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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.
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