Happy New Year - 2013
Monday, December 31, 2012
Sunday, December 23, 2012
Discuss Synergy with reference to merger
Synergy :
Synergy results from complementary activities. For example, one firm may have a substantial amount of
financial resources while the other has profitable investment opportunities. Likewise, one firm may have a
strong research and development team whereas the other may have a very efficiently organized production
department. Similarly, one firm may have well established brands of its products but lacks marketing
organization and another firm may have a very strong marketing organization. The merged business unit in
all these cases will be more efficient than the individual firms. And, hence, the combined value of the
merged firms is likely to be greater than the sum of the individual entities (units). Symbolically;
Combined value = Stand alone value of acquiring firm, V
a + Stand alone value of acquired target firm,
V
t + Value of synergy, Vat
Normally, the value of synergy is positive and this constitutes the rationale for the merger. In valuing synergy,
costs attached with acquisitions should also be taken into account. These costs primarily consist of costs of
integration and payment made for the acquisition of the target firm, in excess of its value, V
t. Therefore, the
net gain from the merger is equal to the difference between the value of synergy and costs.
Net gain = Value of synergy, Vat costs.
Why do Companies want to measure intellectual capital?
There a number of reasons why firms want to measure IC and the predominant reason has been for strategic
or internal management purposes. Specifically, the reasons include :
(i) Alignment of IC resources with strategic vision. To support the implementation of a specific strategy
via a general upgrading of the work with the companies’ human resources (support and maintain a
strategy concerning the composition of staff as regards seniority, professional qualifications and
age. Through the description of the staff profile, measuring, discussion and adjustment become
possible).
(ii) To support or maintain various parties’ awareness of the company.
(iii) To help bridge the present and the past (stimulates the decentralized development of the need for
constant development and attention towards change).
(iv) To influence stock prices, by making several competencies visible to current and potential customers.
(v) To make the company appear to the employees as a name providing an identity for the employees
and visualizing the company in the public. Knowledge of employees and customers will stimulate
the development of a set of policies to increase customer satisfaction and customer loyalty.
(vi) Assessing effectiveness of a firm’s IC utilization - Allocate resources between various business units.
Extract full value from acquisition and joint ventures.
(vii) Determine the most effective management incentive structures.Why do many mergers fail?
Major reasons of failure of Mergers are as follows :
•
Flawed corporate strategy for either or both companies.
• One company sugarcoats the truth, the other buys a Power Point pitch.
• Sub-optimum integration strategy for the situation.
• Cultural misfit, loss of key employees after retention agreements are up.
• Acquiring company’s management team inexperienced at M&A.
• Flawed assumptions in synergies calculation.
• Ineffective corporate governance, plain and simple.
• Two desperate companies merge to form one big desperate company.
• An impulse buy or panic sell gets shoved down the board’s throat.
Thursday, December 13, 2012
Use of Statistical Sampling Methods
Use of Statistical Sampling Methods:-
This is the most vital part of auditing. In fact this is the main part of auditing, as the audit programme is
no more than a plan of checking and audit working papers are the records of such checking. Traditionally,
the operations of auditing are classifi ed as casting, posting and vouching. Casting refers to arithmetical
operations whereas posting refers to copying fi gure from one place to another. Vouching on the other
hand is often described as “the backbone of auditing” and is most important operation. Vouching is the
examination of entries in the books of accounts with reference to vouchers and supporting documentary
evidence. The cost auditor, because of time constraints cannot examine each entry with the voucher and
as such has to resort to test check which helps to form an opinion about the nature and quality of work
and enables him to obtain defi nite basis for audit observations. The cost auditor also uses the following
techniques in cost audit :
1. Flow charts
2. Statistical sampling
3. Ratio analysis
Flow Charts:-
Flow chart is chart or diagrammatic representation of fl ow of information etc. In auditing it is used
to diagrammatically represent the fl ow of information with the help of documents. It is useful to
record the “decision” at different levels, the posting of data, and the recording of transactions on
the document. It is customary to indicate the analysis of systems and documents in the fl ow chart
detailed as under –
a) The number of copies of each document.
b) Its movements to different departments and sequence of such movements and where every
copy is fi nally kept.
c) The operations like initialing, approving, etc. done on the documents in each department
with brief description of the operations.
d) The collection from these documents into another register/documents as well as posting any
information in the former from the latter by dotted line.
1.4.12.2 This helps in identifying –
a) The division of responsibilities of the different departments.
b) The source of document whose error would be of far reaching consequences.
c) Possible clerical errors that can occur at each stage.
d) It gives a bird’s eye view of the system and an effi cient documentation for the auditors testing it.
e) It is the most effi cient tool for doing actual analysis.
However, fl ow charts might not give the desired results as details are sometime omitted and the
individual charts are not properly cross referenced and indexed. Failure to standardize the symbols
and incomplete nature of the chart fails to give desired results.
Statistical Sampling:-
It is the principle, established by statistics, that every sample has the attributes of the population to which
it belongs. It follows that from examination of such attributes of the sample, conclusions can be drawn
from examination of every member of the population. Statistics recognizes that every member has certain
662/3% to 97% confi dence level. It has further refi ned tools like stratifi ed sample to ensure that a small
sample reasonably enlarges confi dence level. Statistical sampling is adopted by auditors and is an effective
tool their attempt to express an opinion based on test checking on the sample. Sometimes statistical sample
may be dangerous to the auditor not because the tool is defective but because the auditor’s knowledge
of statistical sample is inadequate. However, if properly applied statistical sampling could enhance the
objectivity of checking and as such auditor’s observation would be more correct.
Ratio Analysis:-
Ratios show the trends and may help in focusing attention to the more important areas where detailed
checking may be necessary. Such ratio analysis may identify anything abnormal or anything which
deviates from the expected and the known. Ratios highlight only symptoms; it is for the auditor to study
those symptoms properly, correlate them and reach defi nite conclusions or identify the areas for further
enquiries. A cost auditor has to work out the fi nancial ratios contained in Para No. 24 of the Annexure to
the Cost Auditor Reports Rules and also to comment on them.
Supplementary Report / Follow-up Action by the Company
Supplementary Report / Follow-up Action by the Company:-
Where the cost audit report is fi nalized with provisional fi gures, a supplementary cost audit report should
be submitted by the cost auditor to the Government as soon as the audited accounts are made available. As
per Section 233B(7), the company has to furnish explanation and full information on every qualifi cation or
reservation in the cost audit report to the Government within 30 days from the date of receipt of the copy
of the said report. According to sub-rule (2) of Rule 4 of Cost Audit Report Rules, 2001, the Cost Auditor
shall also give clarifi cations required by the Central Government on the Cost Audit Report submitted by
him, within 30 days of the receipt of communication addressed to him calling for such clarifi cations.
Where the cost audit report is fi nalized with provisional fi gures, a supplementary cost audit report should
be submitted by the cost auditor to the Government as soon as the audited accounts are made available. As
per Section 233B(7), the company has to furnish explanation and full information on every qualifi cation or
reservation in the cost audit report to the Government within 30 days from the date of receipt of the copy
of the said report. According to sub-rule (2) of Rule 4 of Cost Audit Report Rules, 2001, the Cost Auditor
shall also give clarifi cations required by the Central Government on the Cost Audit Report submitted by
him, within 30 days of the receipt of communication addressed to him calling for such clarifi cations.
Number of Copies of Cost Audit Report
Number of Copies of Cost Audit Report:-
The Cost Audit Report is electronically fi led with the Central Government and is physically
submitted as was done previously. However, Cost Auditor may sign at least fi ve physical reports
also as per following usage :-
e-fi ling for Cost Audit Branch
One copy to the cost auditor himself
One copy for the company
One copy for the Central Excise
One copy for Income Tax authority
(One copy extra for future cost audit)
In view of e-fi ling, no hard copy is required to be submitted to the Cost Audit Branch.
The Cost Audit Report is electronically fi led with the Central Government and is physically
submitted as was done previously. However, Cost Auditor may sign at least fi ve physical reports
also as per following usage :-
e-fi ling for Cost Audit Branch
One copy to the cost auditor himself
One copy for the company
One copy for the Central Excise
One copy for Income Tax authority
(One copy extra for future cost audit)
In view of e-fi ling, no hard copy is required to be submitted to the Cost Audit Branch.
Authentication of Annexure to the Cost Audit Report
Authentication of Annexure to the Cost Audit Report:-
The annexure and proforma prescribed under the cost audit report shall be approved by the board of
directors of the company before submitting the same to the Central Government by the cost auditor.
The annexure and proforma prescribed under the cost audit report shall be approved by the board of
directors of the company before submitting the same to the Central Government by the cost auditor.
Preparation of Cost Audit Report
Preparation of Cost Audit Report:-
When review and verifi cation of the cost accounting records and proformae and Annexures/
fi nancial statements are completely in line with the Cost Audit Report Rules, the cost auditor will
be in a position to prepare his report. It may be pointed out that the report should refl ect the
professional care exercised by the cost auditor. Certifi cation of fi gures is only a part of the report.
Other aspects are the analysis, critical review of the systems in vogue in the company, identifi cation
of areas where improvements can be made and suggestions on those areas.
The cost auditor has to give his observation in the main certifi cate with qualifi cations, if any. He has
to complete all paras contained in the Annexure to the Cost Audit Report Rules, 2001 and fi nalise
the checking of Proforma to the Cost Audit Report.
When review and verifi cation of the cost accounting records and proformae and Annexures/
fi nancial statements are completely in line with the Cost Audit Report Rules, the cost auditor will
be in a position to prepare his report. It may be pointed out that the report should refl ect the
professional care exercised by the cost auditor. Certifi cation of fi gures is only a part of the report.
Other aspects are the analysis, critical review of the systems in vogue in the company, identifi cation
of areas where improvements can be made and suggestions on those areas.
The cost auditor has to give his observation in the main certifi cate with qualifi cations, if any. He has
to complete all paras contained in the Annexure to the Cost Audit Report Rules, 2001 and fi nalise
the checking of Proforma to the Cost Audit Report.
Verifi cation of Cost Proformae and Annexures
Verification of Cost Proformae and Annexures:-
(a) The cost auditor has to examine all the cost accounting records, cost statements, other books and
documents, annexures and proforma to the report and other relevant data in course of his audit
work. Such examination of the cost and fi nancial statements by the cost auditor may include the
following –
1. Financial position including fi nancial ratios as required to be stated in Para 24 of the Annexures
to the Cost Audit Report Rules.
2. Licensed capacity, installed capacity, production and capacity utilized (Para 4).
3. Consumption of raw materials, power and fuel, salary and wages, stores and spare parts,
provision for depreciation, expenditure on overheads, royalty and technical know-how
charges, quality control expenses, pollution control expenses, abnormal non-recurring costs
and other items.
4. Sales realization – local and export unit and total for each variety of product.
5. Cost proformae maintained by the company as per cost accounting records rules.
6. Reconciliation with fi nancial books.
(b) As mentioned earlier, the examination of cost proformae as per provisions contained in relevant
cost accounting records rules and other items mentioned above may commence only after the end
of the accounting year when all the closing entries are passed through the books of account.
(a) The cost auditor has to examine all the cost accounting records, cost statements, other books and
documents, annexures and proforma to the report and other relevant data in course of his audit
work. Such examination of the cost and fi nancial statements by the cost auditor may include the
following –
1. Financial position including fi nancial ratios as required to be stated in Para 24 of the Annexures
to the Cost Audit Report Rules.
2. Licensed capacity, installed capacity, production and capacity utilized (Para 4).
3. Consumption of raw materials, power and fuel, salary and wages, stores and spare parts,
provision for depreciation, expenditure on overheads, royalty and technical know-how
charges, quality control expenses, pollution control expenses, abnormal non-recurring costs
and other items.
4. Sales realization – local and export unit and total for each variety of product.
5. Cost proformae maintained by the company as per cost accounting records rules.
6. Reconciliation with fi nancial books.
(b) As mentioned earlier, the examination of cost proformae as per provisions contained in relevant
cost accounting records rules and other items mentioned above may commence only after the end
of the accounting year when all the closing entries are passed through the books of account.
Review of Cost Accounting Records by Cost Auditor
Review of Cost Accounting Records by Cost Auditor:-
The cost auditor during the course of audit will thoroughly review the cost accounting records.
Such review and verifi cation may include :
1. Methods of costing in use – batch, job, process etc.
2. System of fi xation of cost centres.
3. Procedures for accounting of raw materials, packing materials, and spares, etc.
4. Methods of accounting of wastes, rejections and defectives.
5. System of recording of wages, salaries and overtime and their allocation.
6. Incentive schemes in vogue.
7. Basis of allocation/apportionment of utilities.
8. Method of accounting for depreciation and charging depreciation to cost centres.
9. Method of apportionment/allocation of service department expenses.
10. Basis of reapportionment of service department expenses to production departments.
11. Basis of absorption of overheads to products.
12. Basis of absorption of interest, bonus, gratuity and selling and distribution cost to products.
13. Treatment of research and development expenses.
14. Budgetary control system.
15. Internal audit system.
16. Method of accounting of production and sales.
17. Method of evaluation of work-in-progress.
18. System of stock-taking.
19. Method of valuation of inventories.
(b) If the company has manual for cost accounting, the cost auditor should study the manual
thoroughly.
The cost auditor during the course of audit will thoroughly review the cost accounting records.
Such review and verifi cation may include :
1. Methods of costing in use – batch, job, process etc.
2. System of fi xation of cost centres.
3. Procedures for accounting of raw materials, packing materials, and spares, etc.
4. Methods of accounting of wastes, rejections and defectives.
5. System of recording of wages, salaries and overtime and their allocation.
6. Incentive schemes in vogue.
7. Basis of allocation/apportionment of utilities.
8. Method of accounting for depreciation and charging depreciation to cost centres.
9. Method of apportionment/allocation of service department expenses.
10. Basis of reapportionment of service department expenses to production departments.
11. Basis of absorption of overheads to products.
12. Basis of absorption of interest, bonus, gratuity and selling and distribution cost to products.
13. Treatment of research and development expenses.
14. Budgetary control system.
15. Internal audit system.
16. Method of accounting of production and sales.
17. Method of evaluation of work-in-progress.
18. System of stock-taking.
19. Method of valuation of inventories.
(b) If the company has manual for cost accounting, the cost auditor should study the manual
thoroughly.
