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Questions and Answers
What is the primary aim of cost accounting?
What is the primary aim of cost accounting?
According to ICWAI, what does cost audit primarily serve as?
According to ICWAI, what does cost audit primarily serve as?
Which of the following best describes the nature of cost audit?
Which of the following best describes the nature of cost audit?
What is a key objective of conducting a cost audit?
What is a key objective of conducting a cost audit?
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In contrast to financial audits, cost audits primarily focus on which of the following?
In contrast to financial audits, cost audits primarily focus on which of the following?
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Which professional is primarily responsible for conducting a cost audit?
Which professional is primarily responsible for conducting a cost audit?
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What is one of the social objectives of cost audit?
What is one of the social objectives of cost audit?
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What is the ultimate goal of a cost audit?
What is the ultimate goal of a cost audit?
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What is the primary purpose of a Value for Money (VFM) audit?
What is the primary purpose of a Value for Money (VFM) audit?
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Which of the following is NOT an objective of a VFM audit?
Which of the following is NOT an objective of a VFM audit?
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How does cost audit primarily benefit management?
How does cost audit primarily benefit management?
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Which of the following best describes a performance audit?
Which of the following best describes a performance audit?
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What is a key benefit of cost audit for shareholders?
What is a key benefit of cost audit for shareholders?
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Which of the following describes a benefit of cost audit for the government?
Which of the following describes a benefit of cost audit for the government?
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In which sector are VFM audits more commonly conducted?
In which sector are VFM audits more commonly conducted?
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What aspect does efficiency in a VFM audit primarily focus on?
What aspect does efficiency in a VFM audit primarily focus on?
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Which of the following statements is accurate regarding cost audit as per Sec 233 B?
Which of the following statements is accurate regarding cost audit as per Sec 233 B?
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Which types of companies are specifically required to keep cost records according to Sec 209 (1) (D)?
Which types of companies are specifically required to keep cost records according to Sec 209 (1) (D)?
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What is one of the main objectives of an efficiency audit?
What is one of the main objectives of an efficiency audit?
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In terms of cost audit, what is necessary for companies to produce under Sec 233 B?
In terms of cost audit, what is necessary for companies to produce under Sec 233 B?
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What does propriety audit specifically evaluate?
What does propriety audit specifically evaluate?
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How does the scope of cost audit extend beyond financial audits?
How does the scope of cost audit extend beyond financial audits?
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Which of the following is NOT included in the scope of cost audit as per the spheres of action?
Which of the following is NOT included in the scope of cost audit as per the spheres of action?
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What is a primary aspect assessed during an efficiency audit?
What is a primary aspect assessed during an efficiency audit?
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Study Notes
Introduction to Cost Audit
- Cost accounting is a branch of accounting that involves recording, analyzing, and controlling costs during production or provision of goods and services.
- Its goal is to determine the cost of a product, operation, or activity to aid decision-making, improving efficiency and profitability.
Definition and Concept of Cost Audit
- According to the Chartered Institute of Management Accountants (CIMA), London, cost audit is the verification of cost account correctness and adherence to the cost accounting plan.
- The Institute of Cost & Works Accountants of India (ICWAI) defines cost audit as a preventive measure, a guide for management decision-making, and a performance barometer.
Nature of Cost Audit
- Cost audit is voluntary in nature.
- It's an audit of efficiency.
- It's a proprietary audit.
- It differs from financial audit.
- It's a specialized service.
Objectives of Cost Audit
- General Objectives (Company Purpose): Detection of errors and frauds, verification of costing records adequacy, assurance of stock valuation, verification of total cost, verification of reconciliation, assuring correct information supply, aiding management.
- Social Objectives (Social Purpose): Increasing efficiency and productivity, generating employment, fixing and controlling prices, promoting cost consciousness, benefiting consumers, and increasing foreign exchange earnings.
Scope of Cost Audit
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Statutory Scope (As Per Statute): Cost audit isn't mandatory for every company. Only specific companies (listed in Section 209 (1) (D) of the Companies Act 1956, as amended in 2013) are subject to it.
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Compulsory maintenance of cost records, as per the Cost Accounting Records Rules, for the companies falling under Section 209 (1) (D).
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Cost audit of accounts is conducted by appointing a qualified cost auditor.
