COST AUDIT U/S 148

It means auditing of cost records by a cost

1. Meaning accountant (CMA in practice).

2. Applicability of If aggregate turnover of company (whether in

regulated sector i.e., Type A or unregulated sector
maintaining cost i.e., Type B) in immediately preceeding financial year
records is minimum 35 crores.
 3. Applicability of cost audit

Regulated sector Unregulated sector

(Type A) (Type B)
Aggregate turnover in Aggregate turnover in
immediately preceeding immediately preceeding
financial year minimum 50 financial year minimum
Cr and from individual 100 Cr and from individual
product minimum 25 Cr. product minimum 35 Cr.
 4. Type A i.e., Regulated Sector

Power Fertilizer

Petroleum Sugar

Drugs Telecommunication
 5. Type B i.e.,
Rest
Unregulated Sector
 Suppose A ltd is a petroleum company
manufacturing three products A, B and C
6. Example whose turnover of immediately
preceeding financial year given below:-

Situations Cost Record Applicability Cost Audit Applicability

1. Products Yes No
A: 20 Cr
B: 20 Cr
C: 20 Cr
Situations Cost Record Applicability Cost Audit Applicability
2. Products Yes Only for product A
A: 30 Cr
B: 20 Cr
C: 20 Cr
3. Products Yes No
A: 30 Cr
B: 10 Cr
C: 5 Cr

7. Cost Record are maintained in CRA 1.

 8. Appointment of Cost Auditor

If Audit Committee (AC) exists

AC shall recommend the
name of the cost auditor. If Audit Committee (AC) does
not exists
BOD shall appoint on its own.
BOD shall appoint.
 9. Remuneration of Cost Auditor

If Audit Committee (AC) exists

AC will recommend. If Audit Committee (AC) does not
exists
BOD shall fix.
BOD shall fix.
Shareholder shall approve.
Shareholder shall approve.
 10. Time limit of Appointment

Cost auditor shall be appointed within 180 days from the commencement of
financial year and company shall inform about its appointment in form CRA
2 to CG (ROC) within 30 days of appointment or 180 days of commencement
of financial year whichever is earlier.
 11. Casual Vacancy

All the casual vacancy shall be filled up by BOD within 30 days of such casual
vacancy and company shall inform to CG (ROC) within 30 days of filling of
such casual vacancy by submitting Form CRA 2.
 BOD may remove the cost auditor without
12. Removal of Cost Auditor any prior approval of CG.

13. Qualifications, Powers Same as company auditor mutatis

and Duties of Cost Auditor mutandis (with necessary changes).

14. Can company auditor be

No
appointed as Cost Auditor?

15. Can the internal auditor No

be appointed as cost auditor?
 16. Time limit of completing Cost audit

Cost audit shall be completed within 180 days from the end of
financial year and cost auditor shall issue his cost audit report in
Form CRA 3 to company and within 30 days company shall along
with explanation to adverse remarks if any submit to ROC in
Form CRA 4.
 17. Exemptions from Cost Audit: (No
exemptions in cost record)

Unit in SEZ
Company whose revenue Unit for captive
from export in foreign consumption
exchange more than 75%
of total revenue.
 Cost Audit Documentation and Audit Process

Meaning of
Documentation:
Audit documentation is a material of audit working papers prepared and preserved by cost auditor in
connection with the performance of his audit.

Audit file:
Audit file means collection of one or more folders or any other shortage media whether kept in
physical or electronic form containing audit documentation.

Audit working papers:

Audit working papers are ordered documents containing details of audit procedures are applied,
audit evidences collected and basis of opinion.
3 stages of cost audit or overview of cost audit
Planning
1. Understanding the entity and its environment including internal environment.
2. Risk identification and strategy.
3. Risk and materiality assessment.

Performing
1. Audit execution
2. Audit procedures
3. Obtain audit evidences or audit findings.

Reporting
1. Audit conclusion
2. Issuing an audit report
 Practical steps of audit process

Step 1: Objective of Audit and management Outlook

Auditor should understand from management of the entity whether management is looking for a
cost audit just to satisfy the statutory requirement or also to fulfil other objectives like

Cost Suggesting Suggesting Complete

reduction product marketing review of
diversificati strategies business
Checking on strategies
Define profit
parameters of
making and
operational
loss making
efficiency
products
 Step 2: Preconditions
1. Cost auditor should understand the following:-

Number of
Objective cost Reporting Statutory
of cost auditors period. deadlines
audit appointed.
Area, nature Applicable
and scope of reporting
cost audit. framework.
 2. Cost auditor should ensure that management understands its
responsibilities:-

To give To give
To maintain unrestricted access necessary
cost records. to cost auditor to representations
To give additional
its books and .
To present cost information is To select and
persons. required by cost apply cost
statements. . auditor. accounting
principles.
3. Auditor and cost auditor should agree on audit fees
and payment schedules and sign the engagement
letter.
Step 3: Understanding the company's in business (key
inputs to make audit plan)
Cost auditor before making an audit plan should understand
the following relating to company's business:-
1. Nature of companies activities, ownership and management structure.
2. Nature of industry in which it operates.
3. Applicable reporting framework.
4. Companies production process.
5. Details of subsidiaries, associates and joint ventures.
6. Purchase and sales policy.
7. Inventory Policy
8. Internal Control system
9. Internal audit system
10. Previous year's audit report
Step 4: Planning the audit

Audit plan should include the following

1. Timings (dates) and duration (number of days) of audit.
2. Level and number of audit personnel required.
3. Determining the audit engagement partner.
4. Deciding materiality level.
5. Drawing and overall audit plan and strategy.
6. Formulating audit procedures like
7. Formulating risk assessment procedures
 Formulating audit procedures like

Test of Analytical Management Assertion

Test of details procedures representation
controls
Step 5: Executing the audit

Performing the audit Collecting the audit Preparing draft Preparing final
procedures as evidences and audit and
discussion.
audit report .
planned. checking.

Relevance and Sufficiency Source of such

reliability and evidences
 Step 6 Audit documentation

Documenting Documenting draft

Documentary Documenting Documenting final
audit plan and audit observations. audit report.
working papers audit evidences
strategy
 COST AUDITOR -
PROFESSIONAL ETHICS,
RESPONSIBILITIES
 COST AUDITOR – DEFINITION
“Cost auditor” means a Cost Accountant in practice
 Code Of Professional Ethics
The objectives of the 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
Cost accountants have to observe fundamental principles, which are:
(a) Integrity - A cost accountant should be straightforward and honest in performing his
services.
(b) Objectivity
(c) Competence
(d) Confidentiality
(e) Professional Behaviour
Duties Of A Cost Auditor To Report Fraud – (Section 143 Of The Companies Act, 2013)

(i) According to Section 143(12) of the Companies Act 2013, if an auditor of a company,
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.
(ii) Sub-Section specifies that no duty to which an auditor of a company may be subject to
shall be regarded as having been contravened by reason of his reporting the matter
referred to in sub-section (12) if it is done in good faith.
(iii) Sub-Section 14 makes it clear that the provisions of this section shall mutatis mutandis
apply to the cost accountant in practice conducting cost audit under section 148.
 (iv) 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 twenty-five lakh
rupees.
(v) Matter are required to be reported immediately but not later than 2 days of his
knowledge specifying:
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.
(vi) Following disclosures are required to be made in Board’s Report:
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken
 Professional And Other Misconducts
The First Schedule
Part I
Professional Misconduct In Relation To Cost Accountants In Practice
A cost accountant in practice shall be deemed to be guilty of professional misconduct, if he:-
(1) allows any person to practice in his name as a cost accountant unless such person is also
a cost accountant in practice and is in partnership with or employed by himself;
(2) pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or
brokerage in the fees or profits of his professional work, to any person other than a member
of the Institute or a partner or a retired partner or the legal representative of a deceased
partner.
“Partner” includes a person residing outside India with whom a cost accountant in practice
has entered into partnership
(3) accepts or agrees to accept any part of the profits of the professional work of a person
who is not a member of the Institute:
Provided that nothing herein contained shall be construed as prohibiting a member from
entering into profit sharing or other similar arrangements, including receiving any share,
commission or brokerage in the fees, with a member of such professional body or other
person having qualifications, as is referred to in item (2) of this Part;
(4) enters into partnership, in or outside India, with any person other than a cost accountant
in practice or such other person who is a member of any other professional body having
such qualifications as may be prescribed
(5) secures, either through the services of a person who is not an employee of such cost
accountant or who is not his partner or by means which are not open to a cost accountant,
any professional business:
(6) solicits clients or professional work, either directly or indirectly, by circular,
advertisement, personal communication or interview or by any other means:
Provided that nothing herein contained shall be construed as preventing or prohibiting-
(i) any cost accountant from applying or requesting for or inviting or securing professional
work from another cost accountant in practice;
(ii) a member from responding to tenders or enquiries issued by various users of
professional services or organisations from time to time and securing professional work as
a consequence;
(7) advertises his professional attainments or services, or uses any designation or
expressions other than cost accountant on professional documents, visiting cards, letter
heads or sign boards, unless it be a degree of a University established by law in India or
recognised by the Central Government or a title indicating membership of the [Institute of
Cost Accountants of India] or of any other institution that has been recognised by the
Central Government
 Part II
Professional Misconduct In Relation To Members Of The Institute In Service
A member of the Institute (other than a member in practice) shall be deemed to be guilty
of professional misconduct, if he being an employee of any company, firm or person—
(1) pays or allows or agrees to pay, directly or indirectly, to any person any share in the
emoluments of the employment undertaken by him;
(2) accepts or agrees to accept any part of fees, profit or gains from a lawyer, a cost
accountant or broker engaged by such company, firm or person or agent or customer of
such company, firm or person by way of commission or gratification.
 Part III
Professional Misconduct In Relation To Members Of The Institute Generally
A member of the Institute, whether in practice or not, shall be deemed to be guilty of
professional misconduct, if he —
(1) not being a fellow of the Institute acts as a fellow of the Institute;
(2) does not supply the information called for, or does not comply with the requirements
asked for by the Institute, Council or any of its Committees, Director (Discipline), Board of
Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority;
(3) while inviting professional work from another cost accountant or while responding to
tenders or enquiries or while advertising through a write up, or anything as provided for in
items (6) and (7) of Part I of this Schedule, gives information knowing it to be false.
 Part IV
Other Misconduct In Relation To Members Of The Institute Generally
A member of the institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if—
(1) he is held guilty by any civil or criminal court for an offence which is punishable with
imprisonment for a term not exceeding six months;
(2) in the opinion of the Council he brings disrepute to the profession or the institute as a
result of his action whether or not related to his professional work.
 THE SECOND SCHEDULE
Part I
Professional Misconduct In Relation To Cost Accountants In Practice
A cost accountant in practice shall be deemed to be guilty of professional misconduct, if he:—
(1) discloses information acquired in the course of his professional engagement to any person
other than his client so engaging him, without the consent of his client, or otherwise than as
required by any law for the time being in force;
(2) certifies or submits in his name, or in the name of his firm, a report of an examination of
cost accounting and related statements unless the examination of such statements has been
made by him or by a partner or an employee in his firm or by another cost accountant in
practice;
(3) permits his name or the name of his firm to be used in connection with an estimate of cost
or earnings contingent upon future transactions in a manner which may lead to the belief that
he vouches for the accuracy of the forecast;
(4) expresses his opinion on cost or pricing statements of any business or enterprise in which
he, his firm or a partner in his firm has a substantial interest;
(5) fails to disclose a material fact known to him in a cost or pricing statement, which is not
disclosed in a cost or pricing statement but disclosure of which is necessary in making such
statement where he is concerned with such statement in a professional capacity;
(6) fails to report a material mis-statement known to him to appear in a cost or pricing
statement with which he is concerned in a professional capacity;
(7) does not exercise due diligence, or is grossly negligent in the conduct of his professional
duties;
(8) fails to obtain sufficient information which is necessary for expression of an opinion
(9) fails to invite attention to any material departure from the generally accepted procedure
of costing and pricing applicable to the circumstances;
(10) fails to keep moneys of his client other than fees or remuneration or money meant to be
expended in a separate banking account or to use such moneys for purposes for which they
are intended within a reasonable time.
 PART II
PROFESSIONAL MISCONDUCT IN RELATION TO MEMBERS OF THE INSTITUTE GENERALLY
A member of the Institute, whether in practice or not, shall be deemed to be guilty of
professional misconduct, if he-
(1)contravenes any of the provisions of this Act or the regulations
(2) being an employee of any company, firm or person, discloses confidential information
acquired in the course of his employment, except as and when required by any law for the
time being in force or except as permitted by the employer;
(3) includes in any information, statement, return or form to be submitted to the Institute,
Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary
Committee, Quality Review Board or the Appellate Authority any particulars knowing them
to be false;
(4) defalcates or embezzles moneys received in his professional capacity.
 Part III
Other Misconduct In Relation To Members Of The Institute Generally
A member of the Institute, whether in practice or not, shall be deemed to be
guilty of other misconduct, if he is held guilty by any civil or criminal court for an
offence which is punishable with imprisonment for a term exceeding six months.]
 Penalties Under The Act
Section 24 of the CWA Act, 1959: Penalty for falsely claiming to be a member, etc.
Any person who,-
(i) not being a member of the Institute-
(a) represents that he is a member of the Institute; or
(b) uses the designation cost accountant; or
(ii) being a member of the Institute, but not having a certificate of practice,
represents that he is in practice or practices as a cost accountant, shall be punishable
on first conviction with fine which may extend to one thousand rupees, and on any
subsequent conviction with imprisonment which may extend to six months, or with
fine which may extend to five thousand rupees, or with both.
 Section 25 of the CWA Act, 1959: Penalty for using name of the
Council, awarding degrees of cost accountancy, etc.
(1)No person shall –
(i) use a name or a common seal which is identical with the name or the common seal of the
Institute or so nearly resembles it as to deceive or as is likely to deceive the public;
(ii) award any degree, diploma or certificate or bestow any designation which indicates or
purports to indicate the position or attainment of any qualification or competence in cost
accountancy similar to that of a member of the Institute; or
(iii) seek to regulate in any manner whatsoever the profession of [cost accountants.]
(2) First conviction with fine which may extend to one thousand rupees, and on any
subsequent conviction with imprisonment which may extend to six months, or with fine
which may extend to five thousand rupees, or with both.
Section 26 of the CWA Act, 1959: Companies not to engage in cost accountancy.