Planning and Structuring the Cost Audit-
Planning and Structuring the Cost Audit:-
Need for Planning an Audit:-
(a) The Cost Auditor should always plan to conduct an effective cost audit in an effi cient and timely
manner. This is very necessary to attain objectives of the cost audit. Audit plan for new client will
be generally more detailed than in case of a repeat audit. In case of new audit, the cost auditor has
to collect all information about the company like nature of business, organization structure, key
personnel, accounting system etc. Similarly, he has to also collect information about other peers
in the industry, nature of problems etc. The details required shall be much less in case of a repeat
audit. The proper planning helps in:
(a) appropriate attention to all the areas for comprehensive audit;
(b) identifi cation of key areas needing more attention;
(c) timely completion of work;
(d) optimum utilization of assistants;
(e) no overlapping and proper co-ordination between the work done by different assistants,
other auditors and experts.
Elements of Planning
Planning of cost audit involves:
(a) Familiarization about the company and applicable cost accounting record rules;
(b) Collection of all relevant information;
(c) Evaluation of internal control procedures and the system;
(d) Preparation of appropriate cost audit programme; and
(e) Audit of working papers and cost sheets.
1.4.2.2 Familiarization about the Company and Applicable Record Rules
1.4.2.2(a) It is very necessary for the cost auditor to familiarize himself with the requirements of Cost Accounting Records Rules for the class of the companies to which the company under audit
belongs. Similarly, the disclosure requirements as contemplated under the Cost Audit Report Rules
2001 should also be seen before actually designing the cost audit programme. This is necessary to
ensure that the audit programme includes the examination of all the relevant records required to
be maintained.
(b) In addition to these, the cost auditor should also familiarize himself with the company especially
with respect to its organization, organization structure, product range, market share, major inputs,
profi tability, fi nancial status, marketing set-up, method of inventory valuation and detailed cost
accounting system etc
.
Collection of All Relevant Information
(a) The following records, explanations and information may also need to be collected before
fi nalization of audit programme and actual commencement of audit:
(a) A brief history of the company and its business activities;
(b) Memorandum of Association and Articles of Association;
(c) Annual reports and accounts for the last three to fi ve years;
(d) A list including addresses of all factories, branch offi ces and depots with the names of
managers-in-charge;
(e) Organization chart with details of key personnel;
(f) Collaboration agreements, if any, including agreements for payment of royalty;
(g) Details of manufacturing capacity – installed, licensed and utilization installed capacity for
the last three years;
(h) A detailed note indicating the system and procedure followed in –
(i) Cost department
(ii) Financial accounting department
(iii) Purchase, raw materials/packing materials stores, etc.
(iv) Time offi ce
(v) Production department
(vi) Sales department
(vii) Management Information System
(viii) Personnel Department
(ix) Internal audit department
(i) Copies of budget manual;
(j) Flow charts and description of manufacturing process;
(k) Major raw materials with quantitative details for each unit of fi nished output;
(l) Labor incentive schemes, if any;
(m) Details of important contracts/agreements regarding purchases, sales and services;
(n) Details of budgetary control and standard costing procedures with treatment for variances;
(o) Copies of industrial licenses if any, issued from time to time;
(p) Periodical reports submitted to Excise and other Govt. authorities;
(q) Details of price control orders/distribution control orders, if any by the Regulatory body;
(r) A broad idea of the cost structure of the industry or other benchmarks in the industry;
(s) Special features of the industry including economic environment in respect of the industry
such as capacity, production, demand, prices, markets, international scenario;
(t) Systems and procedures of the organization and accepted cost accounting principles;
(u) The different types of government levies such as excise duty, sales tax, cess, royalty and
freight equalization etc; and
(v) Follow-up based on earlier cost audit reports, if any.
(b) In case of repeat audit engagements, most of the aforesaid information would be available with
the cost auditor, which would then be appropriately updated.
Evaluation of Internal Control Procedures and System
(a) The evaluation of internal control procedures and systems provides a reasonable assurance to
the cost auditor. This evaluation helps in identifying the strong points as well as the weak points
of the internal control system. This will facilitate setting up of materiality levels and designing of
audit programme accordingly. The cost auditor may confi ne his checks and audit procedures to a
representative sample, if these internal control procedures are effective. This will help in reducing
the avoidable verifi cation of each and every transaction, which will be not only very time consuming
but costly as well.
Structuring the Cost AuditThe basic concept of audit may be looked at from the angle of planning the audit work. This may
be elaborated under the following heads :
1. Cost audit programmes;
2. Cost audit working papers; and
3. Checking including test checking
Preparation of Cost Audit Programme
A cost audit programme is the cost auditor’s plan of action indicating the tests and procedures to be
followed to implement the cost audit plan. The programme should be comprehensive and detailed
to serve as a manual to the assistants and as a means to effi ciently and effectively execute the audit
of each of the element of cost of sales prescribed in the cost accounting records rules.
The cost audit programme should then be discussed with the management to ensure that the
programme does not clash with other audits as far as possible. This will also reveal the preparedness
of the company for cost audit and any arrears in the compilation of cost accounting records could
be taken care of well in advance before the actual commencement of cost audit.
The planning the cost audit would inter-alia include :
(a) Deciding on the audit team of persons having adequate training, experience and competence
in cost auditing
(b) Briefi ng the personnel on the requirements, coverage and documentation of audit evidence
(c) Deciding on areas of cost audit, quantum to be covered, types of checks and techniques to be
used, methodology of collection of facts and on recording the progress of cost audit
(d) Laying down time targets for completion of different segments of cost audit.
A cost audit programme is usually subdivided in the following stages :
(a) Review of cost accounting records
(b) Verifi cation of cost statements, proformae and annexures
(c) Preparation of cost audit report.
The cost auditor prepares the cost audit report under the Cost Audit Report Rules, 2001 after
reviewing the cost accounting records and detailed verifi cation of the cost proformae, annexures,
cost statements and other fi nancial data submitted by the company to the cost auditor.
Working Papers
The Audit working papers contain the basic records including audit programme, nature of queries
raised in course of audit, important information about the business of the company and audit
fi ndings. Such audit working papers help to locate audit fi ndings. The working papers are the
important aid in planning and performance of the cost audit. It facilitates the supervision and
review of the audit work. It also provides supporting evidence of the audit work performed. Audit
of working papers usually consist of:
(a) evidence obtained during the audit exercise;
(b) details of methods and procedures followed during such exercise; and
(c) conclusions derived by the cost auditor as regards objectives of the cost audit.
The working papers should record the cost audit plan, the timing, nature and extent of the audit
procedures performed and the conclusions derived from the evidence obtained. The working
papers serve as an important proof regarding the way evidence was found, analyzed and verifi able
conclusion drawn.
1.4.5.3 Whenever any question is raised or a clarifi cation is desired by the Central Government regarding
any point, the cost auditor can reply properly if the audit working papers are properly kept. Such
working papers will help the cost auditor in cost audit of that company during subsequent years
also. The working papers should be cross-indexed in such a manner that required information
could be obtained with minimum delay. The working papers may be arranged properly according
to Para numbers of the Annexure to the Cost Audit Report Rules.
The audit working paper may be kept in two fi les – a “permanent” fi le for all the years and a
“variable” fi le for each year of audit. Thus copies of Memorandum of Association, Articles of
Association, collaboration agreement, process fl ow chart, cost manual etc. may belong to the
permanent fi le.
It is advisable that detailed comments on verifi cation of supporting statement are kept attached to
that statement. This would enable the cost auditor to know at any time how a fi gure was arrived at,
what examination he made to satisfy himself, what queries he raised, what replies were received
and what comments he fi nally decided to put in his report.
Verifi cation of Records and Reports
Details of Cost Accounting Records
(a) The records contemplated under Section 209(1)(d) of the Companies Act, 1956 would include all
cost accounting records maintained by the company and made available for audit. The following
records are considered as part of the cost accounting records-
(1) Production
(a) Consumption register of raw material, packing materials, etc.
(b) Production reports.
(c) Scrap, wastage, spoilage and defective reports.
(d) Machine utilization report and idle time report.
(e) Details of production hours, labour and machine hours.
(2) Raw materials stores etc. :
(a) Goods received register.
(b) Bin cards and stores ledger.
(c) Material consumption and stock reports.
(3) Utilities (Steam, power & water) :
(a) Records of inputs and outputs.
(b) Records of cost centre-wise allocation of products.
(c) Records for own generated power and purchased power.
(4) Wages and Salaries :
(a) Attendance registers.
(b) Payroll.
(c) Leave wages and gratuity payments.
(d) Overtime and idle time records.
(5) Overheads :
(a) Overheads analysis/distribution registers.
(b) Overhead absorption details.
(6) Repairs and maintenance :
(a) Work order register
(7) Work-in-progress and fi nished goods :
(a) Cost centre-wise/product-wise stock register.
(b) Product-wise fi nished goods register.
(8) Cost accounts, records and statements :
(a) Cost centre-wise assets register.
(b) Product ledger.
(c) Annexures and proformae as per Cost Accounting Records Rules.
(d) Reconciliation of profi t/loss as per costing and fi nancial records.
(9) Sales :
(a) Sales register including export sales register.
(b) Sales analysis by products (quality, size, variety-wise).
(b) The above mentioned cost records shall be maintained on a regular and continuous basis and
not at the end of the year only.
Need for Planning an Audit:-
(a) The Cost Auditor should always plan to conduct an effective cost audit in an effi cient and timely
manner. This is very necessary to attain objectives of the cost audit. Audit plan for new client will
be generally more detailed than in case of a repeat audit. In case of new audit, the cost auditor has
to collect all information about the company like nature of business, organization structure, key
personnel, accounting system etc. Similarly, he has to also collect information about other peers
in the industry, nature of problems etc. The details required shall be much less in case of a repeat
audit. The proper planning helps in:
(a) appropriate attention to all the areas for comprehensive audit;
(b) identifi cation of key areas needing more attention;
(c) timely completion of work;
(d) optimum utilization of assistants;
(e) no overlapping and proper co-ordination between the work done by different assistants,
other auditors and experts.
Elements of Planning
Planning of cost audit involves:
(a) Familiarization about the company and applicable cost accounting record rules;
(b) Collection of all relevant information;
(c) Evaluation of internal control procedures and the system;
(d) Preparation of appropriate cost audit programme; and
(e) Audit of working papers and cost sheets.
1.4.2.2 Familiarization about the Company and Applicable Record Rules
1.4.2.2(a) It is very necessary for the cost auditor to familiarize himself with the requirements of Cost Accounting Records Rules for the class of the companies to which the company under audit
belongs. Similarly, the disclosure requirements as contemplated under the Cost Audit Report Rules
2001 should also be seen before actually designing the cost audit programme. This is necessary to
ensure that the audit programme includes the examination of all the relevant records required to
be maintained.
(b) In addition to these, the cost auditor should also familiarize himself with the company especially
with respect to its organization, organization structure, product range, market share, major inputs,
profi tability, fi nancial status, marketing set-up, method of inventory valuation and detailed cost
accounting system etc
.
Collection of All Relevant Information
(a) The following records, explanations and information may also need to be collected before
fi nalization of audit programme and actual commencement of audit:
(a) A brief history of the company and its business activities;
(b) Memorandum of Association and Articles of Association;
(c) Annual reports and accounts for the last three to fi ve years;
(d) A list including addresses of all factories, branch offi ces and depots with the names of
managers-in-charge;
(e) Organization chart with details of key personnel;
(f) Collaboration agreements, if any, including agreements for payment of royalty;
(g) Details of manufacturing capacity – installed, licensed and utilization installed capacity for
the last three years;
(h) A detailed note indicating the system and procedure followed in –
(i) Cost department
(ii) Financial accounting department
(iii) Purchase, raw materials/packing materials stores, etc.
(iv) Time offi ce
(v) Production department
(vi) Sales department
(vii) Management Information System
(viii) Personnel Department
(ix) Internal audit department
(i) Copies of budget manual;
(j) Flow charts and description of manufacturing process;
(k) Major raw materials with quantitative details for each unit of fi nished output;
(l) Labor incentive schemes, if any;
(m) Details of important contracts/agreements regarding purchases, sales and services;
(n) Details of budgetary control and standard costing procedures with treatment for variances;
(o) Copies of industrial licenses if any, issued from time to time;
(p) Periodical reports submitted to Excise and other Govt. authorities;
(q) Details of price control orders/distribution control orders, if any by the Regulatory body;
(r) A broad idea of the cost structure of the industry or other benchmarks in the industry;
(s) Special features of the industry including economic environment in respect of the industry
such as capacity, production, demand, prices, markets, international scenario;
(t) Systems and procedures of the organization and accepted cost accounting principles;
(u) The different types of government levies such as excise duty, sales tax, cess, royalty and
freight equalization etc; and
(v) Follow-up based on earlier cost audit reports, if any.
(b) In case of repeat audit engagements, most of the aforesaid information would be available with
the cost auditor, which would then be appropriately updated.
Evaluation of Internal Control Procedures and System
(a) The evaluation of internal control procedures and systems provides a reasonable assurance to
the cost auditor. This evaluation helps in identifying the strong points as well as the weak points
of the internal control system. This will facilitate setting up of materiality levels and designing of
audit programme accordingly. The cost auditor may confi ne his checks and audit procedures to a
representative sample, if these internal control procedures are effective. This will help in reducing
the avoidable verifi cation of each and every transaction, which will be not only very time consuming
but costly as well.
