COST ACCOUNTING RECORD RULES AND COST AUDIT

COST ACCOUNTING RECORD RULES AND COST AUDIT

The institute of Cost and Works Accounting of India (ICWAI) has a pioneer role as premier institution which has undertaken the work of standardizing Cost Accounting practices in India so that the cost of product manufactured in India could be compared with product manufactured in other countries.

To develop Cost Accounting Standard on important issues relating to Cost and Management Accounting, the ICWAI established the Cost Accounting Standard Board (CASB).

Introduction to Cost Accounting Record:

A] Maintenance of record under section 148 of the companies Act, 2013:

1] Every company to which the rules apply should keep and maintain cost records.

2] The cost records shall be kept on regular basis in accordance with the Generally Accepted Cost Accounting Principles and Cost Accounting Standards issued.

3] All cost records shall be reconciled with the audited financial accounts.

4] All cost records shall be duly authenticated by a Cost Accountant.

5] Company is liable to maintain accounts under section 18 of the said Act.

B] Cost Audit under section 148 of the Companies Act 2013:

1] Every company shall within 180 days of the commencement of every financial year appoint a cost auditor at remuneration in accordance with provisions of sub-section (3) of section 148.

2] Every cost auditor who conducts an audit of the cost records of the company shall submit the cost audit report in the Form II specified in Annexure to those rules.

3] Every cost auditor shall forward his report to the Board within 180 days from the close of the company’s financial year to which the report relates. List of records and information:

In order to carry out cost audit effectively and efficiently, the cost auditor requires various documents and he has a right to call for any information and explanation from the authorities of the company. He should give a list of documents that he may require before starting the work.

Following is the list of documents divided in two parts:

A] Specific documents and information

B] General Documents and information

A] Specific documents and information:

1 Memorandum of Association and Article of Association

2 Copies of published accounts of companies for last few years

3 Companies objectives, details of factory, product profile and organisational chart.

4 Internal audit reports

5 Companies Accounting Policy

6 All important manuals.

7 Details of production process.

8 Closing inventory of raw materials

9 Statement of production and dispatches.

10 List of non-moving stores, spares, raw materials etc.

11 Statement showing computation of depreciation.

12 Reports of spoilages, rejections and losses.

13 Cost sheet of service centers.

14 Statement of expenditure on repairs, research & development.

15 Major contracts entered during the period.

16 List of imported items

17 Reports of physical verification

18 Reports of returns submitted to Central Excise Authorities

19 Copy of annual stock taking report verified by Excise officials.

20 Summary statement of electricity generated, purchased and consumed.

21 Summary statement of Central Excise Duties paid.

22 Information related with financial position.

23 Statement of manpower and machine utilization.

24 All statements as per cost accounting record rules.

25 Reconciliation between cost and financial accounts for the year.

B] General Documents and information:

1 Data on general economic environment in respect of the industry such as capacities, production, demand prices, market and international scenario.

2 Government policies on tariff, price control, licensing etc.

3 Efficiency parameters adopted, industry norms given by various associations in the industry.

COST AUDIT PROGRAMME:

A cost audit programme is a written scheme of the exact details of the work to be done by the auditor and his staff in connection with a particular audit.

The cost auditor prepares the cost audit programme before the commencement of cost audit.

The preparation of cost audit programme involves mainly three things:

1] The scope of audit work.

2] Division of work among the staff.

3] Period of audit during which audit is to be completed.

The cost auditor should pay his attention to the following records:

A] Records of materials;

B] Labour records;

C] Records of overhead charges;

D] Depreciation;

E] Records of work in progress;

F] Incomplete contracts.

A cost audit programme should ensure:

1] that all items to be audited are covered;

2] that the audit will be completed in time allowed;

3] work done by the assistants is reviewed from time to time;

4] documentary evidence is avaialable.

The cost auditor should ask the following questions in the nature of ‘YES ‘& ‘NO’ to the respective authorities. MATERIAL:

1 Is there a system of checking materials as and when received?

2 Are the maximum, minimum. Ordering and danger levels fixed?

3 Are the levels fixed strictly adhered to?

4 Are goods received noted written up for all materials and inspection reports prepared regularly?

5 Is an entry made in Bin card immediately from Goods Received Notes?

6 Are the materials received only against requisitions?

7 Are material transfer notes prepared for transfer of material from one job to another?

8 How are the material issues priced?

9 Is there a perpetual inventory system?

10 How much each item of material has contributed to total material cost in last three years?

LABOUR:

1 Is there a system of comparing the works attendance cards with the Attendance Register and the Foreman’s Register?

2 Are proper records maintained in respect of wage paid to workers working on piece rate system?

3 Is the labour classified as direct and indirect?

4 Is there internal control system in respect of preparation and payment of wages?

5 Is the proper and qualified person appointed for payment of wages?

6 Is bonus paid to workers on the basis of efficiency?

7 Is there a system to check the overtime work?

8 Are wages and salaries paid properly?

9 Is proper record maintained regarding idle time?

10 Is idle time classified as normal and abnormal for the purpose of accounting?

COST ACCOUNTING RECORDS:

Section 209 provides that a company, pertaining to any class of companies engaged in production, processing, manufacturing or mining activities should keep proper books of accounts showing utilisation of materials or labour. The Central Government has notified Cost Accounting Record Rules for more than 36 industries. These rules prescribe the manner in which Cost Accounting Records should be maintained and also specify the particulars which should be entered in the books of accounts.