(1)No company, whether incorporated in India or elsewhere, shall practice as cost

accountants.
(2) Any contravention of the provisions shall be punishable on first conviction with
fine which may extend to one thousand rupees, and on any subsequent conviction
to five thousand rupees.
 Unqualified persons not to sign documents

(1)No person other than a member of the Institute shall sign any document on behalf
of a cost accountant in practice
(2) Any person who contravenes the provisions without prejudice to any other
proceedings which may be taken against him, be punishable on first conviction with a
fine not less than five thousand rupees but which may extend to one lakh rupees, and
in the event of a second or subsequent conviction with imprisonment for a term which
may extend to one year or with a fine not less than ten thousand rupees but which
may extend to two lakh rupees or with both.]
Section 29 of the CWA Act, 1959: Sanction to prosecute.
• No person shall be prosecuted under this Act except on a
complaint made by or under the order of the Council or of the
Central Government.
COST AUDITING AND ASSURANCE
STANDARDS
Sub-section (3) of section 148 prescribes that the auditor conducting
the cost audit shall comply with the cost auditing standards. This
proviso to be read with the following explanation:
“cost auditing standards” mean such standards as are issued by the
Institute of Cost Accountants of India, constituted under the Cost and
Works Accountants Act, 1959, with the approval of the Central
Government..
The Institute of Cost Accountants of India is a founder member of the
International Federation of Accountants (IFAC). The International
Auditing and Assurance Standards Board (IAASB) established under
the authority of IFAC have issued series of International Standards on
Auditing (ISAs).
Government of India, Ministry of Corporate Affairs, vide their letter no.
52/33/CAB/2013 dated 10th September, 2015 has, under section 148(3) of the
Companies Act, 2013, granted Central Government’s approval to the following Cost
Auditing Standards:
1. Cost Auditing Standard-101 on Planning an audit of Cost Statements;
2. Cost Auditing Standard-102 on Cost Audit Documentation;
3. Cost Auditing Standard-103 on Overall objectives of the independent cost
auditor and the conduct of an Audit in accordance with Cost Auditing Standards
4. Cost Auditing Standard-104 on Knowledge of business, its processes and the
business environment
 Cost Auditing Standard on Planning an Audit of Cost
Statements - 101
1. Objective - The objective of this Standard is to guide the members in planning for
the audit of cost statements so that it is performed in an efficient and effective
manner. Audit planning shall also include establishing the overall audit strategy
and audit plan for the conduct of the audit.
2. Definitions
• Audit: Audit is an independent examination of financial, cost and other related
information of an entity whether profit oriented or not, irrespective of its size or legal form,
when such an examination is conducted with a view to expressing an opinion thereon.
• Audit Plan: A record of the planned nature, timing and extent of risk assessment
procedures and further audit procedures at the assertion level in response to the assessed
risks.
• Audit Risk: Audit risk is the risk that the cost auditor expresses an inappropriate audit
opinion on the cost statements that are materially misstated.
 2. Requirements
1. Prior to entering the planning phase, the Cost Auditor shall ensure that:
(a)the appointment as cost auditor is proper, he has received the letter of appointment
(b)the ethical requirements
(c) an understanding of the terms of reference , scope of coverage
2. At first Audit Strategy is made and then the plan and then the audit programme
3. In formulating the Overall audit strategy, the Cost Auditor shall consider all
relevant factors.
(a) results of preliminary activities
(b) knowledge from previous audits
(c) knowledge of business
(d) nature and scope of the audit
(e) statutory deadlines and reporting format
 4. The Cost Auditor shall develop an audit plan.
5. The Cost Auditor shall update the Overall audit strategy and the
audit plan as required during the course of audit.
6. The Cost Auditor shall document the overall audit strategy, the
audit plan and any significant changes made therein during the audit
engagements and the reasons for the changes.
 3. Application Guidance

1. The nature and extent of planning activities will vary according to the:
(a) size and complexity of the entity’s activities, the number of products to be
covered, the processes and operations involved
(b) the audit team members’ previous experience
2. Planning is not a discrete phase of an audit, but rather a continuous and
iterative process.
3. In audits of small entities where the entire audit may be conducted by a
small audit team comprising the audit partner working with say one team
member .
Cost Auditing Standard on Cost Audit Documentation – 102

Covered in Chp – 3

The Cost Audit Documentation should be retained for at least ten

years from the date of the Cost Audit Report.
 Cost Auditing Standard Overall Objectives of the Independent Cost
Auditor and
the Conduct of an Audit in Accordance with Cost Auditing
Standards - 103

Objectives
The Cost auditor‘s overall objectives are:
1. to obtain reasonable assurance about whether the cost statements as a whole are free from
material misstatement, whether due to fraud or error
2. Where reasonable assurance cannot be obtained, the cost auditor should qualify the opinion
and in extreme cases disclaim an opinion.
Professional Judgment: The application of relevant training, knowledge
and experience, within the context provided by cost auditing standards,
cost accounting standards and ethical requirements, in making informed
decisions about the courses of action that are appropriate in the
circumstances of the audit engagement.

Professional Skepticism: An attitude that includes

(1)a questioning mind,
(2)being alert to conditions which may indicate possible misstatements
due to error or fraud, and
(3)a critical assessment of audit evidence.
 Requirements

1. The cost auditor shall comply with the relevant ethical requirements including
those pertaining to independence in respect of cost audit engagements.
2. While conducting an audit, the cost auditor shall comply with each of the Cost
Auditing Standards relevant to the audit.
3. The cost auditor shall plan and perform an audit with an attitude of
professional skepticism
4. The auditor shall obtain sufficient appropriate audit evidence
5. The cost auditor shall exercise professional judgment
 Application Guidance:
Audit and Ethics: The cost auditor should comply with relevant ethical
requirements as per Code of Ethics issued by the Institute of Cost
Accountants of India. The fundamental principles with which the auditor is
required to comply are Independence, Integrity, Objectivity, Professional
competence and due care, Confidentiality and Professional conduct.

Conduct of audit – By applying Relevant Cost Auditing Standard

A cost auditor cannot obtain absolute assurance because there are
inherent limitations in an audit that affect the cost auditor’s ability to
detect material misstatements. These limitations result from factors such
as the following:
(1) The use of sample testing.
(2) The inherent limitations of internal control (for example, the
possibility of management override or collusion).
(3) The fact that most audit evidence is persuasive rather than
conclusive.
 Audit Risk and Materiality:
Inverse Relationship

Responsibility for the Cost Statements: The cost auditor is responsible

for forming and expressing an opinion on the Cost Statements.
The Cost auditor is not responsible for preparing and presenting the cost
statements in accordance with the applicable Cost reporting framework
 Cost Auditing Standard on Knowledge of Business, its
Processes and the Business Environment - 104

The following is the Cost Auditing Standard (Cost Auditing Standard - 104) on
“Knowledge of Business, its Processes and the Business Environment”.
Objective
The objective of this standard is to enable the cost auditor to have knowledge of the
client’s business
 Requirements
1. The Cost Auditor shall have adequate level of understanding of the knowledge of
Business, its Processes and the Business Environment to develop a reasonable
assurance in order to express an opinion on the cost statements
2. The Entity and Its Environment: The cost auditor should obtain an understanding of
the following:
(a) The nature of the entity, (including its operations covering Business processes, major
inputs, Joint & By- Products and Wastages and major outputs etc) and the entity’s
ownership and governance structure.
(b) Relevant industry, regulatory, and other external factors including the applicable cost
and financial reporting framework.
(c) The entity’s selection and application of cost accounting policies.
(d) The measurement and review of the entity’s performance.
The Entity’s Internal Control:
(a)Control Environment: The cost auditor shall evaluate whether management has
created and maintained a culture of honesty and ethical behaviour.
(b) The entity’s risk assessment process: The cost auditor shall obtain an
understanding of whether the entity has a process for
(1) Identifying business risks relevant to cost reporting objectives;
(2) Assessing the likelihood of their occurrence;
(3) Estimating the significance of the risks; and
(4) Deciding about actions to address those risks.
c) Cost Information System/ Management Information System:
(1) The classes of transactions and their analysis, that are significant to the cost
statements;
(2) The procedures, by which those transactions and their analysis are initiated,
recorded, processed, and reported in the management information systems and cost
statements;
(3) The related cost accounting records
(d) Control Activities: The auditor shall obtain an understanding of the control
activities, relevant to the audit.
(e) Monitoring of controls
COST AUDIT PROGRAMME
 FACTORS IN PLANNING COST AUDIT ASSIGNMENT

In planning the audit assignment certain important factors are taken into
consideration viz.
(a) Requirement of audit personnel for the assignment
(b) Documentation of the audit procedures and of evidences
(c) Quality control exercised over performance of the assignment etc.
 Audit personnel for the assignment

The cost audit team to whom the assignment is to be delegated need appropriate
direction and supervision. It is therefore, essential that they accomplish the following
tasks:
(i) Physical inspection of the activities and the area where they are performed;
(ii) Knowledge of the key personnel responsible for the activities and for the maintenance of
cost records;
(iii) Physical inspection of the cost accounting records and other records relating to activities;
(iv) Study of the statements of budgets, plans and strategies relating to activities;
(v) Study of the Cost Accounting system
Documentation of the audit procedures and of
evidences

Chap - 3
 Quality control over performance of the assignment

(a) Monitoring the progress of the preparation / maintenance of cost accounting

records;
(b) Reviewing that the audit assistants do have necessary skill and competence
(c) Modifying the plan and programme, as considered necessary; and
(d) Removing the differences of professional judgement between the personnel
and deciding the level which is appropriate for reference purpose
 CHECKLIST TO AUDIT VARIOUS COST ELEMENTS

