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Basics of Cost Audit
This Chapter Includes : Nature and Scope of Cost Audit; Provisions Under
Companies Act Relating to Maintenance of Cost Records and Cost Audit; Cost
Auditor - Appointment, Rights and Responsibilities; Planning and Structuring the
Cost Audit.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
S HORT N OTES
2011 - Dec [3] (b) Write a note on ‘social objectives’ of Cost Audit.
Q&A-17.11
(5 marks)
Q&A-17.12 O
Solved Scanner CMA (CWA) Final Gr. IV Paper - 17
Answer :
The social objectives of Cost Audit are enumerated below:
(i) Facilitation in fixation of reasonable prices for goods and services produced by
the enterprise.
(ii) Improvement in productivity of human, physical and financial resources of the
enterprise.
(iii) Channelising of the enterprise resources to most optimum, productive and
profitable areas.
(iv) Availability of Audited Cost data as regards Contracts containing escalation
clauses.
(v) Facilitation in settlement of bills in the case of Cost-plus contracts entered into
by the Government.
(vi) Pinpointing areas of inefficiency and mis-management if any for the benefit of
shareholders, consumers and society in large.
(vii) Hospitalisation, schooling, roads and transportation facilities to own employees
as well as neighbouring people & cost benefit analysis.
D ESCRIPTIVE Q UESTIONS
2002 - Dec [3] (b) (iii) A person has been appointed as Cost Auditor for Twenty
products manufactured in seven companies. He is again proposed for appointment as
Cost Auditor for three more products manufactured by two other companies. Will this
appointment be 'In Order'?
(2 marks)
(iv) A person is doing Internal Audit on one of the factories manufacturing 'Cement'
in a company. He was proposed for appointment as Cost Auditor in another
factory of the same company manufacturing cement for the same period. Is this
appointment as Cost Auditor 'In Order'?
(2 marks)
Answer :
(iii) A cost auditor can accept a maximum of twenty cost audits out of which not more
than 10 cost audits shall have paid up capital of twenty five lakhs or more. The
ceiling is on number of companies and not on number of products. Therefore in
the given cost auditor can accept the new audits.
(iv)
Cost auditor is required to comment on internal auditors report also. Therefore
it is quite obvious that a cost auditor shall not be appointed as internal auditor.
2002 - Dec [4] List the steps to be taken by a company from the time the Cost Audit is
ordered for its product and the report is submitted by the Cost Auditor to the
Government, specifying the time schedules and penalties for non-compliance.
(15 marks)
[Chapter # 1] Basics of Cost Audit O
Q&A-17.13
Answer :
The Central Government has powers to issue order under Section 233-B (1) of the
Companies Act,1956 directing the company to get its cost records audited by a
practicing Cost Accountant. The order may also indicate the products for which the
order is issued and the time period for which cost audit is ordered. Cost audit once
ordered is applicable for all subsequent years unless the order is revoked by the
government.
Once the order is received, the Board of Directors shall appoint a Cost Accountant/
Cost Accounting firm in practice and shall pass a resolution at the Board meeting for
appointment of cost auditor. The appointment is subject to approval by the Central
Government. More than one cost auditor can also be appointed for the same product
under audit.
The Board of Directors shall ensure that the cost accountant fulfills the following
conditions:
1. The person/ firm proposed to be appointed is a qualified cost accountant within the
meaning of the ICWA Act, 1959 and shall also hold a certificate of practice.
2. If a firm is appointed as cost auditor, then the BOD shall ensure that the firm is
constituted as per Regulation 113 of the ICWA Act, 1959.
3. The cost accountant shall not be in whole time employment elsewhere as provided
in Section 224 (1 B) of the Companies Act, 1956.
4. The firm or person shall not attract any disqualification as mentioned in Section 233
B (5) of the Companies Act 1956.
5. The appointment if accepted shall be within the ceiling limits as prescribed u/s 224
(1B).
6. The Secretary/ Director of the company should make the application (e- filing)
within 45 days from the commencement of the accounting year to the Central
Government in prescribed Form (23-C), along with prescribed fees, for approval of
the appointment of Cost Auditor.
7. If the appointment of cost auditor is approved by the government then the company
shall issue a letter to the cost accountant confirming his appointment.
