Unit 1 Introduction To Cost Audit PDF

# UNIT 1 INTRODUCTION TO COST AUDIT ## DSE-6 T.Y. B.COM B SEM VI ## INTRODUCTION * Cost Accounting is a branch of accounting that involves recording, analyzing, and controlling the costs incurred during the production or provision of goods and services. * It aims to ascertain the cost of a product...

# UNIT 1 INTRODUCTION TO COST AUDIT ## DSE-6 T.Y. B.COM B SEM VI ## INTRODUCTION * Cost Accounting is a branch of accounting that involves recording, analyzing, and controlling the costs incurred during the production or provision of goods and services. * It aims to ascertain the cost of a product, operation, or activity and helps in decision-making to achieve efficiency and profitability. ## DEFINITION AND CONCEPT OF COST AUDIT * According to Chartered Institute of Management Accountants, London (CIMA), cost audit is "the verification of the correctness of cost accounts and of the adherence to the cost accounting plan". * According to Institute of Cost & Works Accountants of India (ICWAI), “Cost Audit basically is a preventive measure, a guide for management decision making and a barometer of performance”. * A cost audit is a systematic examination of the cost records and accounts of an organization. * It aims to verify the accuracy of cost data, ensure compliance with regulations, and identify areas for improvement. * This process helps organizations in making informed financial decisions. * Statutory Audit → compulsory audit ## COST AUDIT V/S FINANCIAL AUDIT | Aspect | Cost Audit | Financial Audit | |---|---|---| | Purpose | Verifies cost records. | Verifies financial statements. | | Focus | Efficiency and cost control. | True and fair view of accounts. | | Statutory Requirement | Mandatory for specified industries.| Mandatory for all companies.| | Auditor | Cost Accountant.| Chartered Accountant.| | Report Submission | To government and board of directors.| To shareholders and government bodies.| ## NATURE OF COST AUDIT * Cost audit is voluntary in nature * Cost audit is the audit of efficiency * Cost audit is a propriety audit * Cost audit differs from financial audit * Cost audit is a specialized service ## OBJECTIVES OF COST AUDIT * **General Objectives (Serving Company Purpose)** * **Social Objectives (Serving Social Purpose)** ### GENERAL OBJECTIVES OF COST AUDIT * Detection of Errors & Frauds * Verification of adequacy of costing records * Assurance on valuation of stock * Verification of total cost * Verification of Reconciliation * Assuring the correct information supply * Aid to management ### SOCIAL OBJECTIVES OF COST AUDIT * Increasing efficiency & productivity * Employment generation * Price fixation & price control * Cost Consciousness * Benefit to consumers * Foreign exchange earnings ## SCOPE OF COST AUDIT ### A. Scope of Cost Audit as per Statute * Sec 233 B & Sec 209 (1) (D) of the Companies Act 1956 as amended in 2013 * **Sec 233 B** 1. Cost audit is not compulsory in case of every company. 2. The companies which may get order of cost audit to be conducted are listed in sec 209 (1) (D). 3. All the companies that re listed in sec 209 (1) (D), shall compulsory maintain cost records as per the Cost Accounting Records Rules. 4. The audit of the cost accounts should be conducted by appointing the cost auditor bearing the required & relevant qualification. * **Sec 209 (1) (D)** 1. Company engaged in Production, Processing, Manufacturing, Mining and Construction have to compulsory keep the cost records. 2. Cost records need to be kept at the registered office of these companies. 3. Books of accounts relating to utilization of material & labour or to the other items of cost should be maintained by these companies. ### B. Scope as per Spheres of Action 1. Services: utilization of power, fuel, water, electricity, material, labour & other specific overheads 2. Wages & salaries: maintenance of employees and attendance records of staff, overtime, idle time, allocation of salaries & wages 3. Overheads: fair & equitable distribution bases followed for allocation of overheads 4. Depreciation: maintenance of fixed assets registered& qualified details, method of depreciation charged and allocation of depreciation 5. Production: production reports and summaries from daily to monthly, monthly to yearly & comparison with the past records 6. Stock verification records: verify the stocks as against the stores ledger ## EFFICIENCY AUDIT * Efficiency is the ratio of a system's outputs to inputs. * Efficiency audit is the audit which ensures that every rupee invested yields optimum results. * It is the appraisal of performance to assess whether the corporate plans have been executed efficiently, e.g., the effective utilization of capital in a concern can be assessed by determining the return on capital employed. * It compares actual performance with the planned performance and investigates the reasons of variances, if any, to take remedial action. ## PROPRIETY AUDIT * It refers to verification of transactions on the tests of public interest, commonly accepted customs and standards of conduct. * It is an audit of the actions and decisions of the executives. * The focus of such an audit is on the financial discipline, the authority structure, rules and regulations and the protection of public interest. ### Important aspects of verification during a propriety audit: * Financial records and accounts are accurate and up to the mark. * The assets of the company are safeguarded and not misused. * Propriety audit will check the utilization of funds. * The results that are budgeted and expected are being met. ## MANAGEMENT AUDIT * It is an overall scientific appraisal of the quality of management. * It is an independent and systematic analysis and evaluation of a company's overall activities and performances. * It is a valuable tool used to determine the efficiency, functions, accomplishments and achievements of the company. * The primary objective of the management audit is to identify errors in management activities and suggest possible changes. * It guides the management to manage the operations most effectively and productively. * In other words, a management audit is involved in evaluation and assessment of the management system and information in various departments or the entire company. ### Need of Management Audit 1. It examines whether the policies laid down by the company are carried out properly or not. 2. It helps in the improvement of the performance of the various managers including the general manager. 3. It offers suggestion to eliminate wastage or reduce the cost of production. 