Cost audit and its objectives:
It is now widely accepted that every type of accounting must be closely monitored by an appropriate auditing system. This is done primarily to check the credibility of accounts and to assess their reliability before they are used as a basis for various business decisions.
Cost accounting is a critical tool for determining the selling prices and maximizing the profitability of a company. However, the costing system must also be competent enough to avoid consumer exploitation. It is in this light that a system of cost audit is used to assess the accuracy and dependability of cost accounting records. In this blog, we have thrown light on the meaning of cost audit, the objectives that it serves and some statutory provisions concerning it.
What is a cost audit?
A cost audit is an audit of cost records on the utilization of materials, labor, overheads, and other items of cost applicable to the production of goods. It checks whether the cost accounting system followed in the company serves as a correct basis for ascertaining the cost of production.
Further, a cost audit is concerned with the verification of cost records/accounts and acts as a check on the adherence to cost accounting standards. It checks whether cost accounts, statements, and cost data are accurate and adhere to cost principles. Section 148 of the Companies Act 2013 confers powers on the Central Government to direct certain classes of companies to get their cost records maintained and audited by a cost accountant.
In other words, a cost audit is mandatory for certain specified classes of companies producing specified goods. Certain classes of companies involved in the manufacture of such goods or the provision of such services as may be prescribed and with a net worth or turnover of such amount as may be prescribed are directed to have their cost records audited. The cost audit report is furnished to the Central Government.
Thus, cost auditing is a legal reporting exercise, as it is related to annual reporting to the government about the efficiency of operations with specific reference to a specified product(s) in a prescribed format.
This includes an evaluation of (a) the appropriateness of cost accounting systems, records, and procedures, (b) their proper maintenance, (c) their proper compilation in the form of cost statements, and (d) conformity to the required cost accounting procedures.
Objectives of cost audit
Cost audit works as a valuable tool for the verification of cost information and exercising control. Following are the main objectives of a cost audit:
1. To check cost accounts in order to ensure that they have been correctly kept and compiled in accordance with the cost accounting system followed by the company
2. To verify the cost of each “cost unit” and “cost center” so as to ensure that these have been correctly ascertained
3. To facilitate the fixation of prices of goods & services
4. To assist in the periodical reconciliation of cost accounts and financial accounts
5. To act as an effective tool of control
6. To protect the interests of the members of the company, users of its products/services, and the Government
7. To ensure the accuracy and correctness of costing data
8. To ensure that the concepts and principles of cost accounting have been appropriately adopted and implemented
9. To aid in the process of decision-making based on cost considerations
10. To make recommendations for how to organize the costing operations more efficiently
11. To ensure that a proper system of costing has been maintained in line with the needs and features of the industry and that the supporting cost procedures aid in the achievement of the organization’s goals
12. To determine whether the cost statements provide a true and fair picture of the cost information
13. To help in the ascertainment of quotations for future contracts based on accurate cost estimates
14. To evaluate if the use of cost procedures as a tool for pricing decisions is effective
15. To serve as a moral check on the staff who work closely with cost accounts
16. To ensure that the enterprise’s human, physical, and financial resources are used optimally
17. To inculcate an attitude of cost-consciousness
18. To advise management on areas that call for improvement in performance based on an inter-firm comparison of cost records
19. To strengthen corporate governance by providing various operational or cost disclosures to directors
Statutory provisions concerning cost audit
As opposed to a financial audit which is compulsory for every company registered under the Companies Act 2013, a cost audit applies to certain categories of companies only.
The main provisions regarding cost audit are as follows:
- It deals with the verification of cost records pertaining to certain specified goods. Rule 4 of the Companies (Cost Records and Audit) Rules, 2014 prescribes the list of companies engaged in the production of some specified goods on which cost audit is applicable. For more details on its applicability, please follow this link.
- Every company to which a cost audit is applicable needs to appoint a cost auditor within 180 days of the commencement of every financial year.
- The Board of Directors of a company appoints its cost auditor and his remuneration is ratified by shareholders subsequently.
- To be eligible to be appointed as a cost auditor, the concerned party must be a cost accountant or a firm of cost accountants in practice. Also, the cost audit must be conducted in compliance with the cost auditing standards issued by the Institute of Cost Accountants of India.
- On the completion of the cost audit, the cost auditor is required to submit his duly signed cost audit report to the company’s Board in e-Form CRA-3. Such a report has to be furnished within 180 days from the closure of the financial year to which the report relates. The report should provide the auditor’s reservations, observations, or suggestions if any.
- After examining the cost audit report and within 30 days of its receipt, the Board of Directors of the company needs to furnish such report to the Central Government in e-Form CRA-4 along with full information and explanation on every reservation or qualification contained therein.
A cost audit is an independent evaluation of the cost statements, cost records, and other associated information of an enterprise in order to offer an opinion on them. It helps to determine whether cost records are accurate or not and whether they adhere to the cost accounting principles or not.
Standards on Cost Auditing guide the cost auditor through each phase of the audit process in terms of the audit procedures to be followed, the responsibilities of the cost auditor, and cost reporting.
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