8. 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 within
135 days from the end of the accounting year. The company shall also assist the
auditor to carry out the audit.
9. The cost auditor shall complete the cost audit and submit his report to the CG
within 180 days.
If there is any contravention of the provisions of the Cost Audit Report Rules, then
the company and every officer of the company who is in default shall be punishable with
a fine upto ` 5,000 and if the contravention is a continuing one, then they are also liable
for fine of up to ` 500/ day after the first day during which period such contravention
continues.
Q&A-17.14 O
Solved Scanner CMA (CWA) Final Gr. IV Paper - 17
2003 - Dec [3] (b) It is said that "Cost Audit" is "Efficiency Audit". Explain this statement.
What is the evidence from the Cost Audit Report that Cost Audit is "Efficiency Audit"?
(7 marks)
Answer :
In efficiency audit auditor appraises the performance of the company. Auditor also
determined whether the plan is properly and efficiently executed. The main purpose of
efficiency audit is to ensure that:
1. The capital employed by the company gives optimum results.
2. The investment is properly designed and balanced between functions to maximize
returns.
However it can also be argued that cost audit is efficiency audit. Cost audit brings
out many aspects of performance and efficiency of the company. There are many
disclosures in audit report which focuses on financial position of the firm, production,
wastage, expenses etc. these disclosures can be studied to reduce expenses and
increase efficiency of the company.
The following arguments prove that cost audit can also be termed as efficiency
audit.
1. Rule 4 of Cost audit report Rules deals with installed capacity, licensed capacity,
utilization of capacity etc. the rule helps to ensure that there is no under utilization
of capacity by the company. If the capacity is properly utilized it will automatically
increase the return on capital employed by the company.
2. Cost audit report also highlights the matter related to energy conservation and
helps the firm to reduce the utilization of energy. Reduced utilization of energy
automatically increases the return on capital employed by the company.
3. Cost audit also brings out cases of wastages and scrap. This report can be used
as a tool to increase the profits of the company.
4. Cost auditor’s report also deals with slow and non moving inventory. This
information can be effectively used to reduce the blockage in working capital. If the
working capital is reduced then the capital saved can be invested in some other
fruitful activity thereby increasing the overall returns of the company.
5. Cost Audit Report gives information related to abnormal costs. This information can
be used to reduce the abnormal costs. Reduction in abnormal costs increases the
return on capital employed by the company.
6. Cost auditor’s report also deals with various expenses related production. These
expenses can be carefully studied and expenses can be reduced to increase the
return on capital employed of the company.
7. Cost audit also gives a break up of expert and domestic sales. This information can
be efficiently used by the company to boost sales.
[Chapter # 1] Basics of Cost Audit O
Q&A-17.15
2003 - Dec [6] What is the role of the Audit Committee as per SEBI guidelines and as
stipulated in Section 292A of the Companies Act ?
(15 marks)
Answer :
The following role is assigned to the Audit Committee as per Section 292A of the
Companies Act, 1956:
The Audit Committee shall discuss with the auditors on a periodical basis regarding
1. Internal control systems implemented by the company
2. The scope of audit
3. Observations of the auditors
The audit committee shall review the half-yearly and annual financial statements
before submission to the Board and also ensure compliance of internal control systems.
Audit committee shall also investigate on matters prescribed the board of directors.
The following role is assigned to the Audit Committee as per SEBI Guidelines:
1. To keep a watch on the company’s financial reporting process and disclosure of
financial information.
2. Audit committee can recommend the remuneration of statutory auditor. They can
also influence the appointment or removal of the external auditor.
3. Atleast 50% of the directors shall be independent directors.
4. Audit committee will be formed by atleast three members who are independent
executives.
5. Audit committee shall meet atleast thrice a year.
6. Remuneration of non executive directors shall be fixed by BOD.
7. Defaults made in repayment to creditors and lenders.
8. Details of appointment of new directors shall be disclosed.
9. To highlight the corporate governance report as a separate section in annual
report.
10. A certificate from the statutory auditor that the company has complied with
principles of corporate governance.
11. The audit committee shall review the half-yearly and annual financial statements
before submission to the Board with particular references being made for related
party transactions, statutory compliances, journal entries, internal controls etc.
