Introduction to Cost Audit

Cost Audit: Cost audit is an examination of cost accounting records and verification of the facts to ascertain that the cost of the product under reference has been arrived at in accordance with principles of Cost Accounting and evaluation of adequacy of proper Cost Accounting Records and their maintenance. The cost audit is performed by an independent, professionally qualified Cost and Management Accountant or Chartered Accountant

Companies (Audit of Cost Accounts) Rules, 1998

Cost Accounting Records Order

Cost Auditor

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 the contractors to maintain cost accounting records. Cost Accounting techniques are needed not only to help the management exercise cost control, but the cost accounting records are also needed for such clients who place orders on cost-plus basis …

Professional Qualifications

Appointment

Ineligibility

The persons ineligible for appointment as Cost Auditor have been specified in sub-rule 4 of Rule 3 of the Companies (Audit of Cost Accounts) Rules, 1998 …

Powers and Duties

Statutory provisions regarding audit of cost accounts are contained in Section 258 of the Companies Ordinance 1984 …

Records for Cost Audit and Financial Audit

Section 255 and its sub-sections quoted in the foregoing paragraph defines the powers and duties of auditors, appointed under Section …

Liabilities

A cost auditor, while examining the cost accounting records, is required to exercise reasonable care and skill. What is reasonable care and skill, depends on the circumstances of each case.

Penalty for Non-compliance

A cost auditor has to comply with the provisions of the Companies Ordinance to avoid any penalty …

Principles of Cost Audit

Planning and Performing Cost Audit

There are certain principles that the cost auditor has to observe in planning and performing the cost audit. There are also principles that the cost auditor has to see are being observed by the company he is auditing

Independence of Cost Auditor

Planning Cost Audit

Cost Audit should be planned with professional care, recognizing that circumstances may exist to cause the cost statements to be materially misstated. For example, management will be providing cost accounting information in the Schedules and Annexure prescribed in the cost accounting record orders/rules, and also statements regarding capacity and inventories …

Documentation

The cost auditor should document all matters which are important in providing evidence to support the opinion given in the cost audit report. Documentation here means the working papers prepared by and for, or obtained and retained by the cost auditor in connection with the performance of cost audit …

Working Paper Management

Working paper management improves the cost audit productivity. The essential aspect of such management is quick retrieval of information from the files of working papers. The filing system should …

Quality Control

Quality Control policies and procedures should be implemented both at the level of the cost audit firm and individual cost audits. The cost auditor should implement quality control policies and procedures designed …

Cost Audit Programme

The Cost Auditor should develop a cost audit programme setting forth the procedures that are required to implement the cost audit plan. The programme is basically based on the …

Cost Auditor’s Report

Submission of Cost Audit Report

According to sub rule 3 of Rule 4 of the Companies (Audit of Cost Accounts) Rules 1998: “The cost auditor shall make out a report within 60 days of his appointment to the Directors in the form …

The Report Format

The cost auditor in his report has to confirm the conclusions drawn from the cost audit evidence gathered during performance of cost audit. Any deviation or error of omission or commission in the records or …

Cost of Production

The cost per unit of each category, variety, or quality of the product under reference, with comparative figures in the previous year, and comments on the reasons for differences should be included in the cost auditor’s report. Such an analysis and comparison will also help …

Financial Ratio Analysis

In order to evaluate the company’s financial position and profit performance, the cost auditor performs checkups on various aspects of the company’s financial health. A tool frequently used during these checkups is working out ‘financial ratios”. Ratios provide …

Cost Auditor’s Observations and Conclusions

Audit Procedures

Performing Cost Audit – Important Elements of Cost

Cost Accounting System and Reconciliation