AA252 Cost and Management Audit Manual

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ICMAB LEARNING MANUAL
COST Hom
Part A AND Part

Chapte
Cost Audit
MANAGEMENT
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Cost A
AUDIT Chapte
Cost A
Chapte
Part B Cost A
Management
Chapte
Audit Legal
Chapte
Repor
Chapte
Part C Cost A
Performance
Analysis Part
Chapte
Intern
Chapte
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Part A: Cost Audit

Chapter A1 [1]:
Cost Audit Concept & Legal issues
Chapter A2 [2]:
Cost Accounting Standards
Chapter A3 [3]:
Cost Auditing Standards and Quality control
Chapter A4 [4]:
Legal Position of Cost Auditor
Chapter A5 [5]:
Reporting under Cost Audit
Chapter A6 [6]:
Cost Audit in Information Technology (IT)
Part B: Management Audit

Chapter B1 [7]:
Internal Control & Internal Audit
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:
Management Audit in Different function
Part C: Performance Analysis

[Chapter 10]
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Part A: Cost Audit

Chapter A1 [1]:
Chapter A2 [2]:
Part A Cost Accounting Standards
Cost Audit Chapter A3 [3]:

Chapter A4 [4]:
Chapter A1 [1]: Cost Audit Concept & Legal issues Legal Position of Cost Auditor
Chapter A2 [2]: Cost Accounting Standards
Chapter A5 [5]:
Chapter A3 [3]: Cost Auditing Standards and Quality control Reporting under Cost Audit
Chapter A4 [4]: Legal Position of Cost Auditor
Chapter A6 [6]:
Chapter A5 [5]: Reporting under Cost Audit Cost Audit in Information Technology (IT)
Chapter A6 [6]: Cost Audit in Information Technology (IT)
Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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Chapter A1 [1]
COST AUDIT CONCEPT & LEGAL ISSUES
Click to jump on a specific topic of this chapter.

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1.1 Meaning, Nature and Scope of Cost Audit
1.2 Objectives and Purpose of Cost Audit Home
1.3 Advantages and limitation of Cost Audit
1.4 Distinction between Financial Audit and Cost Audit in connection with their Part A: Cost Audit
objectives, purpose, engagement, scope, reporting etc.
1.5 Genesis of Cost Audit in Bangladesh Chapter A1 [1]:
1.6 Companies Act, 1994 Cost Audit Concept & Legal issues
1.7 Cost Audit (Report) Rules, 1997
Chapter A2 [2]:
1.8 Government Gazette Notification relating to Cost Audit Cost Accounting Standards
1.9 CMA Act, 2018
1.10 CMA Probidhanmala (Rules), 2019 Chapter A3 [3]:
1.11 Financial Reporting Council (FRC) Cost Auditing Standards and Quality control
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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1.1 Meaning, Nature and Scope of Cost Audit
Meaning
The Chartered Institute of Management Accountants, London, defines Cost Audit as "The
verification of the correctness of cost accounts and of the adherence to the cost accounting
plan." In other words, Cost Audit is the verification of the cost of production of any product,
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service or activity on the basis of accounts maintained by an enterprise in accordance with the
accepted principles of cost accounting. This definition of Cost Audit is relevant to the voluntary
Home
Cost Audit without any statutory backing. Therefore, cost audit is an examination of cost
accounting records and verification of the facts to ascertain that the cost of the product under
Part A: Cost Audit
reference has been arrived at in accordance with principles of Cost Accounting and evaluation
of adequacy of proper Cost Accounting Records and their maintenance. The cost audit is
Chapter A1 [1]:
performed by an independent, professionally qualified Cost and Management Accountant. Cost Audit Concept & Legal issues
Cost audit is carried out to evaluate cost performance of the entity for which Cost Accounting Chapter A2 [2]:
Records Rules have been prescribed by the Government of Bangladesh. The Cost Auditor, Cost Accounting Standards
therefore, carries out such tests and makes such inquiries which enable him to give a
professional, independent, unprejudiced opinion on the cost performance of the entity, as Chapter A3 [3]:
reflected in the cost information provided in the schedules and annexures which are prepared Cost Auditing Standards and Quality control
by the entity in accordance with the cost accounting records rules maintained. Thus; cost audit
extends to: (1) the verification of the correctness or accuracy of the cost accounts, in so far as Chapter A4 [4]:
the cost ascertainment of processes or production or services or products are concerned, and (2) Legal Position of Cost Auditor
the check on the adherence to the detailed systems of cost accounting and its related records
and documents, either through the own initiative of the business concern, or on the issuance of
Chapter A5 [5]:
an order for cost audit by the Government of Bangladesh under the provisions contained in the
Companies Act 1994.
Chapter A6 [6]:
Cost audit when introduced under the strength of a statute or law is called Statutory Cost Audit
that is a "system of audit introduced by the Government of Bangladesh for the review, Part B: Management Audit
examination and appraisal of the cost accounting records and added information required to be
maintained by specified industries". Chapter B1 [7]:
Nature and Scope of Cost Audit
The scope and characteristics of cost audit can be viewed from two aspects: (a) Statutory and Chapter B2 [8]:
(b) Spheres for action. Operational Audit
From the aspect of statute:

Chapter B3 [9]:
In the case of a limited company, the scope of cost audit is outlined in the provisions contained
in under Section 220 of the Companies Act, 1994. According to the section of 220: Audit of
certain matters by Cost and Management and Accountants:
[Chapter 10]
(1) where in the opinion of the Government, it is necessary to do in relation to any company
required under clause-(d) of sub-section (1) of section 181 to include in its books of
accounts the particular referred to therein the Government may, by order, direct that an
audit of cost accounts of the company shall be conducted in such manner as may be
specified in the order by an auditor who shall be a "Cost and management accountant"
within the meaning of the Cost and Management Accounts Ordinance, 1977 (L III of 1977).
(2) An audit conducted by an auditor under this section shall be in addition to an audit
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conducted by an auditor appointed under section 210.

