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COST AUDIT

Swajan K Sen , Mech Engg,, F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280


A comprehensive presentation
OVERVIEW
India is the first country in South Asia (and perhaps in the
world) to make cost audit mandatory.

The Institute of Cost and Works Accountants of India (ICWAI)
supervises it and is the custodian.

Vide The Gazette of India dated June 3 2011 it becomes
mandatory w.e.f 1
st
April 2011

It is to be monitored by the Govt of India through its economic
branch the Ministry of Corporate Affairs.

It attracts the following sections of Companies Act
Sec 233B
Sec 209(1) (d)
Sec 600(3)(b) and Rule 2 of Co.Act (Cost Accounting Records) Rules, 2011

Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
WHAT IT IS ?
It is the detailed maintenance & checking of the
cost in relation to any activity of business -
Its origin
Its recording
Its maintenance
Its justification
AND to arrive at Total Cost Sales Price Profit

As a whole it is a study of the system, technique and to verify
their correctness and to determine actual cost of any product
or services.

Objectives of cost audit include the determination and control of
cost together with providing data to arrive at decisions on various
matters, such as operational efficiency.

Data generation and capturing shall be industry specific.
Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
WHY ?
Every one will agree that we are at the verge of
exhausting our natural resources. Technocrats do
conserve them by process refinements and
scientists by innovations. However, the actual
effect of such efforts were not being recorded
systematically so as to increase the profit of an
enterprise by best industrial engineering
processes and to conserve the resources
especially as to when we know in few years we
might not have coal and oil.
Hence it is a need to dig down to cost and
optimize it, rather than chasing revenueit is a
time for the survival of the fittest.
Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
OBJECTIVES

From the perspective of management:
Cost audit detects correct cost that provides opportunity to quote better and increases
competitiveness in the market and enhances efficiency.

.
From the perspective of shareholders:
Cost audit ensures that the valuation of closing stock and work-in-progress are
correct, hence helps in the computation of more accurate profit figures.



From the perspective of the government:
Increased profit means increased government exchequer
Conservation of resources by way of reduction in wastage
Higher productivity and higher GDP & PCI



From the perspective of customers:
Customers may obtain more benefit if the cost is reduced due to effective control.

Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
The said Rules are applicable to all companies engaged in production,
processing, manufacturing and mining activities as defined under
Rules 2(j), 2(k), 2(l) or 2(o) respectively and where:

a) the aggregate value of net worth as on the last date of the immediately
preceding financial year exceeds five crores of rupees; or

b) the aggregate value of the turnover made by the company from sale or
supply of all products or activities during the immediately preceding
financial year exceeds twenty crores of rupees; or

c) the companys equity or debt securities are listed or are in the process of
listing on any stock exchange, whether in India or outside India.

Any company meeting the above criteria would be required to maintain cost
accounting records and file a Compliance Report in the prescribed format from
financial year commencing on and from 1st April 2011.

Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
APPLICABILITY
UNDERSTANDING APPLICABILITY

Cost Audit applies to

Specific activities undertaken by an organization.

Please note
IT APPLIES TO ACTIVITIES and NOT TYPES OF
COMPANIES

Unlike 44AB of Income tax Act applies to just turnover

Hence, in a multi activity company, one activity may be attracted and
may not.
What Activities then ?


Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
UNDERSTANDING APPLICABILITY

How is production & manufacturing defined ..

(j) Manufacturing Activity includes any act, process or method
employed in relation to
i. Transformation of raw materials, components, sub-assemblies, or
parts into semi-finished or finished products; or
ii. Making, altering, repairing, fabricating, generating, composing,
ornamenting, furnishing, finishing, packing, re-packing, oiling,
washing, cleaning, breaking-up, demolishing, or otherwise treating
or adapting any product with a view to its use, sale, transport,
delivery or disposal; or
iii. constructing, reconstructing, reconditioning, servicing, refitting,
repairing, finishing or breaking up of any products.


Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
UNDERSTANDING APPLICABILITY

How is processing defined ..

(l) Processing Activity includes any act, process, procedure, function,
operation, technique, treatment or method employed in relation to
i. altering the condition or properties of inputs for their use,
consumption, sale, transport, delivery or disposal; or
ii. accessioning, arranging, describing, or storing products;
or
iii. printing, publishing, finishing, perforation, trimming,
cutting, or packaging; or
Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
Duty of Company under
Companies (Cost Accounting Records) Rules
2011
Company to maintain Cost Accounting Records as
per Cost Accounting Standards and Generally
Accepted Cost Accounting Principles



Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
Audit compliance
Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
Statutory Audits in INDIA
There used to be two types of Statutory Audits now that
becomes three
1 . Govt Audits (Applicable to Govt or Govt monitored companies)
CAG Audit, CVC Audit, RBI Audit, Special Audits, Defense Audit etc Generally not applicable to
private companies unless there is a reason by Govt of India.
Audit is done by - C&AG, RBI, and by special enforcement personnel
2. Financial Audit u/s 224 of Companies Act 1956 and Tax Audit u/s
Sec 44 AB of I.T.Act
Audit of the accounts of certain assesses.
Tax audit is done by - Chartered Accountants holding COP
3. Cost Audit
Recently introduced by Govt of India vide section 233B
of Companies Act 1956 in the year 2011.
Mandatory Cost Accounting Records rule to follow
Mandatory Cost Accounting Reports Rule to follow
Cost Audit is done by - Cost Accountants holding COP

Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
COST AUDIT DETAIL- 1
The Company has to follow and maintain Cost Accounting
Standards CAS as issued by Cost Accounting Standards
Board
CAS1- Classification of Cost
CAS2-Capacity Determination
CAS3-Overheads
CAS4-Cost of Production for Captive Consumption
CAS5-Average (equalized) Cost of Transportation
CAS6-Material Cost
CAS7-Employee Cost
CAS8-Cost of Utilities
CAS9-Packing Material Cost
CAS10-Direct Expenses
CAS11-Administrative Overheads
CAS12 -Repairs And Maintenance Cost
CAS13 -Cost of Service Cost Centre
Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
COST AUDIT DETAIL- 2
Company has to follow GACAP
(Generally Accepted Cost Accounting
Principles)




Swajan K Sen , Mech Engg, F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
COST AUDIT DETAIL- 3
Salient features
Appointment of Cost Auditors
Cost Auditor to submit his consent letter to BOD for his appointment u/s 233B(2) of Co.Act 1956
as required u/s 224(1-B).
Company has to pass a resolution.
Company shall e-file Form 23C within 90 days from commencement of each financial year
certified copy of Board resolution
Consent letter from auditor
Challan for fees
Auditor to e-file Form 23C
Containing- Consent letter u/s 224(1-B) , Tax Pan , Membership number , Email id of the auditor,
Scope of Audit
Company has to furnish the form 23C & SRN to Auditor
Appointment deemed to be approved by Central Govt.
Company has to issue appointment letter to Auditor
Failure to comply shall attract penalty u/s 209(5), 209(6), 209(7), 233B(11), 642(5) and 642(7) of
Companies Act 1956.





Swajan K Sen , Mech Engg,, F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
COST AUDIT DETAIL- 4
REPORT FORMS





Form I
Cost Audit report and other documents to C.Govt
Form II
Cost Auditors report with all Annexures **
Form -III
Form of performance appraisal report
** Annexures to be signed by at least 2 directors of the
company.
Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
COST AUDIT DETAIL- 5







ANNEXURE TO THE COST AUDIT REPORT
[See rule 2 and rule 6]
1. GENERAL INFORMATION:
1. CIN or GLN of the company:
2. Name of the company:
3. Registered office address:
4. Corporate office address:
5. E-mail address of the company:
6. Company's financial year to which the Cost Audit Report relates:
7. Name, address, membership number and e-mail of the Cost Auditor(s):
8. SRN Number and date of Filing of Form 23C with the Central Government:
9. Date of Board of Directors' meeting wherein the Annexure to the cost audit report
were approved
10. No. of Audit Committee meetings held by the company, and attended by the Cost
Auditor during the
Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
COST AUDIT DETAIL- 6







2. COST ACCOUNTING POLICY:
(1) Describe the cost accounting policy adopted by the Company
(2) Cost accounting standards and its adequacy
(3) Determine correctly the cost of production/operation, cost of sales, sales realization and margin of
the
product/activity groups separately for each product/activity group.

The policy should cover, inter alia, the following areas:
a) Identification of cost centers/cost objects and cost drivers.
b) Accounting for material cost including packing materials, stores and spares etc., employee cost,
utilities and other relevant cost components.
c) Accounting, allocation and absorption of overheads
d) Accounting for Depreciation/Amortization
e) Accounting for by-products/joint-products, scarps, wastage etc.
f) Basis for Inventory Valuation
g) Methodology for valuation of Inter-Unit/Inter Company and Related Party transactions.
h) Treatment of abnormal and non-recurring costs including classification of other non-cost items.
i) IFRS Not applicable

Observations of the Cost Auditor regarding adequacy or otherwise of the Budgetary Control System.
Swajan K Sen , Mech Engg, F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
COST AUDIT DETAIL- 7







Sno.
Name of each Product Group
Names of Products/ Activities
included in the Product Group
Net Sales (net of
taxes, duties, etc.)
Rs. Lakh
Covered
under Cost
Audit (Y / N)
A
Manufactured Product Groups
1,2,3,.
Sub-Total (A)
B
Services Groups
1,2,3,.
Sub-Total (B)
C
Trading Activities (Product
Group-wise)
1,2,3,.
Sub-Total (C)
D
Other Incomes
1,2,3,.
Sub-Total (D)
E
Total Income as per Audited Annual
Report (A+B+C+D)
NOTES:
(1) For manufactured product groups, use the nomenclature as used in the Central Excise Act and Rules, as applicable.
(2) For service groups, use the nomenclature as used in the Finance Act / Central Service Tax Rules, as applicable.


Swajan K Sen , Mech Engg,, F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280







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Swajan K Sen , Mech Engg,, F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280







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Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280







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Swajan K Sen , Mech Engg, F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280







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Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280







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Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280







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Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280







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Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280







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Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280







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Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280







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Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280







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Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280







COST AUDIT DETAIL- 19
Appointment of Cost
Auditor
Ensure system so that
required data can be
captured
Auditor to be ensured
that data shall be
furnished
Auditor to complete the
audit and directors to
authenticate reports
Auditor to submit
report to Central Govt
Statutory Auditor to be
furnished copy to
reconcile the financial
audit
Swajan K Sen , Mech Engg, F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280







Swajan K Sen , Mech Engg, , F.I.C.W.A, LL.B, LL.M (I) , Ph 9830563280
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Swajan Kr Sen
Mech Engg, F.I.C.W.A, LL.B, LL.M (I)
Ph 9830563280
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Swajan Kr Sen
Mech Engg, F.I.C.W.A, LL.B, LL.M (I)
Ph 9830563280
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