4. It points out the ways available to maximize profit and for optimum utilization of all resources. 5. It finds out the weaknesses or shortcomings which are responsible for inefficient performance and brings improvement in performance. 6. It can ascertain the financial soundness of the company. 7. Banks & financial institutions may require management audit to find out whether loan amounts have been properly utilized or not. ## SOCIAL AUDIT * Social audit refers to the systematic evaluation of an organization's social performance. * It discloses the company’s involvement in socially oriented activities, activities taken for the well-being of the employees of the concern, activities as to prevention of environment pollution etc. * A social audit can be defined as a review of a company's production procedure, policies and code of conduct to find how they impact the society. * It is conducted out of social responsibility by an organization to establish its positive image in the public, and if anything is found negative, then suitable actions are taken to correct them. ## OPERATIONAL AUDIT * An operational audit refers to the process of evaluating a company’s operating activities – both on a day-to-day level and a broader scale. * While other types of audits might look solely at a single department or the company’s finances, an operational audit delves deeper. * The purpose of an operational audit is to identify areas where improvements can be made to streamline processes or implement more effective organizational activities. * It examines all aspects of a company’s operations, including its internal policies, procedures, and controls. * By evaluating these key components, an operational audit provides valuable insights into how well a company is managing its resources and whether it is operating in compliance with relevant laws and regulations. ## ENERGY AUDIT * An energy audit is a systematic process to evaluate how energy is being used in a building, system, or organization and to identify opportunities for energy savings and efficiency improvements. * The goal is to minimize energy waste, reduce costs, and enhance environmental performance while maintaining or improving operational functionality. * In simple words, Energy audit means monitoring the energy efficiency of different equipment and process 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. ### The main objectives of an energy audit are: 1. Reduce energy consumption: Identify ways to reduce energy consumption per unit of product output or lower operating costs 2. Improve energy efficiency: Identify potential areas of energy efficiency improvements and report them 3. Establish energy costs: Establish the relative costs of different forms of energy and their main use 4. Identify areas of inefficiency: Identify locations where losses, wastages, or inefficiency occur 5. Plan for more effective energy use: Provide the basis for planning a more effective use of energy throughout the organization ## VFM (VALUE FOR MONEY) AUDIT * A value for money (VFM) audit is a systematic evaluation of how an organization uses its resources to achieve its goals. * It’s a way to determine if an organization is being efficient and effective, and if it’s using its resources in the best way possible. * VFM audits are relevant in both the public and private sectors, but are more common in the public sector. ### Objectives of a VFM Audit 1. Economy: Assessing whether resources (financial, human, physical) are being acquired at the lowest cost without compromising quality. 2. Efficiency: Evaluating how well resources are being utilized to produce maximum output with minimum waste. 3. Effectiveness: Determining whether the desired outcomes or objectives are being achieved. ## PERFORMANCE AUDIT * Performance audit is an independent assessment or examination of the extent to which an organization, programme or scheme operates economically, efficiently and effectively. * Performance auditing carried out by the Department is an independent, objective and reliable examination of whether government undertakings, programs, systems, activities or organizations are performing in accordance with the principles of economy, efficiency & effectiveness and whether there is room for improvement. * Performance audit is a technique also used sometimes in corporate by internal auditors to evaluate the economy, efficiency and effectiveness of the organization’s operations so as to assure management that its strategic objectives are being carried out and whether or not they can be improved on. ## ADVANTAGES OF COST AUDIT ### (1) BENEFITS TO THE MANAGEMENT * Cost audit ensures that the cost accounting plan is in accordance with the firm's objectives as well as the system of cost accounting that is adopted. * Ensures reliability of cost data for price fixation, formulation of policy, decision making & control. * By ensuring an effective system of management reporting, cost audit brings to light all forms of waste, idle capacity and profitable and unprofitable lines of activity. * Helps determine efficiency of operations. * Facilitates inventory valuation & enables inter-firm comparison. ### (2) BENEFITS TO SHAREHOLDERS * Cost audit ensures the maintenance of proper cost accounting records to reflect reliable cost information with regard to every element of cost. * Cost audit distinguishes profitable activities from non-profitable activities. * It enables shareholders to assess and evaluate the performance of their concern. * It also ensures that there is no wastage or inefficiency of any kind. * It ensures a fair return on shareholders' investment. ### (3) BENEFITS TO GOVERNMENT * It helps in identification of sick units and enables the Government to make relevant decisions. * It helps in fixing prices in the case of essential commodities and checking undue profiteering. * It enables to take decisions as to granting of subsidies, incentives and protection to various industries. * It helps to take decisions as to levies, duties and taxes. ### (4) BENEFITS TO SOCIETY * Cost audit enables the Government to fix prices of essential commodities. This safeguards the interests of the society. * Cost audit enables the Government to keep a check on undue profiteering by the manufacturers and avoids artificial price rise due to monopolistic tendencies. ## LIMITATIONS OF COST AUDIT 1. Expensive 2. Complex system and time consuming 3. Some cost techniques are not efficient 4. Lack of accuracy 5. Financial items not reflected at all 6. Employee efficiency is not calculated