Structuring the Cost AuditThe basic concept of audit may be looked at from the angle of planning the audit work. This may
be elaborated under the following heads :
1. Cost audit programmes;
2. Cost audit working papers; and
3. Checking including test checking
Preparation of Cost Audit Programme
A cost audit programme is the cost auditor’s plan of action indicating the tests and procedures to be
followed to implement the cost audit plan. The programme should be comprehensive and detailed
to serve as a manual to the assistants and as a means to effi ciently and effectively execute the audit
of each of the element of cost of sales prescribed in the cost accounting records rules.
The cost audit programme should then be discussed with the management to ensure that the
programme does not clash with other audits as far as possible. This will also reveal the preparedness
of the company for cost audit and any arrears in the compilation of cost accounting records could
be taken care of well in advance before the actual commencement of cost audit.
The planning the cost audit would inter-alia include :
(a) Deciding on the audit team of persons having adequate training, experience and competence
in cost auditing
(b) Briefi ng the personnel on the requirements, coverage and documentation of audit evidence
(c) Deciding on areas of cost audit, quantum to be covered, types of checks and techniques to be
used, methodology of collection of facts and on recording the progress of cost audit
(d) Laying down time targets for completion of different segments of cost audit.
A cost audit programme is usually subdivided in the following stages :
(a) Review of cost accounting records
(b) Verifi cation of cost statements, proformae and annexures
(c) Preparation of cost audit report.
The cost auditor prepares the cost audit report under the Cost Audit Report Rules, 2001 after
reviewing the cost accounting records and detailed verifi cation of the cost proformae, annexures,
cost statements and other fi nancial data submitted by the company to the cost auditor.
Working Papers
The Audit working papers contain the basic records including audit programme, nature of queries
raised in course of audit, important information about the business of the company and audit
fi ndings. Such audit working papers help to locate audit fi ndings. The working papers are the
important aid in planning and performance of the cost audit. It facilitates the supervision and
review of the audit work. It also provides supporting evidence of the audit work performed. Audit
of working papers usually consist of:
(a) evidence obtained during the audit exercise;
(b) details of methods and procedures followed during such exercise; and
(c) conclusions derived by the cost auditor as regards objectives of the cost audit.
The working papers should record the cost audit plan, the timing, nature and extent of the audit
procedures performed and the conclusions derived from the evidence obtained. The working
papers serve as an important proof regarding the way evidence was found, analyzed and verifi able
conclusion drawn.
1.4.5.3 Whenever any question is raised or a clarifi cation is desired by the Central Government regarding
any point, the cost auditor can reply properly if the audit working papers are properly kept. Such
working papers will help the cost auditor in cost audit of that company during subsequent years
also. The working papers should be cross-indexed in such a manner that required information
could be obtained with minimum delay. The working papers may be arranged properly according
to Para numbers of the Annexure to the Cost Audit Report Rules.
The audit working paper may be kept in two fi les – a “permanent” fi le for all the years and a
“variable” fi le for each year of audit. Thus copies of Memorandum of Association, Articles of
Association, collaboration agreement, process fl ow chart, cost manual etc. may belong to the
permanent fi le.
It is advisable that detailed comments on verifi cation of supporting statement are kept attached to
that statement. This would enable the cost auditor to know at any time how a fi gure was arrived at,
what examination he made to satisfy himself, what queries he raised, what replies were received
and what comments he fi nally decided to put in his report.
Verifi cation of Records and Reports
Details of Cost Accounting Records
(a) The records contemplated under Section 209(1)(d) of the Companies Act, 1956 would include all
cost accounting records maintained by the company and made available for audit. The following
records are considered as part of the cost accounting records-
(1) Production
(a) Consumption register of raw material, packing materials, etc.
(b) Production reports.
(c) Scrap, wastage, spoilage and defective reports.
(d) Machine utilization report and idle time report.
(e) Details of production hours, labour and machine hours.
(2) Raw materials stores etc. :
(a) Goods received register.
(b) Bin cards and stores ledger.
(c) Material consumption and stock reports.
(3) Utilities (Steam, power & water) :
(a) Records of inputs and outputs.
(b) Records of cost centre-wise allocation of products.
(c) Records for own generated power and purchased power.
(4) Wages and Salaries :
(a) Attendance registers.
(b) Payroll.
(c) Leave wages and gratuity payments.
(d) Overtime and idle time records.
(5) Overheads :
(a) Overheads analysis/distribution registers.
(b) Overhead absorption details.
(6) Repairs and maintenance :
(a) Work order register
(7) Work-in-progress and fi nished goods :
(a) Cost centre-wise/product-wise stock register.
(b) Product-wise fi nished goods register.
(8) Cost accounts, records and statements :
(a) Cost centre-wise assets register.
(b) Product ledger.
(c) Annexures and proformae as per Cost Accounting Records Rules.
(d) Reconciliation of profi t/loss as per costing and fi nancial records.
(9) Sales :
(a) Sales register including export sales register.
(b) Sales analysis by products (quality, size, variety-wise).
(b) The above mentioned cost records shall be maintained on a regular and continuous basis and
not at the end of the year only.
Constitution / Reconstitution of Partnership Firm of Cost Accountants
Constitution / Reconstitution of Partnership Firm of Cost Accountants:-
Only the members of the Institute i.e. AICWA or FICWA who have obtained Certifi cate of Practice
and are engaged in full time practice are entitled to constitute/reconstitute a partnership fi rm of
Cost Accountants. For this purpose, the following procedure have to be followed and the related
conditions have to be complied with :-
1. Application has to be made to the Council in Form L, which should be duly fi lled in and
signed by all the partners, indicating the name and membership no. against each signature.
2. The application should be accompanied by a copy of Deed of Partnership duly executed on a
non-judicial stamp paper by all the partners and attested by at least two witnesses indicating
their full names and addresses. The date of execution of the Deed and submission of Form L
should pertain to a date on or after the date of purchase of the non-judicial stamp paper.
3. A declaration in the Deed of Partnership is required from all the partners that they are
fully engaged in the practice of profession of Cost Accountancy and engaged in no other
occupation.
4. The name of the partnership fi rm to be indicated in sl. no. 1 of Form L and Deed of Partnership
should be in accordance with the provisions of Regulation 108 of the Cost and Works
Accountants Regulations, 1959. Such a fi rm’s name should have the suffi x “& Associates” or
“& Co.”
5. Prior to the approval of the Council, the use of any stamp/visiting card/letterhead or the like
in any fi rm name is strictly prohibited.
6. When a partnership fi rm is reconstituted on account of admission, retirement, death of partners
or change of terms and conditions, etc., a fresh Deed of Partnership has to be duly executed
by the existing partners, and copy of such Deed along with Form L has to be submitted to the
Council for Reconstitution of the partnership fi rm.
7. When a partnership fi rm is dissolved, a copy of Deed of Dissolution of Partnership duly
executed by all the partners has to be submitted to the Council for its record.
8. Whenever there is a change in the address of the Head Offi ce or Branch Offi ce of the partnership
fi rm, it is to be immediately intimated to the Council in Form L.
9. The Head Offi ce or any Branch Offi ce, if any, of the fi rm should be headed by a person who
is member of the Institute i.e. AICWA or FICWA.
10. No Constitution or Reconstitution of partnership fi rm is valid unless it is approved by the
Council of the ICWAI.
11. If the partner of a fi rm gets engaged in any salaried employment, he should immediately
retire from the partnership fi rm and intimate to the Institute immediately. Under such
circumstances, the remaining partners may reconstitute the fi rm by executing a fresh Deed of
Partnership and Form L.
Only the members of the Institute i.e. AICWA or FICWA who have obtained Certifi cate of Practice
and are engaged in full time practice are entitled to constitute/reconstitute a partnership fi rm of
Cost Accountants. For this purpose, the following procedure have to be followed and the related
conditions have to be complied with :-
1. Application has to be made to the Council in Form L, which should be duly fi lled in and
signed by all the partners, indicating the name and membership no. against each signature.
2. The application should be accompanied by a copy of Deed of Partnership duly executed on a
non-judicial stamp paper by all the partners and attested by at least two witnesses indicating
their full names and addresses. The date of execution of the Deed and submission of Form L
should pertain to a date on or after the date of purchase of the non-judicial stamp paper.
3. A declaration in the Deed of Partnership is required from all the partners that they are
fully engaged in the practice of profession of Cost Accountancy and engaged in no other
occupation.
4. The name of the partnership fi rm to be indicated in sl. no. 1 of Form L and Deed of Partnership
should be in accordance with the provisions of Regulation 108 of the Cost and Works
Accountants Regulations, 1959. Such a fi rm’s name should have the suffi x “& Associates” or
“& Co.”
5. Prior to the approval of the Council, the use of any stamp/visiting card/letterhead or the like
in any fi rm name is strictly prohibited.
6. When a partnership fi rm is reconstituted on account of admission, retirement, death of partners
or change of terms and conditions, etc., a fresh Deed of Partnership has to be duly executed
by the existing partners, and copy of such Deed along with Form L has to be submitted to the
Council for Reconstitution of the partnership fi rm.
7. When a partnership fi rm is dissolved, a copy of Deed of Dissolution of Partnership duly
executed by all the partners has to be submitted to the Council for its record.
8. Whenever there is a change in the address of the Head Offi ce or Branch Offi ce of the partnership
fi rm, it is to be immediately intimated to the Council in Form L.
9. The Head Offi ce or any Branch Offi ce, if any, of the fi rm should be headed by a person who
is member of the Institute i.e. AICWA or FICWA.
10. No Constitution or Reconstitution of partnership fi rm is valid unless it is approved by the
Council of the ICWAI.
11. If the partner of a fi rm gets engaged in any salaried employment, he should immediately
retire from the partnership fi rm and intimate to the Institute immediately. Under such
circumstances, the remaining partners may reconstitute the fi rm by executing a fresh Deed of
Partnership and Form L.
Withdrawal of Cost Audit Orders
Withdrawal of Cost Audit Orders:-
Even though there is no provision in the Companies Act, 1956 for withdrawal of cost audit order,
the withdrawal of Cost Audit is considered in case of permanent closure or sale or merger/
amalgamation of production activities for the product under reference. These exemptions are based on logic that approval for withdrawal can be accorded by the executive since the cost audit orders
are also issued by the executive.
Following documents are required to be furnished along with application for withdrawal:
• Printed or attested true copy of complete Annual Report containing balance sheet and profit
and loss account for the year for which exemption is being sought along with copies of the
same pertaining to preceding two years (or immediate last three years).
• An affidavit containing full facts of capacity utilization, turnover and financial status of the
company such as sick or not, duly signed by two Directors of the company and authenticated
by a Notary Public.
• Documentary evidences substantiating closure/winding-up, sale, merger, amalgamation, etc.
e.g. Court’s order, surrender of licenses, sale of plant and machinery, power disconnection,
manpower reduction, etc.
Even though there is no provision in the Companies Act, 1956 for withdrawal of cost audit order,
the withdrawal of Cost Audit is considered in case of permanent closure or sale or merger/
amalgamation of production activities for the product under reference. These exemptions are based on logic that approval for withdrawal can be accorded by the executive since the cost audit orders
are also issued by the executive.
Following documents are required to be furnished along with application for withdrawal:
• Printed or attested true copy of complete Annual Report containing balance sheet and profit
and loss account for the year for which exemption is being sought along with copies of the
same pertaining to preceding two years (or immediate last three years).
• An affidavit containing full facts of capacity utilization, turnover and financial status of the
company such as sick or not, duly signed by two Directors of the company and authenticated
by a Notary Public.
• Documentary evidences substantiating closure/winding-up, sale, merger, amalgamation, etc.
e.g. Court’s order, surrender of licenses, sale of plant and machinery, power disconnection,
manpower reduction, etc.
Exemption from Cost Audit Orders
Exemption from Cost Audit Orders:-
Even though there is no provision in the Companies Act, 1956 for grant of year-to-year exemption
from Cost Audit, the exemption from Cost Audit on year-to-year basis is granted by Cost Audit
Branch in situations arising out of temporary closure of the company and/or its manufacturing
facilities, negligible production/activity, etc. These exemptions are based on logic that exemptions
can be accorded by the executive since the cost audit orders are also issued by the executive.
Applications for seeking exemption are required to be made to the Central Government, along with
fee, as prescribed above for appointment of Cost Auditor. Following documents are required to be
furnished along with application for exemption:
• Printed or attested true copy of complete Annual Report containing balance sheet and profit
and loss account for the year for which exemption is being sought along with copies of the
same pertaining to preceding two years. In case, exemption is being sought in the beginning
of the financial year, the printed or attested true copy of Complete Annual Report for last
three years may be provided.
• An affi davit containing full facts of capacity utilization, turnover and fi nancial status of the
company such as sick or not or such other grounds on the basis of which exemption is being
sought, duly signed by two Directors of the company and authenticated by a Notary Public.
• A brief note/status report on steps taken by the management for revival of the company and/
or the said unit.
Approval of Cost Auditor by Central Government
Approval of Cost Auditor by Central Government:-
The powers of the Central Government are exercised by the Cost Audit Branch of the Ministry
of Corporate Affairs, New Delhi for approving the appointment of Cost Auditor. After receiving
Form 23-C with all particulars contained therein as per the check list, the approval letter is generally
issued within a period of about two to three weeks.
The powers of the Central Government are exercised by the Cost Audit Branch of the Ministry
of Corporate Affairs, New Delhi for approving the appointment of Cost Auditor. After receiving
Form 23-C with all particulars contained therein as per the check list, the approval letter is generally
issued within a period of about two to three weeks.
