2. • Cost Audit comprises following;
• Verification of the cost accounting records
such as the accuracy of the cost accounts, cost
reports, cost statements, cost data and
costing technique and
• Examination of these records to ensure that
they adhere to the cost accounting principles,
plans, procedures and objective.
3. Objectives of Cost Audit
• Prospective Objective: Under
which cost audit aims to identify
the undue wastage or losses and
ensure that costing system
determines the correct and
realistic cost of production.
4. Objectives of Cost Audit
• Constructive Objectives: Cost audit
provides useful information to the
management regarding regulating
production, economical method of
operation, reducing cost of
operation and reformulating
Cost accounting plans .
5. Types of Cost Audit
• Cost Audit on behalf of the management:
• Cost audit on behalf of a customer
• Cost Audit on behalf of Government
• Cost Audit by trade association
• Statutory Cost Audit
6. Cost audit on behalf of
management
• The principal object of the audit is to
see that the cost data placed before
the management are verified and
reliable and they are prepared in
such detail as will serve the purpose
the management in taking
appropriate decisions.
7. Cost audit on behalf of customer
• In case of cost plus contracts, the
buyer or contractee insists on
cost audit to satisfy himself
about the correct ascertainment
of cost.
8. Cost audit on behalf of
government
• Government may order cost audit to
satisfy itself the genuineness of the
industry seeking the assistance.
• To establish fair price of any product,
government may order cost audit.
9. Cost audit by trade association
• Where activities of trade association
include maintenance of price of the
products manufactured by the member
units or where pooling or contribution
arrangements, the trade association
require accuracy of costing information
submitted by member units checked.
10. Statutory cost audit
• This is covered by the provisions
of section 233B of the Companies
Act.
11. Cost Audit Procedures
• Cost audit comprises following three steps;
• Review
• Verification
• Reporting
12. REVIEW
• The cost auditor should familiarise
himself with the memorandum and
articles of association, past audit
reports on the financial accounts,
annual reports issued by the board,
the chairman’s speech, etc.
13. • Review the costing system in vogue in relation
to the production process and method,
• Should have detailed knowledge of the flow of
production process and documents that arise
or received in that course.
• A list of cost account books maintained by
client should also be obtained.
REVIEW
14. Review
• Careful study and evaluation of internal
controls and their operation on the cost
account books.
15. Review
• Before audit work is taken up, all
books and records should be posted
up to date, vouchers for the various
transactions filed serially and all
working sheets made available to the
auditors.
16. Review
• Audit should be conducted with utmost co –
operation of the staff.
• Auditor should have knowledge of various
standards issued by the Institute.
17. Cost accounting standards
CAS1 Classification of Cost CAS 2 Capacity Determination
CAS 3 Overheads CAS 4 Cost of Production for Captive Co
nsumption
CAS 5 Average (equalized) Cost of Tran
sportation
CAS 6 Material Cost
CAS 7 Employee Cost CAS 8 Cost of Utilities
CAS 9 Packing Material Cost CAS 10 Direct Expenses
CAS 11 Administrative Overheads CAS 12 Repairs And Maintenance Cost
CAS 13 Cost of Service Cost Centre CAS14 Pollution Control Cost*
CAS 15 Selling and Distribution
Overheads
CAS 16 Depreciation and Amortisation
CAS 17 Interest and Financing Charges CAS 18 Research and Development Costs
CAS 19 Joint Costs CAS 20 Cost Accounting Standard on
Royalty and Technical Know-How
Fee
CAS 21 Cost Accounting Standard on CAS 22 Cost Accounting Standard on
18. Verification
• A suitable programme for cost audit is made.
• The procedure and programme to be adopted
for audit and the various forms and
documents used for it should be laid down in
Audit manual.
• The audit programme should be drawn out in
detail, specifying each item of audit work to
be carried out.
19. Verification of capacities
• Examination of licensed capacity,
installed and utilised capacities of
various products.
• Reasons for abnormal variance may
noted.
20. Verification of financial ratios
• Financial ratios such as
• Profit as percentage of capital emplyed,
• Profit as percentage of sales,
• Current assets as a percentage of current
liabilities,
• Net worth expressed as percentage of long
term borrowings and liabilities.
