COST AUDIT AND COST AUDIT RULES PART 1

• COST AUDIT AND COST AUDIT RULES PART 1
  AUDITING
  CONTEMPORARY AUDITING
  
  
• DR SHASHI AGAGRWAL
• INTRODUCTION

• FIRST TIME INTRODUCED IN 1965 IN INDIA WHEN THE CENTRAL GOVERNMENT ADDED CLAUSE d  TO SECTION 209 AND 233 OF THE COMPANIES ACT
• THE NEED :
• FOR MAINTENANCE AND PROPER USE OF SCIENTIFIC COST RECORD WHICH ARE ENGAGED IN THE MANUFACTURING AND ALLIED ACTIVITIES
• EFFECTIVE MEANS OF CONTROL IN THE HANDS OF THE MGMT
• CHECK ON BEHALF OF THE SHAREHOLDERS OF THE COMPANY/CONSUMER/GOVERNMENT

·         ALSO CALLED EFFICIENCY AUDIT

·         EVIDENCED BY THE AMENDMENT IN SECTION 209  WHICH READS,” THE OBJECT OF THE AMENDMENT OF THE SECTION IS TO ENSURE SPECIFIED COMPANY PROPER RECORDS RELATING TO UTILIZATION OF MATERIALS ,LABOURS ARE AVAILABLE WHICH WOULD MAKE EFFICIENCY AUDIT POSSIBLE.

·         FINANCIAL AUDIT IS ‘FAIT ACCOMPLAI

·         COST AUDIT IS MAINLY PREVENTIVE MEASURE WHICH GUIDE MANAGEMENT POLICY AND DECISION IN ADDITION TO BEING A BAROMETER OF PERFORMANCE

·         AS PER ICWAI : AN AUDIT OF EFFICIENCY OF MINUTE DETAILS OF EXPENDITURE  WHILE THE WORK IS IN PROGRESS AND NOT A POST MORTEM EXAMINATION.

• COST AUDIT :

1. VERIFICATION OF COST ACCOUNTS AND CHECK ON THE ADHERENCE OF COST ACCOUNTING PLANS
2. ASCERTAIN THE ACCURACY OF COST ACCOUNTING RECORDS TO ENSURE THEY ARE IN CONFORMITY WITH COST ACCOUNTING PRINCIPLES,PLANS,PROCEDURES AND OBJECTIVES
3. TO REPORT TO THE GOVERNMENT ON OPTIMUM UTILIZATION OF NATIONAL RESOURCES

• MEANING OF COST AUDIT
• PROCESS FOR VERIFICATION OF THE COST ALLOCATION OE EACH PRODUCT OR SERVICES COMPRISING OF LABOUR COST,MANUFACTURING COST OR ANY OTHER ITEM OF COST AS APPLICABLE,
• COST AUDIT :
• IS A METHODICAL AND RELIABLE VERIFICATION OF THE ACCOUNTED AND RECORDS
• TO MAINTAIN THE ACCOUNT ACCORDING TO THE COST ACCOUNTING STANDARD
• DEFINITION OF COST AUDIT
• THE INSTITUTE OF COST ACCOUNTANT OF INDIA 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 ATTENDENT INFORMATION REQUIRED TO MAINTAINED BY SPECIFIED INDUSTRIES

·         DEFINITION BY INSTITUTE OF COST AND WORKS ACCOUNTANTS OF LONDON

·         COST AUDIT IS THE VERIFICATION OF THE CORRECTNESS OF COST ACCOUNTS AND ADHERENCE TO THE COST ACCOUNTING PLANS.

• OBJECTIVES OF COST AUDIT

1. TO IDENTIFY THE UNDUE WASTAGE OR LOSSES AND ENSURE THAT COSTING SYSTEM DETERMINES THE CORRECT AND REALISTIC COST OF PRODUCTION
2. USEFUL INFORMATION TO THE MGMT REGARDING REGULATING PRODUCTION,ECONOMICAL METHOD OF OPERATION,REDUCING COST OF OPERATION AND REFORMULATING COST ACCOUNTING PLANS.
3. THE BASIC OBJECTIVE IS TO ENSURE THAT COST OF PRODUCTION AS COST OF SALES INCLUDES ONLY THOSE FACTORS WHICH ARE ABSOLUTELY NECESSARY AND THESE FACTORS ARE USED IN THE MOST EFFICIENT WAY
4. VERIFICATION OF ACCURACY OF ACCOUNTS/RECORDS
5. DETECT ALL ERRORS OR FRAUDS IN COST RECORDS
6. FULL CONTROL ON THE WORKING OF COSTING DEPARTMENT OF THE ORGANIZATION AND TO SUGGEST WAYS AND MEANS FOR SMOOTH RUNNING
7. VERIFICATION OF EFFECTIVE INTERNAL COST AUDIT SYSTEM
8. MORAL CHECK ON THE STAFF OF COST ACCOUNTING DEPARTMENT AND BRINGS EFFICIENCY IN COST ACCOUNTING SYSTEM AND PROCEDURES
9. GIVES SUGGESTION FOR BRINGING EFFICIENCY