Form 23 Application to The Cost Audit Branch Requesting Approval of Cost Auditor
Form 23 Application to The Cost Audit Branch Requesting Approval of Cost Auditor:-
The cost audit orders issued by the Cost Audit Branch normally mention that – `the application
in the prescribed form no. 23-C proposing for appointment of cost auditor for one term should
be electronically filled at the website of department i.e., www.mca.gov.in within 45 days of the
date of the order and thereafter within 45 days of the commencement of every financial year’. The
application fee is payable along with form 23-C which is presently as under:
Nominal Share Capital Rs. Fees Payable
less than Rs. 25 lacs Rs. 500
Rs. 25 lacs or more but less than Rs. 5 crores Rs. 1,000
Rs. 5 crores or more Rs. 2,000
1.3.15.2 The payments can now be made through appropriate mechanisms – electronic (credit card, internet
banking) or traditional means (at the Bank counter). Electronic payments can also be made at Virtual
Front Office (VFO). If the user selects the traditional payment option, the system generates a prefi
lled challan in the prescribed format. Traditional payments through cash, cheque can be done at
the designated bank branches using the system generated challan.
The cost audit orders issued by the Cost Audit Branch normally mention that – `the application
in the prescribed form no. 23-C proposing for appointment of cost auditor for one term should
be electronically filled at the website of department i.e., www.mca.gov.in within 45 days of the
date of the order and thereafter within 45 days of the commencement of every financial year’. The
application fee is payable along with form 23-C which is presently as under:
Nominal Share Capital Rs. Fees Payable
less than Rs. 25 lacs Rs. 500
Rs. 25 lacs or more but less than Rs. 5 crores Rs. 1,000
Rs. 5 crores or more Rs. 2,000
1.3.15.2 The payments can now be made through appropriate mechanisms – electronic (credit card, internet
banking) or traditional means (at the Bank counter). Electronic payments can also be made at Virtual
Front Office (VFO). If the user selects the traditional payment option, the system generates a prefi
lled challan in the prescribed format. Traditional payments through cash, cheque can be done at
the designated bank branches using the system generated challan.
Board Resolution
Board Resolution:-
The sub-Section (2) of Section 233B inter-alia provides that the auditor under this Section shall be
appointed by the Board of directors of the company in accordance with the provisions of sub-
Section (1B) of Section 224 and with the previous approval of the Central Government.
The company has to make an application to the Central Government for obtaining an approval
for an appointment of Cost Auditor in Form No. 23-C. As per clause 12, a certified copy of the
resolution passed by the Board of Directors of the company sanctioning the proposal for which the
Government’s approval has been sought is to be attached along with Form 23-C.
Hence, it is imperative that a resolution has to be passed by the Board of Directors for the appointment
of the Cost Auditor. Since, the appointment of the Cost Auditor is subject to the previous approval
of the Central Government, the Board Resolution (Appendix I-C) should specifically mention that,
`subject to the approval of the Central Government and pursuant to the provisions of Section 233B of
the Companies Act, 1956, Mr. / M/s ................ be and is hereby appointed as Cost Auditor(s)...’.
On receipt of approval of the Central Government (Appendix I-E), the company should send letter
of appointment to Cost Auditor(s).
The sub-Section (2) of Section 233B inter-alia provides that the auditor under this Section shall be
appointed by the Board of directors of the company in accordance with the provisions of sub-
Section (1B) of Section 224 and with the previous approval of the Central Government.
The company has to make an application to the Central Government for obtaining an approval
for an appointment of Cost Auditor in Form No. 23-C. As per clause 12, a certified copy of the
resolution passed by the Board of Directors of the company sanctioning the proposal for which the
Government’s approval has been sought is to be attached along with Form 23-C.
Hence, it is imperative that a resolution has to be passed by the Board of Directors for the appointment
of the Cost Auditor. Since, the appointment of the Cost Auditor is subject to the previous approval
of the Central Government, the Board Resolution (Appendix I-C) should specifically mention that,
`subject to the approval of the Central Government and pursuant to the provisions of Section 233B of
the Companies Act, 1956, Mr. / M/s ................ be and is hereby appointed as Cost Auditor(s)...’.
On receipt of approval of the Central Government (Appendix I-E), the company should send letter
of appointment to Cost Auditor(s).
Written Certifi cate by the Cost Auditor
Written Certificate by the Cost Auditor:-
Section 224(1)(B) provides that no company or its Board of directors shall appoint or re-appoint any
person who is in full time employment elsewhere or firm as its auditor if such person or firm is, at
the date of such appointment or re-appointment, holding appointment as auditor of the specified
number of companies or more than the specified number of companies. The explanation to the said
Section provides that maximum number of companies for which a person can be the auditor at a
point of time cannot be more than twenty.
Proviso to sub-Section (2) of Section 233B further provides that before the appointment of any
auditor is made by the Board, a written certificate shall be obtained by the Board from the auditor
proposed to be so appointed to the effect that the appointment, if made, will be in accordance with
the provisions of sub-Section (1B) of Section 224.
Therefore, Company should obtain a written certificate from the proposed cost auditor to the effect
that the appointment, if made, will be in accordance with the provisions laid down by Section
224 of the Companies Act, 1956. A specimen copy of certificate by the Cost Auditor is given at
Appendix I-B.
Section 224(1)(B) provides that no company or its Board of directors shall appoint or re-appoint any
person who is in full time employment elsewhere or firm as its auditor if such person or firm is, at
the date of such appointment or re-appointment, holding appointment as auditor of the specified
number of companies or more than the specified number of companies. The explanation to the said
Section provides that maximum number of companies for which a person can be the auditor at a
point of time cannot be more than twenty.
Proviso to sub-Section (2) of Section 233B further provides that before the appointment of any
auditor is made by the Board, a written certificate shall be obtained by the Board from the auditor
proposed to be so appointed to the effect that the appointment, if made, will be in accordance with
the provisions of sub-Section (1B) of Section 224.
Therefore, Company should obtain a written certificate from the proposed cost auditor to the effect
that the appointment, if made, will be in accordance with the provisions laid down by Section
224 of the Companies Act, 1956. A specimen copy of certificate by the Cost Auditor is given at
Appendix I-B.
Procedure for Appointment of Cost Auditor
Procedure for Appointment of Cost Auditor:-
The sub-Section (2) of Section 233B provides that the cost auditor shall be appointed by the Board
of directors of the company in accordance with the provisions of sub-Section (1B) of Section 224
and with the previous approval of the Central Government. It further provides that before the
appointment of any auditor is made by the Board, a written certificate shall be obtained by the Board from the auditor proposed to be so appointed to the effect that the appointment, if made, will
be in accordance with the provisions of sub-Section (1B) of Section 224.
The cost audit order issued by the Cost Audit Branch under Section 233B of the Companies Act,
1956 normally provides that ‘the application for the proposal for appointment of Cost Auditor for
ONE TERM should be sent to this Department within forty-five days of the date of this order’. It also
further provides that ‘thereafter the application for the proposal for appointment of Cost Auditor
should be sent to this Department within 45 days of the commencement of every financial year’.
The fees payable for such application and the manner in which it is to be paid are also specified in
that order. These forms are now e-filed. All the relevant information and guidelines in this regard
is available on the MCA portal www.mca.gov.in .
The cost audit orders issued, normally also state that a fi rm of cost accountants, whether proprietary
or partnership, may be proposed, if such fi rm is constituted under regulations 108 and 113 of the
Cost and Works Accountants Regulations, prescribed under the Cost and Works Accountants Act,
1959. Therefore on receipt of cost audit order by the company, the Board of Directors should select
a cost accountant or a fi rm of cost accountants qualified to conduct the cost audit. The concurrence
of the cost auditor is also obtained (Section 224(1B)) prior to passing the resolution. The Board
of Directors then passes a resolution either at a meeting or through circulation appointing a cost
auditor, subject to the approval of the Central Government.
The Board resolution normally authorizes the Secretary of the Company or a Director to make
necessary application to the Central Government. This application is to be e-fi led in Form 23C
(Appendix I-D) within the time limit specifi ed in the cost audit order. The application should be
accompanied by the requisite fees.
The Department of Company Affairs considers the application and accords approval of the
appointment of the cost auditor. Normally, the Central Government approves the appointment of
cost auditor unless he suffers from any disqualifi cation under Section 224(1-B) or Section 233-B(5)
of the Companies Act. The approval is communicated to the company and the copy of the approval
is sent to cost auditor by the Central Government. However, the appointment of cost auditor is
confi rmed only when the Board of Directors informs the cost auditor that he has been appointed as
the cost auditor with the approval of the Central Government.
Detailed forms/procedures relating to the appointment of the cost auditor, starting from issue of
cost audit order to the time of approval of appointment of cost auditor is accorded by the Central
Government, are given at the end of this Study Note detailed as under:
Appendix 1-A Specimen of Cost Audit Order
Appendix 1-B Format for Written Certifi cate u/s 233B(2)/224(1-B) in case of an Individual/
Firm
Appendix 1-C Specimen Board Meeting Resolution regarding Cost Auditor
Appendix 1-D Form 23-C – Application for Appointment of Cost Auditor
Appendix 1-E Approval for Appointment of Cost Auditor
Appendix 1-F Intimation to the previous Cost Auditor
The sub-Section (2) of Section 233B provides that the cost auditor shall be appointed by the Board
of directors of the company in accordance with the provisions of sub-Section (1B) of Section 224
and with the previous approval of the Central Government. It further provides that before the
appointment of any auditor is made by the Board, a written certificate shall be obtained by the Board from the auditor proposed to be so appointed to the effect that the appointment, if made, will
be in accordance with the provisions of sub-Section (1B) of Section 224.
The cost audit order issued by the Cost Audit Branch under Section 233B of the Companies Act,
1956 normally provides that ‘the application for the proposal for appointment of Cost Auditor for
ONE TERM should be sent to this Department within forty-five days of the date of this order’. It also
further provides that ‘thereafter the application for the proposal for appointment of Cost Auditor
should be sent to this Department within 45 days of the commencement of every financial year’.
The fees payable for such application and the manner in which it is to be paid are also specified in
that order. These forms are now e-filed. All the relevant information and guidelines in this regard
is available on the MCA portal www.mca.gov.in .
The cost audit orders issued, normally also state that a fi rm of cost accountants, whether proprietary
or partnership, may be proposed, if such fi rm is constituted under regulations 108 and 113 of the
Cost and Works Accountants Regulations, prescribed under the Cost and Works Accountants Act,
1959. Therefore on receipt of cost audit order by the company, the Board of Directors should select
a cost accountant or a fi rm of cost accountants qualified to conduct the cost audit. The concurrence
of the cost auditor is also obtained (Section 224(1B)) prior to passing the resolution. The Board
of Directors then passes a resolution either at a meeting or through circulation appointing a cost
auditor, subject to the approval of the Central Government.
The Board resolution normally authorizes the Secretary of the Company or a Director to make
necessary application to the Central Government. This application is to be e-fi led in Form 23C
(Appendix I-D) within the time limit specifi ed in the cost audit order. The application should be
accompanied by the requisite fees.
The Department of Company Affairs considers the application and accords approval of the
appointment of the cost auditor. Normally, the Central Government approves the appointment of
cost auditor unless he suffers from any disqualifi cation under Section 224(1-B) or Section 233-B(5)
of the Companies Act. The approval is communicated to the company and the copy of the approval
is sent to cost auditor by the Central Government. However, the appointment of cost auditor is
confi rmed only when the Board of Directors informs the cost auditor that he has been appointed as
the cost auditor with the approval of the Central Government.
Detailed forms/procedures relating to the appointment of the cost auditor, starting from issue of
cost audit order to the time of approval of appointment of cost auditor is accorded by the Central
Government, are given at the end of this Study Note detailed as under:
Appendix 1-A Specimen of Cost Audit Order
Appendix 1-B Format for Written Certifi cate u/s 233B(2)/224(1-B) in case of an Individual/
Firm
Appendix 1-C Specimen Board Meeting Resolution regarding Cost Auditor
Appendix 1-D Form 23-C – Application for Appointment of Cost Auditor
Appendix 1-E Approval for Appointment of Cost Auditor
Appendix 1-F Intimation to the previous Cost Auditor
Penal Provisions for Companies and Cost Auditor
Penal Provisions for Companies and Cost Auditor:-
Rule 8 of the Cost Audit Report Rules, 2001 provides the following penal provisions –
(i) If the company contravenes the provisions of Rule 6 or Rule 7 (of the Cost Audit Report Rules,
2001) the company and every officer thereof who is in default, including the persons referred
to in sub-rule (6) of Section 209 of the Companies Act, 1956, shall, subject to the provisions of
Section 233B of the Act, be punishable with fine which may extend to five thousand rupees
and where the contravention is a continuing one, with a further fine which may extend to
five hundred rupees for everyday day after the first day during which such contravention
continues; and
(ii) Where default is made by the Cost Auditor in complying with the provisions of Rule 4 or Rule
5 (of the Cost Audit Report Rules, 2001), he shall be punishable with fine, which may extend
to five thousand rupees.
Rule 8 of the Cost Audit Report Rules, 2001 provides the following penal provisions –
(i) If the company contravenes the provisions of Rule 6 or Rule 7 (of the Cost Audit Report Rules,
2001) the company and every officer thereof who is in default, including the persons referred
to in sub-rule (6) of Section 209 of the Companies Act, 1956, shall, subject to the provisions of
Section 233B of the Act, be punishable with fine which may extend to five thousand rupees
and where the contravention is a continuing one, with a further fine which may extend to
five hundred rupees for everyday day after the first day during which such contravention
continues; and
(ii) Where default is made by the Cost Auditor in complying with the provisions of Rule 4 or Rule
5 (of the Cost Audit Report Rules, 2001), he shall be punishable with fine, which may extend
to five thousand rupees.