21. Verification of financial ratios
• Net worth expressed as a percentage of
capital employed,
• Cost of production as percentage of capital
employed,
• Cost of production as percentage of working
capital.
22. Verification of production data
• Production in quantities for various products
under reference.
• Percentage of production of the product in
relation to installed capacity.
23. Verification of cost of raw
materials consumed
• Verify the method of accounting followed for
recording the quantities and value of receipts,
issues and balances of all materials used in
production.
• Verify consumption of major raw materials
per unit of production compared with the
standard requirement.
24. Verification of cost of raw
materials consumed
• Verify variation in consumption of major raw
materials per unit of production as compared
to the preceding two years.
• Verify confirmation received form the prarties
to whom materials are loaned.
• Verify the system or return of scrap and
wastage.
25. Verification of cost of power & fuel
• Verify the adequacy of records maintained to
ascertain the cost of power, fuel, steam etc.
• If purchased, it should be shown seperately.
• Allocation of power cost to departments and
products has to be verified.
26. Verification of employee costs
• Verify the total man-days of direct labor
available and actual worked in the year.
• Verify the labor cost per unit of product or
products under reference.
• Variations as compared to the previous two
years.
• Contribution of incentive schemes towards
increasing productivity and effect on the cost.
27. Cost of stores
• Verify the system of stores accounting for
recording receipts, issues and balances.
• Non moving items have to be checked.
• Cost per unit of production has to be verified.
28. Verify provision for depreciation
• Method of depreciation adopted by the
company.
• Verify depreciation provided comply with that
of companies act section 205 sub –sec 2
• The basis of allocation of depreciation of
common assets to the different departments.
• The basis of charging depreciation to the cost
of products.
29. Verification over heads and
allocation
• Variations as compared to the previous two
years.
• Basis of allocation of overhead to cost centres
and absorption to products.
• Comparison of actual with budget and reasons
for variation.
• Amount of expenditure compared to the
volume of output.
30. Royalty and Technical aid
payments
• Verify the record of basis of calculation and
charging of royalty and other allied payments
to production cost.
31. Sales
• Sales in quantity and value for each of the
product.
• Average sales realisation per unit.
• Variations compared with last two years.
32. Verification of abnormal, non-
recurring and special costs
• Strikes, lockouts, major breakdowns in the
plants, substantial power cuts, serious
accident etc., may affect production.
• Costs incurred during that period may verified
and excluded from the product cost.
33. Verification of cost statements
• Determination of cost following the generally
accepted cost accounting principles.
• Application of costing system appropriate to
the product.
• Consistency in the application of costing
system and cost accounting principles.
• Verification of cost statements as to
prescribed form and the prescribed content.
34. Verification of cost statements
• Elimination of material prior – period
adjustments.
• Abnormal wastes and losses and other unusal
transactions being ignored in determining of
cost of product.
• The Costing Accounting Records Rules also
prescribe the proforma of the various cost
statements.
35. Reconciliation with financial books
• The cost records should be reconciled with the
financial books of account to ensure accuracy.
• The reconciliation should be done in such a
manner the profitability of the product can be
correctly adjudged and reconciled with over all
profit of the company.
• Variations should be correctly indicated and
explained.
36. Audit notes
• In the course of audit, the auditor records on working
papers the material facts observed.
• Clarifications and answers may be recorded.
• The power to obtain information and explanations is a
tool to accomplish the duty cast on auditor. He should
know how to use.
• The auditor has to satisfy himself that the information
and data collected and compiled therein are correct
and the cost of production determined there form is
fair.
37. Reporting
• With the help of the working papers, an audit
report is issued on completion of audit.
• It should summarise the final result of audit.
• Certificate regarding correctness of the
accounts should be include in the report.
• The report should consist of notes,
obeservations and comments on the cost
accounting system, financial position,
38. Reporting
• stores and spare parts, depreciation, sales,
abnormal non- recurring costs, etc.
• The report may also highlight other points of
interest like factors responsible for the
increase in cost of production.
• Suggestion regarding improvements and
corrective measures to be taken.