(3) The provisions relating to audit of a company specified in this Act mutatis mutandis, and
so far as they are applicable, apply to an audit conducted under this section.
According to under clause (d) of section 181 of CA 1994 [Books to be kept by company and
penalty for not keeping them]: (1) (d) in the case of a company engaged in production,
distribution, marketing, transportation, processing, manufacturing, milling extraction and Click to jump on:
mining activities, such particulars relating to utilization of material, labor and other items of
overhead cost. This particular clause is the scope of cost auditors to conduct the statutory cost Home
audit.
▪ As per listing requirements, Regulation no. 3 (1) (f) of the Bangladesh Securities and Part A: Cost Audit
Exchange Commission (Public Issue) Rules, 2015 states that “it has got cost audit by
professional accountants as per the Companies Act 1994, if applicable.;” Chapter A1 [1]:
Therefore, if any manufacturing companies who wants to issue its share to public through IPO
(Initial Public Offerings), they must conduct cost audit. Chapter A2 [2]:
From the aspect of spheres for action:
The scope and coverage of cost audit extends to the verification and checking on the following Chapter A3 [3]:
important areas: Cost Auditing Standards and Quality control
1. Services-Utilization of power, fuel, water, steam and electricity and that of material, labor
Chapter A4 [4]:
and other costs like, overheads allocated to, the service departments.
2. Wages & Salaries-Maintenance of employment and attendance records of staff and
workmen, overtime, idle time, allocation of salaries and wages among the production, Chapter A5 [5]:
services departments and department engaged for capital projects, including the wages Reporting under Cost Audit
sheets, etc.
3. Overhead- Fair and equitable distribution basis followed for allocation, of overheads, viz, Chapter A6 [6]:
manufacturing, administration, selling and distribution, reconciliation of financial records Cost Audit in Information Technology (IT)
for overheads incurred with overheads absorbed as per cost records, overhead recovery
rates and variances where standard costing system is followed, and the basis for Part B: Management Audit
classification of costs between fixed and variable.
4. Depreciation-Maintenance of fixed assets.' registers. with quantitative' details and situation, Chapter B1 [7]:
method of depreciation charged and the allocation 'of depreciation in respect of common Internal Control & Internal Audit
assets.
5. Production-Daily production reports, summaries from daily to monthly, monthly to yearly Chapter B2 [8]:
and comparison with the past records and budgeted targets including abnormal losses, etc. Operational Audit
6. Work-in-Progress-Maintenance of records viz, job card, works order, cost ledger, etc. and
Chapter B3 [9]:
their valuation method.
7. Stock verification records, statistical records, etc.
8. Royalty/technical aid payments.
9. Capacity utilization, including key limiting factors causing production bottlenecks.
[Chapter 10]
10. Company's policies and steps with regard to inventory management, cost control, cost
reduction, productivity, internal audit, and budgetary control systems.
11. Exports performance and energy conservation.
12. Abnormal non-recurring costs affecting production due to abnormal features, e.g. strike,
lockout, major breakdowns, etc. and their impact on production cost, and;
13. Inter-company transactions.
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1.2 Objectives and Purpose of Cost Audit
Objectives of Cost Audit

Cost Audit has both general and social objectives. The general objectives can be described in
following:
1. Verification of cost accounts with a view to ascertaining that these have been properly
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maintained and compiled according to the cost accounting system followed by the
enterprise.
Home
2. Ensuring that the prescribed procedures of cost accounting records rules are duly adhered
to.
Part A: Cost Audit
3. Detection of errors and fraud.
4. Verification of the cost of each “cost unit” and “cost center” to ensure that these have
Chapter A1 [1]:
been properly ascertained. Cost Audit Concept & Legal issues
5. Determination of inventory valuation.
6. Facilitating the fixation of prices of goods and services. Chapter A2 [2]:
7. Periodical reconciliation between cost accounts and financial accounts. Cost Accounting Standards
8. Ensuring optimum utilization of human, physical and financial resources of the enterprise.
9. To assist the management by highlighting deficiencies or inefficiencies in the use of Chapter A3 [3]:
material, labor and machines, Cost Auditing Standards and Quality control
10. Detection and correction of abnormal loss of material and time.
11. Inculcation of cost consciousness. Chapter A4 [4]:
12. Advising management, on the basis of inter-firm comparison of cost records, as regards Legal Position of Cost Auditor
the areas where performance calls for improvement.
13. Promoting corporate governance through various operational disclosures to the directors.
Chapter A5 [5]:
14. Finally, to advise the management for the adoption of alternative courses of action by"
preparing cost plan, especially in regard to: rectification of general imbalance in
Chapter A6 [6]:
production facilities, fuller utilization of installed capacity, budgetary control system, Cost Audit in Information Technology (IT)
inventory policies, key limiting factors causing production 'bottlenecks', etc.
Interactive Question 1.1: Eligibility of Cost Auditor
[Difficulty Level: Easy] Chapter B1 [7]:
Mr. Ajmal Hussain who is practicing Tax & VAT, is a qualified Cost and Management Accountant. He
has no license for cost audit form from ICMAB. Is he eligible for selecting as a cost auditor under Chapter B2 [8]:
section 220 of Companies Act 1994? Please explain on your argument. Operational Audit
Chapter B3 [9]:
Ans: Under section 220 of Companies Act 1991 said that Cost Audit must be conducted by an auditor
who shall be a "Cost and management accountant" within the meaning of the Cost and Management
Accounts Ordinance, 1977 (L III of 1977). But any "Cost and management accountant" shall not
appoint or conduct a Cost Auditor unless he/she has Certificate of Practice issued by the ICMAB
[Chapter 10]
under the said ordinance.
Social objectives
The social objects of cost audit are to protect the interest of shareholders, stopping erosion of
the value of capital, production of quality products at reduced prices, control of inflation and
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overall improvement of socio-economic structure by higher productivity and higher national

income, etc. The said objectives can be achieved in the manner stated below:
1. Increasing productivity: Efficient management of material and labor and optimal
utilization of installed capacities increase productivity. Cost audit brings to light these
factors, and so 'aids the management and the Government to bring about improvements of
existing economic conditions of the country.
2. Price fixation and price control mechanism: The Government's order to conduct cost Click to jump on:
audit acts as a counter-weight to the monopolistic attitude of certain industries to increase
commodity prices. The role of the Bureau of Industrial Costs and Prices in studying the Home
cost structure and in fixing the prices in the right direction benefits the society.
3. Cost consciousness in both public and private sectors: Compulsory maintenance of cost Part A: Cost Audit
accounting records is also applicable to the public sector companies. Cost audit creates cost
consciousness in respect of utilization of national, financial, physical. and human resources Chapter A1 [1]:
in these sectors of economy. Cost Audit Concept & Legal issues
4. Identifying uneconomic product line: Cost audit, aimed at locating uneconomic product,
gives a clue to the industry to divert their resources into productive and remunerative Chapter A2 [2]:
channels-which in turn serves. the society. Cost Accounting Standards
5. Guard against evasion of tax: Cost audit ensures correct valuation of the work-in-progress
and stock-in trade, and eliminates the tendencies of inflating costs and reporting least profit Chapter A3 [3]:
of the business. So "the interest of the Government regarding payment of correct taxes by Cost Auditing Standards and Quality control
the industry are also taken care of in the process".
Chapter A4 [4]:
6. Benefit to consumers: "cost audit aims at increasing the added value through increased
profitability per unit of input or resources. This added value can be shared by all the
participants and certainly part of the benefit may reasonably be expected to be passed down Chapter A5 [5]:
to the consumer by way of reduced prices." Reporting under Cost Audit
7. Foreign exchange earnings: In a foreign market the products are highly competitive in
respect of quality and price, and preparation for fighting against anti-dumping duty imposed Chapter A6 [6]:
by the importing country. Application of marginal costing technique either to accept or to Cost Audit in Information Technology (IT)
reject or to improve uneconomic line of operation calls for a more reliable and sophisticated
data. Cost audit can ensure such data as they are authenticated by it cost auditor. Part B: Management Audit
Interactive Question 1.2: Anti-dumping duty Chapter B1 [7]:

[Difficulty Level: Intermediate] Internal Control & Internal Audit
Chapter B2 [8]:
Samuda Chemical, a large manufacturer of Hydrogen Per Oxide and others related chemicals, is
Operational Audit
regularly exporting chemical to neighbouring countries. They are regularly facing anti-dumping duty
imposed by the importing countries. How can Cost Auditor help them to defend legal arguments? Chapter B3 [9]:
Ans: When the Exporting country export the goods at the price below its normal price, then it is called
the dumping of product in the domestic country, where it has been imported. “Margin of Dumping” Part C: Performance Analysis
which determines by the difference between its Normal Value and its Export price. Cost Auditor help [Chapter 10]
to minimize the imposed “Margin of Dumping” and related anti-dumping duty by ensuring that
provided cost data and related manufacturing information are accurate and authenticate. With the
application of marginal costing technique and its authentication by a cost auditor makes a legal ground
for argument with the exporting country’s regulatory authorities.
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1.3 Advantages and Limitations Of Cost Audit