1. Audit of production - Product wise 9. Audit of repairs and maintenance cost

2. Audit of raw material cost 10 Audit of employee cost
3. Audit of key raw materials 11. Audit of insurance cost
inventory status 12. Audit of depreciation cost
4. Audit of electricity cost 13. Audit of administrative overhead cost
5. Audit of cost of electricity 14. Audit of selling and distribution
generated by DG set overhead cost
6. Audit of demineralised water cost 15. Audit of packing material cost
7. Audit of steam cost 16. Audit of sales value
8. Audit of stores and spares cost
 Audit of Production - Product Wise
Following checklist should be considered to audit production - product wise:
• Ensure that there is proper inventory balancing for each of the finished product, for
example,
Opening Stock + Production = External Sales + Internal Transfers + Closing Stock
• Ensure that closing stock of previous year is correctly considered as opening stock of
current year
• Check the capacity utilisation of previous 5 years - product wise
• For any abnormal under utilisation of production capacity the auditor should seek the
reasons from the management and what steps management has proposed to undertake to
overcome under utilisation of capacity.
• Check whether there is any circumstance where there is addition to capacity for any
product during the year but actual production achieved is either equal to or less than that
of previous year. Reasons for the same should be sought from the management
 Audit of Raw Material Cost

• Ensure that proper quantitative inventory balancing is carried

Opening Stock + Purchases – Consumption = Closing Stock
• Work out Input / Output Ratios for key raw materials for previous 3 to 5 years.
• In case of chemical based industries, some chemicals tend to evaporate during
their storage. Being normal loss, it should be shown as consumption for that product.
• In some cases it may happen that residue of some particular raw material is not
reusable but has to be sold out in the market, say for example In such case, sale
value of residue of raw material X will be reduced from raw material consumption of
X for Product A only.
• FIFO & Weighted Average rates can be applied
 • FIFO & Weighted Average rates can be applied
• If some raw material is produced in-house, then the company would have
created separate cost centre for that raw material.
• Sometimes a company may keep rented storage tank at port to store the
material which is subsequently brought to the company premises. This rent will
form part of cost of material
• Demurrage or detention charges or any penalty levied should not form part of
landed cost of raw material
• R & D department should suggest how to reduce/eliminate wastages
• Check the trend of rates of key raw materials for previous 4 years
 Audit of Key Raw Materials Inventory Status

• Obtain information about current stock position

• Assess how the stock position is keeping pace with consumption pattern
• Check whether unnecessary increase in the volume of inventory results in more
and more cost locked up in inventory
 Audit of Electricity Cost

Following checklist should be kept in view to audit electricity cost

during cost audit:
• Focus on A Category cost centres
• Any increase in consumption without any corresponding increase in
output requires explanation from the management as it is a matter of
concern
• Check the trend of electricity cost for previous 5 years
• Check whether proper meters are installed
• Check whether meters are regularly calibrated
• A company may have more than one source of electricity.
 Audit of Cost of Electricity Generated by DG Set

Following checklist should be remembered to audit the cost of

electricity generated by DG set:
• Monthly report of Diesel Generating Set prepared by officer in-charge of DG
set should be the basis for ascertainment of cost of electricity generated
• Ensure that monthly report contains the following information:
(a) No of hours DG set is operated
(b) Quantity of high speed diesel used
(c) Total units generated
• Proper meters should be in place to quantify the total units generated
• Meters should be regularly calibrated
• There should be proper system to quantify quantity of diesel used
• Ensure the correctness of depreciation and insurance booked against DG set
 Audit of Demineralised Water Cost

Following checklist should be kept in view to audit demineralised water cost

during cost audit:
• Proper cost centre should be allocated to DM water plant
• Monthly report prepared for demineralised water plant should form the
basis for ascertainment of cost of demineralised water plant
• Ensure that monthly report so prepared contains the following data
(a) Quantity of filtered water used
(b) Quantity of chemicals used
(c) Electricity units used (Kwh)
(d) Quantity of demineralised water generated
(e) Quantity of demineralised water allocated to production cost centres,
boiler etc
• There should be proper system in place to quantify quantity of
demineralised water generated and quantity allocated to various cost centres
• It is recommended to have proper meters which should be regularly
calibrated
• Ensure correctness of depreciation and insurance
• Cost of electricity
• Cost of chemicals consumed
 Audit of Steam Cost

• Generally boiler house prepares monthly report which becomes the basis for
ascertainment of cost of steam. Ensure that monthly report for boiler contains
the following information:
(a) Running hours of boiler
(b) Quantity of steam generated (MT)
(c) DM water consumption (KL)
(d) Electricity consumption (Kwh)
(e) Fuel consumption
• The cost auditor should check the following ratios for previous 5 years:
(a) Cost of steam generated for previous 5 years
(b) Quantity of steam generated per unit of fuel used
• Focus on A category cost centres
• Ensure that cost of consumable stores and repairs is properly booked against
boiler
• Ensure that depreciation and insurance are correctly worked out
• Cost auditor should go through steam cost of previous 5 years
 Audit of Stores and Spares Cost

• If there is any substantial increase in expenditure with respect to any particular

cost centre/cost centres then reasons for the same should be discussed with the
head of that cost centre(s) so that appropriate action can be taken to prevent such
recurrences.
• The cost auditor can pick up few major items of stores & spares and ensure that
they have been booked against correct cost centres
• The cost auditor should also go through expense control chart
 Audit of Repairs and Maintenance Cost

• If there is any substantial increase in expenditure with respect to any particular

cost centre / cost centres then reasons for the same should be discussed with
the head of that cost centre(s) so that appropriate action can be taken to
prevent such recurrences.
• The cost auditor can pick up few major items of repairs & maintenance and
ensure that they have been booked against correct cost centres
• The cost auditor should also go through expense control chart
 Audit of Employee Cost

Following checklist should be kept in view to audit employee cost during

cost audit:
• The cost auditor should verify the following information:
(a) Employee cost for previous 5 years – cost centre wise
(b) Number of employees for previous 5 years - cost centre wise
(c) Employee cost per employee for previous 5 years - cost centre wise
• The cost auditor should also verify the following information:
(a) Employee cost for previous 5 years – product wise
 Audit of Employee Cost

(b) Number of employees for previous 5 years – Product wise

(c) Employee cost per employee for previous 5 years – product wise
• The cost auditor should verify that cost centre wise list of employees is regularly
updated in employee payroll so that cost centre wise employee cost gives correct
reflection of employee cost
• Generally, employees are transferred from one cost centre to another cost centre.
The cost auditor should ensure that pay roll of employees reflect all such transfers
correctly and timely
• Increase in number of employees for particular cost centres or product should be
looked into. The reasons and justification should be obtained from the management
 Audit of Insurance Cost

The insurance premium paid by company may cover various kinds of insurances.
Insurance of plant & Machinery, buildings and equipments, furniture & fixtures
usually covers risks of general loss and fire.
• The cost auditor should obtain information from either CMA
department/Finance department
• product wise expenses on insurance.
Audit of Depreciation Cost
Same as Insurance
 Audit of Administrative Overhead Cost

A cost auditor should ask for the following information:

(a) Trend of administrative expenses (`/Lacs) – year wise
(b) Administrative expenses (`/MT) – year wise product wise
• The auditor should see that basis of allocation/apportionment
• For any abnormal increase in any expenses, the cost auditor should ask for cost
centre wise break up discuss with the management
• He should see that donations and penalties are not charged to products but shown
as items of reconciliation
• If there is any substantial increase/decrease in per MT administrative expenses as
compared to any of 4 years, he should seek the reasons for the same
 Audit of Selling and Distribution Overhead Cost

1) Determination of the costs of sales of products and the extent of profitability of each.
2) Control of selling & distribution costs
3) Price fixation
• A cost auditor should ask for the following information:
(a) Trend of selling & distribution expenses (`/Lacs) – year wise
(b) Selling & distribution expenses (per/MT) – year wise product wise
• He should see that basis of allocation/apportionment
• For any abnormal increase in any expenses and discuss with the management
 Audit of Packing Material Cost

• Efforts should be made to negotiate the rate of high value consumption packing
materials
• Steps should be taken to reduce handling losses, wastages, etc
• Ensure that proper quantitative inventory balancing is carried out for all the
packing materials i.e. opening stock + purchases – consumption = closing stock
• For charging packing material cost to product/products, both FIFO and weighted
average rates can be applied.
• a company prepares expense control chart
• If some packing material is produced in-house then the company would have
created separate cost centre for that packing material.
 Audit of Sales Value
• More focus should be on products of A category and B category in terms of sales
value
• Check whether efforts have been made to increase sales realisation
• Check whether efforts have been made to procure more orders for product/products
having higher contribution
• Check whether company has diverted resource allocation from high volume/low
contribution products to high contribution products
• Check that there is a proper balance between the opening stock, production, sales
and closing stock in order to ensure no unnecessary locking up of working capital in
terms of closing stock
• Check that any increase in production capacity has resulted in increase in sales
quantity without affecting corresponding sales realisation
 An overall checklist of the programme is drawn up for reader’s guidance:
SI. No. Planning Phases Action to be taken
1. Familiarisation with the company: Acquire the previous
(a) Nature of business and industry years’ Annual Reports and
Accounts (at least 5 years)
(b) Objectives of the company, e.g., maximisation of profits, cost Keep notes
reduction, quality improvement, customised production etc.
Strategies of the company like market expansion, market
diversification including mergers/acquisitions, research including
innovation, product diversification including product mix etc.

(c) Ownership, e.g. public or private, domestically controlled or MNC, Identify and keep notes on
major shareholders, management position of shareholders legal forms.

(d) Corporate structure, subsidiaries and affiliates ownership Keep notes

percentage and dates of acquisition
SI. No. Planning Phases Action to be taken
2. Company records: Obtain copies.
Memorandum and Articles of Association, foreign technical collaboration & Keep notes
agreement, other agreement deeds or contracts including that of inter-
company transactions, secretarial records and registers.
3. Familiarisation with the Organization of the Company: Keep notes
(a) Head of Finance/ Accounts/Costing
(b) Other Directors & Key Managerial Personnel
(c) Delegation of Financial and Administrative Authorities;
Organisation control systems in existence including MIS, and cost control
processes

4. Familiarity with organisation profile: Obtain detailed organisation

Main or Central or Head Office Administration Offices other functional chart showing functional
managements, e.g. Purchase, Sales, Production, Finance, etc. Background relationships.
of Key personnel
SI. No. Planning Phases Action to be taken
5. Familiarity with the company policies: Keep notes and
(a) Capitalisation Identify
(b) Products or Services
(c) Inter-company transactions policies
(d) Other important policies
6. Sales policy and sales management: Keep notes and Identify
Pricing Policies – Home and export sales
7. Production planning and control: Obtain the process flowcharts
Manufacturing process, factory layout, Product details
8. Accounting systems:
Financial accounting, Cost accounting, Integrated accounts
9. Management information systems: Obtain an outline of the
♦ Budgets schemes adopted, if any
♦ Standard costing
SI. No. Planning Phases Action to be taken
10. Internal audit system and Internal control: Obtain Internal Auditor’s
Systems/Internal Audit Programmes Manual and reports on areas
covered.
11. Cost records, statements and reports: Obtain them from the cost
(a) Cost accounting records and other related records department.
(b) Cost Statements and related Statements & documents
(c) Cost Accounts Manual
(d) Previous cost auditor’s reports (if any)
 An Illustrative check-list of information to be obtained
A. One Time Information:
1. Organization chart
2. Process of manufacture with Flow Chart
3. Blue print of production area with machine locations
4. List of cost centres
5. Machine details
6. Product details
7. Details of any product manufactured under any technical collaboration, licence
agreement, Terms of payment of royalty if any
8. Details of process chemicals
9. Details of packing materials
PREPARATION AND FILING OF
COST AUDIT REPORT
 Introduction
A Cost Auditor is required to submit his report in Form CRA-3 which
is required to be prepared on the basis of data and information
available in the cost accounting records and other data maintained
by the company in accordance with CRA-1 of the rules.
 • A qualified audit report is given by the cost auditor
Qualified • when the cost statements are materially misstated due to
misstatement in one particular cost element, class of
Audit transaction or disclosure that does not have pervasive effect
on the cost statements
Report
• when the cost auditor is unable to obtain audit evidence
regarding particular cost element, its allocation and
apportionment, class of transaction or disclosure that does
not have pervasive effect on the cost statements.