• ADVANTAGE

1. CHECK ON WASTAGE ON MATERIALS ON STORES,LABOUR ETC
2. EASY LOCATION OF INEFFICIENCY IN PRODUCTION OR EFFICIENCY
3. MANAGEMENT BY EXCEPTION WILL BE POSSIBLE
4. THE SYSTEM OF BUDGETARY CONTROL AND STANDARD COSTING WILL BE GREATLY FACILITATED WITH COST AUDIT AT THE HANDS OF QUALIFIED COST ACCOUNTANT
5. RECORDS WILL BE UP TO DATE AND INFORMATION IS EASILY AVAILABLE
6. DISCOVERING OF MANY ERRORS AND FRAUDS

• ADVANTAGE TO MGMT

1. DETECTION OF ERRORS AND INCONSISTENCIES
2. SERVE AS MEASURE OF PERFORMANCE
3. HELPS IN PREPARATION OF ACCURATE COST REPORTS
4. POSSIBILITY OF INTER FIRM COMPARISON
5. ALSO GIVE AN IDEA ABOUT THE COMPARATIVE OPERATIONAL EFFICIENCY

• COST AUDIT ALSO HELPS STATUTORY AUDITOR HELPS THE STATUTORY AUDITOR IN PREPARING HIS AUDIT PROGRAMME AND ALSO HELP HIM IN DETERMINATION OF THE VALUE OF STOCK,REMUNERATION OF MANAGERIAL PERSONNEL
• IT IS ALSO BENEFICIAL TO CONSUMER AS COST AUDIT AIMS AT ENSURING EFFICIENCY IN THE ORGANIZATION AND IT WILL REDUCE THE PRICES AND
• ALSO GIVES BENEFITS TO LABOUR AS IT WILL BRING THE ROLE OF LABOUR IN IMPROVING EFFICIENCY
• IT WILL PROVIDE A CORRECT PICTURE  OF THE ORGANIZATION TO SHAREHOLDER
• TYPES OF COST AUDIT
• COST AUDIT TO ASSIST MANAGEMENT :-TO ENSURE MGMT THE ACCURACY OF COST ACCOUNTS AND ASSISTS THE MGMT IN TAKING IMPORTANT DECISIONS AND COST AUDITOR SUGGEST THE WAYS TO REDUCE THE COST OF PRODUCTION AND IMPROVEMENT IN THE COST ACCOUNTING PLAN
• COST AUDIT ON THE BEHALF OF GOVERNMENTT :-TO DO SO IN THE OPINION OF THE GOVERNMENT UNDER SECTION 233 B OF THE COMPANIES ACT AND TO ASCERTAIN THE CORRECT COST OF CERTAIN UNITS AND TO ASCERTAIN THE CORRECT COST OF CONTRACT GIVEN TO PRIVATE FIRMS UNDER COST PLUS BASIS, AND TO FIX REASONABLE PRICES OF CERTAIN ITEMS OF PRODUCTION AS TO PREVENT UNDUE PROFITEERING
• COST AUDIT ON BEHALF OF A CUSTOMER :WHEN HE AGREES TO PAY PRICE FOR A CERTAIN PRODUCT ON COST PLUS BASIS.
• COST AUDIT ON BEHALF OF TRADE ASSOCIATION :

1. TO ASCERTAIN COMPARATIVE PROFITABILITY OF MEMBERS
2. TO DETERMINATION OF MINIMUM PRICE TO AVOID CUT THROAT COMPETITION AMONG ITS MEMBERS
3. TO MAINTAIN PRICES AT CERTAIN LEVEL

·         COST AUDIT ON BEHALF OF TRIBUNALS :LABOUR TRIBUNAL MAY DIRECT THE AUDIT OF COST ACCOUNT TO SETTLE TRADE DISPUTES FOR MORE WAGES, INCOME TAX TRIBUNAL MAY DIRECT THE AUDIT OF COST ACCOUNT TO ASSESS THE CORRECT PROFIT FOR  ASSESSMENT PURPOSE,

• COST RECORD AND COST AUDIT APPLICABILITY
• SECTION 148 OF THE COMPANIES ACT 2013 CONTAINS PROVISIONS :
• SECTION 148(1) EMPOWERS THE CENTRAL GOVERNMENT TO DIRECT COMPANIES SPECIFIED IN THE PRODUCTION OF GOODS AND PROVISIONS OF SERVICES TO INCLUDE  PARTICULARS RELATING TO THE UTILIZATION OF MATERIALS OR LABOUR OR OTHER ITEM OF COST IN THE BOOKS OF ACCOUNT OF THE COMPANY

