1. COST AUDIT 2.

INTRODUCTION
o

It is the detailed checking of the costing system, technique and accounts to verify their correctness and to ensure adherence to the objective of cost accountancy.

3. OVERVIEW
o

India was the first country in South Asia (and perhaps in the world) to make cost audit mandatory for some of its business sectors. The Institute of Cost and Works Accountants of India (ICWAI) refers to cost audit as an audit of efficiency of minute details of expenditure while the work is in progress and not a post-mortem examination. Objectives of cost audit include the determination and control of cost together with providing data for making judgements and decisions on various matters, such as operational efficiency. GOI has added industries involved in the manufacturing of plantation products together with the petroleum and telecommunication industries in 2002 to the list of industries requiring mandatory cost audits.

4. OBJECTIVES
o o o o

From the perspective of management: Cost audit detects errors, frauds and misappropriation and hence enhances efficiency. 2. From the perspective of shareholders: Cost audit ensures that the valuation of closing stock and work-in-progress are correct, hence helps in the computation of more accurate profit figures. 3. From the perspective of the government: To curb the profiteering by the manufacturing concerns and help in the decision to provide tariff protection to any industry. 4. From the perspective of customers: Customers may obtain more benefit if the cost is reduced due to effective control, implemented as a result of a cost audit. 5. From the perspective of cost accountants: Cost accountants, who are employees of a company, obtain a share of all benefits derived by the company from a cost audit.

o o

o o

o o

5. Financial Audit vs Cost Audit

o o

Financial Audit The Companies Act 1956, which has been amended several times, and is now known as Companies (Amendment)/(Second Amendment) Act 2002 contains the detailed provisions concerning the preparation of annual accounts and reporting. Cost Audit A cost accountant offers to perform or perform services concerning the costing or pricing of goods and services or the preparation, verification or certification of cost accounting and related statements.

o o

6. COST AUDIT PROGRAMME

o o o o o o o o

The Cost Auditor should pay his attention to the following records: Record of Materials Labour Records Record of Overhead Charges Depreciation Work-in-Progress Records Incomplete Records Stores and Spare Parts Records

Records for Cost Audit and Financial Audit :Section 255 and its sub-sections quoted in the foregoing paragraph defines the powers and duties ofauditors,appointed under Section 252(1) of the Ordinance and auditors and duties of auditors appointed underSection 252(1) of the Ordinance and auditor appointed under Cost Audit Rules.References made in the sections tobooks of accounts and to balance sheet, profit and loss account or income and expenditure account for the financial auditor would mean accounting records and capacity utilisation statement, statement of closing stock and cost accounting statements (schedules and annexures) would mean cost records for the cost auditor. Although the role of the cost auditor has been defined while discussing the objectives of cost audit, the position ofthe financial auditor and that of the cost auditor, are slightly different.The position of an auditor of the Company isconstrued as a servant of the shareholders and it is his duty to examine the affairs of the company on their behalf andreport to them

his findings.The position of a cost auditor, however, is different because he is appointed by themanagement (Board of Directors), subject to prior approval of Securities & Exchange Commission of Pakistan, andhis position is to be interpreted in view of the provisions of the Companies (Audit of Cost Accounts) Rules 1998. Cost Auditor Cost Audit Hand Book 10 CHAPTER II 1. Development of Cost Audit Profession: During World War I, a large number of contracts were awarded on cost plus basis, which made it necessary for thecontractors to maintain cost accounting records. Cost Accounting techniques are needed not only to help themanagement exercise cost control, but the cost accounting records are also needed for such clients who place orderson cost plus basis. In such cases, the client has the right to examine cost accounting records or have performed costaudit.In USA, Defence suppliers and contractors have to maintain cost accounting records in accordance with CostAccounting Standards laid down by the Cost Accounting Standards Board (CASB).This is subject to cost audit toensure its authenticity. The Cost Accounting in its developed form helps the management of manufacturing concernsin improving the efficiency, in making the business decisions and in evaluating the performance of entities in thesame industrial sector through standardizing the systems and procedures.However, it is only in India, Pakistan andBangladesh that cost audit has been formalized under Companies Ordinance/Acts. India is the pioneer in introducingCost Audit since late 60s and now over 40 industries are covered under Cost Audit Scheme. In India andBangladesh, only Cost and Management Accountants are eligible to conduct cost audit. In Pakistan, CharteredAccountants are also eligible to conduct cost audit. 2. Professional Qualifications: Statutory cost audit was introduced in Pakistan under the Companies (Audit of Cost Accounts) Rules 1998[Appendix I]. Under sub-rule (I) of Rule 3 thereof, it has been laid down that every company shall be required to getits cost accounts audited by a cost auditor who is a CharteredAccountant within the meaning of the CharteredAccountants Ordinance 1961 [X of 1961] or a

Cost and Management Accountant within the meaning of the CostandManagementAccountants Act, 1966 [XIV of 1966]. 3. Appointment: Under sub-rule (2) and (3) of Rule 3 of the Companies (Audit of Cost Accounts) Rules 1998, the cost auditor shallbeappointedby the directors with the prior approval of the SECP within 60 days of the close of the financial yearof the company.The company shall apply to the SECP in the form, set out in Appendix-I to the Companies (Auditof Cost Accounts) Rules 1998, for appointment of cost auditor, not later than 30 days before date on which costauditor is to be appointed. The cost auditor is appointed by the directors subject to the prior approval of the SECP.An example of an audit acceptance letter is shown as Appendix II at the end of this Handbook.The example or anyvariation of it may be used after the directors of the client company have agreed to appoint the cost auditor and haveapplied to the SECP, in the prescribed form, for its prior approval. 4. Ineligibilities: The persons ineligible for appointment as Cost Auditor have been specified insub-rule 4 of Rule 3 of theCompanies (Audit of Cost Accounts) Rules, 1998. Cost and Management accountants in practice, who are noteligible for appointment as cost auditor should not offer themselves for appointment.Theineligibilitiesarebrieflyexplained as under: (i) The same accountant or accounting firm, who has been appointed as an auditor of the Company, underSection 252 of the Companies Ordinance 1984shall not be appointed as a cost auditor.A financial orcorporate auditor of a company, therefore, shall not be appointed as a cost auditor of the same company at thesametime.Accountants who are already acting as auditors of financial statements of a company shall not beappointed as cost auditors of the same company.