Wednesday, December 12, 2012
Cost Audit Report Rules, 2001 (With Author’s Comments
Cost Audit Report Rules, 2001 (With Author’s Comments)
The Cost Audit Report Rules, 2001 as notified vide G.S.R. 924(E) dated 27th December 2001 along with
author’s comments (in italics) are explained as under
MINISTRY OF LAW, JUSTICE AND COMPANY AFFAIRS
(DEPARTMENT OF COMPANY AFFAIRS)
NOTIFICATION
New Delhi, the 27th December, 2001
G.S.R. 924(E).- In exercise of the powers conferred by sub-section (4) of section 233B, read with
sub-section (1) of section 227 and clause (b) of sub-section (1) of section 642, of the Companies Act, 1956
(1 of 1956), and in supersession of the Cost Audit (Report) Rules, 1996, except as respect things done or
omitted to be done, before such supersession, the Central Government hereby makes the following rules,
namely:-
1. Short title and commencement . –
(1) These rules may be called the Cost Audit Report Rules, 2001.
(2) They shall come into force on the date of their publication in the Official Gazette.
(Comments: Rule 1: The Cost Audit Report Rules, 2001 were published in the Official Gazette vide GSR 924(E) dated 27 December 2001. These rules have superceeded the Cost Audit (Report) Rules, 1996 and came into force on the date of publication in the Official Gazette i.e., 27th December 2001. The application clause (rule 3) clarifies that all the cost audit reports submitted on or after 1st October 2002, shall be in the form prescribed irrespective of the financial year to which it relates.)
2. Definitions – In these rules, unless the context otherwise requires,-
(a) “Act” means the Companies Act, 1956 (1 of 1956);
(b) “Cost Auditor” means an auditor directed to conduct an audit under sub-section (1) of section
233B of the Act;
(c) “Form” means the Form of the Cost Audit Report and includes auditor’s observations and
suggestions, Annexure and Proforma to the Cost Audit Report;
(Comments: Rule 2(c) - This rule clearly states that the auditor’s observation and suggestions, Annexure and
Proforma to the Cost Audit Report are included in the prescribed form of Cost Audit Report to be submitted to the Central Government under rules.
(d) “Report” means Cost Audit Report duly audited and signed by the Cost Auditor in the prescribed
form of Cost Audit Report;
(e) “Product under reference” means the product or activity to which the Report relates;
((Comments: Rule 2(e) -The term “product under reference” was defined to include “product” as well as
“activities” (in service sector). This explanation was followed by notification of Cost Accounting Records
(Electricity) Rules, 2001 and Cost Accounting Records (Telecommunication) Rules 2001.This clarification
brought paradigm change in the applicability of Cost Audit as the various “services” are also produced, processed and sold like “products” now a days and in any case the term “processing” always meant to include “services” as well. In any case, the fast pace of technology development and opening up of economy for international competition has brought services at par with other products as today services are also being brought and sold just like any other product or commodity.
(f) All other words and expressions used in these rules but not defined, and defined in the Act
and rules made under clause (d) of sub-section (1) of section 209 of the Act shall have the same
meanings as assigned to them in the Act or rules, as the case may be.
3. Application These rules shall apply to every company in respect of which an audit of the cost accounting records has been ordered by the Central Government under sub-section (1) of section 233B of the Act. The Cost Audit Report submitted on or after 1st October, 2002, irrespective of the financial year of the company to which it relates, shall be in the form prescribed under these rules. (Comments: Rule 3 : The rules clearly provide that all the cost audit reports submitted on or after 1st October, 2002 shall be submitted in the form prescribed under the Cost Audit Report Rules, 2001 irrespective of the financial year, it belongs to.
4. Form of The Cost Audit Report (1) Every Cost Auditor, who conducts an audit of the cost accounting records of the company shall submit the report (a hard copy and a soft copy) along with auditor’s observations and suggestions, Annexure and Proforma to the Central Government in the prescribed form and at the same time forward a copy of the report to the company.
(2) Every Cost Auditor, who submits a report under sub-rule (1), shall also give clarifications, if any,
required by the Central Government on the Cost Audit Report submitted by him, within thirty
days of the receipt of the communication addressed to him calling for such clarifications.
(3) The Forms prescribed in these rules may be filed through electronic media or through any
other computer readable media as referred under section 610A of the Companies Act, 1956 (1 of
1956).**
(4) The electronic-form shall be authenticated by the authorized signatories using digital signatures,
as defined under the Information Technology Act, 2000 (21 of 2000).**
(5) The Forms prescribed in these rules, when filed in physical form, may be authenticated by
authorized signatory by affixing his signature manually.
(Comments: Rule 4 : The Cost Auditor shall submit Cost Audit Report containing:
(a) Auditors’ observations and suggestions (as included in the Form of the Cost Audit Report); and
(b) Annexure to the Cost Audit Report (Para 1 to Para 28); and
(c) Proforma (product-wise cost, sales and margin)
The Cost Auditor has to submit the said Cost Audit Report to the Central Government and at the same time
send a copy of the Cost Audit Report to the company. However, the Cost Audit Report (Amendment) Rules, 2006 provide for e-filing of Cost Audit Reports and have also prescribed Form – I for filing cost audit report and other documents with the Central Government.
** The Cost Audit Report (Amendment) Rules, 2006 issued vide notification no GSR 148(E) have inserted the aforesaid sub-rule (3), (4) and (5). These amendments allow the cost auditor to submit cost audit reports through electronic media or through any other computer readable media as referred under section 610A of the Companies Act, 1956. The electronic form of the cost audit report shall be authenticated by the authorized signatories using digital signatures. Even though, the rules (5) regarding provision for submission of Cost Audit Report in Physical Form still theoretically remain in the rules, no cost audit report is being submitted in the physical form.
5. Time Limit For Submission Of Report
The Cost Auditor shall forward his report referred to in sub-rule (1) of rule 4 to the Central Government
and to the concerned company within one hundred and eighty days from the close of the company’s
financial year to which the report relates.
(Comments: Rule 5 : Even though, there is no provision for extension of time for the submission of the Cost
Audit Report, extension of time can be granted by the Ministry for any valid reason like loss or damage of
records under fire or floods etc.)
6. Cost Auditor to Be Furnished with the Cost Accounting Records etc.
Without prejudice to the powers and duties the Cost Auditor shall have under sub-section (4) of
section 233B of the Act, the company and every officer thereof, including the persons referred to in
sub-section (6) of section 209 of the Act, shall make available to the Cost Auditor within one hundred
and thirty five days from the close of the financial year of the company, such cost accounting records,
cost statements, other books and documents, Annexure and Proforma to the Report, duly completed,
as would be required for conducting the cost audit, and shall render necessary assistance to the Cost
Auditor so as to enable him to complete the cost audit and submit his report within the time limit
specified in rule 5.
(Comments: Rule 6 - Rule 6(2) of the earlier Cost Audit (Report) Rules, 1996 provided that “ if the cost
accounting records, cost statements, other books and papers are not made available by the company within the
time limit specified, [i.e. within 90 days from the end of the financial year of the company], the cost auditor
shall intimate the facts of not having made available to him such records, statements, books and papers to the
Central Government within 10 days after expiry of said time limit of 90 days. However, the corresponding rule
is not appearing in Cost Audit Report Rules 2001. Moreover, the number of days allowed to the company for
making available cost records etc. have been increased from 90 days earlier to 135 days under the new rules. It
is probably due to the following reasons:
(a) The existing rule clearly place the specific responsibility for duly complete cost accounting records, cost
statements, Annexure and Proforma to the Report on the company, which was not there in the earlier
rules.
(b) Companies were earlier finding it difficult to complete the accounting records within 90 days as financial
figures would often change due to financial audit. Therefore, Cost Auditors would initially submit the
provisional report followed by the supplementary report. Therefore, it was requested that if 135 days are
allowed to companies, there may be no need to submit supplementary report as first report itself would be
based on the audited figures.
(c) Rule 7 of the Cost Audit Report Rules 2001 further provides that the Annexure and Proforma prescribed
with the Cost Audit Report shall be approved by the Board of Directors before submitting the same to the
Central Government by the Cost Auditor. Since, the Board would approve the audited Annexure and
Proforma only, the additional 45 days were allowed to the company enable them to complete their documents in all respects. This would also ensure that there is no difference in figures adopted in financial accounts
and those in cost accounts as any changes in financial figures due to audit of financial accounts shall also
reflected in cost accounts; and
(d) Rule 7 of the Cost Audit Report Rules 2001 provides that the Annexure and Proforma, duly audited
by the Cost Auditor, shall also be signed by the Company Secretary and at least one Director on behalf
of the company. In absence of Company Secretary in the Company, the same shall be signed by at least
two Directors. With independent Directors, Audit Committes and strict penalties for not complying with
corporate governance requirements, it was felt that this type of issues regarding not providing of cost
records etc. may not arise
(e) A clarification was also issued that the Cost Auditor shall attend the Audit Committee meetings held by the company. The issues of delays and non availability of cost statements etc. can always be discussed in such Audit Committee meetings. A better understanding and coordination was thus contemplated between the company management and the cost auditor.
(f) The provisions regarding approval by Board of Directors or signing of Annexure and Proforma by Company Secretary and one director etc. were not there earlier in the Cost Audit (Report) Rules, 1996 and therefore, these documents were often signed by the very low officials, who were often responsible for complying with the lawful requirements. Hence the need for intervention by the Central Government at higher levels under those earlier rules.
(g) The responsibility for the compliance of these provisions has been placed on the company and every officer thereof including the persons referred to in sub section 209 (6), i.e. Managing Director, Manager, all
officers and employees of the company, and if there is neither a Managing Director nor Manager, every
Director of the Company. The company has also to render necessary assistance to the Cost Auditor in and
through out the assignment. Therefore, it can be concluded that chances of non-compliance of the rules shall
be almost nil.
(h) However in case of delay in furnishing the Cost Accounting Records, etc by the Company, the Cost Auditor may still be advised to write a letter within 10 days from the expiry of 135 days from the close of the financial year to the company for non-receipt of Cost Accounting Records / Statements, Annexure / Proforma to the
Cost Audit Report, as the case may be, and get it acknowledged by the Company.
Authentication of Annexure to the Cost Audit Report
The Annexure and Proforma prescribed with the Cost Audit Report shall be approved by the Board of
Directors before submitting the same to the Central Government by the Cost Auditor. The Annexure
and Proforma, duly audited by the Cost Auditor, shall also be signed by the Company Secretary and
at least one Director on behalf of the company. In the absence of Company Secretary in the company,
the same shall be signed by at least two Directors.
The Cost Audit Report Rules, 2001 as notified vide G.S.R. 924(E) dated 27th December 2001 along with
author’s comments (in italics) are explained as under
MINISTRY OF LAW, JUSTICE AND COMPANY AFFAIRS
(DEPARTMENT OF COMPANY AFFAIRS)
NOTIFICATION
New Delhi, the 27th December, 2001
G.S.R. 924(E).- In exercise of the powers conferred by sub-section (4) of section 233B, read with
sub-section (1) of section 227 and clause (b) of sub-section (1) of section 642, of the Companies Act, 1956
(1 of 1956), and in supersession of the Cost Audit (Report) Rules, 1996, except as respect things done or
omitted to be done, before such supersession, the Central Government hereby makes the following rules,
namely:-
1. Short title and commencement . –
(1) These rules may be called the Cost Audit Report Rules, 2001.
(2) They shall come into force on the date of their publication in the Official Gazette.
(Comments: Rule 1: The Cost Audit Report Rules, 2001 were published in the Official Gazette vide GSR 924(E) dated 27 December 2001. These rules have superceeded the Cost Audit (Report) Rules, 1996 and came into force on the date of publication in the Official Gazette i.e., 27th December 2001. The application clause (rule 3) clarifies that all the cost audit reports submitted on or after 1st October 2002, shall be in the form prescribed irrespective of the financial year to which it relates.)
2. Definitions – In these rules, unless the context otherwise requires,-
(a) “Act” means the Companies Act, 1956 (1 of 1956);
(b) “Cost Auditor” means an auditor directed to conduct an audit under sub-section (1) of section
233B of the Act;
(c) “Form” means the Form of the Cost Audit Report and includes auditor’s observations and
suggestions, Annexure and Proforma to the Cost Audit Report;
(Comments: Rule 2(c) - This rule clearly states that the auditor’s observation and suggestions, Annexure and
Proforma to the Cost Audit Report are included in the prescribed form of Cost Audit Report to be submitted to the Central Government under rules.
(d) “Report” means Cost Audit Report duly audited and signed by the Cost Auditor in the prescribed
form of Cost Audit Report;
(e) “Product under reference” means the product or activity to which the Report relates;
((Comments: Rule 2(e) -The term “product under reference” was defined to include “product” as well as
“activities” (in service sector). This explanation was followed by notification of Cost Accounting Records
(Electricity) Rules, 2001 and Cost Accounting Records (Telecommunication) Rules 2001.This clarification
brought paradigm change in the applicability of Cost Audit as the various “services” are also produced, processed and sold like “products” now a days and in any case the term “processing” always meant to include “services” as well. In any case, the fast pace of technology development and opening up of economy for international competition has brought services at par with other products as today services are also being brought and sold just like any other product or commodity.
(f) All other words and expressions used in these rules but not defined, and defined in the Act
and rules made under clause (d) of sub-section (1) of section 209 of the Act shall have the same
meanings as assigned to them in the Act or rules, as the case may be.
3. Application These rules shall apply to every company in respect of which an audit of the cost accounting records has been ordered by the Central Government under sub-section (1) of section 233B of the Act. The Cost Audit Report submitted on or after 1st October, 2002, irrespective of the financial year of the company to which it relates, shall be in the form prescribed under these rules. (Comments: Rule 3 : The rules clearly provide that all the cost audit reports submitted on or after 1st October, 2002 shall be submitted in the form prescribed under the Cost Audit Report Rules, 2001 irrespective of the financial year, it belongs to.
4. Form of The Cost Audit Report (1) Every Cost Auditor, who conducts an audit of the cost accounting records of the company shall submit the report (a hard copy and a soft copy) along with auditor’s observations and suggestions, Annexure and Proforma to the Central Government in the prescribed form and at the same time forward a copy of the report to the company.