Adverse • An adverse audit report means that the cost statements are
materially misstated and such mis-statements have pervasive
Audit Report effect on the cost of production, cost of sales and margin of
the products.
 Cost Audit Report In XBRL Format (As Per Taxonomy)

XBRL – Extensible Business Reporting Language

“Every company covered under these rules shall, within a period of thirty days from the
date of receipt of a copy of the cost audit report, furnish the Central Government with such
report in Form CRA-4. All the cost audit reports have to be filed online, with MCA, in XBRL
format, attached to the prescribed Form- CRA-4. XBRL is the open international standard
for digital business reporting, managed by a global not for profit consortium called “XBRL
International”. XBRL is used around the world, in more than 50 countries.
XBRL makes reporting more accurate and more efficient.
 STEPS FOR FILING COST AUDIT REPORT IN XBRL FORMAT ON MCA PORTAL

1.Creation of XBRL instance document

The first step for creating the instance document is tagging of the XBRL taxonomy elements
with the information in the Cost audit report of the company by means of mapping of the
taxonomy elements with the Cost audit report. This converts the report into XBRL form.
2.Download XBRL validation tool
A separate tool has been provided on the MCA XBRL portal for validating the generated
XBRL instance document. You are required to download the tool from the portal and
validate the instance document before uploading the same. (www.mca.gov.in/XBRL)
 STEPS FOR FILING COST AUDIT REPORT IN XBRL FORMAT ON MCA PORTAL

3. Load the instance document

To load the instance document, you need to click the open button, select the instance
document and open it. You need not exit the tool to load another instance document just
click on ‘open’ again in the menu bar to open the next document.
4. Validate the instance document
The next step is to validate the instance document. The following validations shall be
performed by the tool-
• Validating that the instance document is as per the latest and correct version of taxonomy
prescribed by MCA
• All mandatory elements have been entered
• Business Rules as specified by MCA
 STEPS FOR FILING COST AUDIT REPORT IN XBRL FORMAT ON MCA PORTAL

5. Pre-scrutiny of the instance document

Once the instance document is successfully validated from the tool, the next step is to pre-
scrutinize the validated instance document with the help of the same tool using a working
internet connection.

6. Convert to PDF and verify the contents of the instance document.

Once the instance document has been successfully pre-scrutinized, the next step is to
generate PDF by using ‘Export to PDF’ functionality in the tool to verify the final instance
document.
 STEPS FOR FILING COST AUDIT REPORT IN XBRL FORMAT ON MCA PORTAL

7. Attach instance document to the Form CRA-4

Form CRA-4 is available on the MCA portal for filing in XBRL instance documents by the
Company.
8. Submitting the Form CRA-4 on the MCA portal.
After the form is correctly filled, it is required to pre-scrutinize and then sign the form [with
a valid digital signature of the person authorized by the board resolution] and then upload
the same as per the normal e-Form filing process.
 A.List of common errors [Annexure – II]
(1)Issue in net connectivity. Please check your connection
(2) The PDF is not getting generated or PDF generated is of zero kilobytes in size.
(3) The format of the date entered is not as per the valid format.
(4) For Boolean data types ‘Yes’ or ‘No’ has been entered.
(5) Wrong Currency code like Rs entered.
(6) Mandatory fields have not been entered.
(7) In case of mandatory table, there is no element present.
 B. Interpretation of validation errors [Annexure – I]
The following the instructions have to be followed to interpret those errors –
• All the Element Names will be shown within single quotes, like-’Quantity Of
Material Consumed’
• All the values will be shown within square brackets like- [In Employment]
MANAGEMENT REPORTING ISSUES UNDER COST AUDIT

Introduction
Performance measures help managers to create capable and matured
processes. Effective performance measures can let us:
 Monitor performance to judge how well the company is fairing,
 Know if company management is meeting its goals.
 If appropriate actions have been taken to affect performance or improve
efficiency.
PERFORMANCE ANALYSIS

(a) To improve profits and profitability.

(b) To optimize resource allocation.
(c) To optimize the product and services portfolio.
The following criteria may help the management auditor to select and include
the various performance measurement criteria in the Report on Performance
Analysis:
(i) Effect on profitability
(ii) Effect on resource utilisation
(iii) Effect on liquidity
(iv) Effect on risks
(v) Effect on quality
(vi) Effect on competitiveness
(vii) Effect on responsiveness to the market etc.
An ideal Report on Performance Analysis should possess the following
characteristics:
1. Objectivity
2. Capability of being predictive value
3. Comprehensiveness
4. No information overload
5. Coverage of strategic thrust
6. Trend measures and current status
7. Timeliness
8. Segmented and enterprise-wide coverage
MECHANISM FOR PERFORMANCE ANALYSIS

After analysing the activities within each process, we give below

the mechanism for performance analysis as follows:
(a) Monitor performance
(b) If company is meeting its own set goals
(c) Take action if the customers are satisfied.
(d) If improvements are necessary.
STEPS SUGGESTED FOR REPORT ON
PERFORMANCE ANALYSIS

Step 1. Identify and understand the key strategies of the company.

Step 2. Choose strategies that have more visible expressions in
costs data.
Step 3. Identify the activities that were impacted by the strategies.
Step 4. Analyze the cost implications of those activities.
Step 5. Present the evaluation, in a table.
Step 6. Give explanatory notes for the terms used, calculations
made, and assumption behind the evaluations.
Step 7. Finalize the finding after a discussion with the concerned
operating executives and then with the management of the
company.
CONTENTS OF THE REPORT ON PERFORMANCE ANALYSIS

The Report on Performance Analysis may cover the following areas:

(i) Capacity Utilization Analysis
(ii) Productivity/Efficiency Analysis
(iii) Utilities/Energy Efficiency Analysis
(iv) Key-Costs & Contribution Analysis
(v) Product/Service Profitability Analysis
(vi) Market/Customer Profitability Analysis
(vii) Working Capital & Inventory Management Analysis
(viii) Manpower Analysis
CAPACITY UTILISATION ANALYSIS

The auditor’s checklist:

1. Technical documents pertaining to the equipment
2. Production planning reports
3. Interviews with managers responsible
4. Wastage reports
5. Benchmarking exercises done
PRODUCTIVITY AND EFFICIENCY ANALYSIS

The cost auditors checklist would include, inter alia, the following:
1. The Bill of Material (BOM) for each product
2. The standard cost card, if any
3. Internal reports on consumption, wastages per unit.
4. Production scheduling.
UTILITIES AND ENERGY EFFICIENCY ANALYSIS

The performance parameters could include the following:

(i)Energy generated per unit of fuel consumed.
(ii)Measurement of improvement in power factor.
(iii)The cost of generating energy per unit.
(iv)Trend analysis of energy costs
KEY COSTS AND CONTRIBUTION ANALYSIS

The checklist for the auditor could include:

1. Sales and production records.
2. Reconciliation with GST records.
3. Price lists and discount structure policy.
PRODUCT/SERVICE PROFITABILITY ANALYSIS

The checklist for the auditor could include:

1. Sales and production records
2. Reconciliation with GST records
3. Price lists and discount structure policy
MARKET / CUSTOMER PROFITABILITY

The checklist:-
1. Market and customer-wise sales and cost reports.
2. The marketing campaigns.
3. New customers added during the year.
WORKING CAPITAL AND INVENTORY
MANAGEMENT ANALYSIS

The auditor’s checklist could include the reference to the following:

1. Records related to inventory of RM, WIP and FG, stock
discrepancy reports.
2. Inventory aging reports.
3. Reports on receivables
4. Terms and conditions of working capital funds.
MANPOWER ANALYSIS

The auditor’s checklist for this content area may be:

1. Details of number of recruitments done, number of people left,
the labour turnover ratios
2. The data on idle time.
3. Manpower productivity reports.
4. Use of temporary or casual labour.
 OTHER AREAS SUGGESTED TO BE COVERED
IN THE REPORT ON PERFORMANCE ANALYSIS

(a) Risk Analysis: Risk analysis affect the future performance. The
auditor should
(i) Identify the sources of various risks
(ii) Assess the potential downside or upside effect thereof.
(iii) Recommend risk mitigation tools.
(b) Environment and Sustainability: This can be assessed to provide
insight into how effectively the company is following policies on
CSR, environment and sustainability.
(c) Quality Performance: This can be assessed by relating the
quality costs incurred versus the benefits achieved by reduction in
customer complaints or increase in customer satisfaction index.
(d) R & D Performance: The future performance of companies
would depend upon their success of the R & D initiatives.
(e) Business Process Performance: The processes could be
evaluated on the criteria like speed, accuracy, empowerment,
hurdles, facilitation etc.
(f) Human Resource Accounting: This is an extended analysis of
total human resource costs.
(g) Value Added Analysis: The value added is measured as an
absolute value created by the business and the distribution thereof
to the employees and other providers of capital.
MANAGEMENT ACCOUNTING TOOLS

The following table shows various management accounting tools

that are used to serve different objectives:

Purpose Management Accounting tool

Control Budgetary control, standard costing, variance
analysis.
Cost computation Full (absorption) Costing, Job, batch, process or
contract costing Activity based costing, Time
Driven ABC .
Purpose Management Accounting tool
Cost reduction Total Quality management, Quality costing,
Kaizen costing, Lean manufacturing, Value
Analysis and Value Engineering, Six Sigma.

Pricing and decision making Target costing, Life cycle costing, Throughput
accounting, Variable or marginal costing
Total performance Balanced Scorecard, Performance Prism,
management Performance pyramid, Business Objects,
Business Intelligence
Planning for the Report on
Performance Analysis
Key Performance Indicators (KPIs) are:-
(a) Quantitative – these can be financial or non-financial
(b) Qualitative – these are often lead indicators i.e. they influence
future performance
(c) Actionable – those which can be influenced by enterprise
actions or controllable
(d) Trending – those which need to be assessed over a period of
time to observe whether they are improving or not.
 BASICS OF MANAGEMENT AUDIT

INTRODUCTION
 Management Audit is the total examination of transaction of an
organization,
 and includes checks on the effectiveness of managers, their compliances
with company on professional standard, the reliability of management
functioning, the quality of performance of duties and recommendations
for improvement.
Management audit deals with –
(i) the objectives of an organisation;
(ii) the policies and procedures in terms of the objective of the
organisation; and
(iii) adequate performance of an organisation in terms of
objectives, policies, and procedures.
Definition and Objects of Management Audit

Management audit is the unique process appraising the

performance of directors, managers or in the other
words, appraising the performance of the management.
The main objectives of management audit can be summarized as follows:-
(i) to ensure optimum utilization on all the resource employed, including
money, materials, machines, men and methods;
(ii) to highlight efficiencies in objectives, policies, procedures and planning;
(iii) to suggest improvement in methods of operations;
(iv) to highlight weak links in organizational structure and in internal
control systems, and suggest necessary improvements;
(v) to help management by providing health indicators and help prevent
sickness or help cure in case of sickness; and
(vi) to anticipate problems and suggest remedies to solve them in time.
Benefits of Management Audit
(i) It helps management in framing basic policies for the organization and
to define objectives.
(ii) management audit helps in preparing a viable and achievable plan for
the organization.
(iii) It helps implement the plans.
(iv) It assists in smooth operation of the organization.
(v) It assists in analyzing SWOT (strengths, weaknesses, opportunities and
threats) of the organization.
(vi) to ensure optimum utilization on all the resource employed, including
money, materials, machines, men and methods;
(vii) to highlight efficiencies in objectives, policies, procedures and
planning;
(viii) to suggest improvement in methods of operations;
(ix) to highlight weak links in organizational structure and in internal
control systems, and suggest necessary improvements;
(x) to help management by providing health indicators and help prevent
sickness or help cure in case of sickness; and
(xi) to anticipate problems and suggest remedies to solve them in time.
Scope and Usefulness of Management Audit

