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:-

(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:-

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

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.