(2) Every Cost Auditor, who submits a report under sub-rule (1), shall also give clarifications, if any,
required by the Central Government on the Cost Audit Report submitted by him, within thirty
days of the receipt of the communication addressed to him calling for such clarifications.
(3) The Forms prescribed in these rules may be filed through electronic media or through any
other computer readable media as referred under section 610A of the Companies Act, 1956 (1 of
1956).**
(4) The electronic-form shall be authenticated by the authorized signatories using digital signatures,
as defined under the Information Technology Act, 2000 (21 of 2000).**
(5) The Forms prescribed in these rules, when filed in physical form, may be authenticated by
authorized signatory by affixing his signature manually.
(Comments: Rule 4 : The Cost Auditor shall submit Cost Audit Report containing:
(a) Auditors’ observations and suggestions (as included in the Form of the Cost Audit Report); and
(b) Annexure to the Cost Audit Report (Para 1 to Para 28); and
(c) Proforma (product-wise cost, sales and margin)
The Cost Auditor has to submit the said Cost Audit Report to the Central Government and at the same time
send a copy of the Cost Audit Report to the company. However, the Cost Audit Report (Amendment) Rules, 2006 provide for e-filing of Cost Audit Reports and have also prescribed Form – I for filing cost audit report and other documents with the Central Government.
** The Cost Audit Report (Amendment) Rules, 2006 issued vide notification no GSR 148(E) have inserted the aforesaid sub-rule (3), (4) and (5). These amendments allow the cost auditor to submit cost audit reports through electronic media or through any other computer readable media as referred under section 610A of the Companies Act, 1956. The electronic form of the cost audit report shall be authenticated by the authorized signatories using digital signatures. Even though, the rules (5) regarding provision for submission of Cost Audit Report in Physical Form still theoretically remain in the rules, no cost audit report is being submitted in the physical form.
5. Time Limit For Submission Of Report
The Cost Auditor shall forward his report referred to in sub-rule (1) of rule 4 to the Central Government
and to the concerned company within one hundred and eighty days from the close of the company’s
financial year to which the report relates.
(Comments: Rule 5 : Even though, there is no provision for extension of time for the submission of the Cost
Audit Report, extension of time can be granted by the Ministry for any valid reason like loss or damage of
records under fire or floods etc.)
6. Cost Auditor to Be Furnished with the Cost Accounting Records etc.
Without prejudice to the powers and duties the Cost Auditor shall have under sub-section (4) of
section 233B of the Act, the company and every officer thereof, including the persons referred to in
sub-section (6) of section 209 of the Act, shall make available to the Cost Auditor within one hundred
and thirty five days from the close of the financial year of the company, such cost accounting records,
cost statements, other books and documents, Annexure and Proforma to the Report, duly completed,
as would be required for conducting the cost audit, and shall render necessary assistance to the Cost
Auditor so as to enable him to complete the cost audit and submit his report within the time limit
specified in rule 5.
(Comments: Rule 6 - Rule 6(2) of the earlier Cost Audit (Report) Rules, 1996 provided that “ if the cost
accounting records, cost statements, other books and papers are not made available by the company within the
time limit specified, [i.e. within 90 days from the end of the financial year of the company], the cost auditor
shall intimate the facts of not having made available to him such records, statements, books and papers to the
Central Government within 10 days after expiry of said time limit of 90 days. However, the corresponding rule
is not appearing in Cost Audit Report Rules 2001. Moreover, the number of days allowed to the company for
making available cost records etc. have been increased from 90 days earlier to 135 days under the new rules. It
is probably due to the following reasons:
(a) The existing rule clearly place the specific responsibility for duly complete cost accounting records, cost
statements, Annexure and Proforma to the Report on the company, which was not there in the earlier
rules.
(b) Companies were earlier finding it difficult to complete the accounting records within 90 days as financial
figures would often change due to financial audit. Therefore, Cost Auditors would initially submit the
provisional report followed by the supplementary report. Therefore, it was requested that if 135 days are
allowed to companies, there may be no need to submit supplementary report as first report itself would be
based on the audited figures.
(c) Rule 7 of the Cost Audit Report Rules 2001 further provides that the Annexure and Proforma prescribed
with the Cost Audit Report shall be approved by the Board of Directors before submitting the same to the
Central Government by the Cost Auditor. Since, the Board would approve the audited Annexure and
Proforma only, the additional 45 days were allowed to the company enable them to complete their documents in all respects. This would also ensure that there is no difference in figures adopted in financial accounts
and those in cost accounts as any changes in financial figures due to audit of financial accounts shall also
reflected in cost accounts; and
(d) Rule 7 of the Cost Audit Report Rules 2001 provides that the Annexure and Proforma, duly audited
by the Cost Auditor, shall also be signed by the Company Secretary and at least one Director on behalf
of the company. In absence of Company Secretary in the Company, the same shall be signed by at least
two Directors. With independent Directors, Audit Committes and strict penalties for not complying with
corporate governance requirements, it was felt that this type of issues regarding not providing of cost
records etc. may not arise
(e) A clarification was also issued that the Cost Auditor shall attend the Audit Committee meetings held by the company. The issues of delays and non availability of cost statements etc. can always be discussed in such Audit Committee meetings. A better understanding and coordination was thus contemplated between the company management and the cost auditor.
(f) The provisions regarding approval by Board of Directors or signing of Annexure and Proforma by Company Secretary and one director etc. were not there earlier in the Cost Audit (Report) Rules, 1996 and therefore, these documents were often signed by the very low officials, who were often responsible for complying with the lawful requirements. Hence the need for intervention by the Central Government at higher levels under those earlier rules.
(g) The responsibility for the compliance of these provisions has been placed on the company and every officer thereof including the persons referred to in sub section 209 (6), i.e. Managing Director, Manager, all
officers and employees of the company, and if there is neither a Managing Director nor Manager, every
Director of the Company. The company has also to render necessary assistance to the Cost Auditor in and
through out the assignment. Therefore, it can be concluded that chances of non-compliance of the rules shall
be almost nil.
(h) However in case of delay in furnishing the Cost Accounting Records, etc by the Company, the Cost Auditor may still be advised to write a letter within 10 days from the expiry of 135 days from the close of the financial year to the company for non-receipt of Cost Accounting Records / Statements, Annexure / Proforma to the
Cost Audit Report, as the case may be, and get it acknowledged by the Company.
Authentication of Annexure to the Cost Audit Report
The Annexure and Proforma prescribed with the Cost Audit Report shall be approved by the Board of
Directors before submitting the same to the Central Government by the Cost Auditor. The Annexure
and Proforma, duly audited by the Cost Auditor, shall also be signed by the Company Secretary and
at least one Director on behalf of the company. In the absence of Company Secretary in the company,
the same shall be signed by at least two Directors.
Provisions of Cost Audit Report Rules 2001
Provisions of Cost Audit Report Rules 2001:-
Cost Audit was initially introduced in the country about 43 years back in the year 1965, when the Companies
(a) The report is to be sent to the Central Government and to the company within 180 days f the end
(b) The Cost Audit Report includes auditor’s observation and suggestions, Annexure and Performa to
(Rule 2(c));
(c) The cost statements as prescribed under Cost Accounting Records Rules are not required to be attached
(d) The Annexure and Proforma prescribed with the Cost Audit Report shall be approved by the Board
of Directors before submitting the same to the Central Government by the Cost Auditor;
(e) The Annexure and Proforma, duly audited by the Cost Auditor, shall also be signed by the Company
(f) The Cost Audit Report (Amendment) Rules 2006 provide that these reports shall be filed through
(g) A copy of the Report is also to be submitted to the Company by the Cost Auditor and a dated
acknowledgement should be obtained from the company;
(h) Clarifications sought by the Central Government from the Cost Auditor should be furnished by the
Auditor;
(i) If the Cost Auditor gives a qualified report, he should indicate the extent to which he has qualified the
cost audit report and the reasons therefore;
Cost Audit was initially introduced in the country about 43 years back in the year 1965, when the Companies
Act, 1956 was amended through Companies (Amendment) Act, 1965 to incorporate the provisions
relating to the maintenance of Cost Accounting Records and Cost Audit. These amendments were made
on the basis of recommendations received from Vivin Bose Commission, Dutta Commission and Shastry
Committee. The basic structure of Cost Audit was implemented through Cost Audit (Report) Rules, 1968.
These report rules were superceded subsequently by the Cost Audit (Report) Rules, 1996 notified vide
GSR 511(E) dated 5.11.96. These Report Rules were again been superceded vide Cost Audit Report Rules,
2001 notified vide GSR 924(E) dated 27.12.2001. The section 233(B) of the Companies Act 1956 requires
the cost auditor to submit his cost audit report to the Central Government in the prescribed form and
simultaneously send a copy of report to the company. The Cost Audit Report Rules 2001 prescribe the
form, procedures and rules regarding the cost audit report. The following are the salient features:
(a) The report is to be sent to the Central Government and to the company within 180 days f the end
of the company’s financial year to which the cost audit report relates (Rule 5);
(b) The Cost Audit Report includes auditor’s observation and suggestions, Annexure and Performa to
the Cost Audit Report. Therefore, these must also be submitted along with the Cost Audit Report
(Rule 2(c));
(c) The cost statements as prescribed under Cost Accounting Records Rules are not required to be attached
with the cost audit report to be submitted to the central government. These cost statements and other
working papers duly audited and signed by the cost auditor remain with the company (Rule 4);
(d) The Annexure and Proforma prescribed with the Cost Audit Report shall be approved by the Board
of Directors before submitting the same to the Central Government by the Cost Auditor;
(e) The Annexure and Proforma, duly audited by the Cost Auditor, shall also be signed by the Company
Secretary and at least one Director on behalf of the company. In the absence of Company Secretary in
the Company, the same shall be signed by at least two Directors (Rule 7);
(f) The Cost Audit Report (Amendment) Rules 2006 provide that these reports shall be filed through
electronic media or through any other computer readable media as referred u/s 610A of the Companies
Act, 1956. These shall be authenticated by the authorized signatories using digital signatures.
(g) A copy of the Report is also to be submitted to the Company by the Cost Auditor and a dated
acknowledgement should be obtained from the company;
(h) Clarifications sought by the Central Government from the Cost Auditor should be furnished by the
Cost Auditor within thirty days of the receipt of such communication. It is a statutory duty of the Cost
Auditor;
(i) If the Cost Auditor gives a qualified report, he should indicate the extent to which he has qualified the
cost audit report and the reasons therefore;
Cost Audit Report Rules, 2001
Cost Audit Report Rules, 2001:-
This Study Note includes:
• Provisions of Cost Audit Report Rules 2001.
• Cost Audit Report Rules 2001
• Form II - The Cost Audit Report
• Annexure to the Cost Audit Report
• Review of Cost Audit Report
• Disposal of Cost Audit Report by the Central Government
• Other End Users of Cost Audit Report
• Disclosure of Information and Confidentiality
Your company has received an order from the Government of India directing your company to have the cost records maintained by the company under Sec. 209(1)(d) for the year ending 31st March, 2009 and for every subsequent year thereafter audited. List the actions to be taken by the company step by step from cost auditor appointment till the submission of the Cost Audit Report, specifying time schedules. What are the penalties for non compliance?
1. Your company has received an order from the Government of India directing your company to have
the cost records maintained by the company under Sec. 209(1)(d) for the year ending 31st March, 2009
and for every subsequent year thereafter audited. List the actions to be taken by the company step
by step from cost auditor appointment till the submission of the Cost Audit Report, specifying time
schedules. What are the penalties for non compliance?
Answer :
(1) The Central Government issues a specifi c order under Section 233-B (1) of the Companies Act,
1956 to get its cost records audited by a practising Cost Accountant, indicating the product for
which the order is issued and the period for which it is ordered (in this case 31st March, 2009).
The order is also applicable for every subsequent year thereafter.
(2) On receipt of the order, the Board of Directors shall select a Cost Accountant in practice or a
fi rm of Cost Accountants and pass a resolution at the Board meeting appointing the cost auditor
subject to approval by the Central Government. The Board may propose a single auditor for all
the units of the company manufacturing the product under audit, or assign the work to more
than one cost auditor. The cost accountant so appointed should fulfi ll the following conditions:
(a) The cost Accountant or all the partners of the fi rm as the case may be, should be qualifi ed
cost accountants within the meaning of the Cost and Works Accountants Act, 1959 and
holding certifi cate of practice.
(b) In the case of a fi rm, it should have been constituted with the previous approval of the
ICWAI as required under Regulation 113 of the Institute of Cost and Works Accountants
Act, 1959.
(c) The Cost Accountant should not be in whole time employment elsewhere as provided in
Section 224 (1-B) of the Companies Act, 1956.
(d) He/they should not suffer from any of the disqualifi cation mentioned in S. 233-B (5) of the
Companies Act.
(e) He/they should not also exceed the ceiling on the number of audits prescribed u/s 224 (1-B).
(3) The Secretary of the company or a Director should make the application to the Central
Government in Form 23-C, accompanied by the requisite fees, for approval of the appointment
of Cost Auditor. The application should be e-fi led within 45 days from the commencement of
the accounting year for which audit is ordered (in this case 15th May, 2008).
(4) On receipt of approval from Government the company should issue a letter to the cost accountant
confi rming his appointment.
(5) Within 135 days from the end of the accounting year, i.e. before 14th August, 2009, the company
should make available all the cost accounting records maintained in accordance with Section
209 (1) (d) of the Companies Act to the cost auditor and render all assistance to him to carry out
the audit.
(6) The cost auditor should complete the audit and submit his report to the Central Government
within 180 days i.e. before 30th September, 1998.
The company and the executives responsible should ensure that the audit is completed and
report is submitted within the stipulated time.
If the company contravenes the provisions of the Cost Audit Report Rules, the company and every
offi cer of the company who is in default shall be punishable with a fi ne upto Rs. 5000 and where the
contravention is a continuing one, with a further fi ne of up to Rs. 500 for every day after the fi rst day
during which period such contravention continues.