12. To ensure that the internal audit report is properly dealt with i.e. the audit
committee shall verify the actions taken on the basis of internal auditor’s report, the
points highlighted by the internal auditor which are important and which require due
consideration etc.
2003 - Dec [8] (a) List the tasks that can be performed by a Cost Accountant in practice
in the following areas:
(i) Direct Tax Laws.
(ii) Central Excise.
(iii) Banks and Financial Institutions.
(3×3 = 9 marks)
Q&A-17.16 O
Solved Scanner CMA (CWA) Final Gr. IV Paper - 17
Answer :
Role of cost auditor under Direct Tax Laws
1. Cost auditor can act as a legal representative of the assessee for assessment
purposes. He can also appear on behalf of the assessee in case of appellate
proceeding before the appellate tribunal (CIT & ITAT)
2. Under wealth tax act he can also act as a valuation expert of shares, stock and
debentures etc.
Role of cost auditor under Central Excise Laws
1. Cost auditor can act as a legal representative of the assessee for assessment
purposes. He can also appear on behalf of the assessee in case of appellate
proceeding before the appellate tribunal (CIT & ITAT)
2. Cost auditor can certify the quantity of goods which are captively consumed by the
concern.
3. He can guide the company for valuation of the goods in accordance with CAS-4
4. Can calculate the assessable value of goods.
Role of cost auditor when dealing with banks and financial institutions:
1. He can act as an concurrent auditor.
2. He can also be nominated as a consultant in the panel of consultants for banks and
financial institutions.
2004 - Dec [2] (b) What is the relevance of Cost Audit in India?
(7 marks)
Answer :
1. The main reason for introduction of cost audit in the initial years was to help
government for regulating price in important industries like cement, steel pipes and
tubes etc which are very important for growth of the economy. Government used
these reports for regulating price of such important products.
2. However due to massive industrialization and rapid growth of economy due to
liberalization and globalization cost data and cost audit has gained more
importance than ever. Because of the importance of the cost data there are
frequent amendments in the cost audit reports which are required to be prepared
for the purpose of submission to government or management. The changes in cost
audit reports are made keeping in mind the important requirements of the industry.
Cost audit report is an effecptive tool which can be used to set competitive prices
in the highly competitive markets. Competition can be taken care of by undertaking
proper study of the cost audit report which highlights important issues like
efficiency, wastage, costs etc.
3. The Competition Law prohibits selling goods below cost to ward of competition. To
calculate the cost of production, cost audit report is an important tool. The cost
audit report can be used by the Regulatory and Enforcement Authority of the
competition law in India.
[Chapter # 1] Basics of Cost Audit O
Q&A-17.17
4.
Due to free foreign trade policy many foreign countries like China dump their
products at very low prices. Such dumping of products affects the local domestic
market. Cost audit reports can be used for levying anti dumping duties on products
imported from China. It can also be used if there is an allegation from foreign
country that goods are dumped by India at substantially low prices.
5. In case of export sales there is an important principle of arms length price… ALP
is often calculated by the Transfer Pricing Officer. Cost audit report serves as an
important source of cost information for calculating transfer price.
6. Cost audit report can also be used by customs and excise authority for levying duty
on products.
7. Cost audit report is also used by the tariff commission for fixation of price and for
calculating subsidies that are required to be given to the industries for making their
products competitive. Various incentives are given by the government to promote
the local industries. Such incentives are calculated by the help of cost audit report.
8. Cost audit report is also used by the National Pharmaceutical Pricing Authority for
fixation of prices of various drugs.
9. Price of Certain products is regulated by the government in many cases. In case
of such products cost audit report becomes an inevitable tool to be relied on.
10. Cost audit report can be used to set the prices of goods which government wants
to procure from the local markets.
2004 - Dec [3] Your company has received an order from the Government of India
directing your company to have the Cost Accounting records audited. List the actions
to be taken by the company step by step from appointment of Cost Auditor till the
submission of the Cost Audit Report specifying the time schedules.
(15 marks)
Answer :
Please refer 2002 - Dec [4] on page no. 12
2005 - Dec [4] (b) What are the preliminary information you, as a Cost Auditor, will
collect from the company which is subject to cost audit for the first time?
