the Cost and Works Accountants Act,
1959].
3. (a) While commencing Cost Audit of a manufacturing company, how the Auditor would
assess the risk of material misstatement? 8
(b) Autoparts Manufacturing Company Ltd. showed a profit for the year 2016-17 as `
35,46,700. During the course of Cost Audit, the followings transactions were noticed:
(i) an old machine with net value of ` 6,54,000 was sold off for ` 9,30,000,
(ii) dividend income was received amounting to ` 84,500 from investments,
(iii) a sum of ` 58,000 was spent towards CSR commitment,
(iv) the company was engaged in trading activity where purchase of goods was `
13,50,000 and sales was ` 13,42,300, after incurring ` 40,800 as expenditure,
(v) some renovation work was carried out at a cost of ` 7,75,000 and its useful life was
only for five years, and
(vi) the closing inventory of raw material was undervalued ` 29,600 and that of
finished goods was overvalued ` 65,400 in the financial records. Work out the Profit
as per the Cost Accounts. 8
Answer:
3. (a) Cost Audit Standard 101 explains the situation when the Cost Auditor expresses an
inappropriate audit opinion on the cost statements that are materially misstated.
Misstatements are the differences between the actual figures and the desired
amounts, classifications, presentations, or disclosures that, in the Cost Auditor‘s
judgment, are necessary for the cost statements to be presented fairly in all material
respects or to give a true and fair view.
For assessment of the risk, the audit strategy is formulated to obtain an understanding
of the entity and its environment, including the entity‘s internal control, to identify and
assess the risks of material misstatement, whether due to fraud or error, at the overall
cost statement level and at the assertion level including items of cost, cost heads and
disclosures thereof.
In formulating the overall audit strategy, the Cost Auditor shall consider all the
relevant factors stated below.
(a) The cost reporting framework generally prescribed, under the Companies Act
and the Rules on the basis of which the cost information to be audited has been
prepared, including need for reconciliation with the financial reporting framework
(b) Industry regulators‘ requirement as to how costs will be handled
(c) Unique features of an industry that influence audit requirements, such as definition
of product in the newspaper industry
(d) Reliance that can be placed on the work of financial auditors, other cost auditors
appointed by the entity and internal auditors
(e) State of IT (information technology) implementation
(f) Statutory timelines for Cost Reporting
(g) Timelines for Board/Audit Committee meetings, which can set the time limits for
completion of audit work
(h) Resources required and available in terms of manpower, equipment and others
and the assignment of these to specified parts of the work,
The Cost Auditor shall then

(i) develop an audit plan which will include the nature, extent and timing of risk
assessment, audit procedures and other activities,
(ii) shall update the overall audit strategy and the audit plan as required during the
course of audit, and
(iii) shall document the overall audit strategy, the audit plan and any significant
changes made therein during the audit engagements and the reasons for the
changes.
In case of deviations from the prescribed accounting and internal control system, if
the Cost Auditor concludes that the deviations are such that the preliminary
assessment of risk persists, he/she would amend the plan, the timing and the extent of
his/her plan and the substantive procedure. He/she would report the deficiencies to
the management and if no remedial action is taken, report the same in the Report.
(b) Reconciliation of the Cost Accounts and the Financial Accounts of Auto parts
Manufacturing Company Ltd.
` `
Profit as per the Financial Accounts 35,46,700
Add Trading Loss 48,500
Add 4/5th of Renovation Expenses Amortized 6,20,000
6,68,500
Less Profit on Sale of Assets 2,76,000
Income from Investments 84,500
CSR Contribution 58,000
Effect of Undervaluation/Overvaluation of closing Inventory 35,800 4,54,300
4. (a) Discuss
(i) the areas of 'Corporate Services' and
(ii) the evaluation criteria used in 'Corporate Services Audit'. 4+4=8
(b) What is Corporate Social Responsibility (CSR) Committee and its role as per the
Companies Act, 2013? Describe the coverage of a CSR Audit Programme. 8
Answer:
4. (a) (i) The areas of the ‗Corporate Services‘ are the support infrastructure of a
company. The activities in such areas are stated below.
 Combine or consolidate certain enterprise-wide needed support services
provided based on specialized knowledge, best practices, and technology
 Serve internal (and sometimes external) customers and business partners
 co-ordinate the diverse organizational units and help them to focus on
organizational goals
 exploit resources and develop core competencies that enable an
organization to keep its edge over its industry competitors
 combining operations with another competitor in the same industry to
increase competitive strengths and lower competition among the industry
rivals
The business world is now becoming increasingly information intensive and