Ratio Analysis
Ratio Analysis:-
Ratios show the trends and may help in focusing attention to the more important areas where detailed
Ratios show the trends and may help in focusing attention to the more important areas where detailed
checking may be necessary. Such ratio analysis may identify anything abnormal or anything which
deviates from the expected and the known. Ratios highlight only symptoms; it is for the auditor to study
those symptoms properly, correlate them and reach defi nite conclusions or identify the areas for further
enquiries. A cost auditor has to work out the fi nancial ratios contained in Para No. 24 of the Annexure to
the Cost Auditor Reports Rules and also to comment on them.
Statistical Sampling
Statistical Sampling:-
It is the principle, established by statistics, that every sample has the attributes of the population to which
It is the principle, established by statistics, that every sample has the attributes of the population to which
it belongs. It follows that from examination of such attributes of the sample, conclusions can be drawn
from examination of every member of the population. Statistics recognizes that every member has certain
662/3% to 97% confi dence level. It has further refi ned tools like stratifi ed sample to ensure that a small
sample reasonably enlarges confi dence level. Statistical sampling is adopted by auditors and is an effective
tool their attempt to express an opinion based on test checking on the sample. Sometimes statistical sample
may be dangerous to the auditor not because the tool is defective but because the auditor’s knowledge
of statistical sample is inadequate. However, if properly applied statistical sampling could enhance the
objectivity of checking and as such auditor’s observation would be more correct.
Use of Statistical Sampling Methods
Use of Statistical Sampling Methods:-
This is the most vital part of auditing. In fact this is the main part of auditing, as the audit programme is
1. Flow charts
2. Statistical sampling
3. Ratio analysis
Flow Charts:-
Flow chart is chart or diagrammatic representation of fl ow of information etc. In auditing it is used
a) The number of copies of each document.
b) Its movements to different departments and sequence of such movements and where every
copy is finally kept.
c) The operations like initialing, approving, etc. done on the documents in each department
with brief description of the operations.
d) The collection from these documents into another register/documents as well as posting any
information in the former from the latter by dotted line.
This helps in identifying –
a) The division of responsibilities of the different departments.
b) The source of document whose error would be of far reaching consequences.
c) Possible clerical errors that can occur at each stage.
d) It gives a bird’s eye view of the system and an efficient documentation for the auditors testing it
e) It is the most efficient tool for doing actual analysis.
However, flow charts might not give the desired results as details are sometime omitted and the
individual charts are not properly cross referenced and indexed. Failure to standardize the symbols
This is the most vital part of auditing. In fact this is the main part of auditing, as the audit programme is
no more than a plan of checking and audit working papers are the records of such checking. Traditionally,
the operations of auditing are classified as casting, posting and vouching. Casting refers to arithmetical
operations whereas posting refers to copying figure from one place to another. Vouching on the other
hand is often described as “the backbone of auditing” and is most important operation. Vouching is the
examination of entries in the books of accounts with reference to vouchers and supporting documentary
evidence. The cost auditor, because of time constraints cannot examine each entry with the voucher and
as such has to resort to test check which helps to form an opinion about the nature and quality of work
and enables him to obtain definite basis for audit observations. The cost auditor also uses the following
techniques in cost audit :
1. Flow charts
2. Statistical sampling
3. Ratio analysis
Flow Charts:-
Flow chart is chart or diagrammatic representation of fl ow of information etc. In auditing it is used
to diagrammatically represent the fl ow of information with the help of documents. It is useful to
record the “decision” at different levels, the posting of data, and the recording of transactions on
the document. It is customary to indicate the analysis of systems and documents in the fl ow chart
detailed as under –
a) The number of copies of each document.
b) Its movements to different departments and sequence of such movements and where every
copy is finally kept.
c) The operations like initialing, approving, etc. done on the documents in each department
with brief description of the operations.
d) The collection from these documents into another register/documents as well as posting any
information in the former from the latter by dotted line.
This helps in identifying –
a) The division of responsibilities of the different departments.
b) The source of document whose error would be of far reaching consequences.
c) Possible clerical errors that can occur at each stage.
d) It gives a bird’s eye view of the system and an efficient documentation for the auditors testing it
e) It is the most efficient tool for doing actual analysis.
However, flow charts might not give the desired results as details are sometime omitted and the
individual charts are not properly cross referenced and indexed. Failure to standardize the symbols
and incomplete nature of the chart fails to give desired results.
Cost Audit Report - Supplementary Report / Follow-up Action by the Company
Cost Audit Report - Supplementary Report / Follow-up Action by the Company:-
Where the cost audit report is fi nalized with provisional fi gures, a supplementary cost audit report should
be submitted by the cost auditor to the Government as soon as the audited accounts are made available. As
per Section 233B(7), the company has to furnish explanation and full information on every qualifi cation or
reservation in the cost audit report to the Government within 30 days from the date of receipt of the copy
of the said report. According to sub-rule (2) of Rule 4 of Cost Audit Report Rules, 2001, the Cost Auditor
shall also give clarifi cations required by the Central Government on the Cost Audit Report submitted by
him, within 30 days of the receipt of communication addressed to him calling for such clarifi cations.
Where the cost audit report is fi nalized with provisional fi gures, a supplementary cost audit report should
be submitted by the cost auditor to the Government as soon as the audited accounts are made available. As
per Section 233B(7), the company has to furnish explanation and full information on every qualifi cation or
reservation in the cost audit report to the Government within 30 days from the date of receipt of the copy
of the said report. According to sub-rule (2) of Rule 4 of Cost Audit Report Rules, 2001, the Cost Auditor
shall also give clarifi cations required by the Central Government on the Cost Audit Report submitted by
him, within 30 days of the receipt of communication addressed to him calling for such clarifi cations.
Number of Copies of Cost Audit Report
Number of Copies of Cost Audit Report:-
The Cost Audit Report is electronically fi led with the Central Government and is physically
submitted as was done previously. However, Cost Auditor may sign at least fi ve physical reports
also as per following usage :-
e-fi ling for Cost Audit Branch
One copy to the cost auditor himself
One copy for the company
One copy for the Central Excise
One copy for Income Tax authority
(One copy extra for future cost audit)
In view of e-fi ling, no hard copy is required to be submitted to the Cost Audit Branch.
The Cost Audit Report is electronically fi led with the Central Government and is physically
submitted as was done previously. However, Cost Auditor may sign at least fi ve physical reports
also as per following usage :-
e-fi ling for Cost Audit Branch
One copy to the cost auditor himself
One copy for the company
One copy for the Central Excise
One copy for Income Tax authority
(One copy extra for future cost audit)
In view of e-fi ling, no hard copy is required to be submitted to the Cost Audit Branch.
Authentication of Annexure to the Cost Audit Report
Authentication of Annexure to the Cost Audit Report:-
The annexure and proforma prescribed under the cost audit report shall be approved by the board of
The annexure and proforma prescribed under the cost audit report shall be approved by the board of
directors of the company before submitting the same to the Central Government by the cost auditor.
Tuesday, December 11, 2012
Preparation of Cost Audit Report
Preparation of Cost Audit Report:-
When review and verifi cation of the cost accounting records and proformae and Annexures/
financial statements are completely in line with the Cost Audit Report Rules, the cost auditor will
be in a position to prepare his report. It may be pointed out that the report should refl ect the
professional care exercised by the cost auditor. Certifi cation of fi gures is only a part of the report. Other aspects are the analysis, critical review of the systems in vogue in the company, identifi cation of areas where improvements can be made and suggestions on those areas.
The cost auditor has to give his observation in the main certifi cate with qualifi cations, if any. He has
When review and verifi cation of the cost accounting records and proformae and Annexures/
financial statements are completely in line with the Cost Audit Report Rules, the cost auditor will
be in a position to prepare his report. It may be pointed out that the report should refl ect the
professional care exercised by the cost auditor. Certifi cation of fi gures is only a part of the report. Other aspects are the analysis, critical review of the systems in vogue in the company, identifi cation of areas where improvements can be made and suggestions on those areas.
The cost auditor has to give his observation in the main certifi cate with qualifi cations, if any. He has
to complete all paras contained in the Annexure to the Cost Audit Report Rules, 2001 and finalise
the checking of Proforma to the Cost Audit Report.
Verification of Records and Reports
Verification of Records and Reports:-
Details of Cost Accounting Records
(a) The records contemplated under Section 209(1)(d) of the Companies Act, 1956 would include all
records are considered as part of the cost accounting records-
(1) Production:-
(b) Production reports.
(c) Scrap, wastage, spoilage and defective reports.
(d) Machine utilization report and idle time report.
(e) Details of production hours, labour and machine hours.
(2) Raw materials stores etc. :-
(a) Goods received register.
(b) Bin cards and stores ledger.
(c) Material consumption and stock reports.
(3) Utilities (Steam, power & water) :-
(a) Records of inputs and outputs.
(b) Records of cost centre-wise allocation of products.
(c) Records for own generated power and purchased power.
(4) Wages and Salaries :-
(a) Attendance registers.
(b) Payroll.
(c) Leave wages and gratuity payments.
(d) Overtime and idle time records.
(5) Overheads :-
(a) Overheads analysis/distribution registers.
(b) Overhead absorption details.
(6) Repairs and maintenance :-
(a) Work order register
(7) Work-in-progress and fi nished goods :-
(a) Cost centre-wise/product-wise stock register.
(b) Product-wise fi nished goods register.
(8) Cost accounts, records and statements :-
(a) Cost centre-wise assets register.
(b) Product ledger.
(c) Annexures and proformae as per Cost Accounting Records Rules.
(d) Reconciliation of profi t/loss as per costing and fi nancial records.
(9) Sales :-
(a) Sales register including export sales register.
(b) Sales analysis by products (quality, size, variety-wise).
Review of Cost Accounting Records by Cost Auditor:-
(a) The cost auditor during the course of audit will thoroughly review the cost accounting records.
Such review and verifi cation may include :
1. Methods of costing in use – batch, job, process etc.
2. System of fi xation of cost centres.
3. Procedures for accounting of raw materials, packing materials, and spares, etc.
4. Methods of accounting of wastes, rejections and defectives.
5. System of recording of wages, salaries and overtime and their allocation.
6. Incentive schemes in vogue.
7. Basis of allocation/apportionment of utilities.
8. Method of accounting for depreciation and charging depreciation to cost centres.
9. Method of apportionment/allocation of service department expenses.
10. Basis of reapportionment of service department expenses to production departments.
11. Basis of absorption of overheads to products.
12. Basis of absorption of interest, bonus, gratuity and selling and distribution cost to products.
13. Treatment of research and development expenses.
14. Budgetary control system.
15. Internal audit system.
16. Method of accounting of production and sales.
17. Method of evaluation of work-in-progress.
18. System of stock-taking.
19. Method of valuation of inventories.
(b) If the company has manual for cost accounting, the cost auditor should study the manual
thoroughly.
Verifi cation of Cost Proformae and Annexures:-
(a) The cost auditor has to examine all the cost accounting records, cost statements, other books and
1. Financial position including fi nancial ratios as required to be stated in Para 24 of the Annexures
to the Cost Audit Report Rules.
2. Licensed capacity, installed capacity, production and capacity utilized (Para 4).
3. Consumption of raw materials, power and fuel, salary and wages, stores and spare parts,
provision for depreciation, expenditure on overheads, royalty and technical know-how
charges, quality control expenses, pollution control expenses, abnormal non-recurring costs
and other items.
4. Sales realization – local and export unit and total for each variety of product.
5. Cost proformae maintained by the company as per cost accounting records rules.
6. Reconciliation with fi nancial books.
(b) As mentioned earlier, the examination of cost proformae as per provisions contained in relevant
Details of Cost Accounting Records
(a) The records contemplated under Section 209(1)(d) of the Companies Act, 1956 would include all
cost accounting records maintained by the company and made available for audit. The following
records are considered as part of the cost accounting records-
(1) Production:-
(a) Consumption register of raw material, packing materials, etc.
(b) Production reports.
(c) Scrap, wastage, spoilage and defective reports.
(d) Machine utilization report and idle time report.
(e) Details of production hours, labour and machine hours.
(2) Raw materials stores etc. :-
(a) Goods received register.
(b) Bin cards and stores ledger.
(c) Material consumption and stock reports.
(3) Utilities (Steam, power & water) :-
(a) Records of inputs and outputs.
(b) Records of cost centre-wise allocation of products.
(c) Records for own generated power and purchased power.
(4) Wages and Salaries :-
(a) Attendance registers.
(b) Payroll.
(c) Leave wages and gratuity payments.
(d) Overtime and idle time records.
(5) Overheads :-
(a) Overheads analysis/distribution registers.
(b) Overhead absorption details.
(6) Repairs and maintenance :-
(a) Work order register
(7) Work-in-progress and fi nished goods :-
(a) Cost centre-wise/product-wise stock register.
(b) Product-wise fi nished goods register.
(8) Cost accounts, records and statements :-
(a) Cost centre-wise assets register.
(b) Product ledger.
(c) Annexures and proformae as per Cost Accounting Records Rules.
(d) Reconciliation of profi t/loss as per costing and fi nancial records.
(9) Sales :-
(a) Sales register including export sales register.
(b) Sales analysis by products (quality, size, variety-wise).
(b) The above mentioned cost records shall be maintained on a regular and continuous basis and
not at the end of the year only.Review of Cost Accounting Records by Cost Auditor:-
(a) The cost auditor during the course of audit will thoroughly review the cost accounting records.