Accordingly, the scope of management audit may include –

(i) The suitability, practicability and present compliance or otherwise of
the organization with its desired objectives and aims.
(ii) The current image of the organization among customers, general
public within its own particular industrial or commercial field.
(iii) Efficient utilization of resources of the organization.
(iv) The rate of return of investors’ capital – whether poor, adequate or
above average.
(v) Relationship of the business with its own shareholders and investing
public in general.
(vi) Employee relation.
(vii) The aims and effectiveness of management.
(viii) Financial policies
Accountability is the main criteria of audit, particularly management
audit. The process of accountability includes following elements:
(i) Description of the organization and its participants.
(ii) Identification of objectives and the provision of relevant information
to those objectives.
(iii) Ability of action on the part of the participants.
Uses of Management Audit

(i) It helps management in framing basic policies for the organization and
to define objectives.
(ii) management audit helps in preparing a viable and achievable plan for
the organization.
(iii) It helps implement the plans.
(iv) It assists in smooth operation of the organization.
(v) It assists in analyzing SWOT (strengths, weaknesses, opportunities and
threats) of the organization.
(vi) to ensure optimum utilization on all the resource employed, including
money, materials, machines, men and methods;
(vii) to highlight efficiencies in objectives, policies, procedures and
planning;
(viii) to suggest improvement in methods of operations;
(ix) to highlight weak links in organizational structure and in internal
control systems, and suggest necessary improvements;
(x) to help management by providing health indicators and help prevent
sickness or help cure in case of sickness; and
(xi) to anticipate problems and suggest remedies to solve them in time.
Concept of Management Audit

Conceptually management audit covers areas which are not

normally covered by other audits. Secondly, management audit
does not go into the vouchers or other similar evidence but
comprises of the appraisal of management effectiveness in
various areas of managerial operations.
Management function include –
(i) Planning.
(ii) Organising.
(iii) Staffing.
(iv) Coordinating.
(v) Communicating.
(vi) Directing.
(vii) Motivating.
(viii) Controlling.
(ix) Innovating.
Functions of Management Audit

(i) Marketing, including selling and distribution.

(ii) Manufacturing/servicing from selection to recruitment,
training, motivating, retaining, advancement, etc.
(iii) Personnel policies and industrial relations.
(iv) Finance including maintenance of accounts.
(v) Research & development.
Ingredients/ Basis Management Internal Audit Financial, cost and
Audit other audits
1. Expectations Appraising Assisting Specific under
management Management to statutory and
identify problems. other’s directions.
2. Attitude Friend, Policeman/judge Watch dog/judge
Philosopher and
guide.
3. Agency Outside team or Internal or External Specially
management designated persons
4. Force Force Statutory in some Statutory
cases.
Ingredients/ Basis Management Internal Audit Financial, cost and
Audit other audits
5. Area Complete Mainly procedural. Specific objectives
Management or
specific problems.
6. Evaluation Effectiveness/ Quality of Specific
quality of procedures information
management/Poli Operations/data
cies
7. Period covered Past, present and Past and present Mainly past
future.

8. Procedures Flexible Structured Highly structured

Ingredients/ Basis Management Internal Audit Financial, cost and
Audit other audits
9. Reporting level Higher Operational Designated

10. Time span Futuristic Current and Current and

immediate. immediate past.
11 . Periodicity Regular Regular Annual
Steps of Management Audit
The steps of management audit are:-
1. Select an area of operation of management
2. Establish what should be the objective, standard or target of the
operation.
3. Determine whether the actual results meet the standards, norms or
targets. If not, why not?
(i) Is the target too difficult?
(ii) Is failure to achieve the target costing the organisation?
4. Establish what is done to ensure the achievement of the
norms, target and standards.
What steps are taken for –
(i) planning
(ii) operations, execution
5. Carryout a detailed investigation.
6. Report the findings of the audit and make recommendations.
Management Auditing Procedure

1. Make a preliminary survey of the activity under audit.

2. Study the basic charter of the activity under audit (applicable
laws and related legislative history.
3. Review the policies established to govern the activities.
4. Report on the findings of the audit work.
Techniques by which the auditor can identify
problems areas

(i) Identification of possible control weakness by survey:- During the

preliminary survey work information is obtained on how the activity is
supposed to function.
(ii) Review of management reports.
(iii)Review of internal audit or inspection reports.
(iv)Physical inspection:- Physical inspections of the organization's activities.
(v) Discussions with the officials and employees
Techniques of Management Audit

(i) Accounting or economic techniques

(a) Break-even analysis
(b) Budgetary control including flexible budget system
(c) Cost management techniques indicating how an
organization's assets should be allocated over competing
projects or
(d) Discounted cash flow and net present value methods.
(e) Cost benefit analysis.
(f) Standard costing and marginal costing
(g) Activity based costing to test.
(h) Quality analysis of company transactions.
(ii) Scientific techniques
(a) Computer Models: Decision on material mix, product, mix,
make or buy etc.
(b) Network analysis
(c) Mathematical programming
(iii) Statistical techniques
(a)Activity sampling
(b) Monte Carlo Simulation
(c) Exponential smoothing
(d) Interfirm comparison
(iv) Personnel techniques
(a)Attitude survey
(b)Man-machine relationship
(c)Training methods
(d)Profitability and productivity measurement
(v) General techniques
(a)Statistical theory of management
(b) Analysing the problem
(c) Establish management by objectives.
(d) Determine the key factors
(b) Brain storming
(c) Transfer pricing
(d) Management by objectives
(e) Management by exception
Management Audit Evidence

The auditor’s evidence comes from his discussions with

the people concerned in the organization, the survey and
review of various reports of the organization.
Management Audit Programme (MAP)

It is a plan of action drawn in advance of taking up the audit.

An efficient management audit programme shall comprise the
following:
(i) Review of the organizational objectives and plans
(ii) Study of the policies and practices of the management
(iii) A critical review of the organizational structure
(iv) Study of the systems and procedures
(v) Evaluation of operations
(vi) Study of the efficiency of the use of physical resources
available.
(vii) Check on adherence to the statutory obligation and
(viii) Above all, review the efficiency of manpower
Qualifications of Management and Administrative
Auditors

The essential qualities of a management auditor are:

(i) Ability to grasp the business problems
(ii) General understanding of the nature, purposes and objects of
the organization.
(iii) assist the progress of the organization.
(iv) Knowledge of the principles of delegation of authority
(v) Understanding different internal control devices.
(vi) Sufficient knowledge statistical techniques, cost and
management accounting.
(vii) General understanding of different laws.
(viii) Sufficient knowledge and experience in preparing various
reports.
(ix) Tactfulness, perseverance, pleasing and dynamic personality.
Audit Checklist
A management auditor shall normally maintain an audit checklist.
The organizational areas covered fall under the broad categories of:-
 Planning
 Organising
 Staffing
 Coordinating
 Communicating
 Directing
 Motivating
 Controlling and
 Innovating
An auditor should look for any weakness which
may affect efficiency of the organization

(i) Directorial weakness

(ii) Management weakness
(iii) Organisational weakness
(iv) Financial weakness
(v) Systems weakness
(vi) Procedural weakness
(vii) Functional weakness
(viii) Operational weakness
(ix) Marketing weakness
(x) Industrial relations weakness
Characteristics of A Good Management Audit
Report

Characteristics of a good management audit report are:-

(i) Pertinence P
(ii) Comprehensiveness C
(iii) Brevity B
(iv) Timeliness T
(v) Motivating M
(vi) Formatting F
Special Reports for Banks, Shareholders, Employees
& Small Business

Salient features for these special reports are briefly discussed

below:-
(1) Reports for banks and creditors:-
Form and content of financial statements and schedules re
important to the lender but explanatory notes to the statements
and schedules are perhaps more important to them.
(2) Report to shareholders :-
In India, auditor’s report in the prospectus at the time of public
issue is very important.
(3) Reports to employees :-
Reports for employees are mainly prepared for better
understanding of the business.
(4) Reports for small business :-
the management auditor should design his report in a very
simple way as the report for a small business if specifically
directed to a person or a small group of persons only.
MANAGEMENT AUDIT IN DIFFERENT FUNCTIONS

Corporate Objectives And Culture

Corporate Objectives are the overall objectives of the

organization that influence the direction of corporate
strategy.
In other words, what the organization seeks to
achieve is corporate objective.

These are the specific, realistic and measurable

aims which an organization plans to achieve.

These represent the charter that the

organisation has laid down for itself.
The corporate objectives of world famous ‘NIKE’ company are
reproduced as under:

Protect & improve Nike’s position as the

number one athletic brand in America;

Build a strong momentum in growing

fitness market.
The corporate objectives of ‘Apple Computers, USA are :

“To offer the best possible personal computing technology,

and to put that technology in the hands of as many people
as possible.” Totally different and the business operations
will differ dramatically depending upon the exact choice of
corporate objective.
Corporate Culture - Concept
Culture refers to a corporate’s values, beliefs and
behaviours on the basis of which people interpret
experiences and behave. Generally firms with strong
cultures achieve higher results. unsuccessful companies
generally have as the three R’s in their corporate culture
i.e., “resistance”, “resentment” and “revenge”.
Corporate culture should consists of the following:-

Commitment to honest productivity.

Planned performance and growth.

Informative, informing and informed,

organization.
Consideration for others in partnership with
the organization.
 Corporate Services Audit

Corporate services audit means critical examination of the

different aspects of services and their extent that have
been satisfactorily rendered by a corporate body.
The areas of corporate services audit criteria can be categorized as
follows:
1. Consumers Quality goods at right prices, place and
time.
2. Employees Pay, training, safety, welfare.
3. Shareholders Safety of investment, satisfactory return,
capital appreciation.
4. Community social benefit, public relations
5. Fellow-businessmen Business ethics and fair trade dealings
6. State Compliance with the spirit of laws,
payment of taxes.
Corporate Development Audit

A corporate development audit is an independent

objective study of an organization’s capabilities. It
aims at identifying strengths and weaknesses.
Corporate development audit assures that –

The various factors and forces constituting a

corporate enterprise.

The pattern of departmentalization in an

enterprise.

The personnel problems are handled

appropriately.
 Corporate Development Audit assures that –

A. Check list on corporate planning

(a) Whether SWOT analysis has been made?

(b) What are the corporate strengths and weaknesses in

relation to price, product, quality, market share, distribution
net work, after sales services, technology.

(c) What are the opportunities and threats in relation to

rivalry among existing firms.
(d) How are the threats overcome and
opportunities availed of in the past?

(e) Whether the “corporate image” is

going to improve in near future?
B. Checklist on corporate objectives

(a) Whether the corporate objectives are clear and explicit?

(b) Whether the different elements of the enterprise have separate

objectives?

(c) How are these objectives defined?

(d) Are the objectives in writing?

(e) Is there sufficient flexibility

C. Checklist on delegation of authority

(a) Whether there are clear lines of authority from top to bottom in
the corporate enterprise?

(b) Whether accountability has been properly coupled with

corresponding authority?

(c) Whether responsibility clearly defined in writing?

D. Checklist On Span Of Control And Management

(a) Whether span of control has been recognized in the

organization?

(b) Whether everybody in department report only to one

superior?
Evaluation Of Personnel Development
Evaluation of personnel development may include the
following criteria -

(a) Pre-planning as an essential feature of human

resource development.

(b) Ascertaining manpower needs for appropriate

education, training and development.

(c) Adopting a suitable programme of

recruitment, selection, training and development.

(d) Adequate manpower planning.

Scope Of Personnel Function

“Personnel Management” is that part of the

management function which is primarily concerned
with the human relationships within an
organization.
(a) Organization • Continuous review and analysis of
organization’s operation may be
review and necessary in order to determine and
analysis:- develop appropriate work structure.

(b) Manpower, • Forecasting and planning is essential

planning, for a sufficient number of qualified
recruitment personnel.
and selection:-

(c) Manpower • Appropriate methods and

techniques of training and
training and development may be
development:- adopted.
(d) Performance • Rating and evaluation of
appraisal:- performance of personnel.

(e) Employee • Wage and salary structure,

remuneration:- incentive payments.

• Health and
(f) Employee services welfare of all
employees
 Consumer Services Audit

The primary responsibility of a business enterprise

towards consumers is to make available the
products of the right qualities at the right time, in
right quantity, at the right place and right price.
Checklist on ‘consumer services’ evaluation:
A. Products related policies and practices

(a) Do the products manufactured meet

the needs of the customers of different
classes ?

