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Paper 19: Cost and Management Audit, , By: CMA. Rakesh Ranjan, , Subscribe YouTube Channel. For Notes whats-app me +91-9308305682., , Chapter 1: Basics of Cost and Management Audit., 1., , Nature of Cost Audit, , The Institute of Cost Accountants of India on the other hand, defines cost audit as “a 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.”, 2. Origin of Cost Audit, 3. Genesis of Cost Audit, H istory of T he Institute of Cost accountants of India:, 1944- ICWAI, Institute of Cost & Works Accountants of India was established under the Companies Act 1913, as a, Limited company., 1959 – The Institute of Cost and Works Accountants of India (ICWAI) was established under Cost & Works, Accountants Act, 1959., 2 012 – The Institute of Cost and Works Accountants of India (ICWAI) was renamed as “The Institute of, Cost Accountants of India”, H istory of Cost Audit:, 196 5 – Cost Audit was first introduced in India with the introduction of Sec 233B of Companies Act 1956, for Cost Audit and Sec 209 (1) (d) for maintenance of Cost Records., 196 5-2 008 - 44 industries were covered under cost record maintenance & cost audit is on a company, specific basics., 2 008 – Expert Group set up to study the existing cost audit mechanism., 2 009 – Expert Group submitted its report to the Central Government., 2 011 – Introduction of mandatory Cost Audit of Cost Records maintained by the Companies under, Companies Act 1956 for Manufacturing, Mining and processing operations depending on limits of, Turnover and Limits of Net Worth and issue of Compliance Certificate by the Cost Accountants., 2 014 – New Companies (Cost Records and Audit Rules), 2014 issued under Companies Act, 2013., 4., , Obje ctive s of cost audit, , Cost Audit has both general and social objectives. The general objectives can be described to include the, following:,  Ve rification of cost accounts with a view to ascertaining that these have be e n prope rly, m aintaine d and compiled according to the cost accounting system followed by the enterprise.,  Ensuring that the prescribed procedures of cost accounting records rules are duly adhe re d to.,  Detection of e rrors and fraud.,  Ve rification of the cost of each “cost unit” and “cost center” to ensure that these have been, properly ascertained.,  Determination of inve ntory valuation.,  Facilitating the fixation of prices of goods and services.,  Periodical re conciliation between cost accounts and financial accounts.,  Ensuring optim um utilization of human, physical and financial resources of the enterprise.,  Detection and correction of abnorm al loss of material and time.,  Promoting corporate gove rnance through various operational disclosures to the directors., , Page 1

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Paper 19: Cost and Management Audit, , By: CMA. Rakesh Ranjan, , Subscribe YouTube Channel. For Notes whats-app me +91-9308305682., , 5. Cost accounting standards, The Cost Accounting Standards:,  Provide a structured approach to measurement of costs in manufacturing process or service, industry;,  Integrate, harmonize, and standardize cost accounting principles and practices;,  Provide guidance to users to achieve uniformity and consistency in classification,, measurement, assignment, and allocation of costs to products or services;,  Arrive at the basis of computing the cost of product, activity, or service where required by, legal or regulatory bodies;,  Enable practicing members to make use of Cost Accounting Standards in the attestation of, General Purpose Cost Statements; and,  Assist in clear and uniform understanding of all the related issues of various user, organizations, government bodies, regulators, research agencies and academic institutions., , Page 2

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Paper 19: Cost and Management Audit, , By: CMA. Rakesh Ranjan, , Subscribe YouTube Channel. For Notes whats-app me +91-9308305682., , Chapter 2: Companies (Cost Records and Audit) Rules, 2014, Rule 1: Short title and commencement, (1) These rules may be called the Companies (Cost Records and Audit) Rules, 2014., (2) They shall come into force on the date of publication in the Official Gazette i.e. 30.06.2014., Rule 2: Definitions - (a) Act; (aa) Central Excise Tariff Act Heading; (b) Cost Accountant in practice; (c) cost, auditor (d) cost audit report; (e) cost records; (f ) form; (g) institute; (h) all other words, Rule-3: Application of Cost Records, , Rule-4: Applicability for Cost Audit, , Page 3

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Paper 19: Cost and Management Audit, Subscribe YouTube Channel. For Notes whats-app me +91-9308305682., , Rule-5: Maintenance of Cost Records – In Form CRA-1., Rule-6: Cost Audit, , Page 4, , By: CMA. Rakesh Ranjan

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Paper 19: Cost and Management Audit, , By: CMA. Rakesh Ranjan, , Subscribe YouTube Channel. For Notes whats-app me +91-9308305682., , CRA-1: Forms in which cost records shall be maintained, CRA-2: Form of intimation of appointment of cost auditor by the company to Central Government, CRA-3: Form of Cost Audit Report, CRA – 4: Form for filing Cost Audit Report with the Central Government, , Page 5

