Cost
Audit
It is an audit process for
verifying the cost of manufacture or production of any article, on the basis of
accounts as regards utilisation of material or labour or other items of costs,
maintained by the company. In
simple words the term cost audit means a systematic and accurate verification
of the cost accounts and records and checking of adherence to the objectives of
the cost accounting.
As per ICWA London’ “cost audit is the verification
of the correctness of cost accounts and of the adherence to the cost accounting plan.”
The ICWAI defines cost audit as " system of
audit introduced by the government of India for the review, examination and
appraisal of the cost accounting records and attendant information required to
be maintained by specified industries"
From above definition of cost audit, it is clear that cost audit is a
sytematic examination of cost accounts to verify correctness of cost accounting
records.
As per the
section 233 B of Company Law 1956, there is the provision for cost audit. Under
this section, cost audit is compulsory for all the public and govt. companies
which are associated with the processing and production. If there aggregate
value of net worth exceeds 5 crores or total sale exceeds 20 crores, the cost
audit is must.
Following are the advantages of cost audit
To The Management
a) Cost audit helps in
detection of errors and frauds.
b) The management gets
accurate and reliable data
based on which they can make day-to-day decisions like price fixation.
c) It helps in cost control and cost reduction.
d) It facilitates the
system of standard costing and
budgetary control.
e) It helps the
management in inter-unit / firm
comparison.
f) It enables the
management to identify loss making
propositions.
To The Government
a) Cost audit ensures
efficient functioning of the industry. This in turn, nurtures a healthy competition among the
different companies and paves a path for fast progress.
b) It helps in identification of sick units and
enables the Government to make relevant decisions.
c) It helps in fixing prices in the case of
essential commodities and checking undue profiteering.
d) It enables to take
decisions as to granting of subsidies,
incentives and protection
to various industries.
e) It helps to take
decisions as to levies, duties and
taxes.
To the Society
a) Cost audit enables
the Government to fix prices of essential commodities. This safeguards the interests of the
society.
b) Cost audit enables
the Government to keep a check on
undue profiteering by the manufacturers and avoids artificial price rise due to monopolistic tendencies.
To the Shareholders
a)
Cost
audit reveals whether any of the products of the company are making losses.
Thus though the company making an overall profit, a loss making line may eating
up the company’s profits. This is brought to the notice of the shareholders and
the management is forced to take remedial measures, thereby making optimum utilisation of resources.
b) Cost audit ensures
that the shareholders get a fair
return on their investments.
Qualification and Disqualification of Cost Auditor
Qualification: Section 233(B) of the Companies Act, 1956 provides that the
Central Government may, if it considers necessary, direct that the audit of
cost accounts kept by a company for a specifi ed product or activity under
Section 209(1)(d) shall be conducted by an auditor who shall be a cost
accountant within the meaning of the Cost and Works Accountants Act, 1959.
In other
words, the Sec. 233B(1), in so far as it relates to qualifi cations of cost
auditor provides that a person holding certifi cate of practice from the
Institute of Cost and Works Accountants of India only can be appointed as a
cost auditor. The cost auditor may be an individual cost accountant or a fi rm
of cost accountants with at least two partners. A fi rm of cost accountants can
be constituted with the previous approval of the Central Government/Institute
as required under the regulation 113 of the Cost and Works Accountants Act,
1959 as amended from time to time and in which all the partners are cost
accountants holding certifi cate of practice issued by the Institute of Cost
and Works Accountants of India.
Section 224 (1-B)
of the Companies Act, 1956 further provides that a person can be appointed as a
cost auditor only if he is not in full time employment elsewhere.
A proviso to
Section 233B(1) lays down that if the Central Government is of opinion that
suffi cient number of cost accountants within the meaning of the Cost and Works
Accountants Act, 1959 are not available for conducting the audit of the cost
accounts of companies generally, the Government may, by notifi cation in the
Offi cial Gazette, direct that, for such period as may be specifi ed in the said
notifi cation, such Chartered Accountant within the meaning of the Chartered
Accountants Act, 1949, as possesses the prescribed qualifi cations, may also
conduct the audit of the cost accounts of companies.
Disqualification: The disqualifications of a person for being
appointed or re-appointed for conducting the cost audit are detailed in
sub Sections (a), (b) and (c) Section 233 (5) of the Companies Act, 1956 detailedas
under:
(a) A person
referred to in sub-Section (3) or sub-Section (4) of the Section 226 shall not
be appointed or re-appointed for conducting the audit of the cost accounts of a
company.
(b) A person
appointed under Section 224 as an auditor of a company shall not be appointed
or re-appointed for conducting the audit of the cost accounts of that company.
(c) A
person, appointed for conducting the audit of cost accounts of a company, becomes
after his appointment, to any of the disqualifications specified in clause 5(a)
or 5(b) above, he shall on and from the date on which he becomes
disqualified, shall cease to conduct the audit of the cost accounts of the
company.
(Mention disqualification under sec. 224 and 226. Refer unit 3 for
disqualification under section 224 and 226)
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