COST AUDIT

What is cost audit ?

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.

Objectives of cost audit

Determination of accurate cost of jobs,material,finished products,comparing present cost with previous experience. Making accurate periodical financial statements for information and guidance of management . Help in determining prices of finished products by furnishing all relevant data. Determination and evaluation of production processes and find out what are profitable and what are not profitable items and determine their extent. Help in planning, operations and stock control. Determination of efficiency of operations by furnishing data as to cost ,volume of production etc.

Types of cost audit

1. Internal audit. 2. External audit. 3. Statutory audit. 4. Special audit. 5. Financial audit.

Steps in cost audit

1. Review . 2. Verification . 3. Reporting .

Qualifications
1. An auditor must be a cost accountant within the meaning of cost and works accountants act 1956.

2. However after the amendment in the companies act a chartered accountant possessing the prescribed qualifications has been permitted for doing cost audit only for such period as notified by central government

Disqualifications
According to companies act (sec -226):1. Body corporate . 2. Officer or employer. 3. Partner. 4. Specified number of cost audits.

ADVANTAGES OF COST AUDIT

Advantage to management
Helps to control on different elements of cost Helps in decision making Helps in reducing price Helps in budgetary control

ADVANTAGES TO COST ACCOUNTANT

Status will go high Improve costing efficiency Cost accounts can be reconciled

ADVANTAGES TO SHAREHOLDERS
To know the efficiency or inefficiency of management To know about the utilization of resources To know about the productivity of material, labour and machine Fair return on investment

Disadvantages of Cost Audit

Expensive luxury. Secrecy in cost. Duplication of work. Shortage of cost accountants. Some accounts audited once by financial auditors

COST AUDIT TECHNIQUES

Technique used by a cost accountant inthe performance of his job. Some of the techniques are; - vouching -Checking and ticking -Test checking -Working papers -Audit notes -Questionnaires

VOUCHING : Inspection by the auditor of a documentary evidence supporting and substantiating a transaction

CHECKING AND TICKING : Check marks or tick marks are used for calculations posting etc TEST CHECKING : Auditor has to check a small part of work on the basis of random sampling WORKING PAPERS : Working papers include copy of office manual , copies of important decisions and procedures etc AUDIT NOTES : Auditor has to make a note in the course of audit and he wil seek clarifications from the officials QUESTIONNAIRES :Auditors should make questions about important elements of cost.

Cost audit in India

Cost audit recommended to indian industries by Vivian Bose enquiry commission under section 223 -B Cost audit report consists of Company information. Information about wages and salary . Detailed information about manufacturing process of the company. Report on the present cost accounting system.

 Financial position of the company of current and previous year Sales of product and fixation of selling price Special expense allocated to production process Cost of raw material Cost of power , steam and fuel Abnormal features related to production process Stores and spare part of the company Depreciation policy and its implementation

COST AUDIT REPORT AND ITS FORMAT

CASE STUDY : Raheja Construction High-Rise Office Building - Cost Plus Contract A contract compliance audit was performed for the shell construction of a high-rise office building which had been constructed under the terms of a cost plus a fixed fee contract. The contractor had billed approximately $80 million for the completed construction work. Our audit identified overstatements of reimbursable costs by the contractor in excess of $1.3 million.

 The primary overcharges concerned nonreimbursable overtime premium, owned equipment charges, non-expendable equipment purchases, charges for corrective work, etc. Owner's representatives negotiated the exceptions with the contractor before making final payment resulting in a cost savings of approximately $700,000.

EXAMPLES: Hotel Resort Facility - Cost Plus with Max Contract

Approximately $50 million in construction costs were audited in connection with a cost plus with a guaranteed maximum contract for the construction of a resort hotel. The audit identified approximately $900,000 in potential overcharges due to overstatements of reimbursable costs, etc.

 Management negotiated a settlement with the contractor which resulted in a savings in excess of $300,000. Overcharges resulted from improper computations of payroll taxes and insurance, duplicate charges for vacation, improper handling of backcharges, etc.

Land Development Dam Project - Unit Price Contract

Unit price billings and related contract documentation were reviewed in connection with the construction of a $2.1 million roller compacted concrete dam being built in connection with a mixed use land development. The audit identified improper charges for bonds and sales tax as part of the unit prices. Management obtained a refund of approximately $80,000 as a result of the audit.

Conclusion

 Web site:http://www.google.co.in Book name:Cost accounting:- K. S. Thakur

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