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Unit 8: Cost Audit
14. After carrying on cost audit, the cost auditor has to prepare a detail report on cost audit Notes
under rule …………………….
15. The Cost Audit (Report) Rules, 1968 laid down by the Central Government makes certain
industries to get cost books compulsory …………………… in every financial year.
Case Study Is Multiplicity of Audit Bad?
udit is not a welcome activity to the auditee. This is so because no one wants
scrutiny of activities. Quite naturally when a new type of audit is added, managers
Agrumble. Another reason for considering audit as a wasteful activity is that it is
difficult to measure the benefits accurately while counting of costs is relatively easy.
Let us examine audit of financial statements (in short, financial audit), internal audit and
cost audit. Financial audit is an age-old practice. Companies have learned to live with it.
Most companies started appointing internal auditors just to comply with the ‘Manufacturing
and Other Companies (Auditor’s Report) Order 1988’ (popularly known as MAOCARO),
which is now replaced by the Companies (Auditor’s Report) Order 2003 (CARO). The
order required the finance audit to report on whether the company has an internal audit
commensurate with its size and nature of business. Only recently companies have started
appreciating the value of internal audit. Cost audit is also in place for quite a long time.
However, in the year 2011, the government has made the cost audit more pervasive and
more regular than before. Companies view cost audit as an additional burden. The three
audits have different objectives but they are complementary in nature.
Financial aims at enhancing the degree of confidence of intended users of financial
statements. The auditor is legally accountable to shareholders and morally to all the
stakeholders. Thus, financial audit is a value-added activity from the perspectives of
investors and other stakeholders. Credibility of financial information reduces the cost of
capital because the perceived risk of investment in the company gets reduced. Quality
financial audit enhances the quality of financial information, which leads to appropriate
valuation of securities in the capital market and enhances investors’ confidence. This in
turn attracts capital to the corporate sector and improves capital market efficiency. This is
the reason why both regulators and the profession endeavour to protect the independence
of the auditor and improve the audit quality.
An efficient and effective internal audit ensures that the exposure of assets to risks is
within the ‘risk appetite’ decided by the board and protects the assets from undesirable
use, waste and theft. It ensures that the internal control system is adequate and operating
effectively. It acts as an internal consultant to the management. In a way it acts as the ears
and eyes of the board of directors, particularly of independent directors and enhances the
effectiveness of the board. Consequently, it enhances the quality of corporate governance.
It adds value at the firm level as well as the macro level.
This is the reason why the Companies Bill 2011 empowers the government to prescribe
appointment of the internal auditor for certain classes of companies to be decided by the
government. The scope of internal audit is much wider than the financial audit. The
management decides the scope of internal audit and has the opportunity to avoid duplication
between financial audit and internal audit. A financial auditor relies on the work of the
internal audit.
Contd...
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