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Cost audit

Knowledge Ki Pathshala (PRACTICE) (258 Points)

11 December 2012

Whether CA in practice perform cost audit of company?

If no then why because CA knows all cost reduction produre as well as cost control mechanichm.

waiting for answer

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6 Replies

Harish (CA Student) (568 Points)
Replied 11 December 2012

As concern of my knowledge, only qualified CMA who holds COP can perform Cost Audit. Cost audit will be conducted as per section 233B.

Correct If I am wrong

Thanks and Regards

Harish.A

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@*CS Siddharth Bumb. * (B.Com, CA Final, CS ) (5270 Points)
Replied 11 December 2012

Originally posted by : Harish
	As concern of my knowledge, only qualified CMA who holds COP can perform Cost Audit. Cost audit will be conducted as per section 233B. Correct If I am wrong Thanks and Regards Harish.A

ACMA SINHA (Cost Accountant) (62 Points)
Replied 11 December 2012

As per Cicular issued by Cost Audit Branch of Appointment of Cost Auditor by Companies, " The Company required to get its cost records audited u/s 233B(1) of the Companies Act, 1956 shall appoint a Cost Auditor who is a Cost Accountant as definded in clause (b) of sub-section (1) of section 2 of Cost and Works Accountants Act, 1959 (23 of 1959) and who holds valid certificate of practice under sub-section (1) of that act and include firm of cost accountants."

Leni James K (Student CMA) (90 Points)
Replied 11 December 2012

A cost accountant knows everything about financial audit and direct taxation(the syllabus covers all these in detail) and also cause most of the cost accountants are in real time employment in financial areas. So can he do the financial audit? Not so. Our legislature has provided the areas for Financial audit and Cost audit to be conducted by the concerned professionals practicing their respective professions only.

Regards

Leni

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ACMA-ICAI (DGM-Global Voice Business) (1052 Points)
Replied 11 December 2012

10 th December, 2012

The state government, which had earlier this year decided to make energy and cost audits mandatory for co-operative sugar mills in Maharashtra, has finalised a panel for the task which is expected to cut manufacturing cost and make sugar industry more energy efficient.

“The government has been working on this for the last five to six months and a panel of some 25 cost auditors and 30 energy auditors has been finalised for the task. This could bring in efficiency and save crores of rupees for the industry,” said Vijay Singhal, State Sugar Commissioner at an Idea Exchange by The Indian Express.

“The cost of manufacturing sugar needs to be reduced and once the cost audit is done for individual factories, they would know the extra expenditure and can take steps to trim it. The energy audit will help factories plan and utilise energy reserves and cut down on manufacturing cost. These audits are expected to begin in a few weeks,” he said.

The Sugar Commissioner said that he was not aware if similar audits were being conducted by sugar mills in other states.

Singhal said the government in a bid to make sure no sugar mill makes any loss, is bringing in several measures including energy and cost audits, continuous and concurrent audits and e-sale of sugar. Mills in the state will be categorised by their balance sheets (A,B,C and D categories) and future funding will be decided on this, he said.

Information on sugar sold by mills will now have to be uploaded online to bring in transparency, he said. Factories will have their own websites in 8-10 months and will be linked to the commissonerate. The commissionerate has directed mills to upload their balancesheets online to ensure transparency, he said.

https://www.indianexpress.com/news/sugar-mills-energy-cost-audits-in-a-few-weeks/1041225

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ACMA-ICAI (DGM-Global Voice Business) (1052 Points)
Replied 11 December 2012

11 th December, 2012

Business Standard

By Asish K Bhattacharyya

In a recent debate in Forbes magazine in the context of the bankruptcy filing by the Monitor Group, which was formed by Michel Porter, many viewed ‘sustainable competitive advantage’ as a mirage in the current business environment. If a company can build sustainable competitive advantage, it continues to earn above average profit. According to Porter’s thesis, a company should choose either of the two generic strategies: cost leadership or differentiation. A company that is cost leader earns a higher margin because of its cost advantage over competitors. A company that pursues the differentiation strategy earns a premium for its products and thus earns above average profit. A company that gets stuck in the middle cannot earn above average profit and may find growth or even survival difficult. However, Porter does not suggest that a company that peruses differentiation strategy should not pay attention to cost management.

he view that the ‘sustainable competitive advantage’ is a mirage is true for most companies. In past companies that could build competitive advantage could maintain that for a long period. But in the fast changing business environment, it is difficult to maintain the same for long. There are companies that continue to earn their return higher than the average return primarily because they manage their intangible assets (not in accounting sense) and product and process innovation well. Although experts may differ, but Apple- Samsung rivalry shows that even a very strong company can face competition from a once unknown competitor. In the backdrop of this rivalry between Apple and Samsung, the survival and growth of other players depend largely on their ability to manage cost and innovation. Indian automobile industry presents another example how a leader can lose competitive advantage to other players.

In the above context it is imperative that every company should have an effective and efficient cost accounting system, which provides reliable information on operating costs and product cost and also provides support in strategic decision-making. Sophistication of the costing system depends on the complexity of the product, process and the business model.

Therefore, the board of directors should pay attention to the efficiency and effectiveness of the cost accounting system.

The government has ordered mandatory maintenance of cost accounting records by almost all companies that cross the threshold of specified turnover or net worth.

Most companies whose turnover exceeds Rs 100 crores or whose securities are listed in a stock exchange are required to get cost record audited by a practicing cost accountant.

For long the boards paid attention to accounting ratios and did not enquire into the adequacy and effectiveness of the cost accounting system. However, after the government initiative, some boards have started looking into the cost audit report. But many do not pay the deserved attention to cost audit report and view it as compliance of another unnecessary law framed by the government. It is true that financial statements capture the overall performance of a company. Therefore, if a company is able to manage cost effectively, the financial statements and accounting ratios will capture it. But financial statements do not tell the whole story of cost management.

For example, the financial statements and related audit report fails to mention whether the company has optimised the resource utilisation. Similarly the financial audit report does not give the assurance that the product and customer profitability presented before the board is correct. This is so because determination of product cost for inventory valuation under financial accounting rules is guided by the principle of accounting prudence as understood by financial accountants.

The principles applied to determine the product cost might deviate from cost accounting principles. Moreover, audit of the market/customer profitability estimated by the cost accounting system is outside the scope of financial audit. Therefore, financial audit is not a substitute for the cost audit.

When I interact with cost auditors, I get a gloomy picture of the adequacy of the cost accounting systems prevailing in different companies. This is not surprising because the average maturity level in the use of cost and management accounting principles, methods and tools in India is low. It is the responsibility of the board to ensure that the company adopts best cost and management accounting practices. This will be a move towards optimal utilisation of resources. It will also help the company to get appropriate cost and revenue information necessary to formulate and implement strategies.

The government has taken the right initiatives and now it is the responsibility of the boards of companies to take it forward.

The author is professor and head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs, Maneshar, and advisor (Advanced Studies), Institute of Cost Accountants of India