Audit & Assurance
Cost Audit is a critical review of Cost Accounts maintained and to check that cost accounting principles and planning have been efficiently followed.
Statutory Cost Audits
Cost Audit & Cost Records
Cost Audit
Section 148 of The Companies Act, 2013 read with The Companies (Cost Records & Audit) Rules 2014 and The Cost and Works Accountants Act, 1959 provide the statutory frame of the present Cost Audit Mechanism.
Cost Audit is defined neither in The Companies Act, 2013 nor in any related laws in force.
However, Cost Audit can be defined as the process of the verification of cost records and accounts and a check on the adherence to the prescribed cost accounting procedures.
Cost Records
The definition of the word ‘cost records’ has been provided under rule 2 (e) of the Companies (Cost Records and Audit) Rules, 2014 which means books of account relating to the utilization of materials, labor and other items of cost as applicable to the production of the goods or provision of services as provided in section 148 of the Act and the Companies (Cost Records and Audit) Rules.
Applicability of Cost Audit (Based on "The Companies (Cost Records & Audit) Rules, 2014)
Table A:
Regulated Sector (Drugs &Pharmaceutical, Sugar & Industrial Alcohol, Fertilizer, Electricity Telecommunication and Petroleum Products).
Table B:
Non-Regulated Sector (Others).
Regulated Sector
If the company is engaged only in any of the activities in Table A, the overall turnover of the company for all products and services should be at least Rs 50 Cr or above in the Previous Year.
If the company is engaged in other products/services in addition to Table A and if such products do not fall under Table A or B, then
- a) Overall turnover of the company for all products /services should be at least Rs 50 Cr or above and
- b) Aggregate turnover of products/services in Table A& B should be at least Rs 25 Cr
The company falls under Cost Audit if the above conditions are fulfilled.
Exemptions from Cost Audit
Companies having export revenue exceeding Rs 75 Cr.
Companies operating in SEZs.
Companies engaged in generation of electricity for captive consumption.
Applicability for Maintenance of Cost Records (Based on "The Companies (Cost Records & Audit) Rules, 2014)
Table A:
Regulated Sector ( Drugs &Pharmaceutical, Sugar & Industrial Alcohol, Fertilizer, Electricity Telecommunication and Petroleum Products).
Table B:
Non-Regulated Sector (Others).
Every company engaged in production/services in Table A / B having an overall turnover from all its products / services of Rs 35 Cr in the Previous Year shall maintain cost records.
Table B
Machinery used in space, nuclear atomic and defense sector, Turbo Jets & Propellers, Arms & Ammunitions, Explosives & Safety Fuses, Radar and related things, Tanks and armored vehicles, Port Services, Aeronautical Services, Steel, Roads & Infrastructure sector, Rubber & allied products, Coffee & Tea, Railway related sectors, Cement, Ores & Mineral products, Base Metals, Chemicals, Jute & Jute products, Edible Oil, Construction Industry, Healthcare Sector, Education Services, Milk Powder, Insecticides, Plastics, Tyre & Tubes, Paper, Textiles, Glass, Machinery – Electrical, Electronic and others in general, Production, import and trading of critical health sector devices like Cardiac stents, Valves, Spinal Implants etc
( The above is a list of suggestive nature, For detailed verification refer to concerned notification which has tariff-based classification )
Exemptions from Cost Audit
Companies having export revenue exceeding Rs 75 Cr.
Companies operating in SEZs.
Companies engaged in generation of electricity for captive consumption.
Appointment of Cost Auditor
A Cost auditor has to be appointed within one hundred and eighty (180) days from the starting of Financial Year by every company on whom these provisions are applicable.
Company after getting the consent letter from the proposed cost auditor needs to take a board approval and E Form CRA 2 is to be filed with the MCA within 30 days from the date of board approval or 180 days from the starting of Financial Year whichever is earlier
Filing of Cost Audit Report
Cost Auditor has to submit the Cost Audit Report along with the annexure approved by the board to the company within 180 days from the subsequent Financial Year.
Company need to file the report and annexure in E Form CRA 4 within 30 days from the receipt of the cost audit report from the cost auditor. Company can make their explanations / replies to the reservations, if any, made by the cost auditor in their report in E Form CRA 4.
Cost Audit – Benefits beyond statutory obligation
Advantages to the management
- It provides reliable and certified cost data for managerial decisions.
- It provides data to regulate production.
- It functions as a tool for detection of frauds, errors and irregularities.
- Wastages in material &labor utilization can be plugged using this data.
- Helps to bring in responsibility accounting where irregularities and wastages are there.
- Provides a platform for constant reviews on costs and overheads.
- It makes budgetary control more effective since reliable data is there to compare with budgeted figure.
- Enables comparison in different parameters of different units.
- It confirms compliance related to the concerned provisions.
Advantages to Shareholders
- Cost audit ensures that proper records are maintained as to purchases, utilization of materials and expenses incurred on various items i.e wages and overheads etc. It also makes sure that the industrial unit has been working efficiently and economically.