1. LIST OF SPECIFIED COMPANIES WHICH NEED TO MAINTAIN COST RECORDS IS PROVIDED UNDER TABLE A AND TABLE B OF RULE 3 OF  THE COMPANIES ACT ( COST RECORDS AND AUDIT RULES) 2014
2. SECTION 148(2( EMPOWERS THE CENTRAL GOVERNMENT TO DIRECT BASED ON THE NET WORTH OR TURNOVER
3. COST RECORD AND COST AUDIT APPLICABILITY
4. RULE 4 OF THE COMPANIES ( COST RECORDS AND AUDIT ) RULES 2014 CONTAINS THE PROVISIONS RELATING TO THE COMPANIES WHICH ARE LIABLE TO GET THEIR COST RECORD AUDITED.
5. SHALL BE CONDUCTED BY COST ACCOUNTANT WHO IS APPOINTED BY BOARD.
6. IN CASE OF ANY DEFAULT ON THE PART OF THE COMPANY
7. PUNISHABLE WITH FINE NOT LESS THAN INR 25,000 BUT CANONT EXCEED MORE THAN 5 LACS
8. FURTHER EVERY OFFICER IN DEFAULT SHALL BE PUNISHABLE WITH IMPRISONMENT OF TERM UP TO ONE YEAR OR WITH THE FINE NOT LESS THAN 10000 BUT NOT MORE THAN ONE LACS
9. IN CASE OF DEFAULT BY COST AUDITOR : PUNISHABLE IN THE MANNER AS PROVIDED UNDER SECTION 147 (2) TO SECTION 147(4)

• MEANING OF THE TERM COST RECORDS
• COST RECORDS HAS BEEN PROVIDED UNDER RULE 2e OF THE COMPANIES ( COST RECORDS AND AUDIT ) RULES 2014 WHICH MEANS BOOKS OF ACCOUNT RELATING  TO THE UTILIZATION OF MATERIALS,LABOUR AND OTHER ITEMS OF COST AS APPLICABLE TO THE PRODUCTION OF THE GOODS AND SERVICES AS PROVIDED IN SECTION 1848 OF THE ACTS AND THE COMPANIES ( COST RECORDS AND AUDIT) RULES.
• TABLE A FOR REGULATED SECTORS
• TABLE B FOR NON REGULATED SECTORS
• COSTS RECORDS ARE MANDATORY IN THE CASE OF FOLLOWING CONDITIONS ARE SATISFIED :-

1. THE COMPANY IS ENGAGED IN THE MANUFACTURING GOODS OR PROVISIONS OF SERVICES WHICH ARE LISTED IN TABLE A OR TABLE B
2. TOTAL AGGREGATE TURNOVER OF THE COMPANY FROM ALL ITS PRODUCTION OR SERVICE IS MORE THAN INR 35 CRORES IN THE PRECEDING FINANCIAL YEAR

3.       A COMPANY WHICH IS CLASSIFIED AS MICRO ENTERPRISES OR A SMALL ENTERPRISES DEVELOPMENT ACT 2006 ARE EXEMPTED FROM THESE PROVISIONS

• APPLICABILITY OF COST AUDIT
• APPLICABILITY FOR COST AUDIT RULES  4

1. REGULATED SECTOR :TELECOMMUNICATION,ELECTRICITY,PETROLEUM AND GAS,DRUGS AND PHARMA,FERTILIZER,SUGAR AND INDUSTRIAL ALCOHOL
2. NON REGULATED SECTOR :-TURBO JET,ARMS AND AMMUNITION,IRON AND STEEL,RUBBER AND ALLIED PRODUCTS AND COFFEES AND TEA AND CEMENT ETC.

• APPLICABILITY FOR COST AUDIT RULES 4
  REGULATED SECTOR
• TABLE A SPECIFIED GOODS AND SERVICES

1. OVER ALL ANNUAL TOTAL TURNOVER OF THE COMPANY FROM ALL THE PRODUCTS/SERVICES IS INR 50 CRORES OR MORE
2. AGGREGATE TURNOVER FROM THE INDIVIDUAL PRODUCT OR SERVICES FOR WHICH THE COST RECORDS ARE REQUIRED TO BE MAINTAINED IN INR 25 CRORES OR MORE

·          

• NON REGULATED SECTOR
• TABLE B SPECIFIED GOODS/SERVICES

1. OVER ALL ANNUAL TURNOVER OF ALL THE PRODUCTS /SERVICES SHALL BE  INR 100 CRORES OR MORE
2. AGGREGATE TURNOVER FROM THE INDIVIDUAL PRODUCT/SERVICES FOR WHICH COST RECORDS ARE REQUIRED TO BE MAINTAINED SHOULD BE INR 35 CORES OR MORE

3.       ( PRECEDING FINANCIAL YEAR )

• EXEMPTION
• THE COMPANIES WHICH ARE COVERED UNDER RULE 3 ARE NOT  REQUIRED TO GET THEIR COST RECORDS AUDITED :

1. WHOSE REVENUE FROM EXPORTS IN FOREIGN EXCHANGE EXCEEDS 75% OF ITS TOTAL REVENUE OR
2. WHICH IS OPERATING FROM A SPECIAL ECONOMIC ZONE OR
3. WHICH IS ENGAGED IN GENERATION OF ELECTRICITY FOR CAPTIVE CONSUMPTION THROUGH CAPTIVE CONSUMPTION PLANT