Advantages of Cost Audit
The advantages of cost audit may be classified into four ways. They are:
• Advantages to the management;
• Advantages to the shareholders;
• Advantages to the society; Click to jump on:
• Advantages to the government;
Home
Advantages of cost audit to the management
1. It provides necessary information for prompt decision decisions. Part A: Cost Audit
2. It helps management to regulate production.
3. Errors, omissions, fraud, and mistakes can be detected and prevented due to the effective Chapter A1 [1]:
auditing of cost accounts. Cost Audit Concept & Legal issues
4. It reduces the cost of production through plugging loopholes relating to wastage of material
Chapter A2 [2]:
labor and overheads.
5. It can fix the responsibility of an individual wherever irregularities or wastage are found.
6. It improves the efficiency of the organization as a whole and costing system, particular by
Chapter A3 [3]:
constant review, revision, and checking or routine procedures and methods. Cost Auditing Standards and Quality control
7. It helps in comparing actual results with budgeted results and points out the areas where
management action is more needed. Chapter A4 [4]:
8. It also enables comparison among different units of the factory in order to find out the Legal Position of Cost Auditor
profitability of the different units.
9. It exercises a moral influence on employees which keeps them efficient and alert. Chapter A5 [5]:
10. It ensures that the cost accounts have been maintained in accordance with the principles of Reporting under Cost Audit
costing employed in the industry concerned.
11. Cost audit ensures effective internal control. Chapter A6 [6]:
12. Surly it increases the overall efficiency of productivity. Cost Audit in Information Technology (IT)
13. Inefficiency can be eliminated by suitable corrective actions.
14. It facilitates cost control and cost reduction. Part B: Management Audit
15. It assists in the valuation of stock of materials, works in progress and finished goods,
16. It ensures maximum utilization of available resources. Chapter B1 [7]:
17. It enables the management to chalk out the future policy on the basis of the report by the
cost auditor especially in regard to labor, raw material, plant, etc. to maximize production
Chapter B2 [8]:
and reduce the cost of production,
Operational Audit
18. It tests the effectiveness of cost control techniques and evaluates their advantages to the
enterprise. Chapter B3 [9]:
Advantages to the Shareholders
1. It ensures that proper records are maintained as to purchases, utilization of materials, and
expenses incurred on various items i.e. wages and overheads, etc.
[Chapter 10]
2. It creates an image of the creditworthiness of the concern.
Advantages to the Society

1. It tells the true cost of production. From this, the consumer may know what the market
price of the article is fair or not. The consumer is saved from exploitation.
2. It improves the efficiency of industrial units and thereby assists in the economic progress
of the nation.
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3. Since the price increase by the industry is not allowed without justification as an increase
in the cost of production, consumers can maintain their standard of living.
Advantages to the Government

1. It assists the tariff board in deciding whether tariff protection should be extended to a
particular industry or not.
2. It helps to ascertain whether any particular industry should be given a subsidy in order to Click to jump on:
develop that industry.
3. It provides reliable data to the government for fixing up the selling prices of t various Home
commodities.
4. It helps in fixing contract prices in a cost-plus contract. Part A: Cost Audit
5. It determines whether differential pricing within the industry is desirable.
6. It helps the government to take necessary measures to improve the efficiency of sick Chapter A1 [1]:
industrial units. Cost Audit Concept & Legal issues
7. It can reveal the fraudulent intentions of the management.
8. Cost statements may be helpful to authorities in imposing tax or duty at the cc of finished Chapter A2 [2]:
products. Cost Accounting Standards
9. It facilitates the settlement of trade disputes of the companies.
10. It imposes an automatic check on inflation. Chapter A3 [3]:
11. It assists the Tariff Board to consider the extension or removal of protection. Cost Auditing Standards and Quality control
Chapter A4 [4]:
Limitations of Cost Audit:
The limitations of Cost Audit are as follows:
1. It is an undue interference in the internal operations of the management. Chapter A5 [5]:
2. It is an expensive and time-consuming process because it starts with the purchase of raw Reporting under Cost Audit
material and ends with sale of finished products.
3. It is a verification of accounts of estimated figures only which are invariably different Chapter A6 [6]:
from actual expenses. Cost Audit in Information Technology (IT)
4. Cost records serve as an important instrument of facing market competition and the
relevant information must be treated as trade secrets. Part B: Management Audit
Interactive Question 1.3: Low emphasis of cost audit Chapter B1 [7]:

[Difficulty Level: Intermediate] Internal Control & Internal Audit
In Bangladesh, recent days the basic living commodities prices like: Rice, Sugar, Oil, etc. increases Chapter B2 [8]:
overnight without any proper reason. This is happening because regular and proper cost audit of such Operational Audit
products hasn't occurred or give very low emphasis on cost audit. How can cost audit help to control
Chapter B3 [9]:
the market price of basic living commodities?
Ans: Cost verification helps increase overall productivity efficiency and reduces production costs by
ensuring the best use of men, machineries and materials. Therefore, government authorities and the
[Chapter 10]
consumer can know what the market price of the such products is fair or not, which helps the consumer
not to be exploited. So, with proper emphasis on cost audit can establish a controlled economic system
where no organization or industry can increase overnight the price of any product that can affect the
lifestyle of people in the society. Therefore, the market price of basic commodities is under control.
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1.4 Distinction Between Financial Audit and Cost Audit in

Connection with Their Objectives, Purpose, Engagement,
Scope, Reporting Etc.
Cost audit is the verification of the correctness of the cost accounts and of the adherence to the
cost accounting plan'. Financial audit is a systematic examination of financial statements, Click to jump on:
records and related operations of a business or an undertaking to enable the auditor to determine
adherence to the generally accepted accounting principles, management policies or stated Home
requirements. The fundamental differences between them are tabulated below:
Part A: Cost Audit
Basis of
Cost Audit Financial Audit
comparison Chapter A1 [1]:
Scope It is conducted under section 220 of It is conducted under section 210 -219 Cost Audit Concept & Legal issues
Companies Act 1994. of Companies Act 1994.
Chapter A2 [2]:
Objectives Cost audit is done to certify after The financial audit is done to report on Cost Accounting Standards
careful examination or checking of the financial data, consisting of a
reports on expenditure made on the statement of the balance sheet and Chapter A3 [3]:
production of intended items. The profit and loss to ensure fairness of Cost Auditing Standards and Quality control
emphasis is laid on the analysis of business perspectives. More emphasis
the efficiency of operations and the is given to compliance with the
Chapter A4 [4]:
propriety of actions of the financial statement with the accounting
management. standards and effectiveness of the
Chapter A5 [5]:
internal control system. Reporting under Cost Audit
Appointment Cost Auditor is appointed by the Financial Auditor is appointed by
board of directors with the previous shareholders at Annual General Chapter A6 [6]:
approval of the Government. Meeting Cost Audit in Information Technology (IT)
Mandatory Cost Audit is conducted in a year in Financial audit is mandatory to be
which an audit is required by the conducted every year. It is the Part B: Management Audit
government. It is the verification of examination of financial records and
accounts and cost records and business accounts by an independent Chapter B1 [7]:
careful compliance with the cost body which is conducted for Internal Control & Internal Audit
accounting process. compliance, taxation or for disclosure
purposes and ensures high accuracy in Chapter B2 [8]:
the given reports. Operational Audit
Auditor Performed by a practicing Cost & Performed by a practicing Chartered
Chapter B3 [9]:
Management Accountant. Accountant.
Emphasis Analysis of the efficiency of Compliance with the accounting
operations and propriety of actions standards and effectiveness of the
of the management. internal control system.
[Chapter 10]
Compulsion Compulsory for the companies Compulsory for all companies.
engaged in the manufacturing
business.
Report To the Board of Directors at the To the Shareholders at the Annual
submission Board Meeting, which is then General Meeting of the company.
submitted to the Government.
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Interactive Question 1.4: Appointment and Conduction of Cost Audit

