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Auditing Theory

Notes Introduction

At present, the Companies Act contains provisions relating to maintenance of Cost Records
under section 209 (1) (d) and Cost Audit under section 233B of the Companies Act in respect of
specified industries. The Audit Committee felt that Cost Records and Cost Audit were important
instruments that would enable companies make their operations efficient and exist in a
competitive environment. The Committee noted that the present corporate scenario also included
a sizeable component of Government owned enterprises or companies operating under
administered price mechanism or a regime of subsidies. It would be relevant for the Government
or the regulators concerned with non-competitive situations to seek costing data. The Committee,
therefore, took the view that while the enabling provision may be retained in the law providing
powers to the Government to cause Cost Audit; legislative guidance has to take into account the
role of management in addressing cost management issues in context of the liberalized business
and economic environment. Further, Government approval for appointment of Cost Auditor
for carrying out such Cost Audit was also not considered necessary.

12.1 Cost Audit

It is an audit process for verifying the cost of manufacture or production of any article, on the
basis of accounts as regards utilization of material or labor or other items of costs, maintained
by the company. In simple words the term cost audit means a systematic and accurate verification
of the cost accounts and records and checking of adherence to the objectives of the cost accounting.
Cost audit is the verification of the correctness of cost accounts and of the adherence to the cost
accounting plan. In cost audit, auditor has to perform the following duties:
1. Examine the correctness of the cost records maintained by the concern and

2. To report as to whether the cost accounting plans have been adhered to or not.

12.1.1 Procedure for Cost Audit (for Financial Year 2011-2012 Onwards)

Applicability of cost audit is based on turnover of the total company or meeting the other
conditions laid down in the respective Cost Audit Orders issued by the Cost Audit Branch,
Ministry of Corporate Affairs. Subject to meeting total turnover criterion or other criteria laid
down in the respective Cost Audit Orders, if any activity of a company is covered under cost
audit dated 2nd May 2011 or 30th June 2011 or 24th January 2012, the cost audit will be applicable
to that company irrespective of the turnover of that particular activity.
It may please be noted that according to revised system of cost audit as above, individual Cost
Audit Orders for the companies or products are now not issued by the Cost Audit Branch,
Ministry of Corporate Affairs.
The procedure for appointment of Cost Auditor has been modified by the Cost Audit Branch,
Ministry of Corporate Affairs. The revised procedure is affected from the financial year
commencing on or after the 1st day of April, 2011.
As per provisions of section 233B (2), the Board of Directors of a Company can appoint a cost
auditor after obtaining prior approval of the Central Government.
As per the revised procedure, the first point of reference will be the Audit Committee to ensure
that the cost auditor is free from any disqualification as specified under section 233B (5) read
with section 224 and sub-section (3) or sub-section (4) of section 226 of the Companies Act, 1956.

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