Such review and verifi cation may include :
1. Methods of costing in use – batch, job, process etc.
2. System of fi xation of cost centres.
3. Procedures for accounting of raw materials, packing materials, and spares, etc.
4. Methods of accounting of wastes, rejections and defectives.
5. System of recording of wages, salaries and overtime and their allocation.
6. Incentive schemes in vogue.
7. Basis of allocation/apportionment of utilities.
8. Method of accounting for depreciation and charging depreciation to cost centres.
9. Method of apportionment/allocation of service department expenses.
10. Basis of reapportionment of service department expenses to production departments.
11. Basis of absorption of overheads to products.
12. Basis of absorption of interest, bonus, gratuity and selling and distribution cost to products.
13. Treatment of research and development expenses.
14. Budgetary control system.
15. Internal audit system.
16. Method of accounting of production and sales.
17. Method of evaluation of work-in-progress.
18. System of stock-taking.
19. Method of valuation of inventories.
(b) If the company has manual for cost accounting, the cost auditor should study the manual
thoroughly.
Verifi cation of Cost Proformae and Annexures:-
(a) The cost auditor has to examine all the cost accounting records, cost statements, other books and
documents, annexures and proforma to the report and other relevant data in course of his audit
work. Such examination of the cost and fi nancial statements by the cost auditor may include the
following –
1. Financial position including fi nancial ratios as required to be stated in Para 24 of the Annexures
to the Cost Audit Report Rules.
2. Licensed capacity, installed capacity, production and capacity utilized (Para 4).
3. Consumption of raw materials, power and fuel, salary and wages, stores and spare parts,
provision for depreciation, expenditure on overheads, royalty and technical know-how
charges, quality control expenses, pollution control expenses, abnormal non-recurring costs
and other items.
4. Sales realization – local and export unit and total for each variety of product.
5. Cost proformae maintained by the company as per cost accounting records rules.
6. Reconciliation with fi nancial books.
(b) As mentioned earlier, the examination of cost proformae as per provisions contained in relevant
cost accounting records rules and other items mentioned above may commence only after the end
of the accounting year when all the closing entries are passed through the books of account.
Working Papers
Working Papers:-
The Audit working papers contain the basic records including audit programme, nature of queries
raised in course of audit, important information about the business of the company and audit
fi ndings. Such audit working papers help to locate audit fi ndings. The working papers are the
important aid in planning and performance of the cost audit. It facilitates the supervision and
review of the audit work. It also provides supporting evidence of the audit work performed. Audit
of working papers usually consist of:
(a) evidence obtained during the audit exercise;
(b) details of methods and procedures followed during such exercise; and
(c) conclusions derived by the cost auditor as regards objectives of the cost audit.
The working papers should record the cost audit plan, the timing, nature and extent of the audit
procedures performed and the conclusions derived from the evidence obtained. The working
papers serve as an important proof regarding the way evidence was found, analyzed and verifi able
conclusion drawn.
Whenever any question is raised or a clarifi cation is desired by the Central Government regarding any point, the cost auditor can reply properly if the audit working papers are properly kept. Such working papers will help the cost auditor in cost audit of that company during subsequent years also. The working papers should be cross-indexed in such a manner that required information could be obtained with minimum delay. The working papers may be arranged properly according to Para numbers of the Annexure to the Cost Audit Report Rules.
The audit working paper may be kept in two fi les – a “permanent” fi le for all the years and a
“variable” file for each year of audit. Thus copies of Memorandum of Association, Articles of
Association, collaboration agreement, process fl ow chart, cost manual etc. may belong to the
permanent file.
It is advisable that detailed comments on verifi cation of supporting statement are kept attached to
The Audit working papers contain the basic records including audit programme, nature of queries
raised in course of audit, important information about the business of the company and audit
fi ndings. Such audit working papers help to locate audit fi ndings. The working papers are the
important aid in planning and performance of the cost audit. It facilitates the supervision and
review of the audit work. It also provides supporting evidence of the audit work performed. Audit
of working papers usually consist of:
(a) evidence obtained during the audit exercise;
(b) details of methods and procedures followed during such exercise; and
(c) conclusions derived by the cost auditor as regards objectives of the cost audit.
The working papers should record the cost audit plan, the timing, nature and extent of the audit
procedures performed and the conclusions derived from the evidence obtained. The working
papers serve as an important proof regarding the way evidence was found, analyzed and verifi able
conclusion drawn.
Whenever any question is raised or a clarifi cation is desired by the Central Government regarding any point, the cost auditor can reply properly if the audit working papers are properly kept. Such working papers will help the cost auditor in cost audit of that company during subsequent years also. The working papers should be cross-indexed in such a manner that required information could be obtained with minimum delay. The working papers may be arranged properly according to Para numbers of the Annexure to the Cost Audit Report Rules.
The audit working paper may be kept in two fi les – a “permanent” fi le for all the years and a
“variable” file for each year of audit. Thus copies of Memorandum of Association, Articles of
Association, collaboration agreement, process fl ow chart, cost manual etc. may belong to the
permanent file.
It is advisable that detailed comments on verifi cation of supporting statement are kept attached to
that statement. This would enable the cost auditor to know at any time how a fi gure was arrived at,
what examination he made to satisfy himself, what queries he raised, what replies were received
and what comments he fi nally decided to put in his report.
Elements of Planning - Cost Audit
Elements of Planning - Cost Audit:-
Planning of cost audit involves:
(a) Familiarization about the company and applicable cost accounting record rules;
(b) Collection of all relevant information;
(c) Evaluation of internal control procedures and the system;
(d) Preparation of appropriate cost audit programme; and
(e) Audit of working papers and cost sheets.
Familiarization about the Company and Applicable Record Rules:-
(a) It is very necessary for the cost auditor to familiarize himself with the requirements of Cost Accounting Records Rules for the class of the companies to which the company under audit
belongs. Similarly, the disclosure requirements as contemplated under the Cost Audit Report Rule
2001 should also be seen before actually designing the cost audit programme. This is necessary to
ensure that the audit programme includes the examination of all the relevant records required to
be maintained.
(b) In addition to these, the cost auditor should also familiarize himself with the company especially
with respect to its organization, organization structure, product range, market share, major inputs,
profi tability, fi nancial status, marketing set-up, method of inventory valuation and detailed cost
accounting system etc.
Collection of All Relevant Information:-
fi nalization of audit programme and actual commencement of audit:
(a) A brief history of the company and its business activities;
(b) Memorandum of Association and Articles of Association;
(c) Annual reports and accounts for the last three to fi ve years;
(d) A list including addresses of all factories, branch offi ces and depots with the names of
managers-in-charge;
(e) Organization chart with details of key personnel;
(f) Collaboration agreements, if any, including agreements for payment of royalty;
(g) Details of manufacturing capacity – installed, licensed and utilization installed capacity for
the last three years;
(h) A detailed note indicating the system and procedure followed in –
(i) Cost department
(ii) Financial accounting department
(iii) Purchase, raw materials/packing materials stores, etc.
(iv) Time offi ce
(v) Production department
(vi) Sales department
(vii) Management Information System
(viii) Personnel Department
(ix) Internal audit department
(i) Copies of budget manual;
(j) Flow charts and description of manufacturing process;
(k) Major raw materials with quantitative details for each unit of fi nished output;
(l) Labor incentive schemes, if any;
(m) Details of important contracts/agreements regarding purchases, sales and services;
(n) Details of budgetary control and standard costing procedures with treatment for variances;
(o) Copies of industrial licenses if any, issued from time to time;
(p) Periodical reports submitted to Excise and other Govt. authorities;
(q) Details of price control orders/distribution control orders, if any by the Regulatory body;
(r) A broad idea of the cost structure of the industry or other benchmarks in the industry;
(s) Special features of the industry including economic environment in respect of the industry
such as capacity, production, demand, prices, markets, international scenario;
(t) Systems and procedures of the organization and accepted cost accounting principles;
(u) The different types of government levies such as excise duty, sales tax, cess, royalty and
freight equalization etc; and
(v) Follow-up based on earlier cost audit reports, if any.
(b) In case of repeat audit engagements, most of the aforesaid information would be available with
the cost auditor, which would then be appropriately updated.
Evaluation of Internal Control Procedures and System:-
(a) The evaluation of internal control procedures and systems provides a reasonable assurance to
The basic concept of audit may be looked at from the angle of planning the audit work. This may
be elaborated under the following heads :
1. Cost audit programmes;
2. Cost audit working papers; and
3. Checking including test checking
Preparation of Cost Audit Programme:-
A cost audit programme is the cost auditor’s plan of action indicating the tests and procedures to be
The cost audit programme should then be discussed with the management to ensure that the
programme does not clash with other audits as far as possible. This will also reveal the preparedness
The planning the cost audit would inter-alia include :
(a) Deciding on the audit team of persons having adequate training, experience and competence
in cost auditing
(b) Briefi ng the personnel on the requirements, coverage and documentation of audit evidence
(c) Deciding on areas of cost audit, quantum to be covered, types of checks and techniques to be
used, methodology of collection of facts and on recording the progress of cost audit
(d) Laying down time targets for completion of different segments of cost audit.
A cost audit programme is usually subdivided in the following stages :
(a) Review of cost accounting records
(b) Verifi cation of cost statements, proformae and annexures
(c) Preparation of cost audit report.
The cost auditor prepares the cost audit report under the Cost Audit Report Rules, 2001 after
reviewing the cost accounting records and detailed verifi cation of the cost proformae, annexures,
cost statements and other fi nancial data submitted by the company to the cost auditor.
Planning of cost audit involves:
(a) Familiarization about the company and applicable cost accounting record rules;
(b) Collection of all relevant information;
(c) Evaluation of internal control procedures and the system;
(d) Preparation of appropriate cost audit programme; and
(e) Audit of working papers and cost sheets.
Familiarization about the Company and Applicable Record Rules:-
belongs. Similarly, the disclosure requirements as contemplated under the Cost Audit Report Rule
2001 should also be seen before actually designing the cost audit programme. This is necessary to
ensure that the audit programme includes the examination of all the relevant records required to
be maintained.
(b) In addition to these, the cost auditor should also familiarize himself with the company especially
with respect to its organization, organization structure, product range, market share, major inputs,
profi tability, fi nancial status, marketing set-up, method of inventory valuation and detailed cost
accounting system etc.
Collection of All Relevant Information:-
(a) The following records, explanations and information may also need to be collected before
fi nalization of audit programme and actual commencement of audit:
(a) A brief history of the company and its business activities;
(b) Memorandum of Association and Articles of Association;
(c) Annual reports and accounts for the last three to fi ve years;
(d) A list including addresses of all factories, branch offi ces and depots with the names of
managers-in-charge;
(e) Organization chart with details of key personnel;
(f) Collaboration agreements, if any, including agreements for payment of royalty;
(g) Details of manufacturing capacity – installed, licensed and utilization installed capacity for
the last three years;
(h) A detailed note indicating the system and procedure followed in –
(i) Cost department
(ii) Financial accounting department
(iii) Purchase, raw materials/packing materials stores, etc.
(iv) Time offi ce
(v) Production department
(vi) Sales department
(vii) Management Information System
(viii) Personnel Department
(ix) Internal audit department
(i) Copies of budget manual;
(j) Flow charts and description of manufacturing process;
(k) Major raw materials with quantitative details for each unit of fi nished output;
(l) Labor incentive schemes, if any;
(m) Details of important contracts/agreements regarding purchases, sales and services;
(n) Details of budgetary control and standard costing procedures with treatment for variances;
(o) Copies of industrial licenses if any, issued from time to time;
(p) Periodical reports submitted to Excise and other Govt. authorities;
(q) Details of price control orders/distribution control orders, if any by the Regulatory body;
(r) A broad idea of the cost structure of the industry or other benchmarks in the industry;
(s) Special features of the industry including economic environment in respect of the industry
such as capacity, production, demand, prices, markets, international scenario;
(t) Systems and procedures of the organization and accepted cost accounting principles;
(u) The different types of government levies such as excise duty, sales tax, cess, royalty and
freight equalization etc; and
(v) Follow-up based on earlier cost audit reports, if any.
(b) In case of repeat audit engagements, most of the aforesaid information would be available with
the cost auditor, which would then be appropriately updated.
Evaluation of Internal Control Procedures and System:-
(a) The evaluation of internal control procedures and systems provides a reasonable assurance to
the cost auditor. This evaluation helps in identifying the strong points as well as the weak points
of the internal control system. This will facilitate setting up of materiality levels and designing of
audit programme accordingly. The cost auditor may confi ne his checks and audit procedures to a
representative sample, if these internal control procedures are effective. This will help in reducing
the avoidable verifi cation of each and every transaction, which will be not only very time consuming
but costly as well.
Structuring the Cost Audit:-
be elaborated under the following heads :
1. Cost audit programmes;
2. Cost audit working papers; and
3. Checking including test checking
Preparation of Cost Audit Programme:-
A cost audit programme is the cost auditor’s plan of action indicating the tests and procedures to be
followed to implement the cost audit plan. The programme should be comprehensive and detailed
to serve as a manual to the assistants and as a means to effi ciently and effectively execute the audit
of each of the element of cost of sales prescribed in the cost accounting records rules.
The cost audit programme should then be discussed with the management to ensure that the
programme does not clash with other audits as far as possible. This will also reveal the preparedness
of the company for cost audit and any arrears in the compilation of cost accounting records could
be taken care of well in advance before the actual commencement of cost audit.
The planning the cost audit would inter-alia include :
(a) Deciding on the audit team of persons having adequate training, experience and competence
in cost auditing
(b) Briefi ng the personnel on the requirements, coverage and documentation of audit evidence
(c) Deciding on areas of cost audit, quantum to be covered, types of checks and techniques to be
used, methodology of collection of facts and on recording the progress of cost audit
(d) Laying down time targets for completion of different segments of cost audit.
A cost audit programme is usually subdivided in the following stages :
(a) Review of cost accounting records
(b) Verifi cation of cost statements, proformae and annexures
(c) Preparation of cost audit report.
The cost auditor prepares the cost audit report under the Cost Audit Report Rules, 2001 after
reviewing the cost accounting records and detailed verifi cation of the cost proformae, annexures,
cost statements and other fi nancial data submitted by the company to the cost auditor.
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