[Difficulty Level: Intermediate]
Mr. Abu Naser Hammad FCA, FCMA, partner of “Hammad & Co.”; was appointed as an Auditor by
shareholders of “Excellent Group of Companies BD” at last Annual General Meeting. At present,
Government asks to Excellent Group for conducting a cost audit for some specific reason. For the Click to jump on:
request of Government, Excellent Group request to Mr. Abu Naser to prepare a cost audit report for the
said Govt. queries. Do you think, that report will be accepted? Home
Ans: No, I think the report of Abu Naser will not be accepted. Because, as per law, he is appointed as Part A: Cost Audit
auditor for “Financial Audit”. For this special asking of Govt. for cost audit, he needs to be appointed
as “Cost Auditor” by the board of directors along with approval of the Government if he has a certificate Chapter A1 [1]:
for practice as a “Cost Auditor”. So, firstly, he must have “a certificate of practice” as a cost auditor. Cost Audit Concept & Legal issues
Secondly, need to prior approval from the Govt. for conducting such said cost audit. And finally, need
to be appointed as a cost auditor by the board of directors. Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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1.5 Genesis of Cost Audit in Bangladesh

During World War I, a large number of contracts were awarded on cost plus basis, which made
it necessary for the contractors to maintain cost accounting records. Cost Accounting techniques
are needed not only to help the management exercise cost control, but the cost accounting
records are also needed for such clients who place orders on cost plus basis. In such cases, the
client has the right to examine cost accounting records or have performed cost audit. In USA, Click to jump on:
Defence suppliers and contractors have to maintain cost accounting records in accordance with
Cost Accounting Standards laid down by the Cost Accounting Standards Board (CASB). This Home
is subject to cost audit to ensure its authenticity. The Cost Accounting in its developed form
helps the management of manufacturing concerns in improving the efficiency, in making the Part A: Cost Audit
business decisions and in evaluating the performance of entities in the same industrial sector
through standardizing the systems and procedures. However, it is only in India, Pakistan and Chapter A1 [1]:
Bangladesh that cost audit has been formalized under Companies Ordinance/Acts. India is the
pioneer in introducing Cost Audit since late 60s and now over 40 industries are covered under
Chapter A2 [2]:
Cost Audit Scheme. In India and Bangladesh, only Cost and Management Accountants are
eligible to conduct cost audit. In Pakistan, Chartered Accountants are also eligible to conduct
cost audit. Chapter A3 [3]:
Interactive Question 1.5: Government imposing mandatory Cost Audit in specific industries?
[Difficulty Level: Intermediate] Chapter A4 [4]:
Companies in a specific economic zone of Chittagong have recently asked for conducting a mandatory
cost audit by Government to ensure the cost of production and product pricing is logical or not. Do you Chapter A5 [5]:
think that the Government have the right to ask so?
Chapter A6 [6]:
Ans: Yes, the Government have the right to ask so. Because, Government facilitates the economic zone
providing various subsidy-based facilities like: allotting lands on a concessionary price basis, provide
utilities in a subsidized rate, build roads and others facilities to connect that zone with the country’s
others areas, various tax subsidy and exemption etc. All these facilities provided by Govt. in the
economic zones to boost up economy and ensure the accurate cost-controlled production of the goods Chapter B1 [7]:
and services with a logical selling price by which the consumer can get the right products in right price. Internal Control & Internal Audit
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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1.6 Companies Act, 1994

AS PER SECTION 118 OF COMPANIES ACT 1994:
As per section 181 of Companies Act 1994, mentioned “Books of Accounts” includes records
includes records maintained in respect of Books to be kept by company and penalty for not
keeping them: -
1. Every company shall keep proper books of account with respect to Click to jump on:
(i) all sums of money received and expended by the company and the matters in respect
of which the receipt and expenditure take place; Home
(ii) all sales and purchases of goods by the company;
(iii) the assets and liabilities of the company; and Part A: Cost Audit
(iv) in the case of a company engaged in production, distribution, marketing,
transportation, processing, manufacturing, milling extraction and mining activities, Chapter A1 [1]:
such particulars relating to utilization of material, labor and other items of overhead
cost.
Chapter A2 [2]:
2. For the purpose of sub-section (1), proper books of account shall not be deemed to be kept
with respect to the matters specified therein if there are not kept such books as are necessary
to give a true and fair view of the state of the affairs of the company and to explain its Chapter A3 [3]:
transactions. Cost Auditing Standards and Quality control
3. The books of account shall be kept at the registered office of the company and shall at all
times be open to inspection by directors during business hours: Chapter A4 [4]:
Provided that all or any of the books of account may, for a period not exceeding six months, Legal Position of Cost Auditor
be kept at such other place in Bangladesh as the board of Directors may decide and when
the board of Directors so decides, the company shall within seven days of the decision, file Chapter A5 [5]:
with the Registrar a notice in writing giving the full address of that other place. Reporting under Cost Audit
4. where a company has a branch office, whether in or outside Bangladesh, the company shall
be deemed to have complied with the provisions of sub-section (1), if proper books of Chapter A6 [6]:
account relating to the transactions effected at the branch office are kept at that office and Cost Audit in Information Technology (IT)
proper summarized returns, made up to date at intervals of not more than three months, are
sent by the branch office to the company at its registered office or the other place referred Part B: Management Audit
to in sub-section (3).
Chapter B1 [7]:
5. The books of account of every company relating to a period of not less than twelve years
immediately preceding the current year together with vouchers relevant to any entry in such
books of account shall be preserved in good order; Chapter B2 [8]:
Provided that in the case of a company incorporated less than twelve years before the Operational Audit
current year, the books of account for the entire period preceding the current year together
with the vouchers relevant to any entry in such books of account shall be so preserved. Chapter B3 [9]:
6. If any of the persons referred to in sub-section (7) fails to take all reasonable steps to secure Management Audit in Different function
compliance by the company with the requirements of this section, or has, by his own willful
act, been the cause of any default by the company thereunder, he shall, in respect of each Part C: Performance Analysis
offence, be punishable with imprisonment for a term which may extend to six months or [Chapter 10]
with which may extend to five thousand taka or with both.
7. The persons referred to in sub-section (6) are the following, namely: -
(i) where the company has a managing agent, managing director executive director,
general manager or manager, such managing agent, managing director, executive
director, general manager or manager and all officers but excluding the bankers,
auditors and legal advisers;
15
(ii) where such managing agent is a firm, every partner in the firm;
(iii) where such managing agent is a body corporate, every director of such body
corporate;
(iv) where the company has neither a managing agent nor managing director nor
executive director nor general manager nor manager, every director of the company.
AS PER SECTION 220 OF COMPANIES ACT 1994: Click to jump on:

Audit of certain matters by Cost and Management Accountants. -
1. where in the opinion of the Government, it is necessary to do in relation to any company Home
required under clause-(d) of sub-section (1) of section 181 to include in its books of
accounts the particular referred to therein the Government may, by order, direct that an Part A: Cost Audit
specified in the order by an auditor who shall be a Cost and management accountant" within Chapter A1 [1]:
the meaning of the Cost and Management Accounts Ordinance, 1977 (L III of 1977). Cost Audit Concept & Legal issues
2. An audit conducted by an auditor under this section shall be in addition to an audit
conducted by an auditor appointed under section 210. Chapter A2 [2]:
3. The provisions relating to audit of a company specified in this Act mutatis mutandis, and Cost Accounting Standards
so far, as they are applicable, apply to an audit conducted under this section.
Chapter A3 [3]:
Interactive Question 1.6: Cost Audit Requirements in Companies Act 1994 Chapter A4 [4]:
[Difficulty Level: Intermediate] Legal Position of Cost Auditor
J&M Entrerprise Pvt. Ltd. is registered under Companies Act 1994 and appoint you as Chief Financial Chapter A5 [5]:
Officer. Considering the “Cost Audit” Aspect, you need to ensure the cost audit requirement of the law. Reporting under Cost Audit
Which points you need to ensure?
Chapter A6 [6]:
Ans: As a CFO, I need to ensure that: Cost Audit in Information Technology (IT)
• shall maintain cost accounting books of production, distribution, marketing, transportation etc. with
such particulars relating to utilization of materials, labor and other items of overhead costs. Part B: Management Audit
• shall appoint a Cost Auditor, who is member of the Institute of “Cost and Management Accountant
Chapter B1 [7]:
of Bangladesh” and have a “Certificate of Practice” from the institute, through a resolution in the
meeting of the Board of Directors.
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
16
1.7 Cost Audit (Report) Rules, 1997

At present, Government has promulgated for seven (7) industries under mandatory of cost audit,
e.g. sugar, chemical fertilizer, cotton, jute, drug, fuel & power, edible oil and vegetable ghee.
Cost Audit (Report) Rules, 1997 has been promulgated on November 18, 1997 under the power
of section 226 (4) of Companies Act 1994 to execute the objective of section 220 (1) of
Companies Act 1994. The salient features of Cost Audit (Report) Rules, 1997 are as follows: Click to jump on:
Rules Home
Head Particulars
No.
2 Definition: (ga) “Cost Auditor” mean any Cost & Management
Part A: Cost Audit
Accountant, and Cost Audit Firm defined in Cost and
Management Accountants Ordinance 1977 [now Cost Chapter A1 [1]:
and Management Accountants Act-2018; Cost Audit Concept & Legal issues
(gha) “Company” means in the case of a company engaged in
production, distribution, marketing, transportation, Chapter A2 [2]:
processing, manufacturing, milling extraction and Cost Accounting Standards
mining activities, such particulars relating to utilization
of material, labor and other items of overhead cost; Chapter A3 [3]:
3 Record keeping in Cost accounting related books of production, distribution, Cost Auditing Standards and Quality control
certain matters: marketing, transportation, processing, manufacturing, milling
extraction and mining activities, such particulars relating to Chapter A4 [4]:
utilization of material, labor and other items of overhead cost Legal Position of Cost Auditor
shall be kept.
4 Accounts audited Every company must be audited its cost accounting books by Chapter A5 [5]:
by Cost Auditor: the Cost Auditor, and this audit will be extra audit under Reporting under Cost Audit
section 210.
Chapter A6 [6]:
5 Appointment of (1) In accordance with section 220(1), the Board of Directors
Cost Auditor: who are being ordered by the Gov0ernment will appoint Cost Audit in Information Technology (IT)
Cost Auditor within 30 days just after the ending of its
fiscal year; Part B: Management Audit
Provided that on one will be appointed or re-appointed Chapter B1 [7]:
without his written consent. Internal Control & Internal Audit
(2) Every cost auditor who is appointed under sub clause 1
must inform government within 15 days after the joining Chapter B2 [8]:
as auditor. Operational Audit
6 Qualification and (1) No company will be appointed any person as a Cost
Disqualification of Auditor unless it is a defined cost & management Chapter B3 [9]:
appointing Cost accountant in the Ordinance/Act: Management Audit in Different function
Auditor:
Provided that no Cost & Management Accountant will be
appointed if s/he has hold Certificate of Practice that is Part C: Performance Analysis
issued by the Institute of Cost & Management Accountant [Chapter 10]
of Bangladesh (ICMAB).
Provided further that if any partner of the firm who is
eligible to be appointed as a Cost Auditor, the firm can be
appointed as a Cost Auditor, and in that case any Partner
of the firm may continue as a cost Auditor in the name of
that firm.
17
Rules
Head Particulars
No.
(2) Any person will not be eligible to appoint as cost auditor,
if-
(a) an officer or employee of the company;
(b) a person who is partner, or who is in the employment
of an officer or employee of the company;
(c) a person who is indebted to the company for an
Click to jump on:
amount exceeding one thousand taka, or who had
given any guarantee or provided any security in Home
connection with the indebtedness of any third person
to the company for an amount exceeding one thousand Part A: Cost Audit
taka;
(d) a person who is director or member of a partner Chapter A1 [1]:
company, or a partner of a firm, which is the managing
agent of the company;
(e) a person who is a director, or the holder of shares
exceeding five percent in nominal value of the Chapter A2 [2]:
subscribed capital, of anybody corporate which is the Cost Accounting Standards
managing agent of the company.
(f) Provided that where any shares held by a person as Chapter A3 [3]:
nominee or trustee for any third person and in which Cost Auditing Standards and Quality control
the holder has no beneficial interest such shares shall
be excluded in computing the extent of the subscribed Chapter A4 [4]:
capital for the purpose of this clause. Legal Position of Cost Auditor
(g) if s/he appointed as Auditor under section 210 of
Companies Act 1994. Chapter A5 [5]:
Explanation: - For the purposes of this sub-section the Reporting under Cost Audit
word "officer" or "employee" shall not in include a Cost
Auditor. Chapter A6 [6]:
(3) A person shall not be qualified for appointment as a cost Cost Audit in Information Technology (IT)
auditor of a company, if- (a) he, according to sub-section
(2), is disqualified for appointment as auditor of any other Part B: Management Audit
body corporate which is that company's subsidiary or
holding company or a subsidiary of that company's Chapter B1 [7]:
holding company's; (b) he would be disqualified for such Internal Control & Internal Audit
appointment, had the said body corporate been a company.
(4) If a cost auditor becomes subject, after his appointment to Chapter B2 [8]:
any of the disqualification's specified in sub-section (2)
Operational Audit
and (3), he shall be deemed to have vacated his office as
such.
Chapter B3 [9]:
7 Purveyance of After promulgating Govt. Gazette for auding under section Management Audit in Different function
Cost Accounting 220(1) of Companies Act 1994, the company must purvey
Records, etc.: related documents under section 181(1) (d) of CA 1994,
specific cost accounting records, statements, and other books, Part C: Performance Analysis
documents, etc. to the Cost Auditor within 75 days after [Chapter 10]
ending of each fiscal year, and the company must necessary
support so that the cost auditor can conduct audit properly.
8 Submission of (1) Every cost auditor shall prepare cost audit report of
Report: auditee company in accordance with the format
incorporated in this rule and will submit cost audit report
within 150 days after ending of the fiscal year.
18
Rules
Head Particulars
No.
(2) Cost auditor will submit cost audit report to the board of
director of auditee company and one copy of the report
will be supplied to the government.
(3) If the government ask explanation on specific points of
cost audit report, cost auditor must explain on that specific
point within stipulated time.
Click to jump on:
9 Presentation of (1) Cost audit report will be presented to the board of directors Home
Cost Audit Report: by CEO of the company within 30 days after submission
of cost audit report.
(2) Cost audit report will not be opened for inspection for the Part A: Cost Audit
general members of the company, or will not be presented
in the AGM: Chapter A1 [1]:
Provided that if the Govt. thinks fit to present the cost
audit report to the general member of the company, by
giving written order with appropriate cause, the cost audit Chapter A2 [2]:
report may be presented full or partial in the AGM, and Cost Accounting Standards
only selected part will be presented in the AGM.
Chapter A3 [3]:
11. Authentication of Statements of cost accounting, if any, shall be signed by the
Statement of Cost CEO and CFO (whichever is called), and if any one of them Cost Auditing Standards and Quality control
Accounting, etc. present outside Bangladesh, alternate persons who are
representative of them shall be signed on the statements. Chapter A4 [4]:
12 Penalty for If any cost auditor or related officials of the company violate
violation of any Provision of the rules, he or in case of they may be
Chapter A5 [5]:
provisions: penalized not more than 1000 taka.
Interactive Question 1.7: Disqualification of Cost Auditor Chapter A6 [6]:

[Difficulty Level: Intermediate] Cost Audit in Information Technology (IT)
Mr. Ragib Ul Alam FCMA is a practicing Cost Auditor who Hold 7% share in ABC Holdings Public Part B: Management Audit
Limited Company. ABC Holdings want to appoint him as a Cost Auditor of its subsidiary company
XYZ Inc. where he has no interest and relation in any manner. Do you think he can be appointed as Chapter B1 [7]:
Cost Auditor of XYZ Inc.? Internal Control & Internal Audit
Ans: No, he cannot be appointed as Cost Auditor of XYZ Inc. which is a subsidiary of ABC Holdings Chapter B2 [8]:
Public Limited Company where Mr. Ragib Ul Alam has 7% ownership. As per “Cost Audit (Report) Operational Audit
Rules, 1997”
• a person who is a director, or the holder of shares exceeding five percent in nominal value of the Chapter B3 [9]:
subscribed capital. Management Audit in Different function
• A person shall not be qualified for appointment as a cost auditor of a company, if he, is disqualified
for appointment as auditor of any other body corporate which is that company's subsidiary or Part C: Performance Analysis
holding company or a subsidiary of that company's holding company'. [Chapter 10]
Here Mr. Ragib has more than 5% ownership in ABC Holdings which disqualified him as a cost auditor
in ABC Holdings and because XYZ Inc. is a subsidiary of ABC Holdings, he also cannot be appointed
as a cost auditor of ABC Holdings.
19
1.8 Government Gazette Notification Relating to Cost Audit

The following gazettes are circulated by the Government as per under section 220(1) of
Companies Act 1994: [Total circular numbers are 5.]
As per Gazette published in said dates by Bangladesh Government the following companies
are must be conducted cost audit by a certified “Cost and Management Accountant”: Click to jump on:
• 11 December 2001: all public limited companies registered under “Companies Act 1994”
and all nationalized Sugar Mills. Home
• 12 December 2003 05 Companies of Fuel & Power Industry, namely: BOC Bangladesh
Ltd., Padma Oil Co. Ltd., Eastern Lubricants Blenders Ltd., National Oxygen Ltd. And Part A: Cost Audit
Bangladesh Welding Electrodes Ltd. And, 06 companies of Jute Industry, namely: Jute
Spinners Ltd., Northern Jute Manufacturing Co. Ltd., Sonali Ash Industries Ltd., Saleh Chapter A1 [1]:
Carpet Mills Ltd., Mutual Jute Spinners Ltd. And Islam Jute Mills Ltd. Cost Audit Concept & Legal issues
• As per Gazette published in 03 December 2009 all nationalized Fertilizer Manufacturing
Chapter A2 [2]:
Companies are must be conducted cost audit by a certified “Cost and Management
Accountant”.
• 03 December 2009: 12 Companies of Pharmaceuticals Industry, namely: MB Chapter A3 [3]:
Pharmaceuticals Ltd., Beximco Pharmaceuticals Ltd., Glaxosmithkline Pharmaceuticals Cost Auditing Standards and Quality control
Ltd., ACI Limited, Reneta Limited, Pharmaco International Ltd., Reckitt Benckiser
(Bangladesh) Ltd., Therapeutics Bangladesh Ltd., The IBN SINA Pharmaceutical Industry Chapter A4 [4]:
Ltd., Libra Infusion Ltd., Orion Infusion Ltd. and Square Pharmaceuticals Ltd. Legal Position of Cost Auditor
• 03 December, 2009: 42 Companies of Textiles Industry, namely: Al-Hajj Textile Mills
Ltd., Ashraf Textile Mills Ltd., GMG Industrial Corporation Ltd., Kashem Textile Mills Chapter A5 [5]:
Ltd., Stylecraft Ltd., Rahim Textile Mills Ltd., Kashem Silk Mills Ltd., Saiham Textile Reporting under Cost Audit
Mills Ltd., Modern Dying and Screenprinting Ltd., Eagle Star Textile Mills Ltd., Desh
Chapter A6 [6]:
Garments Ltd., Dulamia Cotton Spinning Mills Ltd., Tallu Spinning Mills Ltd., Arbi
Textile Ltd., Tamijuddin Textile Mills Ltd., Padma Textile Mills Ltd., Apex Spinning and
Knitting Mills Ltd. Beximco Knitting Ltd., Dynamic Textile Industries Ltd., Mithun
Knitting and Dying Ltd., Mita Textiles Ltd., Bangladesh Dying and Finishing Industries
Ltd., Delta Spinner Ltd., Apex Waiving and Finishing Mills Ltd., Dandy Dying Ltd.,
Chapter B1 [7]:
Sonargaon Textile Ltd., Beximco Textile Ltd., Bangladesh Zipper Industries Ltd., Beximco Internal Control & Internal Audit
Denims Ltd., Prime Textile Spinning Mills Ltd., M Hossian Garments Ltd, Sajib Knitwear
and Garments Ltd., Chick Tex Ltd., Shripur Textile Mills Ltd., Monno Fabrics Ltd., Altex Chapter B2 [8]:
Industries Ltd., Anlima Yarn Dying Ltd., H.R. Textile Mills Ltd., CMC Kamal Textile Operational Audit
Mills Ltd., Safco Spinning Mills Ltd., Square Textile Ltd. And Metro Spinning Ltd.
Chapter B3 [9]:
Interactive Question 1.8: Mandatory Cost Audit for Companies as Per Government Circular Management Audit in Different function
[Difficulty Level: Intermediate]
In Bangladesh, which companies are bound to conduct cost audit as per Government Circular. As a [Chapter 10]
practicing cost auditor, you need to list out all the industries who need to must conduct cost audit.
Mention how many companies of each industry are specified by the Government to conduct mandatory
cost audit?
Ans: The following Industries are need to must conduct cost audit:
20
1) All public Limited Companies and nationalized Sugar Mills.