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Paper 19: Cost and Management Audit, , By: CMA. Rakesh Ranjan, , Subscribe YouTube Channel. For Notes whats-app me +91-9308305682., , Chapter 3: Cost Audit Documentation and Audit Process, 1. Cost Audit Documentation, , Planning an Audit - First Stage, , “It is well said that a well planned audit is almost half way done”, Performing an Audit – Second Stage, The performance, or execution, stage of the audit involves detailed testing of internal controls,, material consumptions, cost accumulation, allocation, apportionment, and absorption. If an, auditor plans to rely on their client’s system of internal controls, they will conduct tests of, controls. Cost auditor will conduct detailed substantive tests of audit procedures for the period, and detailed substantive tests of consumptions and balances recorded at the period end., Concluding and Rep orting on an Audit – Final Stage, , The final stage of the audit involves drawing conclusions based on the evidence gathered and, arriving at an opinion regarding the fair presentation of cost statements. The cost auditor’s, opinion is expressed in the cost audit report., , Page 6

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Paper 19: Cost and Management Audit, , By: CMA. Rakesh Ranjan, , Subscribe YouTube Channel. For Notes whats-app me +91-9308305682., , 2. Audit Process, , 3. Practical Step s Of Audit Process, Stage-I Step s – Objectives of Audit and Management Outlook, Stage-II Step s – Pre-conditions, Stage-III Step s – Understanding the Comp any’s B usiness, Stage-IV Step s – Planning the Audit, Stage-V Step s – Execution of Audit, Stage-VI Step s – Audit Documentation, If we have to succeed in the globalized world, we have to enlarge the scope of Cost Audit to cover all aspects, of Manufacturing and Services sector activities including healthcare and education., — Dr. APJ Abdual Kalam, , Page 7

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Paper 19: Cost and Management Audit, , By: CMA. Rakesh Ranjan, , Subscribe YouTube Channel. For Notes whats-app me +91-9308305682., , Chapter 4:- Cost Auditor - Professional Ethics And Responsibilities, “Cost auditor” means a Cost Accountant in practice, as defined in clause (b), who is appointed by, the Board; This definition is given under Rule 2(c)., “Cost Accountant in practice” means a cost accountant as defined in clause (b) of sub-section, (1) of section 2 of the Cost and Works Accountants Act, 1959 (23 of 1959), who holds a valid, certificate of practice under sub-section (1) of section 6 of that Act and who is deemed to be in, practice under sub-section (2) of section 2 thereof, and includes a firm or limited liability, partnership of cost accountants; [Rule 2(b)], 1., , Professional Ethics, , Code of Ethics:, As professionals in the field of Cost and Management Accounting, the members of our Institute, are bound by a code of professional ethics. This code stipulates and binds them to the highest, level of care, duty and responsibility to their employers and clients, the public and their fellow, professionals., The objectives of accountancy profession require four basic needs to be met:, a. Credibility in information and information systems;, b. Professionalism identified by employers, clients and other interested parties;, c. Quality of service carried out to the highest standards of performance; and, d. Confidence that there is a framework of professional ethics to govern the, provision of services., In order to achieve the objectives of the accountancy profession, cost accountants have to, observe fundamental principles, which are:, i., ii., iii., iv., v., , 2., , Integrity, Objectivity, Competence, Confidentiality, Professional Behavior, Duty Of A Cost Auditor To Report Fraud - Section 143 Of The Companies Act 2013, ,  According to Section 143(12) of the Companies Act 2013, if an auditor of a company, in, the course of the performance of his duties as auditor, has reason to believe that an, offence involving fraud is being or has been committed against the company by, officers or employees of the company, he shall immediately report the matter to the, Central Government within such time and in such manner as may be prescribed.,  Sub-Section 14 makes it clear that he provisions of this section shall mutatis mutandis, apply to the cost accountant in practice conducting cost audit under section 148., Page 8

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Paper 19: Cost and Management Audit, , By: CMA. Rakesh Ranjan, , Subscribe YouTube Channel. For Notes whats-app me +91-9308305682., ,  According to Sub-Section 15 if any auditor, cost accountant or company secretary in, practice do not comply with the provisions of sub-section (12), he shall be punishable, with fine which shall not be less than one lakh rupees but which may extend to twentyfive lakh rupees.,  Matter to be reported immediately but not later than 2 days of his knowledge, specifying:, o Nature of Fraud with description;, o Approximate amount involved; and, o Parties involved.,  Following disclosures to be made in Board’s Report:, o Nature of Fraud with description;, o Approximate Amount involved;, o Parties involved, if remedial action not taken; and, o Remedial actions taken., , Page 9