Audit Rules | Cost Accounting - B Com PDF Download

What is Cost Audit?

• A cost audit involves a thorough examination of an entity's cost records and associated information, extending even to non-profit organizations.
• The primary objective of this process is to provide assurance to various stakeholders, including shareholders, management, and regulatory bodies.
• It ensures that the cost-related information disclosed by a company is accurate, reliable, and compliant with relevant regulations and standards.

Key Components of Cost Audit

• Verification of the accuracy of cost accounting records, cost reports, statements, and data.
• Examination of these records to confirm adherence to cost accounting principles, plans, procedures, and objectives.

Approach of Cost Auditors

• Cost auditors must ensure that the organization's cost accounting plan aligns with its objectives.
• The accounting system should be designed to achieve these objectives effectively.
• They are responsible for verifying figures through methods like vouching, reconciliation, etc.

Paraphrasing the information provided, a cost audit is a detailed review of an entity's cost documentation, encompassing both for-profit and non-profit organizations. Its primary aim is to instill confidence in stakeholders like shareholders, management, and regulators regarding the accuracy and compliance of reported cost data. The process involves verifying the precision of various cost-related records and ensuring their alignment with established principles and objectives.

Objectives of Cost Audit

• Verifying the accuracy of the cost data: The main goal of cost audit is to examine a company's cost accounts and records to ensure that the reported cost data is precise, dependable, and devoid of significant errors.
• Enhancing cost control: Cost audit assists a company in pinpointing areas where it can enhance its cost control procedures. This, in turn, leads to cost savings and enhanced profitability.
• Identifying inefficiencies: Through cost audit, companies can pinpoint areas where unnecessary costs are being incurred or where production processes can be improved to lower costs.
• Ensuring compliance with regulations: Companies need to adhere to relevant regulations and guidelines established by governmental bodies or professional associations to maintain compliance.
• Improving decision making: Cost audit provides management with a clearer insight into the company's cost framework, enabling them to make more well-informed decisions regarding cost-related issues.

Advantages of Cost Audit

Advantages to Management

• Management benefits from receiving accurate data for day-to-day operations such as price setting, control, and decision-making.
• A structured reporting system enables close monitoring of all forms of wastage.
• Identifying inefficiencies within the company becomes possible, leading to corrective measures.
• Management by exception is facilitated by assigning specific responsibilities to individual managers.
• Budgetary control and standard costing systems are significantly enhanced.
• Accurate valuation of closing stock and work-in-progress can be established.
• Cost audit aids in detecting errors and fraudulent activities.

Society

• Cost audit plays a role in price fixing, ensuring consumers are protected from price exploitation.
• Industries are prevented from unjustified price hikes, thus helping to curb inflation and maintain consumer welfare standards.

Shareholders

• Ensuring proper records of material purchases, expenses, and fair valuation of stocks and work in progress benefit shareholders.
• Companies can promise shareholders a fair return on investments.

Government

• Cost audit assists the government in fairly setting prices in cost-plus contracts.
• It helps in regulating prices of essential goods, preventing excessive profiteering.
• Identifying inefficient units allows the government to focus on necessary interventions.
• It aids the government in making decisions to support specific industries.
• Encouraging competition among industry units helps to control inflation.
• Facilitates resolution of trade disputes brought to the government's attention.

Disadvantages of Cost Audit

• Cost: Conducting a cost audit can be expensive and time-consuming. This process necessitates the involvement of specialized auditors who might demand high fees for their services.
• Complexity: Cost audits entail a meticulous review of a company's cost accounts and records, which can be intricate and demand significant expertise.
• Resistance from management: Companies might perceive cost audits as interfering with their operations and may push back against the audit procedure. This resistance can result in a lack of cooperation from management, undermining the effectiveness of the audit.
• Difficulty in detecting fraud: Cost audits are not well-suited for uncovering fraudulent activities. As a result, auditors may struggle to pinpoint fraudulent behaviors, particularly when they are skillfully concealed.
• Limited scope: Cost audits exclusively concentrate on the cost aspects of a company's operations. They do not offer a comprehensive overview of its financial performance.
• Reliance on historical data: Cost audits rely on historical cost data and do not take into account future trends or market conditions that could impact the cost of goods or services.

Cost Accounting Records & Cost Audit

Cost Audit

The ICWAI defines statutory cost audit as “A system, of audit introduced by the GOI for the review, examination and appraisal of the cost accounting records.

Cost Audit is a critical review undertaken for the purpose of

• Verification of the correctness of cost accounts and
• Checking that cost accounting plan is adhered to

Imporatant Terms

• “Cost Records” means books of account relating to utilization of materials, labour and other items of cost as applicable to the production of goods or provision of services as provided in Section 148 of the Act and these rules. 
• Every company specified in item (A) of rule 3 shall get its cost records audited in accordance with these rules if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is rupees fifty crores or more as the aggregate turnover of the individual. 

Exemption from maintenance of cost records: 

• Foreign companies having only liaison offices 
• A company which is classified as a micro enterprise or a small enterprise including as per the turnover criteria u/s 7(9) of the Micro, Small and Medium Enterprises Development Act, 2006. 

Rule 3: Application of Cost Records

• For the purposes of Section 148(1) of the Act, the class of companies, including foreign companies engaged in the production of the goods or in rendering services, having an overall turnover from all its products and services of Rs 35 crores or more during the immediately preceding financial year, shall include cost records for such products or services in their books of account.
  

Rule 5: Maintenance of Cost Records

• Every company under these rules including all units and branches thereof shall in respect of each of its financial year commencing on or after the 1st day of April, 2014, will maintain cost records in form CRA-1. 
• The cost records referred to in the sub-rule (1) shall be maintained on regular basis in such a manner as to facilitate calculation of per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities for every financial year on monthly or quarterly or half yearly or annual basis. 
• The cost records shall be maintained in such a manner so as to enable the company to exercise, as far as possible, control over the various operations and costs to achieve optimum economies in utilization of resources and these records shall also provide necessary data which is required to be furnished under these rules. 

Rule 6: Cost Audit

Provisions of Companies Act, 2013 Relating to Cost Audit

Forms

• CRA – 1: The Form CRA – 1 prescribes the form in which cost records shall be maintained
• CRA – 2: Form of Intimation of Appointment of Cost Auditor by the Company to Central Government
• CRA – 3: Form of Cost Audit Report
• CRA – 4: Form for filing Cost Audit Report with the Central Government