complex and, therefore, companies have begun to incorporate web-based
services into the work place. These include public relations, customer assistance
or call centers, training, engineering, human resources and procurement, etc., to
create new business value and help the company function more effectively by
improving the internal processes, managing the customer relationships and
extending the organization. The benefits of these services extend to core business
areas in form of (a) reduced costs, (b) less inventory, (c) less working capital
requirements, (d) improved procurements and higher profits, and (e) higher
efficiency and productivity of the employees as new technologies can introduce
an array of new possibilities with powerful computers and integration of database
with web technologies.
(ii) The appraisal system of the ‗Corporate Services Audit‘ should consider the level of
contribution a business entity makes to society and its business environment
towards raising the quality of life through better product quality and services
rather than profit maximization. The ‗corporate services audit‘, thus, attempts to
distinguish between the ends (i.e., profits) and means (i.e., services) of business
and provides a new dimension to the concept of audit approach. It is the
fulfillment of the social responsibilities of a business unit. Auditor‘s responsibility lies
in evaluating the company‘s response to the social needs. The focus should be
on:
Target Stakeholder Corporate Service focus

Consumer quality goods in proper price
Employee pay, training, safety, welfare
Shareholders safety of investment, good return
Community public relations, social cost, social benefit
Fellow Business business ethics, fair trade
State compliance of law, fair trade, no evasion of tax
(b) As per the Section 135(1) of the Companies Act, 2013, every company having net
worth of rupees five hundred crore or more, or turnover of rupees one thousand crore
or more or a net profit of rupees five crore or more during any financial year shall
constitute a Corporate Social Responsibility (CSR) Committee of the Board consisting
of three or more directors, out of which, at least, one director shall be an
independent director.
In terms of the Section 135(5) of the Act read with Companies (Corporate Social
Responsibility Policy) Rules, 2014, the company, in pursuance of the
recommendations of the CSR Committee of the Board and as per the declared CSR
Policy of the company, spends, in every financial year, at least, two per cent. of the
average net profits of the company made during the three immediately preceding
financial years subject to the condition that such policy will cover the subjects
enumerated in the Schedule VII of the Act.
In Schedule VII, the following items and entries are illustrative:

(i) eradicating hunger, poverty and malnutrition, safe drinking water,
(ii) promoting education, vocation skills among children, women, elderly persons
(iii) promoting gender equality, empowering women, setting up homes, hostels for
women and orphans, old age homes, day care centers, etc.
(iv) environmental and ecological balance, protection of flora and fauna
(v) protection of national heritage, art and culture, etc.
(vi) measures for the benefit of armed forces veterans, war windows, etc.
Through there is no mandatory requirement for CSR Audit, yet a CSR Audit
programme will form part of the Management Audit and may cover all or any of the
following:
 effectiveness of the operating framework for CSR implementation,
 effectiveness of implementation of specific, large CSR projects,
 adequacy of internal control and review mechanisms,
 reliability of measures of performance, and
 management of risks associated with external factors like regulatory compliance,
management of adverse or potentially adverse NGO attention, etc.
CSR Audit and review will in nutshell look for the following:
 ensuring compliance with the Act,
 evaluating internal control and governance framework,
 assessing the CSR project life cycle, and
 conducting financial review of the project to confirm the utilization of budgets for
achieving desired outcomes.
5. (a) (i) What are the mandatory requirements for appointment of Internal Auditor in a
listed company?
(ii) Who are the persons eligible for appointment as Internal Auditor? 4+4=8
(b) You have been appointed as an Internal Auditor for CENVAT Audit of Kwality Alloy Ltd.
which is a large manufacturing concern. Draft a suitable audit programme for the
above. 8
Answer:
5. (a) (i) Rule 13 of the Companies (Accounts) Rules, 2014, makes it mandatory to appoint
an Internal Auditor for every listed company.
The Board of Directors of every listed company shall appoint an Audit Committee
[Rule 6 of the Companies (Meetings of Board and its Powers) Rules]. It is the
responsibility of the Audit Committee of a listed company to review the
adequacy of the internal audit functions and review the Internal Audit Reports
(Clause 49 of the Listing Agreement).
(ii) In terms of Section 138 of the Companies Act, 2013, read with Rule 13 of the
Companies (Accounts) Rules, 2014,
(a) every listed company;
(b) every unlisted public company having (i) paid up share wealth of fifty crore
rupees or more during the preceding financial year; or (ii) turnover of two
hundred crore rupees or more during the preceding financial year; or (iii)
outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the
preceding financial year; or (iv) outstanding deposits of twenty five crore
rupees or more at any point in time during the preceding financial year; and
(c) every private company having (i) turnover of two hundred crore rupees or
more during the preceding financial year; or (ii) outstanding loans or
borrowing from banks or public financial institutions exceeding one hundred
crore rupees
shall appoint (i) an individual or (ii) a firm of Internal Auditors as the Internal
Auditor of the company. Such person or firm shall either be a Chartered
Accountant or a Cost Accountant, or such other professional as may be decided
by the Board to conduct the internal audit of the functions and activities of the
company.
(b) While drafting Audit Programme for CENVAT Audit the Internal Auditor should keep in
mind various factors such as examine the controls and procedures for accounting
and claim in respect of Cenvat on eligible inputs – particularly examine the cases
where Cenvat could not be claimed due to various reasons i.e. non-eligible items, loss
of documents etc.
The following aspects need to be checked during audit:

(i) Type of industry
(ii) Principal raw materials used and the input output ration of the raw materials.
(iii) Percentage of scrap/waste /loss and its comparison with standard and actual.
(iv) Value of input for which the CENVAT credit availed and the value of input
consumed in the product/manufacture.
(v) In case of consumables for which CENVAT has been availed, whether expenses
charged to revenue are gross or net of CENVAT.
(vi) In case of capital goods for which CENVAT has been availed whether
depreciation has been claimed on the element of CENVAT included in the cost
of capital goods. The auditor needs to ensure that cost of the asset is
capitalised in the books net of such CENVAT and depreciation is claimed on the
net amount only.
(vii) Procedure adopted for payment of duty on goods sent to sub-
contractors/other factories of the Assessee.
(viii) Material receipts to be checked to ensure that the material receipt register (at
the gate / stores) contains record reference of CENVAT documents. Also to be
examined the normal time lag between receipt of material and availing of
CENVAT credit.
(ix) Records maintained or prepared by him in terms of sub rule (2) of Central Excise
Rules, 2002.
(x) The cost audit reports, if any, under Section 148 of the Companies Act, 2013
(xi) The Income Tax Audit reports, if any, submitted under Section 44 AB of Income
Tax Act, 1961.
(xi) Excise Reconciliation Statement.
(xii) In certain clients, data in respect of CENVAT not claimed on inputs if not readily
available, which may be a management issue for advising the client in
strengthening the overall control over accounting in respect of CENVAT.
(xiii) Abnormal delays in availing CENVAT credit may be a management issue and
may offer opportunities for advising the client for streamlining the processes.
(xiv) CENVAT records
(i) PLA register
(ii) Amount claimed and claimable against Raw Materials and Capital Goods
(iii) Summary statement of CENVAT Credit
(iv) Vender Invoice, etc.
(v) Review and checking of the documents relating to notices/show causes/
litigation matters in respect of CENVAT Audit
6. (a) The financial position of Hind Automobiles Ltd. for the years 2016-17 and 2015-16 are
given below. From the figures, find (i) Capital Employed, (ii) Debt-Equity Ratio, (iii)
Proprietory Ratio, and (iv) Current Ratio.
(` in '000)
Liabilities 31.03.17 31.03.16 Assets 31.03.17 31.03.16
Capital (Equity) 600 600 Fixed Assets 2400 1800
General Reserves 414 326 Less: Depreciation 840 600
Revaluation Reserve 110 125 Net Fixed Assets 1560 1200
Profit/Loss A/c Balance 122 54 Stock 720 600
Loan-Secured 385 467 Sundry Debtors 410 300
Loan-Unsecured 655 128 Cash & Bank Balances 180 120
Sundry Creditors 560 480 Other Current Assets 40 30
Provision for Tax 64 70
Total 2910 2250 Total 2910 2250
8
(b) Saharanpur Sugar Mill Ltd. has a boiler that uses the unit's own by-product, cane
waste (Bagasse), as fuel which has a market price of ` 750 per ton. The steam
generated is first used for the generation of power and the exhaust steam is used in
the process of sugar manufacture. The exhaust steam (after generation of power)
transferred to the sugar manufacturing process is 84% of the cost of production of
steam. The mill buys restricted amount of power from the grid. The following details
are extracted from the Financial Accounts and Cost Accounting Records of the Sugar
Mill:
Sugar produced 28,70,000 quintals
Steam generated and consumed 17,58,000 ton
Fuel (Bagasse) consumed for production of steam 8,22,000 ton
Conversion Cost of generation of steam ` 10,97,00,000
Steam used for generation of power 7,44,000 ton
Power purchased from the Electricity Board @ ` 5.84/kWh 67,92,000 kWh
Power generated from the Steam Turbine 5,82,30,000 kWh
Conversion Cost of generation of power (excluding cost of steam) ` 5,06,61,500
Find out (i) Gross Cost of Steam per ton of Steam, (ii) Average Cost of Power per kWh
and (iii) Average Cost of Power per ton of Sugar. 8
Answer:
6. (a)
` in’ 000
(A) Capital Employed 31.03.2017 31.03.2016
Gross Block 2,400 1,800
Less Depreciation 840 600
(a) Net Fixed Assets 1,560 1,200
Current Assets: Stock 720 600
Sundry Debtors 410 300
Cash and Bank Balances 180 120
(b) Total Current Assets 1,350 1,050
Current Liabilities :
Sundry Creditors 560 480
Provision for Tax 64 70
(c) Total Current Liabilities 624 550
(d) Working Capital = b-c 726 500
(e) Capital Employed = a+d 2,286 1,700
(B) Debt-Equity Ratio
Debt--Secured 385 467
Debt--Unsecured 655 128
(i)Total Long-term Debt 1,040 595
Equity: Share Capital 600 600
General Reserves 414 326
Profit / Loss Account Balance 122 54
(ii) Total Equity 1,136 980
Debt-Equity Ratio (i) / (ii) 0.915 : 1 0.607 : 1
(C) Proprietory Ratio

