Strategic Cost Management

Presented By: Ashish Chanchlani Manish Kukreja Hitesh Talreja

07 12 42

INTERNAL AUDIT

Definition

Internal auditing consists of continuous, critical review and operating activities by a staff of auditors functioning as full-time

salaried employees.

Prof. Walter B. Meigs of America.

Another

name

for

Internal

audit

is

Operational audit.

Objectives of Internal Audit

Examination structure.

of

the

applicable

control

Use of auditors general knowledge of the company operations in examination of the relation of departmental controls and

operations to general company policies

and to other departments.

Advantages of Internal Audit Programme

It is assured that all the necessary work are done and nothing is omitted. Auditor can know about the progress of work done by assistant.

Audit work can be divided amongst the juniors who will be responsible for their work.
It is a kind of guidance to the audit clerk for the work he has to perform. It facilitates the final review before the report is signed.

Disadvantages of Internal Audit Programme

Initiative of the efficient clerk are lost because of the fixed programme. Although the audit programme may be well planned but may not cover everything that might come up during cost audit. The audit programme may be followed mechanically year after year though some changes may be introduced. Each business may have a separate problem of its own. Drawing up of an audit programme may be unnecessary for a business. The audit clerk may regard the work entrusted to him according to the programme as the maximum work to be done by him. These disadvantages can be overcome by impressing upon the audit clerk that the audit programme is only a guidance and should use his initiative and intelligence during the course of audit. He should be encouraged to make suggestions.

COST AUDIT

Cost Audit

Verification of the correctness of cost accounts and of the adherence to the cost accounting plans.

Institute of Cost and Works Accountants of England.

Objective of Cost Audit

To find out:

Whether the cost accounts are properly maintained or not, according to the principles of costing. Any error or fraud which might have been committed intentionally or otherwise. Whether each item of expenditure is involved into the relevant components of the goods manufactured or produced has been properly incurred or not. Cost plus percentage Contracts between Government and manufacturers.

To enable management to choose economic methods of operations to earn profits. (To satisfy shareholders.) To enable management to avoid wastages of materials and labors in order to reduce the working cost.

Cost Audit Programme

The auditor should clearly understand the cost system in

operation in the company concerned.

The cost auditor should pay attention to the following records. Records of materials. Labor Records. Records of Overhead Charges. Depreciation. Work-in-progress Records. Incomplete Contracts. Stores and Spare Parts Records.

a) b) c) d) e) f) g)

Cost Auditors Report

The cost auditor has to prepare a report after he has conducted the cost audit. This report has to be submitted to the Central Government under section 233-b(4) and not to the Registrar of the companies.

contd

Cost Auditors Report (contd)

1.

Essentials of Good Cost Audit Report: The report should be precise, concise and clear. There should be no praise/criticism for/against the individual members of management or the staff. Irregularities, deficiencies and discrepancies should be reported. The acts of omission or commission on the part of members of the staff, especially if such irregularities have resulted in increasing the cost of production should be reported.

2.

Matters to be Dealt in the Report: If the machines and labor remain idle because of the shortage of raw materials during the year. If the large quantities of raw materials were stocked and remained unutilized and thus locking up the working capital of the company. Whether the cost records maintained by the company were adequate for the purpose of audit. Whether the broad policy laid down by the management was faithfully followed. contd

There should be more concentration on the cost of production, comparative profitability and operating efficiency of different lines in which the company is engaged. Whether there has been increase in the cost of production with respect to previous year, it should be analyzed and stated clearly. Whether there has been any wastage during production and how it can be avoided. The areas where cost of production can be reduced should be mentioned. Whether the cost statements reveal true and fair view of the cost of production.

MANAGEMENT AUDIT

Management Audit

Management Audit is an investigation of a business from the highest level downward in order to ascertain prevails whether throughout, sound thus management

facilitating the most effective relationship with the outside world and the most efficient organization and smooth running of internal organization.

Leslie R Howard

Objectives of Management Audit

To reveal the defects in any elements examined by management auditor To indicate what improvements are possible to obtain best results of the operations of the concerns. Assisting management to administration for operations. achieve efficient

To suggest management ways if the organization lacks the knowledge of efficient management. To aid management to discharge its duties and responsibilities efficiently at all levels.

Criticism of Management Audit

The critics of the Management Audit:

Would discourage the initiative and dynamism of the management, instead of serving useful.
Management will always try to keep the books of accounts up-to-date instead of paying attention at production. Management Auditor will always try to find some faults in order to justify his appointment and existence.

Who Should conduct Management Audit?

Internal Auditor Goes over the question of the performance of management. States whether management control system is effective or not. Examines the shortcomings of personnel and department of the organization. Examines the plans and policies and on basis of this, suggests the change in organizational structure. O & M Personnel

Study organizational workings in order to remove bottlenecks.

Study is concerned with the appraisal of the performance of the organization as how far they have reached the goal. Has analytical bent of mind with regard to organizational structure and methods of operations. Are technical hands to study organization more effectively.

Management Audit Programme

Management

Auditor

has

to

use

his

imagination and judgment according to the circumstances of each case.

Outlines of management audit programme

with respect to management auditor are

stated as:

Outlines of Management Audit Programme

1.

2.

3.

4.

5.

Organization: He should study the structure of the organization in the area of management audit work assigned to him. Plans and objective: Plans and objectives of the concerns of management should be discussed by management auditor. Policies and Practices: He should find out whether the policies are properly laid down or not and they are adhered to or not. Systems and Procedures: He should suggest improvements to the existing system and procedure in case of any defects. Controls: He should find out if the controls are adequate and effective. contd

Contd
6.

Operations: production.

He

should

suggest

improvements

to

overcome drawbacks if any in order to achieve maximum

Physical Equipments: He should check whether the

7.

modern equipments are used to its optimum or not.

8.

Personnel: To check if the manpower is fully utilized or not to increase the production. Regulations: To check whether the company follows the rules and regulations and company Act along with those of municipal and local authorities.

9.

Management Auditors Report

1.

Essential of Good Management Auditors Report: The report should be correct. The report should be concise. The report should be courteous. The report should recommendations if any. contain contd

2.

Matters to be Dealt in the Report:

Whether the return on investment of the shareholders is poor, average or above average.
Comparison of rate of return of investment between the current year and previous year. Comparison of operating costs of the concern with other concerns conducting the same type of business.

Whether the plant and machinery are in suitable condition for maximum production or not.
Whether the relationship between management and staff and workers is cordial or not.

Reference

Practical Auditing B. N. Tandon.