2) Nationalized Fertilizer Companies.
3) Total 5 companies of Fuel & Power
4) Total 6 companies of Jutes;
5) Total 12 Listed Pharmaceuticals Companies
6) Total 42 Listed Textile Mills
Click to jump on:
Home
Part A: Cost Audit

Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
21
1.9 CMA Ordinance, 1977 (Ordinance No. LIII of 1977)

GOVERNMENT OF THE PEOPLE'S REPUBLIC OF BANGLADESH
MINISTRY OF LAW AND PARLIAMENTARY AFFAIRS
NOTIFICATION
Dhaka, the 14th November, 1977* Click to jump on:
No. 888-Pub. - The following Ordinance made by the President of the People's Republic of Bangladesh,
on the 8th November, 1977 is hereby published for general information:- Home
THE COST AND MANAGEMENT ACCOUNTANTS ORDINANCE, 1977 Part A: Cost Audit
Ordinance No. LIII of 1977
AN ORDINANCE Chapter A1 [1]:
to constitute an Institute of Cost and Management Accountants of Bangladesh for the purpose of
Chapter A2 [2]:
regulating the profession of cost and management accountants.
WHEREAS it is expedient to constitute an Institute of Cost and Management Accountants in Chapter A3 [3]:
Bangladesh for the purpose of regulating the profession of cost and management accountants and for Cost Auditing Standards and Quality control
matters connected therewith.
Chapter A4 [4]:
Now, THEREFORE, in pursuance of the proclamations of the 20th August, 1975, and the 8th Legal Position of Cost Auditor
November, 1975, and in exercise of all powers enabling him in that behalf, the President is pleased to
make and promulgate the following Ordinance:- Chapter A5 [5]:
1. Short title − The Ordinance may be called the Cost and Management Accountants Ordinance,
1977.
Chapter A6 [6]:
2. Definitions − (1) In this Ordinance, unless there is anything repugnant in the subject or
context:-
(a) "associate" means an associate member of the Institute;
Chapter B1 [7]:
(b) "cost and management accountant" means a person who is an associate or a fellow of the Institute; Internal Control & Internal Audit
(c) "Council" means the Council of the Institute;
(d) "dissolved Institute" means the Institute as defined in the Cost and Industrial Accountants Act, 1966 Chapter B2 [8]:
(XIV of 1966); Operational Audit
(e) "Fellow" means a fellow member of the Institute;
(f) "Institute" means the Institute of Cost and Management Accountants of Bangladesh constituted Chapter B3 [9]:
under this Ordinance; Management Audit in Different function
(g) "prescribed" means prescribed by regulations made under this Ordinance;
(h) "President" means the President of the Council; Part C: Performance Analysis
(i) "Register" means the Register of members of the Institute maintained under this Ordinance; [Chapter 10]
(j) "Vice-President" means the Vice-President of the Council.
22
(2) Save as otherwise provided in this Ordinance, a member of the Institute shall be deemed "to
be in practice" when, individually or in partnership with one or more members of the Institute in
practice, he, in consideration of the remuneration received or to be received:-
(a) engages himself in the practice of cost and management accounting; or
(b) offers to perform services involving the costing or pricing of goods or services, or the preparation,
verification or certification of cost accounting and related statements, or holds himself out to the
public as a cost and management accountant; or Click to jump on:
(c) renders professional service or assistance in or about matters of principles or detail relating to the
cost and management accounting procedures, or the recording, presentation or certification of Home
costing facts or data; or
(d) renders such other services as, in the opinion of the Council, are or may be rendered by a cost and Part A: Cost Audit
management accountants in practice; and the words "to be in practice", with its grammatical
variations and cognate expressions, shall be construed accordingly. Chapter A1 [1]:
Explanation- An associate or fellow who is a whole-time salaried employee of any person shall not
be deemed "to be in practice" within the meaning of this sub-section. Chapter A2 [2]:
3. Incorporation of the Institute − (1) All persons whose names are entered in the Register at the
commencement of this Ordinance and all persons who may thereafter have their names entered in the Chapter A3 [3]:
Register under the provisions of this Ordinance, so long as they continue to have their names borne on
the Register, are hereby constituted a body corporate by the name of the Institute of Cost and
Chapter A4 [4]:
Management Accountants of Bangladesh and all such persons shall be known as members of the Legal Position of Cost Auditor
Institute.
(2) The Institute shall have perpetual succession and a common seal and shall have power to Chapter A5 [5]:
acquire, hold and dispose of property, both movable and immovable, and to contract, and shall by its Reporting under Cost Audit
name sue or be used.
Chapter A6 [6]:
4. Entry of names in the Register − (1) The following persons shall be entitled to have their names Cost Audit in Information Technology (IT)
entered in the register, namely:-
(a) any person who was, immediately before the commencement of this Ordinance, a fellow or Part B: Management Audit
associate of the dissolved Institute;
(b) any person who has passed such examination and completed such training as may be prescribed by Chapter B1 [7]:
the Council for membership of the Institute; Internal Control & Internal Audit
(c) any person who has passed such other examination and completed such other training outside
Bangladesh of such Institute of Cost and Management Accountancy and admitted as member of Chapter B2 [8]:
Operational Audit
that Institute as may be recognized by the Council as being equivalent to the examination and
training prescribed for the members of the Institute:
Chapter B3 [9]:
Provided that, in the case of any such person who is not a citizen of Bangladesh, or permanently Management Audit in Different function
residing in Bangladesh, he shall fulfill such further conditions as the Council may deem fit to
impose;
(d) any person being a citizen of Bangladesh, who at the commencements of this Ordinance, has passed [Chapter 10]
such other examination and completed such other training outside Bangladesh of such Institute of
Cost and Management Accountancy and admitted as member of that Institute:
Provided that any such examination or training of such Institute of Cost and Management
Accountancy was recognized, before the commencements of this Ordinance, for the purpose of
conferring the right to be registered as a member of the dissolved Institute;
(e) any person, being a citizen of Bangladesh, who at the commencement of this Ordinance,-
23
(i) is studying for any foreign examination and is, at the same time, undergoing training, whether
within or outside Bangladesh, of such Institute of Cost and Management Accountancy, and
passes such examination and completes such training, or
(ii) having passed such foreign examination of such Institute of Cost and Management
Accountancy, is undergoing training whether within or outside Bangladesh and completes such
training:
Provided that any such examination or training of such Institute of Cost and Management Click to jump on:
Accountancy was recognized, before the commencement of the Ordinance, for the purpose of
conferring the right to be registered as a member of the dissolved Institute. Home
(2) The Council shall, as early as possible, take such steps as may be necessary for having the Part A: Cost Audit
names of all such persons as are mentioned in clause (a) of sub section (1) entered in the Register
without any application being made in that behalf or the payment of any fee and the name of every such Chapter A1 [1]:
person so entered shall be deemed to have been entered at the commencement of this Ordinance for the Cost Audit Concept & Legal issues
purpose of sub-section (1) of section 3.
(3) Every person belonging to any of the clauses mentioned in clauses (b), (c), (d) and (e) of Chapter A2 [2]:
sub-section (1) may have his name entered in the Register on an application made to, and granted by, Cost Accounting Standards
the Council in the prescribed manner and on payment of the prescribed fee.
Chapter A3 [3]:
5. Disabilities − Notwithstanding anything contained in section 4, a person shall not be entitled to
have his name entered in or borne on the Register if he:-
Chapter A4 [4]:
(a) has not attained the age of twenty-one years at the time of his applications for the entry of his name Legal Position of Cost Auditor
in the Register; or
(b) is of unsound mind and stands so adjudged by a competent court; or Chapter A5 [5]:
(c) is an undercharged insolvent; or Reporting under Cost Audit
(d) having been discharged of insolvency, has not obtained from the court a certificate stating that his
insolvency was caused by misfortune without any misconduct on his part, or Chapter A6 [6]:
(e) has been convicted by a competent court, whether within or without Bangladesh, of an offence Cost Audit in Information Technology (IT)
involving moral turpitude punishable with transportation or imprisonment, or of and offence, not
of a technical nature, committed by him in his professional capacity unless in respect of the offence Part B: Management Audit
committed he has either been granted a pardon, or, on an application made by him in this behalf,
the Government has, by an order in writing, removed the disability; or Chapter B1 [7]:
(f) has been removed from the membership of the Institute on being found on enquiry to have been Internal Control & Internal Audit
guilty of such professional or other misconduct as may be prescribed:
Provided that a person who has been removed from membership of the Institute for a specified Chapter B2 [8]:
period shall not be entitled to have his name entered in the Register until the expiry of such period. Operational Audit
Chapter B3 [9]:
6. Associates and fellows − (1) Save as otherwise provided in this Ordinance, the members of the
Institute shall be of two classes designated as fellows and associates.
(2) A person, other than a person mentioned in sub-section (3), shall, on his name being entered
in the Register, be an associate and so long as his name remains so entered, shall be entitled to use the [Chapter 10]
letters ACMA after his name to indicate that he is an associate member of the Institute.
(3) A person who was, immediately before the commencement of this Ordinance a fellow of
the dissolved Institute shall be entered in the Register as a fellow of the Institute; and such person, so
long as his name remains so entered, shall be entitled to use the letters FCMA after his name to indicate
that he is a fellow member of the Institute.
24
(4) A person who has been as associate for a continuous period of not less than five years and
who possesses such qualifications as the Council may prescribe, may apply to the Council for admission
as a fellow; and if the Council grants his application his name shall be entered in the Register as a
fellow.
Explanation-- In computing the continuous period during which a person has been an associate of
the Institute, there shall be included any continuous period during which he has been an associate of the Click to jump on:
dissolved Institute immediately before he became an associate of the Institute.
Home
(5) The decision of the Council on an application made under sub-section (4) shall be final.
Part A: Cost Audit
7. Certificate of practice − (1) No member of the Institute shall be entitled to practice within
Bangladesh unless he holds a certificate of practice granted by the Council. Chapter A1 [1]:
(2) The Council may, subject to such conditions as it may deem fit to impose, grant a certificate Cost Audit Concept & Legal issues
of practice to a member of the Institute who applies in the prescribed form and pays the prescribed
annual fee for such certificate. Chapter A2 [2]:
(3) Every member holding a certificate of practice shall pay the annual fee which shall be due Cost Accounting Standards
on the first day of July in each financial year.
(4) A certificate of practice shall be liable to be cancelled for default in payment of the annual Chapter A3 [3]:
fee for any financial year.
Chapter A4 [4]:
8. Members to be known as Cost and Management Accountants − Every member of the Legal Position of Cost Auditor
Institute in practice shall, and any other member may, use the designation of Cost and Management
Accountant and no member using such designation shall use any other designation, whether in addition Chapter A5 [5]:
thereto or in substitution therefore: Reporting under Cost Audit
Provided that nothing contained in this section shall be deemed to prohibit any such member from
adding any other description or designator letters to his name, if entitled thereto, to indicate Chapter A6 [6]:
membership of such other institute of accountancy, whether in Bangladesh or elsewhere, as may be Cost Audit in Information Technology (IT)
recognized in this behalf by the Council, or any other qualification that he may possess, or to prohibit
a firm, all the partners of which are members of the Institute and in practice, from being known by its Part B: Management Audit
firm name as Cost and Management Accountants.
Chapter B1 [7]:
9. Constitution and Composition of the Council − (1) There shall be a Council of the Institute Internal Control & Internal Audit
for the management of the affairs of the Institute and for discharging the functions assigned to it under
Chapter B2 [8]:
this Ordinance.
Operational Audit
(2) The Council shall be composed of the following persons, namely:
(a) 1twelve persons to be elected by the members of the Institute from amongst the fellows; Chapter B3 [9]:
and Management Audit in Different function
(b) four persons to be nominated by the Government. Part C: Performance Analysis