(b) Whether the prices are reasonable?

(d) Whether detailed information regarding the
product, are adequately disseminated in order to
ensure that the communication made to the customers
regarding price, quality, services, etc. are truthful?

(e) Whether constant efforts are made for

improvement of the product’s?
B. Customer Relationship

(a) Whether the customer complaints are handled

promptly and efficiently?

(b) Whether the company responds quickly to the

customers’ enquiries?

(c) Whether the labels of the products contain

adequate information to help the consumers to
appreciate quality and other characteristics of the
products?
C. General Considerations

(a) Whether safety norms relating to products are

maintained ?

(b) Whether performance guarantees are explicitly

stated?

(c) Whether all the “warranties” are explicitly

stated?
Audit Of Environmental Pollution Control
Pollution can be described in the
following ranges :-

(i) Pollution as any alteration of the

environment.

(ii) Pollution as a damage to man and

to the environment.

(iii) Pollution as interference with

other uses of the environment.
The different types, cause and effects of
environmental pollution may be as follows -

(a) Air pollution:- Air pollution is the human

introduction into the atmosphere of chemicals,
particulates or biological materials that cause harm or
discomfort to humans or other living organisms or
damage the environment. Air pollution is caused by
burning coal or crude oil from automobiles.

(b) Water pollution :- Water pollution is the

contamination of water bodies such as lakes, rivers
and/or oceans caused by effluents. Water pollution
affects public health and safety, causes damage to
property and leads to many economic losses.
The different types, cause and effects of environmental
pollution may be as follows -

(c) Noise pollution:- Noise pollution is a type of energy

pollution in which distracting, irritating or damaging sounds
are freely audible and is caused by noise due to running of
heavy machines, big aircrafts. Noise pollution may lead to
loss of efficiency at work, loss of hearing.

(d) Smell pollution:- Discharge of industrial products, unclear

garbage dumps, open sewers, etc. and even causes
psychological disorders.
The different types, cause and effects of environmental
pollution may be as follows -

(e) Thermal pollution:- Large inputs of heated water from a

single plant or a number of plants using the same lake or
slow-moving stream can have harmful effects on aquatic life.
Thermal pollution is radiation of heat generated by plants in
industries.

(f) Visual pollution:- Effluents from chemical plants and

washeries are discharged into the waterways causing
reduced visibility. Industrial fumes and dust causing loss of
landscape attractiveness
The different types, cause and effects of environmental
pollution may be as follows -

(g) Climate pollution:- Radiation of heat in highly

industrial centres leading to “micro climate zones”
causing deforestation, shortening plants growth.

(h) Radiation pollution:- Radioactive fallouts, leakage

from nuclear reactors causes a significant chronic affect
by increasing the rate of genetic mutation.

(i) Soil/land pollution :- Indiscriminate use of fertilizers and

pesticides. Due to pollution the quality of soil deteriorates
 Energy Audit
An Energy Audit has been defined as an inspection, survey
and analysis of energy flows in a building, process or system
with the objective of instituting energy efficiency programs in
an establishment.

In other words, an energy audit is conducted to seek

opportunities to reduce the amount of energy input into the
system without negatively affecting the output(s).
Energy audit means monitoring the energy efficiency of
different equipment and process.

An energy audit is a fundamental step of the energy

conservation programme.

Energy audit and environment audit sometimes done

together.
 Productivity Audit/Efficiency Audit

The Productivity audit is basically an analysis of the productivity of the

resources deployed by any organization. The term ‘resources’ here would
include not only “money” but also “men”, “machines”, “materials” and
“methods”. The objectives of productivity audit is – to attain optimum
result, and to improve on the benchmarks. This audit would generally
comprise – comparison of expected returns on utilization of the resources
vis-a-vis the actual returns; and the steps taken to improve benchmarks of
returns and the utilization. Productivity audit is done by – (a) Ratio analysis
– Return on capital employed – Return on sales – Turnover ratios of fixed
assets, current assets, inventories, category-wise debtors etc.
The following ratios are generally used in measuring productive efficiency of the
resources deployed and utilized:

Resources Deployment:-
(a) Capital employed per capita

(b) Capital employed per unit of product

(c) Gross profit to capital employed

(d) Net profit to capital employed

(e) Debt equity ratio

(f) Net worth and long-term debts to gross fixed
assets.
(g) Net worth and long-term debts to net fixed
assets.
(h) Debts to fixed loans

(i) Debts to floating loans

(j) Current assets to current liabilities

(k) Net working capital

(l) Total inventory to capital employed.

Resource Utilisation:- (a) Capacity utilisation – Installed capacity:
Utilised capacity of machines (by units)

(b) Capacity utilisation – Installed capacity:

Utilised capacity of machines (by machine hours)

(c) Machine time available : Machine time

utilized.

(d) Machine time consumed : Per unit of product

(individually).

(e) Machine time consumed : Per capita.

(f) Gross fixed assets : Turnover

 (g) Net fixed assets : Turnover

(h) Inventories : Turnover

(i) Raw materials : Turnover

(j) Work in process : Turnover

(k) Finished goods : Turnover

(l) Labour time consumed : Division-wise

(m) Labour time consumed : Product-wise

 Propriety audit

The expenditure should not, prima facie.

No authority should exercise its power.

Public money should not be utilized for

the benefit.
Corporate Social Responsibility (CSR) under Companies Act, 2013

“Net profit” means

(i) Any profit arising from any overseas branch
or branches of the company’ whether operated
as a separate company or otherwise; and

(ii) Any dividend received from other companies

in India, which are covered under and complying
with the provisions of section 135 of the act.
Corporate Social Responsibility (CSR) Audit- Process

Human Rights: Fundamental Human Rights, Freedom of association and

Collective bargaining, non-discrimination.
Business behavior: Relations with clients, suppliers and sub-contractors,
Prevention of corruption and anticompetitive practices.
Human Resources: Labor relations, Working conditions, health and safety
measures.
Corporate Governance: Board of Directors, Audit and internal controls.

Environment: Pollution control measures undertaken.

Community Involvement: Impacts on local communities.

 Evaluation Of Corporate Image

Audit Checks Of Different Managerial Functions

1. Directorial Checks
(a) What routine reports are considered as directors’ meetings?
(b) Do the directors receive projected information covering the various
functions of the business?
(c) “Whether the Director review strategic and financial plans for
achieving long-term success of the company.
(d) What is the directors’ policy for ensuring that the right kind of
senior managers including CEO are engaged?
(e) What interest do directors take in R&D?
(f) Have the directors set out the objects of the organization in
writing?
(g) Are all activities of the organization within the scope of its
objectives?
(h) What control do directors exercise on the cash flow?
(i) What is the method of determining budgets?
(j) Do up-to-date organization structure exist?
(k) What control do directors exercise over senior management
training?
2. Managerial Checks
(a) Are all level of managers competent in their functions?
(b) What evidence is there that managers are up-to-date in their
particular function?
(c) Do all managers sufficiently and efficiently delegate their
function?
(d) Are there any example of delegation to the point where control
is lost?
(e) Are there adequately defined communication procedures?
(f) Is there adequate definition of stuff responsibilities?
(g) Is there a precise organizational structure?
(h) Is there a system of management by objectives?
(i) Are job specifications available?
(j) Are methods of work defined?
(k) What training facilities or arrangements are there for:
a. Managers?
b. Staff generally?
c. Newly joined staff?
d. Trainees?
(l) Who is responsible for training?
(m) Do managers use their time effectively?
3. Organisational Checks
(a) How effective is the coordination and integration of the various
departments?
(b) What is the management information system and who is responsible for
it?
(c) Is the information supplied well ?
(d) Is the information structured?
(e) What strengths and weaknesses of the organization are revealed by the
scrutiny of the special reports?
(f) How is inflation catered for in budgets?
(g) Has each manager defined the responsibilities of his staff?
(h) What checks are there on the accuracy of the information?
(i) Who has authority to amend such file information?
(j) What security controls are there on the various levels of
management information?
(k) How is the business controlled in general?
4. Capital Checks
(a)who actually controls the cash flow on a day to day basis?
(b) How effective is the control of cash flow?
(c)Is the working capital adequate?
(d)Is the capital employed the optimum for the business?
(e)Are the fixed assets valued carefully
(f) What authorizations are required for the purchase of fixed assets?
(g) Is there an up-to-date asset register?
(h) How often is the asset register compared with the actual fixed assets
position?
(i) Is the equity and loan capital adequate of the business?
(j) How do the ratio of such capital compare with other business audited?
(k) What is the capital structure in relation to ordinary and preference share?
5. Data Processing Systems Checks
(a) What are the main categories of data processing system?
(b) Are there adequate controls?
(c) Is use made of appropriate office techniques, such as
photocopying, duplicating etc?
(d) Are computer systems used where appropriate?
(e) Is the computer installation appropriate in size and
staffing?
(f) Who has access to the computer installations?
(g) How is systems testing organized?
(h) Are recovery procedures featured in systems testing?
6. Standard Procedures Checks
(a) Do standard procedures exist and are they in writing?
(b) Who is responsible for keeping them up-to-date?
(c) Do they adequately reflect changes in organization?
(d) To whom are they circulated?
(e) Are any checks carried out on behalf of general management to
verify that the procedures are being adhered to?
(f) If so, who is responsible for carrying out such checks?
7. Planning Function Organisation Checks
(a) Who is responsible for overall planning within the organization?
(b) If detailed planning is a staff function, what arrangements are there for
making sure the planning does not get out of step with the planning policy
makers?
(c) Is there a corporate planning unit?
(d) Is there a corporate stimulation model?
(e) How accurate are the models?
(f) How are the various models kept up-to-date?
(g) Are environmental surveys carried out?
8. Purchasing Function Checks
(a) Are there effective arrangements for minimizing the price of
purchases?
(b) What arrangement are there for controlling stock investment,
in particular for controlling deliveries of raw materials, perhaps
as a result of contracts placed for raw materials to be called off
as required?
(c) Is there evidence that the purchasing budget is developing on
sound lines?
(d) Effective control on the purchasing function?
(e) Are ‘make-or-buy’ proposals made?
(f) What follow-up is there on scheduled deliveries?
(g) Is the receipt of goods adequately controlled?
(h) Is there an effective system of inspection of materials received?
9. Inventory Control Function Checks
(a) How are maximum and minimum stock controlled?
(b) What customer service level is required?
(c) How are these limits determined?
(d) Is stock control also a function of the economic batch
quantities?
(e) How is the issue of stock controlled?
(f) What are the systems of stock security?
(g) Who has authority to scrap the stock?
(h) Are all stock movements accounted for by any paper work?
(i) Is there any security check that goods leaving the premises are
covered by one or other of the permitted authorizing
documents?
(j) What system is in force for counting the stock?
(k) What is the procedure for investigating any discrepancies in
stock?
10. Production Function Checks
(a) How are the production requirements for raw materials
communicated to the purchasing function?
(b) How is the production scheduled?
(c) Are these methods suitable for the type, size and complexity of
the production processes?
(d) What is the system for amendments to the production
schedule?
(e) How are labour requirement determined?
(f) What system is there for ensuring good utilisation for
machinery?
(g) what is the system for ensuring good utilisation of labour?
(h) What is the inspection system during production?
(i) How are scrap items to be re-worked and controlled?
(j) What methods are used for forecasting the production levels?
11. Marketing Function Checks
(a) Have clear marketing objectives been set?
(b) What plans have been developed to attain those objectives?
(c) What is the extent and nature of market research?
(d) What principles apply to product planning?
(e) What arrangements are therefore the planning and control of
packaging?
(f) How is the effectiveness of special sales promotions?
(g) How is the sales force divided geographically?
(h) How is the performance of salesman measured?
(i) What special incentives are there for salesmen?
(j) How are customers’ orders received?
(k) Has a standard order form been considered?
12. Distribution Function Checks
(a) Are there arrangements for deciding the most viable means of
transport of finished goods?
(b) What are these arrangements?
(c) how were they developed?
(d) If the organization uses its own transport fleet, have the pros
and cons been considered?
(e) Are decentralized warehouses part of the distribution system?
13. Financial Function Checks
(a) Is there an internal audit department?
(b) Does the internal audit department make regular reports
(c) Are control checks made the financial records?
(d) Is there a budgetary control system?
(e) How effective is the budget system?
(f) Are the reasons for the discrepancies carefully ascertained and
noted in the records?
(g) Are the financial records so organized that the performance of
senior managers can be measured?
(h) How is the personnel expenditure authorized?
(i) How is the material expenditure authorized?
(j) How is fixed asset expenditure authorized?
14. Personal Function Checks
(a) Is there a manpower specification?
(b) Who has the authority to amend the manpower specification?
(c) How do staff measure up to this manpower specification?
(d) Has job evaluation been carried out?
(e) Do job specifications exist for all jobs in the organization?
(f) Are adequate personnel records properly maintained at all
times?
(g) Is there an active training programme?
(h) Who is responsible for training managers?
(i) What arrangements are there for the management
development?
(j) Are adequate training records kept?
(k) How is basic training carried out?
(l) Is this carried out “in-house”, “externally” or a mixture of both?
(m) Are promotable employees readily identifiable?
15. Management Service Function and Data Processing Security
Checks
(a) What services are covered by the department?
(b) Are the roles of the various specialists defined?
(c) To whom does the head of the management services report?
(d) To whom does the head of the computer department report?
(e) Are the duties of each section clearly defined?
(f) Are operation research techniques practiced?
(g) Are managers generally aware of the type of problem
amenable to an operations research approach?
(h) How are projects controlled?
(i) Are projects selected as a result of cost-benefit studies?
(j) Is a project team leader always appointed?
(k) Are the objectives of a project always specifically stated?
(l) What measurement of project progress are used?
16. Equipment Checks
(a)Who authorizes the purchase or rental capital equipment?
(b)What are the procedures for specifying equipment required?
(c)Is recently obtained equipment in accordance with the
specification?
(d)How does capital equipment generally relate to the needs of the
business?
(e) Is there the proper balance of office equipment and facilities?
(f) Where a large number of copies of computer output are
required, have the merits of producing an offset master and/or the
use of micro film considered?
(g) What methods are used for the efficient scheduling of the use
of machinery?
17. Methods and Systems Audit Checks
(a) What general control is there on methods and systems?
(b) How efficiently is this exercised?
(c) How are methods and systems knitted into the organizations?
(d) What detailed control is there on the implementation of a
system?
(e) If the stages of implementation of a system?
(f) How are methods and systems maintained and documented?
(g) How are systems evaluated?
(h) What is the method of development of a system?
(i) Are flow charts used?
(j) How is the documentation used?
18. Security Audit Checks
(a) What security precautions are taken against leakage of those
aspects of the organization’s policy and planning, which are
desired to be kept secret?
(b) In particular, what security precautions are taken at boardroom
level?
(c) Is assess to research and development areas controlled?
(d) Are the controls efficient?
(e) What are the documentary and drawings security controls?
(f) Who is responsible for the security of the company assets?
(g) What measures are taken for the security of cash?
(h) How is cash transferred to the bank?
(i) Is there a fixed asset register and who is responsible for
maintaining it?
(j) How effective is the control of receipts and issues of stock-in-
trade?
(k) How often are stock-in-trade and raw materials items physically
counted?
(l) What action is taken when physically counted stock varies
significantly from the book stock?
Audit Checks Of Corporate Divisions/Departments