(i) Equity Fund 1,136 980
(ii) Total Assets (Fixed Assets + Working Capital) 2,286 1,700
Proprietary Ratio = (i) / (ii) 0.50 :1 0.58 : 1
(D) Current Ratio
(i) Current Assets 1,350 1,050
(ii) Current Liabilities 624 550
Current Ratio: (i) / (ii) 2.16:1 1.91:1
(b)
(i) Gross Cost of Steam `
Cost of fuel consumed for production of Steam (8,22,000 × 750) 61,65,00,000
Conversion cost of generation of Steam 10,97,00,000
72,62,00,000
Gross cost of Steam / ton (72,62,00,000 / 17,58,000) 413.08
(ii) Average Cost of Power per KWh
Steam for Power (7,44,000 × 413.08) 30,73,31,520
Conversion Cost of generation of Power (including cost of Steam) 5,06,61,500
Grid Power Cost (67,92,000 × 5.84) 3,96,65,280
39,76,58,300
Average cost of Power per KWh 6.11575
39,76,58,300 / (67,92,000 + 5,82,30,000) ` 6.12 (approx.)
(iii) Average cost of Power per ton of Sugar ` 138.5568
(39,76,58,300 / 28,70,000) 138.56 (approx.)
7. (a) A Cloth processing unit has two Rotary Printers-P1and P2- running on two shifts, having
normal capacity of 4600 hours. The unit can process two products X and Y which
have the following cost structure:
Per 50 mts. of cloth X Y
Machine Hours required for P1 3 4
Machine Hours required for P2 3 4.5
Processing Fees (`) 480 560
Direct Materials Cost (`) 120 150
Machine P1 Machine P2
Direct Labour/hr. (`) 48 40
Variable overhead/hr. (`) 30 22
In case of breakdown of any one machine, the management has to be selective in

processing of products. Assuming that there is no other constraint of order book or
costs, arrange the products in terms of profit. 8
(b) Goodyear Automotives Ltd., located in a coastal state, had faced interruption in
production during the year 2016-17 due to cyclone and flood. Out of total 303
available working days during the year, the interruptions were: (a) Flood: 4 days, (b)
Cyclone: 3 days, and (c) Damage Restoration: 2 days (these exclude weekly off days
falling in between). The unit declared lay-off during such period on payment of
average 50% wages for direct workers. The damage to the plant and the cost of its
repairs amounted to ` 87 million. Find out the abnormal expenses deductible from the
product cost on the basis of the following expenses incurred in the FY 2016-17:
Amount in millions
Direct Wages & Salaries 1230 Indirect Wages & Salaries 740
Power 820 Depreciation 210
Other Fixed Expenses 490 Finance Charges 115
8
Answer:
7. (a) The contribution per 50 mts. of processing of products X and Y in machines P1 and P2
are analyzed below.
Products X X Y Y
Machines used P1 P2 P1 P2
Processing Income (`) 480 480 560 560
Direct Raw Materials (`) 120 120 150 150
Direct Labour (`) 144 120 192 180
Variable Overheads (`) 90 66 120 99
Total Variable Cost (`) 354 306 462 429
Contribution (`) 126 174 98 131
Ranking for both machines P1 and P2 : X, Y
(b) As per CAS 6, Abnormal Cost is defined as atypical or an unusual cost due to some
abnormal situation in case of production or operation. Any abnormal cost is excluded
from total cost of production. In the present case, the following expenses are
excluded from the total expenses:
1) The Finance Charge is not charged to Cost of Production but is to be shown
under the head ‗Cost of Sales‘ (CAS 17).
2) Power is a direct cost and is excluded from the total expenses.
3) Direct wages and salaries is a variable cost but, in the given situation, the layoff
payment was made and hence is treated as fixed cost.
4) Depreciation is treated as fixed cost by its very nature (number of days of
working).
Accordingly, the abnormal expenses for the year comes to:
` in million
Lay off payment (1230 x 9 / 303 x 0.5) 18.27
Restoration Cost of plant damages & repairs 87.00
Indirect Wages & Salaries 740
Depreciation 210
1440
The abnormal expenses will be = 1440 x (9/303) 42.77
Total : (Lay-off payment + Restoration Cost of plant 148.04
Damage & repairs + Abnormal Expenses)