- Cost audit ensures a true picture of company’s state of affairs. It reveals whether the resources like plant and machinery are being properly utilized or not.
- The cost audit enables shareholders to determine whether or not they are getting a fair return on their investments. It reflects managerial efficiency or inefficiency.
Advantages to the Government
- Cost audit assists the ‘Tariff Board’ in deciding whether tariff protection should be extended to a particular industry or not.
- Cost audit helps to ascertain whether any particular industry should be given any subsidy in order to develop that industry (Anti-Dumping Duty).
- Cost audit provides reliable data to the government for fixing up the setting prices of the various commodities.
- Cost audit helps the government to take necessary measures to improve the efficiency of sick industrial units.
- Cost statements may be helpful to authorities in imposing tax or duty at the cost of finished products.
- Cost audit can reveal the fraudulent intentions of the management.
- Cost audit facilitates settlement of trade disputes of the companies.
Advantages to the Society
- Cost audit improves the efficiency of industrial units and thereby assists in economic progress.
- Since it brings out the true cost of production, selling price can be monitored and controlled by government interventions.
- It provides a scope for check on prices and as a result purchasing power of the society is balanced.
Operational & Internal Audits
Operational audit is a review mainly focusing on the key processes, procedures, system, as well as internal control with an objective to improve the productivity, as well as efficiency and effectiveness of operation.Operational audit is also targeted the leak of key control and processes that cause waste of resources and then recommend for improvement.
Internal Audit provides a number of important services to company management. These include detecting and preventing fraud, testing internal control, and monitoring compliance with company policy and government regulation.
The role of internal audit is to provide independent assurance that an organisation’s risk management, governance and internal control processes are operating effectively.
Internal audit functions consider wider issues such as risks to the organisation’s reputation and culture, cyber security, financial crime and the management of complete supply chain process.
The principal objective of efficiency audit is to ensure that resources flow into the most remunerative channels.
Its purposes are basically two fold, which are as follows:
- That every rupee invested in capital, or in other fields gives optimum results.
- That the balancing of investment between different functions and the aspects is designed to give optimum results.
Stock Audits
Inventory audit also referred to as stock audit, refers to an accounting process which takes into account a company’s total stock of physical goods. This is especially needed in manufacturing companies where raw materials need to be converted to finished goods and is a quintessential process of maintaining a healthy business and for it to succeed. Inventory audit is considered mandatory for keeping account of the quantity and quality of raw materials remaining in stock. This is because anything more than 70% of product cost involves material cost. Additionally, inventory audit is absolutely necessary for organisations with multiple branches as they tend to have a massive stock of physical goods. Audit of essential physical inventories is generally conducted at or near the end of the year.
Importance of Inventory Audit
Inventory tends to be the easiest assets to manipulate and hence it’s essential to keep a constant vigil over it. Here are some reasons why inventory audit is considered paramount:
- Inventory audit is also required to match the actual quantity of items in stock against the accounting records while also adjusting for differences and allowing for shrinkage so that the ledger reflects accurate values.
- Inventory audit will be able to reveal which physical goods or products are over- or under- stocked. This will allow you to properly and effectively maintain stock, thus helping the business to maximize profit.
- Inventory audit is necessary to reduce unnecessary investment on stocks and to ensure that you have a proper line balancing in the process.
- Inventory audit is needed to compare actual physical counts and match it to business records: When this count is conducted accurately, an inventory audit will be able to disclose the true picture of what you actually hold as compared to the recorded stocks which, in turn, will give you an understanding of the financial health of the company. Misstatement of inventory balances often tends to have a direct effect on reported profit.
- Inventory audit is imperative to account for any sort of inventory losses resulting from, wastage, pilferage, damage, obsolescence, and dormant stock.
- An inventory audit will also help determine the effectiveness of your warehouse procedures and help reveal any issues within your organisation’s warehouse procedures, whether it is at the receiving dock or during the actual packaging. This could help in highlighting any potential inefficiencies in the process such as disorganisation of the warehouse and slow retrieving methods.
- Inventory audit will help reveal any failure owing to lack of security which results in loss, theft or misappropriation.
- High levels of stock generally result in unnecessary overstocking thus resulting in poor cash flows and financial loss. An inventory audit at timely intervals will help to avoid such issues. Similarly, it helps in determining any obsolete inventory in stock or orders incorrectly supplied to customers which could not only lead to financial loss but also result in an irreparable damage to the organisation’s reputation.
Receivable Audit
Receivables also known as debtors form part of the sales receivable cycle. It is therefore important to carry out the compliance procedures in the sales audit as part of the debtors audit procedure. In summary, check to ensure that the system for receivables has the following features:
- Only bona fide sales bring receivables.
- All such sales are to the approved customers.
- All such sales are recorded. Once recorded, the debts can only be eliminated by receipt of cashü or on the authority of a responsible official.
- Debts are collected promptly.
- Balances are regularly reviewed and aged, a proper system of follow up exists and if necessary adequate provision for bad debt exists.
Other Statutory Audits
- Statutory Audits under various laws in force like GST, Customs Act etc.
- Special Audits under various laws in force.