The audit checks of various corporate divisions/ departments include:

1. Evaluation of Purchase Management
2. Evaluation of Personnel Management
3. Evaluation of Production Management
4. Evaluation of Research and Development Activities
5. Marketing Audit
(i) Evaluation of Sales Management
(ii) Evaluation of Distribution Function
 MEANING OF INTERNAL CONTROL

Internal control means Internal Control means the

procedures established,
identifying & assessing the risk
implemented & maintained by
material mis-statement
TCWG, MGT 4, other personnel in
understanding the entity & its organization which provides
environment. reasonable assurance regarding
achievement of organization’s
objectives with regard to
Internal Control means the procedures established, implemented & maintained by TCWG,
MGT 4, other personnel in organization which provides reasonable assurance regarding
achievement of organization’s objectives with regard to

Proper
Reliability of Compliance of
execution of Safeguarding
Financial applicable
day to day of assets and
Reporting. laws.
operations.
 OBJECTIVES OF INTERNAL CONTROL

Transactions are Recorded assets are

Transactions promptly Assets are compared with
are executed as recorded in safeguarded physical assets at
per Correct Account, from reasonable intervals
Management’s Date & Correct unauthorized & in case of any
authorization. Accounting access. discrepancy, proper
Period. action is taken.
 SCOPE OF INTERNAL CONTROL
FINANCIAL AND
ADMINISTRATIVE OPERATIONAL COMPLIANCE
ACCOUNTING
CONTROL CONTROL CONTROL
CONTROL

It includes all types These controls are

of Managerial the managements
It is exercised
Controls related to plan relating to
through
decision making safeguarding of
management It relates to timely
process. An example assets, prevention &
accounting technique compliance of all
of It is maintaining a detection of frauds &
such as Budgetary applicable laws.
register showing the errors, accurate
Control & Standard
details of customers accounting records &
Costing.
contacted by timely preparation of
salesmen. financial Statements.
 STRUCTURE OF INTERNAL CONTROL
Internal Control from organization to organization & it’s structure depends on
four factors.

Infrastructure Potentiality Of
Magnitude Of
Types Of Business available in the Human
Business
Organization. Resources.
 LIMITATION OF INTERNAL CONTROL

No matter how strong internal control is but it can only provide a reasonable
assurance with respect to achievement of organization’s objectives & never an
absdute assurance due to limitations of internal control.

MANUPULATION COLLUSION
UNUSUAL HUMAN ABUSE OF
COST BY AMONG
TRANSACTIONS ERROR AUTHORITY
MANAGEMENT EMPLOYEE
 COST

Management may not want to make a strong internal control due to cost
evolving in it.

UNUSUAL TRANSACTIONS

No control can be made for unusual transactions.

 HUMAN ERROR

There is always a chance of error being made by employees handling internal

control.

ABUSE OF AUTHORITY

Management may over ride the internal control for its own benefits.
 MANIPULATION BY MANAGEMENT

Management may manipulate the accounting estimates & judgements.

COLLUSION AMONG EMPLOYEES

Employees may have ego clashes or other conflicts white managing internal
control.
 EVALUATION OF INTERNAL CONTROL

Evaluation of Audit Committee is

It means checking internal control is applicable on
the effectiveness of mainly done by Companies under
internal control. Audit Committee section 177
(AC).
FOLLOWING ARE THE COMPANIES REQUIRED TO CONSIDER
AUDIT COMMITTEE

Unlisted Public Co.

Unlisted Public Co.
Unlisted Public Co. having Outstanding
having Paid Up
Listed company having turnover Min Loan, Debenture,
Share Capital Min
100 Cr. Borrowings &
10 Cr.
Deposits > 50 Cr
 These limits will be checked of last audited financial statements.
Also Audit Committee not applicable on following unlisted Public Co.

Wholly Owned
Joint Venture Dormant Company
Subsidiary
 ROLE/FUNCTIONS OF AUDIT COMMITTEE

Reviewing Discussion
Evaluation of Reviewing Asking the
the with
Internal the statutory Reviewing the
adequacy statutory
Financial performance auditor findings of
of internal auditor
Control & of both about its investigations
control & before the
Risk statutory & comments by internal
internal audit about
management internal on internal auditors.
audit his scope of
system. auditors. control.
functions. audit.
 INTERNAL CONTROL & THE AUDITORS

Auditors shall
The auditors report to
shall identify the Auditors will also Management
All significant
deficiencies in find out (i) All Significant
deficiencies shall
Internal Control significant deficiencies
be reported by
on the basis of deficiencies if any
auditors in writing
audit work in Internal (ii) Other deficiencies
to TCWG.
performed by it. Control. which auditor feels
that Management
should be made
aware.
 While Reporting deficiencies in Internal Control to TCWG & Management
Auditors will also communicate to them.

That auditor’s Deficiencies

That preparation
objective is only reported are
of Internal
to form an audit limited to only
Control is not
opinion on those which have
Auditors
financial been identified
responsibility.
statements. by auditor.
 INTERNAL AUDITS NECESSITY

It assists the
Management
to improve It helps to It helps to It Helps in
Internal detect detect increases checking Improves
Control by frauds & wastage of morale of of Books Organization’s
identifying errors. resources. honest of effectiveness
the staffs. Accounts.
weakness.
 SCOPE OF INTERNAL AUDIT & IT’S EVOLUTION
(Maturity Index)
INTERMEDIARY CONTEMPORARY
INITIAL POSITION
POSITION POSITION

Risk based audit

Initially scope of i.e. to identify
Compliance
internal audit was Risk of Material
checking &
only limited to mis-statement
operational Audit
checking of information
also became its
transactions & its system audit is
scope.
accounting. also added in
scope.
INTERNAL AUDITING UNDER THE COMPANIES ACT 2013

Applicability

Unlisted Public Private Company

Company satisfying satisfying any
Listed Company any one of the four one of two
conditions. conditions.
 Unlisted Public Company satisfying any one of the four
conditions.

Loan, Borrowing,
Public Deposits Turnover Min 200
Paid Up Share Outstanding from
outstanding Min. Cr.
Capital Min 50 Cr. Banks/PFI min
25 Cr.
100 Cr.
 Private Company satisfying any one of two
conditions.

Loan, Borrowing,
Outstanding from Banks/PFI Turnover min 200 Cr.
more than 100 Cr.

NOTE :- These limits are to be taken of immediately preceding Financial Year.

 INTERNAL AUDITOR
Appointment Form No. Duties & Scope
Eligibility Penal Provision
Authority

CA or CMA or
any other BOD shall MGT 14 has to
professional (CS). Not mentioned
appoint in be submitted to
Internal Auditor in Act so it will
consultation inform ROC No specific
may or may not be as per Terms
be an employee. with Audit within 30 days provision exists.
of
Statutory Auditor Committee If of
Engagement.
cannot be any. appointment.
Internal Auditor.
 PREPARATION FOR AN AUDIT

Determine
Define the scope Evaluate nature, timing &
Obtain the Accounting
of audit & send knowledge of extent of audit
an engagement system & procedures to be
clients business. Internal Control.
letter. performed.
 PREPARATION FOR AN AUDIT

Adequate Issue an Audit

Documentation is Form an Opinion. Report.
necessary.
 AUDIT TECHNIQUES THROUGH WHICH AUDITORS OBTAINS
EVIDENCES

Analytical Electronic
Verification Confirmation Data
Procedures
Processing

Test Checking
Vouching Inquiry Inspection i.e., sampling.
 AUDIT PROGRAMME

It is a detailed layout of audit plan which contains exact audit procedures to be

applied on exact dates on exacts items of financial statements by exact
auditing staffs.
 ADVANTAGES OF AUDIT PROGRAMME

Work can be
It’s a ready allocated to Audit Plan It makes
checklist of audit is Audit audit more
audit assistants Audit is achieved. evidences effective.
procedures easily. timely are
that have completed. collected.
been
applied.
 DISADVANTAGES OF AUDIT PROGRAMME

Unusual or It kills the

Audit Audit
new areas initiative of
becomes becomes
may be efficient
mechanical. rigid.
neglected. staffs.
CONTINOUS AUDIT FINAL AUDIT

1. It’s a type of Internal audit which starts It’s a type of audit which is done after
before the end of financial year. financial year ends.