(a) How do you define 'Packing Material' as per the Generally Accepted Cost
Accounting Principle? What is the treatment of such cost? 4
(b) Suggest some checklists the Cost Auditor should draw for Profitability Analysis in a
manufacturing organization. 4
(c) What do you understand by 'Energy Audit'? Briefly state the functions of Energy Auditor.
4
(d) ABC Stores is a departmental store, selling goods on retail basis. It makes a gross
profit of 20% on net sales. The following figures for the year-end are available:
Opening Stock `62,000, Purchases `4,46,000, Purchase Returns `12,500, Freight
Inwards `15,000, Gross Sales `5,60,000, Sales Returns `14,000 and Carriage Outwards
`8,000. Calculate the estimated cost of the Inventory on the closing date. 4
(e) During the Energy Audit of Reliable Engineering Ltd., the following figures relating to
usage of power were placed before the Auditor:
2016-17 2015-16 2014-15
Total Power consumed (kWh) 2642720 2744360 2393250
Rate per kWh (`) 6.29 5.42 4.90
Total Production (in million kg.) 422.16 416.36 376.08
Compute the necessary productivity measures and (i) Price Variance and (ii) Volume
Variance of power usage during these years. 4
Answer:
(8) (a) The Cost Accounting Standard on Packing Material Cost (CAS 9) defines Packing
Materials as materials used to hold, identify, describe, store, protect, display,
transport, promote and make the product marketable.
Packing Materials for the purpose of the standard are classified into primary and
secondary packing materials. Primary Packing Material is that packing material which
is essential to hold and preserve the product for its use by the customer. Secondary
Packing Material is that packing material that enables to store, transport, inform the
customer, promote and otherwise make the product marketable. For example, in
‗pharmaceutical industry‘, cartons used for holding strips of tablets and card board
boxes used for holding cartons.
Packing material costs shall be directly traced to a cost object to the extent it is
economically feasible. Where the packing material costs are not directly traceable to
the cost object, these may be assigned on the basis of quantity consumed or similar
measures like technical estimates. The packing material cost of reusable packing
shall be assigned to the cost object taking into account the number of times or the
period over which it is expected to be reused. Cost of primary packing materials shall
form part of the cost of production. Cost of secondary packing materials shall form
part of distribution overheads.
(b) In the analysis of the profitability in a financial year, the Cost Auditor needs to analyze
the effects of change in the selling price and change in the different elements of
cost. In the case of service industry, the Cost Auditor needs be careful as the output
units in such sector are not standard and needs bifurcation of each element of cost
and revenue. The usual checklists an Auditor should draw up for the analysis are
stated below.
 Sale and Production Records – Analysis of past year‘s data to identify variations
 Reconciliation of Sales with CENVAT Records--to see any discrepancy which has
led to wrong accounting, if any
 Pricing and Discount Structure Policy – analyze the variations to see how far the
changes have favoured the profitability and marketability of products
 Product Cost Statements – Cost data analysis will facilitate discovering variable
and fixed cost elements and their impact on total profitability
 Operational Budget – A study of the budget estimates with that of the actuals will
throw light on the deficiencies and will lead to taking corrective measures
(c) Energy Audit consists of activities that seek to identify conservation opportunities
preliminary to the development of an energy saving programmes. In other words, an
Energy Audit is conducted to seek opportunities to reduce the amount of energy
input into the system without negatively affecting the output(s). An Energy Audit also
seeks to prioritize the energy uses according to the maximum to the least cost-
effective opportunities for energy savings. Energy Audit means monitoring the energy
efficiency of different equipment and procesess is in a plant and looking into way by
which the total sum of energy consumed can be cut down without affecting
production or its efficiency.
Energy Auditor seeks to focus on the possible sources for conserving energy.
 Steam Generation
 Steam Distribution
 Steam Utilization
 Electrical Energy Utilization
 Total Energy System
 Diesel Exhaust Recovery
(d) ABC Stores has the following inventory at the end of the year: (figures in ` ‗000)
1 Opening Stock 62,000
2 Purchases 4,46,000
4 Net Purchases 4,33,500
5 Freight Inwards 15,000
6 Cost of Materials Purchased 4,48,500
7 Total Cost of Materials (1)+(6) 5,10,500
8 Sales 5,60,000
10 Net Sales 5,46,000
11 Profit @ 20% 1,09,200
12 Cost of Sales 4,36,800
13 Carriage Outwards 8,000
14 Closing Stock=(7)-(12)-(13) 65,700
(e) The power usage of Reliable Engineering Ltd. is given below along with the
productivity measures and Price Variance and Volume Variance.
2016-17 2015-16 2014-15
1. Power consumed (KWh) 26,42,720 27,44,360 23,93,250
2. Production (in million kg.) 422.16 416.36 376.08
3. Rate per KWh (`) 6.29 5.42 4.90
4. Power Cost (`) [1 x 3] 16,622,709 14,874,431 11,726,925
5. Power Cost/‘000 kg. (`) 39.375 35.725 31.182
6. Price Variance (`) 22,99,166 14,27,067
7. Volume Variance (`) 2,28,375 14,39,003
Workings:
2016-17 2015-16
Price Variance : 26,42,720 x (6.29 – 5.42) 22,99,166
: 27,44,360 x (5.42 – 4.90) 14,27,067
Volume Variance : 39.375 x (422.16 – 416.36) 2,28,375
: 35.725 x (416.36 – 376.08) 14,39,003

