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.
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