(7 marks)
Answer :
As a cost auditor I will collect the following information before starting a cost audit for
the first time:
1. A list of products manufactured by the company
2. A flowchart which indicates the entire manufacturing process of the company.
3. The list of raw materials required to manufacture the product
4. The expenses which are required to be incurred for the production of the product
(wages, overheads, expenses)
5. The list of premises where the goods are manufactured and premises where the
goods are stored
Q&A-17.18 O
Solved Scanner CMA (CWA) Final Gr. IV Paper - 17
6.
A statement of last three years which highlights the:
•
Installed Manufacturing capacity
•
Capacity which is utilized for manufacture
7. Copies of licenses and certificate issued if any, by the regulating authority.
8. A statement which highlights the budgetary and actual performances of the
company.
9. A statement indicating the standard cost and the actual costs of production. Such
statement shall also highlight the variances and the reason for such variances.
10. Copies of returns filed with excise, customs and other officers to cross verify the
production of goods.
Since this is my first audit in the company I will also request for the following
documents:
1. Statutory documents like MOA and AOA of the company.
2. Documents like previous year’s financial statements and returns filed by the
company.
3. A brief history of background of the company and its promoters and the history of
evolution of the company.
4. Organizational flow chart which indicates the authorities with whom communication
is required to be made.
5. List of Joint ventures and associates if any.
6. A list indicating the system implemented by the company in:
•
Costing and accounting department.
•
Production and sales department .
•
Stores and manufacturing unit.
•
Computer information system.
2006 - June [2] (b) (iii) A person has been appointed as Cost Auditor for twenty
products manufactured in seven companies. He is again proposed for appointment as
a Cost Auditor for three more products manufactured by two other companies. Will this
appointment be ‘in order’ ?
(2 marks)
(iv) A person is doing Internal Audit on one of the factories manufacturing ‘Cement’
in a company. He was proposed for appointment as Cost Auditor in another
factory of the same company manufacturing cement for the same period. Is this
appointment as Cost Auditor ‘in order’?
(2 marks)
Answer :
(iii) A cost auditor can accept a maximum of twenty cost audits out of which not more
than 10 cost audits shall have paid up capital of twenty five lakhs or more. The
ceiling is on number of companies and not on number of products. Therefore, in
the given cost auditor can accept the new audits.
(iv) Cost auditor is required to comment on internal auditors report also. Therefore
it is quite obvious that a cost auditor shall not be appointed as internal auditor.
But cost auditor can very much accept audit of other factory as internal auditor.
[Chapter # 1] Basics of Cost Audit O
Q&A-17.19
2006 - June [3] List the steps to be taken by a company from the time the Cost Audit
is ordered for its product and the Report is submitted by the Cost Auditor to the
Government, specifying the time schedules and penalties for non-compliance.
(15 marks)
Answer :
Please refer 2002 - Dec [4] on page no. 12
2007 - Dec [7] (a) Give an “Audit Programme” as a Cost Auditor after being appointed
for Cenvat Credit Audit.
(7 marks)
(b) Give an “Audit Programme” as an Internal Auditor of Wage Audit.
(8 marks)
Answer :
(a) Audit programme includes the manner and the areas where auditor will perform
audit procedures. The following areas will be considered in audit of CENVAT credit
availed by the assessee.
Name: Mahakali Limited
MGM&Co
Audit Team Leader: Kartik
Cost Accountants
Time allotted: 23 days
Period covered: 1/04/10 to 31/3/11
Location: Mumbai
Sr.
no
Area
Total
%
Time
documents Checked allotted
in number
1
Manufacturing Process
2
Input and output
3
Material
Yield Ratio & analysis
4
Bill of materials
5
Statutory details
PLA, Challans, CCR
availed, invoices &
Challans
6
Correspondence
authorities
7
Internal controls
with
NA
100
12,502
65%
6hrs
Time
taken
Checked
By
5.5 hrs
Quntesh
15 days 18 days
8 days
Champak
NA
45%
6 days
13,672
30%
8 days 9.5 days
Amar
132
100%
11/2
days
1 days
Nicholas
8
100%
1 day
1 day
Nicholas
NA
65%
3 days
2 days
Kartik
Parimal
Instructions: All queries will be forwarded to the accounting and finance department.