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Paper - 19 : Cost and Management Audit

Paper – 19 : Cost and Management Audit

Section - A [20 marks]

(i) The cost records are to be maintained as specified in __________.

(iii) CAS 11 deals with ______________.

(v) Remuneration of the Non-Executive Directors is treated as ______________

(x) Consumer Service Audit is part of ___________________

1. (i) (b) CRA 1

(ii) (a) two schedules

(iii) (a) Administrative Overheads.

(iv) (c) ` 1950 Lakh.

(v) (b) Administrative Overheads

(vi) (c) Profit before Tax to Value Added

(vii) (d) All of the above

(viii) (b) Unregulated sector

(ix) (b) Detection risk.

(x) (b) Social Audit.

Section - B [80 marks]

(3) Details of Industries/Sectors/Product(s)/Service(s) (CETA heading level, wherever

(ii) Maintenance of records

Less: Amount of expenses not considered in cost

The uses of Management Audit are given below:

customers, employees, shareholders, suppliers, the community and government is

matters where there is suspected fraud or irregularity or a failure of internal

The following matters are to be considered for conducting audit of Co-operative

1. Examination of overdue debts

Sugar produced 29,20,000 quintals

The variable cost of the product is ` 22 as per details below:

(i) Gross Cost of Steam `

6. (b) Labour time is the key or the limiting factor.

If this order is accepted:

Contribution/labour hr. = ` 14/2 hours = ` 7

Special type Auto Components: 3,00,000 Nos. ` in’000 ` in ’000

Working Notes : Calculation of Sales

Statement showing bifurcation of Expenses between Strike and Non-strike days

The total Cost incurred during the period 17.08.2019 to 29.11.2019

8. Answer any four. 4x4=16

Particulars Product P Product Q

8. (a) Internal Check is a system of instituting checking of the day-to-day transactions as

8. (b) The steps of management audit are :-

8. (c) The need for determining “production capacity” in respect of industrial

Paper - 19 : Cost and Management Audit

Paper – 19 : Cost and Management Audit

Section - A [20 marks]

(ii) Cost Accounting Standard 8 is a Cost Accounting Standard on ___________ .

(v) Quality costing is used for the purpose of ____________ .

(c) studying correlation of information in decision areas

(viii) Non-Governmental Organizations can be incorporated as a company

(x) _____________ Analysis is evaluation of every resources declared in the industry.

1. (i) (a) CRA – 3

(ii) (b) Utilities Cost

(iii) (c) Risk identification, process improvement

(iv) (c) 10 years

(v) (a) Cost Reduction

(vi) (d) Studying all the above.

(vii) (b) The Statement is Incorrect.

(viii) (b) Section 8 of the Companies Act, 2013.

(ix) (a) Audited Financial Data

(x) (c) Productivity

Section - B [80 marks]

(ii) The Cost Auditor appointed shall submit a certificate that –

Sales (Local) 18,000 units 54,00,000