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Scope as per Spheres of Action: Includes service sector cost analysis (utility, material, labor), wage and salary analysis (records, overtime, idle time allocation), overhead allocation (fair, equitable methods), depreciation (maintenance, details, method), and production reports (daily to monthly summaries). Stock verification records (ledger comparison).
Efficiency Audit
- Efficiency is the ratio of a system's outputs to inputs.
- Efficiency audits ensure every rupee invested produces optimum results.
- Performance is appraised to ensure corporate plans are executed efficiently. Return on capital employed serves as a gauge for efficient capital utilization.
- Actual performance is compared to planned performance. Variances are investigated to aid corrective action.
Propriety Audit
- Propriety audit verifies transactions based on public interest, customs, and standards of conduct. It's an audit of executive actions and decisions.
- Financial discipline, authority structure, rules, and regulations are assessed, all in the interest of protecting public interest.
- Crucial aspects include accuracy of financial records and accounts, company asset safeguarding, funds utilization, and meeting budgeted/expected results.
Management Audit
- A comprehensive scientific appraisal of management quality.
- It's a systematic analysis and evaluation of company activities and performance.
- The audit valuates efficiency, functions, accomplishments, and achievements of the company.
- It identifies management errors and suggests improvements.
- Management audit guides efficient and productive company operation.
- Evaluation and assessment of management systems and information in various departments.
Social Audit
- Systematic evaluation of an organization's social performance.
- It portrays the company’s involvement in socially relevant activities.
- Social well-being of the concern’s workers and activities to stop environmental contamination are key focus points.
- It’s an organization's social responsibility review.
- The audit helps the organization build its positive image. Concerns with negative aspects are addressed, ensuring corrective actions are taken.
Operational Audit
- The process of evaluating a company's operating activities (both daily and overall).
- It goes beyond financial matters and departments, investigating procedures, and internal controls.
- The audit aims to identify improvements and streamline organizational activities.
- It evaluates whether a company is operating in line with legal and regulatory regulations.
Energy Audit
- Systematic evaluation of how energy is consumed in buildings, systems, or organizations.
- The goal is to identify energy savings opportunities, minimize waste, lower costs, and enhance operational and environmental performance.
- Monitoring equipment and processes helps to identify how energy consumption can be reduced.
Value for Money (VFM) Audit
- Systematic evaluation of how an organization uses its resources (financial, human, physical) to achieve its goals.
- Efficiency and effectiveness are determined using resource management. VFM is more common in the public sector.
- The key objectives of the audit are focused on economy (resource acquisition at the lowest cost without quality compromise), efficiency (high output with low waste), and effectiveness (the achievement of desired objectives).
Performance Audit
- Independent assessment of an organization's, program, or scheme's economic, efficient, and effective operation.
- Government undertakings, programs, and systems are examined to evaluate whether they adhere to standards for economy, efficiency, and effectiveness.
- Internal corporate auditors use this technique to evaluate economy, efficiency, and effectiveness of the organization's operation.
Advantages of Cost Audit
- Management Benefits: Ensures cost accounting plan alignment with the firm’s objectives, reliable cost data for decision-making and controls. Cost audit identifies operational efficiencies and areas of waste. It helps determine the efficiency of operations and inventory valuation. Inter-firm comparison is facilitated.
- Shareholders Benefits: Ensures accurate cost accounting reflecting the cost of every item. Distinguishes between profitable and non-profitable activities. It facilitates assessment and evaluation of company performance. Guarantees no wastage or inefficiency and a fair return on shareholder investment.
- Government Benefits: Identifies sick units to determine relevant policy for companies, essential commodity price fixation to prevent undue profiteering. Enables subsidies, incentives, and protection to industries, and helps with levy/duty decisions.
- Societal Benefits: Enables government to fix essential commodity prices, and helps prevent undue profiteering and artificial price rises.
Limitations of Cost Audit
- Cost audit is expensive and time-consuming.
- Complex system may arise based on various cost techniques, and some cost techniques may not be efficient.
- Accuracy issues arise with some audits.
- Financial data may not always be reflected accurately.
- Employee efficiency calculations may be lacking in some audits.
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Description
This quiz explores the fundamentals of cost audit, its definitions, concepts, and objectives, as well as its nature and differences from financial audits. Understand the role of cost accounting in decision-making and efficiency improvement.