The report shall be submitted to the General Manager along with areas that require
special consideration.
Q&A-17.20 O
Solved Scanner CMA (CWA) Final Gr. IV Paper - 17
(b) Audit programme includes the manner and the areas where auditor will perform
audit procedures. The following areas will be considered in audit of wages.
Name: Mahakali Limited
MGM&Co
Audit Team Leader: Kartik
Cost Accountants
Time allotted: 23 days
Period covered: 1/04/10 to 31/3/11
Location: Mumbai
Sr. Area
Total
%
Time
Time
Checked
No.
documents Checked allotted Taken
by (audit
in number
team)
1
Statutory dues PF, ESI,
132
100%
11/2
1 days Nicholas
Bonus, Gratuity, etc.
days
Challans, calculation &
returns
2
Details of salary
54%
23 days
20
Champak
Register, bank statedays
ment & attendance
sheet
3
Cross verification
3
4.5
Amar
days
days
4
Internal controls
65%
3
3 days
Kartik
policies and procedays
dures for checking
grade, incentive,
bonus, allowances,
reimburse-ments etc.
Instructions : All queries will be forwarded to the accounting and finance department.
The report shall be submitted to the General Manager along with areas that require
special consideration.
2008 - Dec [2] (b) What are the duties of the Cost Auditor?
(6 marks)
Answer :
The duties of cost auditor are similar to those of statutory auditor of the company. In
addition to those duties certain additional duties are also cast on cost auditors which are
as follows:
1. Cost auditor shall verify and ensure that proper books of accounts as required by
Cost Accounting Records Rules have been kept by the company. He is also duty
bound to verify the returns of those branches which are not visited by him.
2. Cost auditor shall ensure that the Cost Audit Report and the detailed cost
statements are in the form prescribed by the Cost Audit Report Rules.
[Chapter # 1] Basics of Cost Audit O
3.
4.
5.
6.
7.
Q&A-17.21
Cost auditor’s report shall be based on data which is verified by him.
Cost auditor is duty bound to include observations in his report only after company
has been given a chance of commenting on the same.
Auditor is duty bound to ensure that the indirect expenses are properly allocated
and are absorbed on a reasonable basis.
To qualify report if there is any need and to give reasons for any qualification in his
report.
To forward the cost audit report within the prescribed time period.
2008 - Dec [3] (c) Can a Cost Accountant who is appointed as the concurrent auditor
of a company accept appointment as Cost Auditor of the same company ? (2 marks)
Answer :
A concurrent auditor is a person holding an office of profit of the company and therefore
he cannot be appointed as the cost auditor of the same company.
2008 - Dec [4] (c) What is the application fee along with form 23C payable to Govt. of
India, Ministry of Corporate Affairs where the nominal share capital of the limited
company is `10 crores and how payment is to be made?
(2 marks)
Answer :
The fee payable along with form 23C is as follows
Nominal Share Capital `
Fees Payable
Less than ` 25 lacs
` 500
` 25 lacs or more but less than ` 5 crores
` 1,000
` 5 crores or more
` 2,000
2009 - June [3] (a) Under what circumstances will the appointment of Cost Auditor for
conducting of cost audit be appointed in firm's name. Who will authenticate such.
reports and how ?
(4 marks)
Answer :
The appointment of cost auditor under a firm’s name will be subject to the following
conditions:
1. All the partners of the firm are full time cost accounting practitioners within the
meaning of Sections 6 and 7 of the Cost and Works Accountants Act, 1959.
2. The firm must have been constituted with the previous approval of CG or of the
Central Council of ICWAI as per amended regulation 113 of the Cost and Works
Accountants Act, 1959.
The Cost Audit Report shall be signed by
1. Any one of the partners of the firm responsible for the conduct of the cost audit in
his own hand for and on behalf of the firm;
2. A proprietary firm can also be appointed as Cost Auditor and in such cases the
report shall be signed by the proprietor himself.
Q&A-17.22 O
Solved Scanner CMA (CWA) Final Gr. IV Paper - 17
2009 - June [4] (b) Define Cost Audit and state its purposes.
(4 marks)
Answer :
Cost audit means audit of cost accounting records. According to CIMA London, cost
audit is “the verification of the correctness of cost accounts and of the adherence to the
cost accounting plan”.