The following are some of the main heads in which costs are generally required to be compiled:

Head

Records to be maintained

Material

Record of receipts, issues, balances, consumption, loss of material in transit, transfer of material, reconciliation.

Consumable Stores, Tools & Machinery

Record of receipts, issues, balances, consumption of each item and tools.

Services

Record of cost of power, fuel, steam etc.

Wages & Salaries

Attendance records, system of remuneration and incentives paid, record of idle time and its calculation.

Service Department expenditure

Expenses for these departments are to be calculated separately. The allocation or apportionment of expenses to be maintained.

Depreciation

The amount of depreciation, method of depreciation.

Royalty and Payment of Technical Aid

Basis of calculating the amount of royalty and charging royalty and other allied payments to production costs are to be recorded.

Overheads

Record must be divided into works, administration, selling and distribution overheads. Method of collection, allocation, apportionment should be indicated. Record of variances should be maintained.

Work-in-Progress

The value of work –in-progress should include materials, wages, overheads and depreciation. The

records should also show the quantities of work-in-progress.

Reconciliation

Reconciliation statements of cost and financial accounts should be maintained

Stock Verification

Records of stock verification of raw materials, components, stores, spare parts should be maintained.

VERIFICATION OF COST RECORDS:

The cost auditor is expected to examine the rules for general guidance before he undertakes audit of such industries. The report has to be submitted to the Central Government under section 233 B and not to the Registrar of Companies. He has to send a copy of the report to the concerned companies.

The cost auditor review and verification of the cost accounting records includes the following:

1] Method of Costing in use.

2] System of fixation of cost centres.

3] Method of accounting of raw materials, packing material, process materials and stores and spares.

4] Method of accounting of wastages, spoilages, rejections and sub-standards.

5] System of recording of wages, salaries and overtime anf their allocation to the cost centres.

6] Incentive schemes.

7] Basis of allocation / apportionment.

8] Method of accounting for depreciation and charging to cost centres.

9] Method of apportionment of service department expenses.

10] Basis of apportionment of overheads to cost centres and of absorption to products.

11] Basis of absorption of interest, bonus, gratuity etc.

12] Treatment of research and Development expenses.

13] Method of production accounting.

14] Special contracts related with sales, purchases and services.

15] Budgetary control system.

16] Internal audit system.

17] Methods of evaluating labour

18] Method of evaluating work-in-progress.

19] System of stock taking.

20] Policy for valuation of inventories.

COST AUDIT NOTES:

Cost audit notes is concerned with disclosing material information on accounts so as to present the ‘truth and fairness’ of the state of affairs on the part of an entity for the knowledge of the readers of such accounts and also for the satisfaction of the auditor. APPOINTMENT OF COST AUDITOR:

The Cost Auditor has to be appointed by the Board of Directors under section 233-B of the Indian Companies Act subject to prior approval of the Company Law Board. For appointment of auditor, the Board of Directors is required to pass a resolution in its meeting or by circulation with a condition that the same is subject to approval of the Central Government.

Cost Auditor is not appointed on regular annual basis as like financial auditor because cost audit is not an annual feature. It is conducted only when ordered by the Central Government. Eligibility for Appointment:

The following persons are eligible to be appointed as cost auditor under section 233-B:

1] Cost Accountant within the meaning of Cost and Works Accountants Act, 1959, or

2] Any such Chartered Accountant within the meaning of the Chartered Accountants act,1949 and a fellow of the Institute Chartered Accountant of india

for a period of 10years and has passed Part 1 of the management Accountancy Examination of the Institute of Chartered Accountants of India, or

3] Other person, as may possess the prescribed qualifications. Disqualification for Appointment as Cost Auditor:

Section 233-B (5) (a) deals with the qualification of a person for appointment as Cost Auditor.

The disqualification are as follows:

1] An officer or employee of the company is not qualified to be a Cost Auditor.

2] A person who is a partner or who is in the employment of a company shall not be a Cost Auditor.

3] A body corporate cannot be a Cost Auditor.

4] A person who is indebted to the company for more than Rs.1,000 or who has given any guarantee or provided any security in connection with the indebtedness of nay third person to the company for an amount exceeding Rs.1,000.

5] Any person appointed as a financial auditor of the company shall not be appointed as its Cost Auditor. RIGHTS OF A COST AUDITOR:

1] He has a right of access at all times to the books of accounts and vouchers of the company.

2] He has a right to get such information and explanations from the officers of the company as he may think necessary for the performance of his duties as an auditor.

3] He has a right to get all facilities and assistance from the company to perform his duties as an auditor.

4] The company and every officer, in default of not providing the accounts, vouchers, information, explanations etc. to the auditor, shall be punishable with fine.

DUTIES & RESPONSIBILITIES OF A COST AUDITOR:

1] He is liable to the company if he does not perform his duties properly or is guilty of negligence.

2] He also owes a legal responsibility to third parties who might have been misled by his audit certificate and acted in reliance thereon.

3] He should maintain his working papers as an evidence of his having carried out his duties.

4] He should not disclose any confidential information which he might have acquired in the course of his work and should not use such information for personal gain or gain of a third party.

5] He is responsible to answer any query required by the Central Government on a scrutiny of the cost audit report submitted by him.

6] He is criminally liable for falsification of books. If he is found guilty of falsification, he shall be punishable with imprisonment for a term which extends to seven years and he shall also be liable to fine in addition.