2. Its done throughout the financial year or Its not done throughout the year.
may be monthly.

3. Its suitable for organizations having large Its suitable for organizations having less
volume of transactions or where Internal volume of transactions or where Internal
Control is weak. Control is strong.
 AUDIT WORKING PAPERS/DOCUMENTATION

DEFINITION

Audit working papers means audit file containing audit

procedures applied, audit evidences collected & auditor’s
observations.
 AUDIT WORKING PAPERS/DOCUMENTATION

ADVANTAGES

1. It helps in audit planning.

2. Helps in future references of articles & assistances.
3. Acts as a legal evidence that audit was properly conducted.
 2 TYPES OF AUDIT FILES

Permanent Audit File Current Audit File

 PERMANENT AUDIT FILE

It records those non-recurring audit matters which generally does not

change year after year.
Contents are :-
1. Clients MOA
2. Clients AOA
3. Significant accounting policies.
4. Significant audit observations.
5. Significant ratios & trends.
 CURRENT AUDIT FILE

It records those recurring audit matters which generally changes year after
year.
Contents are :-
1. Results of vouching.
2. Results of verification.
3. Communication of Management.
4. Communication with Expert.
5. Communication with Other Auditors.
 AUDIT NOTE BOOK

Meaning Contents

It is a bound book which contains large variety of audit manner.

 CONTENTS

1. Audit queries which are not resolved immediately.

2. Client’s important clauses of MOA & AOA.
3. Internal Control Details.
4. Auditor’s observations.
5. Communication with previous year auditor.
6. Communication with Management.
 Form & extent of Audit working papers depend on following factors.

1. Size of 2. Nature of 3. Complexity

Organizations organizations Involved

4. Reliance placed on 5. Type of audit 6. Risk Of Material

Internal Control. procedures applied. mis-statement.
 ENGAGEMENT LETTER

Meaning Contents

It’s a letter sent by auditor to the client before accepting his audit.
 CONTENTS

1. Auditor’s scope of audit.

2. Auditor’s responsibility.
3. Managements responsibility.
4. Auditor’s unrestricted access to books of Accounts.
 ROLE OF CMAs IN AUDIT

Exactly same as Internal Audit necessity & Internal Audit

Evolution.
 OPERATIONAL AUDIT

Operational audit is a type of internal audit in which day to day operations

are checked.

Internal Audit is of 3 types.

A ) Financial
B ) Compliance
C ) Operational
INTERNAL AUDIT OPERATIONAL AUDIT
1. Compliance objective. Risk identification & process improvement
objective.
2. Transaction based. Process based.
3. Financial Accounts focus. Business Focus.
4. Typical & procedures focus. Efficiency & improvement focus.
5. Policies & procedures focus. Risk management focus.
INTERNAL AUDIT IN DIFFERENT
SECTORS
 AUDIT OF EDUCATIONAL INSTITUTIONS

Audit shall apply the following audit procedures to conduct the audit of
educational institutes

1. If school, colleges have been 2. In case of university 3. Also read the 4. Auditor will vouch fees
registered under a trust then read the Act passed by the minutes of meetings received from cash book,
auditor should read trust deed legislature to understand of managing student attendance
to identify various provisions the provisions relating to committee or register & counterfoil of
relating to accounts and audit. accounts &audit governing body fees receipt.
 Audit shall apply the following audit procedures to conduct the audit of
educational institutes

8. Check arrears of
5. Check that fines if 6. Check that 7. Check that
fees received or not
any have been collected scholarship if any hostel dues have
& what steps of
by appropriate granted by appropriate been received or
recovery have been
authority. authority. not .
taken.
 Audit shall apply the following audit procedures to conduct the audit of
educational institutes

12. Check that cautions

many i.e. security
11. If government
10. Check legacy deposit has been
9. Check Donations grants received,
income & also see the refunded or adjusted
Income & its source. As 12 followed or
will document . with dues or not &if not
not.
it should be shown as
liability.
 Audit shall apply the following audit procedures to conduct the audit of
educational institutes

15. Check refund 16. Games fund,

13. Check payments of taxes if scholarship fund
14. Check income from
made to staffs & applicable have have ben used for
investments.
teachers. been property proper purpose or
applied or not . not .
 AUDIT OF CO-OPERATIVE SOCIETY

Co-operative society’s Central Act is Co-operative Society Act 1912 &

auditor shall apply following procedures to audit Co-operative society:-

1. Examination of Overdue 2. Examination of overdue

3. Bad debts Certification.
debt. interest.
 Examination of Overdue debt

Overdue debts are those loans which members have not repaid back to
Co-operative society on due date . They should be classified as

More than 6 months upto 5

More than 5 years due
years due

Auditor should also report whether its affecting working capital positions or not & whether these overdue
amounts are good or bad.
 Examination of overdue interest

Interest on overdue debt booked on accrual basis but not yet received
should be excluded from interest while computing profits.
 Bad debt Certifications

Before writing off bad loans against provision for bad debt or reserve
fund auditor should certify it as bad debt.
 AUDIT OF CO-OPERATIVE SOCIETY

Co-operative society’s central Act is Co-operative society Act 1912 & auditor shall apply
following procedures to audit Co-operative society:-

4. Verification of Assets and 5. Adherence to Co-operative 6. Members register and

Liabilities Principles passbook.
 Valuation of Assets and Liabilities

Auditor shall check whether assets & liabilities have been valued as
per Generally Accepted Accounting principles. He shall also check
their existence, ownership/obligation & valuation. Fixed assets
should be valued at cost less provision for depreciation. Current
assets at cost or realizable value which ever is lower.
 Adherence to Co-operative Principles

Auditor shall check that mutual assistance principle followed by

members or not .
 Member’s register & pass book

If loan given to a person check that his name was there in register of
member or not & also see his passbook whether he actually received
the money or not .
 AUDIT OF CO-OPERATIVE SOCIETY

Co-operative society’s central Act is Co-operative society Act 1912 & auditor shall apply
following procedures to audit Co-operative society:-

7. Observation of Act & Rules 8. Special report to registration 9. Awarding class to society
 Observation of Act & Rules

Auditor shall check whether Co-operative society has followed

applicable Act & Rules or not.
 Special report to registration

Auditor shall report to Registrar :-

Profiteering Dis proportionate

of member of Any fraud detected Mis management advances made to
managing committee member
 Awarding class to society

After completing audit auditor shall award class to society & if

maangement is not satisfied it can appeal to Registrar who may ask
auditor to reconsider his decision.
 AUDIT OF GOVERNMENT EXPENDITURE

C & AG shall apply 5 principle while auditing the government expenditure:-

Audit Audit against

Audit against Performance
against provision of Propriety Audit
rules & order. Audit
sanctions funds
 Audit Audit against
Audit against against Performance
Provision of Propriety Audit
rules & Order. Audit
sanctions funds

C & AG shall It means checking

check whether Whether Whether that objective of
Government Government Government It means government
expenditure is was expenditure checking that expenditure fulfilled
consistent with sanctioned was incurred Government or not & the project
constitution of by from proper expenditure in which such
india, Rules appropriate fund which should not be expenditure was
India,
authority or was created infructuous i.e incurred is operating
framed by
parliament & not. for that wasteful. economically ,
Parliament
CAG. purpose
purpose. effectively &
effectively or not.
 3 Principle of propriety audit

1. The expenditure should not be

more than what the occasion
2. No part of Government
demands. Government officers 3. No public money should be
expenditure should be incurred for
should exercise strict vigilance expended for any particular
any direct/indirect benefits of any
while expending public money as person or community unless
Government officer.
if they are expending their own
money.
 3. No public money should be expended for any
particular person or community unless

The amount is Its ordered by the

Its as per the custom.
insignificant or court or
 Role of C & AG in audit of Government
company.

2. CAG has the power u/s 143 to

1.CAG has the right to appoint of give directions to the auditors as 3. CAG also has the power to
auditors of government to how to conduct the audit & also comment upon the audit
company u/s 139 of the conduct supplementary audit on report of Government
Companies Act 2013. any item of its financial company.
statement.
 Audit of Commercial Accounts
Government also engages in commercial activities by opening any one of the following
entities:-

Departmental Organisation Statutory Corporation Government company

Government transfers its power It is formed by passing special Act of Means a company whose atleast
It is formed by passing special Act of
department. parliament. 51% PUSC is held by CG/SG or
parliament eg. LIC, Air India .
Eg. Defence factory Eg. LIC, Air India . both.
Note :- All the above three entities audit is conducted by complying same 5
principle of government expenditure audit.
 Audit of Self Help Groups:-

Self help groups are created in India to mobilize empowerment of

rural people specially woman & marginalized (neglected) section of
society. SHG are facilitated by government or NGOs.
 Audit Procedure/Field Balance Sheet Approach in SHG

Meeting with
Background Prepare Field Private Meeting
SHG Reporting
Review Balance sheet with members
(30 minutes)
In case of any
Auditor should irregular
do meeting with activity,(eg. Fraud Auditor will
Auditor will check
the object of SHG
& its cash Book.
* atleast 25%
members of SHG
to understand
detected) auditor
should conduct
meeting with
report his
audit
summaries.
their issues. entire self help
group.
 * Format of field balance sheet
SL.NO Asset Amount SL.NO Liabilities Amount

1 Cash in hand 1 Voluntary saving of

2 Cash at bank members
3 Loan to members 2 External borrowing
4 Fixed deposit 3 Profit /equity
5 Fixed assets a. Compulsory
b. Retained earnings
 Audit of NGO

While planning audit of NGO , auditor should identify the following:

Understand the Identify its legal Read the minutes of

Understand the Understand its
vision mission & form i.e society meetings of
organizational accounting
its area of or trust or sec 8 managing committee
chart. system.
operations. company. or its board.
 Audit programme should consider the following items of NGO:

Corpus Ear marked Project Cash &

Reserves Loans Fixed asset Investments
fund fund balance bank

Check
amount
Its Check Check from
Check collected Check
includes reserves fixed asset Check from Check
transfer & all the
all created register & investment cash
to/from expended loans
donations for specific physical register. book
reserves. for a taken.
& grants purposes. verification
particular
project.
 Audit of income of NGO

Contributions & Receipts from fund Subscription Interest &

grants Membership fees
raising programme income dividend

Auditor will
check details of
Auditors will
Auditor will check fund Auditor will tally subscribers who Auditor will
check source of
raising programme from members have taken check it from
such
details. register subscription of investment
contributions &
newsletter & register.
grants.
magazines
issued by NGO.
 Audit of local Bodies

Budgetary procedure
Budgetary procedure Expenditure control
Expenditure control Accounting system

a. Separate register of taxes,

assets & cash maintained or
Auditor will check the budget of Auditor will find variances between not .
receipts & payments of local budgeted & actual expenditure & b. Separate voucher for each
bodies. the reasons behind it. type of transaction
c. Monthly BRS should be made.
d. Submission repot to state
government.
 Audit of Hospital
Auditor shall apply following steps to conduct audit of hospital:

2. Auditor should read

1.Auditor should check the trust deed or
4. Vouch patients fees
the letter of Charter (constitutional 3. Check the patient’s from cash book,
appointment & also documents) to register. counterfoil of patients
understand his scope of understand the
receipts.
responsibilities. provision related to
accounts
 Auditor shall apply following steps to conduct audit of hospital:

4. Evaluate internal 6. Vouch dividend 7. Vouch income of

control system to income , interest medicine shop & 8. Vouch canteen
identify nature, timing, income on investments ambulance if these are income if any.
extent of audit with reference to owned by hospital.
procedures. investment register.
 Auditor shall apply following steps to conduct audit of hospital:

11. If there was

significant deviation
9. Vouch donation & 10. If Government between budgeted & 12. Check that proper
legacy income & verify received check whether actual expense whether distinction has been
their source AS 12 followed. approval of managing made between reserve
committee taken or & capital expenditure .
not.
 Auditor shall apply following steps to conduct audit of hospital:

13. Check that

15. Check that all
appointment of staffs & 14. Physically verify depreciable assets have
payment of salaries investment & Fixed been appropriately
have been properly assets. depreciated.
authorized.
 Audit of Hotels
1. Internal control : The biggest problem in any hotel is pilferage & so there must exist a strong IC
minimise the pilferage & leakages . Strong IC incorporate following points :

d. Procedure
a. Effectiveness of b. Procedure for c. Procedure regarding e. Ensure that
cash collections & purchase of stocks regarding billing recording & weekly trading
payments. & assets. of customers. physical custody A/C are prepared.
of assets.
 2. Room sales & cash collection

a.Identify various sales point

which generates revenues for
the hotel. b. Check that total sales reported
Example: room sales, matches with sales at various
restaurant incomes, sports sales points.
Centre income , spa income
banquet income etc.