The ICWAI on the other hand, defines cost audit as “a system of audit introduced
by the Government of India for the review, examination and appraisal of the cost
accounting records and attendant information, required to be maintained by specified
industries.”
The purpose of cost audit can be understood by the definition itself. In India cost
audit is more specific and lays emphasis on the evaluation of the efficiency of
operations and the propriety of management actions.
2009 - Dec [2] (a) What are the Social objectives of Cost Audit ?
(6 marks)
(b) What review should be made by a Cost Auditor of Cost Accounting Records?
(8 marks)
Answer :
(a) The following are the social objectives of cost audit:
1. It helps in improvement in productivity of all resources of the enterprise.
2. It helps in using the resources in most beneficial manner as all the areas are
studied by the company.
3. It helps in fixation of reasonable prices of goods and services produced by the
concern.
4. It helps in highlighting areas of inefficiency and mismanagement and thus
increases the overall profits of the company.
5. It helps in contract costing particularly where the price is subject to escalation
due to inflation.
6. It helps in cost plus contracts where records of cost play a very important role.
7. It also helps the government in setting prices for regulated goods.
(b) The cost auditor during the course of audit reviews the Cost Accounting Records
of the company. Such review may include:
1. The manner in which cost centers are identified and established.
2. The accounting procedures followed for raw materials, packing materials, and
spares, etc.
3. Method of accounting of wastes, rejections and defectives.
4. Methods of costing used by the company – batch, job, process etc.
5. The accounting system for recording of wages, salaries and overtime and their
allocation.
6. The manner in which overheads are allocated/ apportioned of utilities and
service departments.
[Chapter # 1] Basics of Cost Audit O
Q&A-17.23
7.
The Method of accounting for depreciation, sales & purchases and charging
depreciation to cost centeres.
8. The basis for reapportioning of service department expenses to production
departments.
9. Internal audit system implemented by the management.
10. The procedure of stock-taking.
11. The method of valuation of inventories and WIP.
2010 - Dec [2] (a) State with reasons whether a person can be appointed as Cost
Auditor in the following cases:
(i) A person has been appointed as Cost Auditor for 20 products manufactured in
seven companies. He is again proposed for appointment as Cost Auditor, for
three more products, manufactured by two other companies.
(ii) A person is doing internal audit on one of the factories manufacturing ‘Textile’
located at Ahmedabad. He was proposed for appointment as Cost Auditor in
another factory of same company of manufacturing ‘Textile’ for the same period
located at Gwalior.
(2×2=4 marks)
Answer :
(i) A cost auditor can accept a maximum of twenty cost audits out of which not more
than 10 cost audits shall have paid up capital of twenty five lakhs or more. The
ceiling is on number of companies and not on number of products. Therefore in
the given cost auditor can accept the new audits.
(ii) Cost auditor is required to comment on internal auditor’s report also. Therefore
it is quite obvious that a cost auditor shall not be appointed as internal auditor.
Therefore it will be in the best interest of the internal auditor that they does not
accept cost audit also simultaneously.
2010 - Dec [4] (b) Which number of Form is to be used for application for appointment
of Cost Auditor(s)?
(1 mark)
Answer :
For appointment of Cost Auditor(s) Form 23C is required to be submitted by the
company.
2011 - June [2] (a) List the duties to be performed by a Cost Auditor.
(6 marks)
Answer :
The duties of the cost auditor are also similar to those of the (financial) auditor of the
company has under sub-Section (1) of Section 227 (Section 223B(4)).The duties of the
cost auditor inter-alia include:
(a) To ensure that the proper books of accounts as required by Cost Accounting
Records Rules have been kept by the company so far as it appears from the
examination of those books and proper returns for the purpose of his audit have
been received from branches not visited by him;
Q&A-17.24 O
Solved Scanner CMA (CWA) Final Gr. IV Paper - 17
(b) To ensure that the Cost Audit Report and the detailed cost statements are in the
form prescribed by the Cost Audit Report Rules by following sound professional
practices i.e. the report should be based on verified data and observations may be
framed after the company has been afforded an opportunity to comment on them;
(c) The underline assumptions and basis for allocation and absorption of indirect
expenses are reasonable and are as per the established accounting principles;
(d) If the auditor is not satisfied in any of the aforesaid matters, he may give a qualified
report along with the reasons for the same;
(e) Sending the Report to the Cost Audit Branch within 180 days from the end of the
financial year with one copy to the company;
(f) Sending his replies to any clarification, that may be sought by the Cost Audit
Branch on his report. Sending such replies within 30 days from the date of receipt
of communication calling for such clarification.
2012 - Dec [4] (a) Enumerate the duties to be performed by a Cost Auditor.
(6 marks)
Answer:
The duties of cost auditor are similar to those of statutory auditor of the company. In
addition to those duties certain additional duties are also cast on cost auditors which are
as follows:
1. Cost auditor shall verify and ensure that proper books of accounts as required by
Cost Accounting Records Rules have been kept by the company. He is also duty
bound to verify the returns of those branches which are not visited by him.
2. Cost auditor shall ensure that the Cost Audit Report and the detailed cost
statements are in the form prescribed by the Cost Audit Report Rules.
3. Cost auditor’s report shall be based on data which is verified by him.
4. Cost auditor is duty bound to include observations in his report only after company
has been given a chance of commenting on the same.
5. Auditor is duty bound to ensure that the indirect expenses are properly allocated
and are absorbed on a reasonable basis.
6. To qualify report if there is any need and to give reasons for any qualification in his
report.
7. To forward the cost audit report within the prescribed time period.
P RACTICAL Q UESTIONS
2003 - June [8] A multidivisional company manufactures a number of products, one of
which is subject to cost audit. The company takes the stand that the cost auditor cannot
have access to the records of other divisions as they are not subject to Cost Audit.
[Chapter # 1] Basics of Cost Audit O
Q&A-17.25
Prepare a note to the company making out a case w hy the Cost Auditor is entitled to
scrutinise the records of the other divisions and the limits, if any, on exercising that right.
(15 marks)
Answer :
Cost auditor has the same rights as that of a statutory auditor of the company. In a
sense his right cannot be restricted if it is related to books of accounts. Further he has
right to obtain all cost records within 135 days from the end of financial year.
U/s 227 cost auditor has the right to access books of accounts and vouchers of the
company, at all times (normal business hours) whether kept at the head office of the
company or elsewhere. In view of the above statutory provision the right of the cost
auditor cannot be restricted by the company. He has a statutory right to verify the books
of accounts maintained at branch as well as Head office.
It is quite clear from that the rights of the cost auditor for verification of books of
accounts of company are unrestricted. He can verify books both at HO as well as
branches or departments. If there is any restriction on his scope he may qualify his
report if the matter is material.
Further he can also verify the records of the divisions when company has any:
1. Manufacturing process which is inter related amongst the divisions.
2. Interdepartmental sale or Interdepartmental rendition of services.
3. Facility by which common resources are shared or common services are provided
by the concern.
4. Apportionment of overheads amongst divisions.
5. Where the capital pool is common and the company is financed from common
capital pool.
2003 - Dec [2] The following is the abridged Balance Sheet of Powerpack Batteries Ltd:
(` in lakh)
31.3.2003
31.3.2002
Liabilities:
Share Capital
300
300
Debenture Redemption Reserve
25
30
Capital subsidy from State Government
30
30
Revaluation Reserve
125
140
General Reserve
160
120
Balance in Profit & Loss A/c.
48
32
Secured Loans
275
295
Unsecured Loans
123
117
1,086
1,064
Q&A-17.26 O
Solved Scanner CMA (CWA) Final Gr. IV Paper - 17
Assets:
Gross Block
725
680
Accumulated Depreciation
(315)
(290)
Capital Work-in-Progress
43
37
Investments
15
15
Current Assets:
Inventories
417
441
Sundry Debtors
182
195
Advances for Capital Equipment
24
17
Other Loans & Advances
144
137
Cash & Bank Balances
21
19
Current Liabilities:
Sundry Creditors
For Capital Expenses
(17)
(21)
For Others
(185)
(197)
Provision for Taxes
(64)
(71)
Miscellaneous Expenses
96
102
Total
1,086
1,064
Notes:
(a) Fixed Assets include Goodwill and Patents ` 122 lakhs (Previous year ` 137
lakhs).
(b) Term Loans due for repayment within 12 months are ` 96 lakhs (Previous year `84
lakhs).
Calculate the following for the company as a whole:(a)
Capital Employed for the year ended 31.3.2003.
(b)
Net Worth as on 31.3.2003 & 31.3.2002.
(c)
Debt-Equity Ratio as on 31.3.2003.
(5×3 = 15 marks)
Answer :
STATEMENT SHOWING CALCULATION OF AVERAGE CAPITAL EMPLOYED
Details of Assets
31.03.03
31.03.02
Gross Block
725
680
Less; Depreciation
315
290
Net Block
410
390
Less: Intangible asstes
122
137
Net fixed assets
(A)
288
253
Details of Current Assets
Inventories
Sundry debtors
loans and advances
Cash and Bank
(a)
31.03.03
417
182
144
21
764
31.03.02
441
195
137
19
792
[Chapter # 1] Basics of Cost Audit O
Details of Current Liabilities
Creditors
Provision for Tax
Loans due (<12 months)
31.03.03
185
64
96
345
419
(b)
Working Capital
B= (a)-(b)
Capital Employed
Average capital employed
(A+B)
Q&A-17.27
31.03.02
197
71
84
352
440
707
707+693
2
= 700 Lakhs
STATEMENT SHOWING CALCULATION OF NET WORTH
Share Capital
Debenture Redemption Reserve
Capital subsidy from State Government
Revaluation Reserve
General Reserve
Balance in Profit & Loss A/c.
Less
Intangible assets
miscellaneous expenditure
693
=
300
25
30
300
30
30
160
48
563
120
32
512
137
137
218 102
239
345
273
STATEMENT SHOWING CALCULATION OF DEBT EQUITY RATIO
Secured Debt
Less: Loans due (<12 months)
Total Long term debts
Debt Equity Ratio
122
96
398
96
302
302:563
0.54:1
412
84
328
328:512
0.64:1
2003 - Dec [8] (b) The following transactions are extracted from Stores Bin Card
relating to a component during the year 2002-03:
Date
Receipt (units)
Issues (units)
Balance (units)
1.4.2002
200
–
200
18,4,2002
–
100
100
10.1.2003
–
50
50
Q&A-17.28 O
Solved Scanner CMA (CWA) Final Gr. IV Paper - 17
16.3.2003
200
–
23.3.2003
–
250
Total consumption
400
Calculate the Inventory Turn-over Ratio.
Answer :
Statement Showing calculation of Inventory turnover ratio
A
B
Stock (units)
No. of days
200
17
100
267
50
65
250
15
0
1
365
Average Stock = 37100/365 = 101.64 units
Inventory turnover ratio = Average consumption/
Average Stock = 400/101.64 = 3.94
250
–
(6 marks)
AxB
Total Stock held
3,400
26,700
3,250
3,750
0
37,100
2005 - Dec [3] (a) As a cost auditor, how would you deal with the following?
(ii) A company has not maintained cost accounting records though having the
obligation under Section 209(1)(d) of the Companies Act, 1956. The
management is of the opinion that necessary steps could be taken after the cost
audit order is received from the Government. Are the directors of the company
absolved of the obligation to maintain cost accounting records?
(2 marks)
Answer :
As per Section 209(1)(d) every company which pertains to a prescribed class of
companies and is engaged in production, processing, manufacturing or mining has to
maintain cost accounting records as per Cost Accounting Record Rules. Therefore
management is responsible to maintain cost accounting records even if no order if
passed by central Government for cost audit.
Repeatedly Asked Questions
No.
Question
1
(iii) A person has been appointed as Cost Auditor for
twenty products manufactured in seven companies.
He is again proposed for appointment as a Cost
Auditor for three more products manufactured by two
other companies. Will this appointment be ‘in order’ ?
Frequency
[Chapter # 1] Basics of Cost Audit O
(iv) A person is doing Internal Audit on one of the
factories manufacturing ‘Cement’ in a company. He
was proposed for appointment as Cost Auditor in
another factory of the same company manufacturing
cement for the same period. Is this appointment as
Cost Auditor ‘in order’ ?
02 - Dec [3] (b) (iii), (iv), 06 - June [2] (b) (iii), (iv)
Q&A-17.29
2 Times