2
(3) An officer or employee of the Institute shall not be eligible for election or nomination as a [Chapter 10]
member of the Council.
1
The word 'twelve' was substituted for the word 'eight' by Act XXXIX of 1990.
2
The sub-section (3) was added by Act XXXIX of 1990.
25
10. Election of the Council − (1) Election of the members of the Council mentioned in clause (a)
of sub-section (2) of section 9 shall be held at the annual general meeting of the institute in such manner
as may be prescribed.
(2) Where any dispute arises regarding any such election, it shall be referred by the Council to
a Tribunal appointed by the Government in this behalf and the decision of such Tribunal shall be final:
Provided that no such reference shall be made except on an application made, within thirty days from Click to jump on:
the date of the declaration of the result of the election to the Council by an aggrieved party supported
by at least five members of the Institute who had attended the election. Home
(3) The expenses of Tribunal shall be borne by the Institute or by the aggrieved party as may Part A: Cost Audit
be ordered by the Tribunal.
(4) If the members of the Institute fail to elect any of the members of Council mentioned in Chapter A1 [1]:
clause (a) of sub-section (2) of the section 9, the Government may nominate any person duly qualified Cost Audit Concept & Legal issues
for the purpose to fill the vacancy, and the person so nominated shall be deemed to have been duly
elected under that clause. Chapter A2 [2]:
11. Honorary office-bearers of the Council − (1) The Council shall, at a meeting specially called
Chapter A3 [3]:
for the purpose, elect from amongst its member the following honorary office-bearers, namely:-
(a) a President;
(b) two Vice-Presidents; Chapter A4 [4]:
(c) a Secretary; Legal Position of Cost Auditor
(d) a Treasurer.
(2) If the Council fails to elect any of the office-bearers within one month of the election of its Chapter A5 [5]:
members mentioned in clause (a) of sub-section (2) of section 9 or, as the case may be within one month Reporting under Cost Audit
of expiry of the term of an office-bearer, the government may appoint any of the members of the Council
to fill in the vacancy, and the office-bearer so appointed shall be deemed to have been duly elected by Chapter A6 [6]:
the date of such appointment. Cost Audit in Information Technology (IT)
(3) The president shall be the Chief Executive of the Council.
(4) Save as provided in sub-section (5), an office bearer shall, subject to his being a member Part B: Management Audit
of the Council, hold his office for a period of one year from the date on which he is elected or deemed
to have been elected. Chapter B1 [7]:
(5) Notwithstanding the expiry of the term of his office under sub-section (4), an office- bearer Internal Control & Internal Audit
shall continue to perform his function until his successor is elected or deemed to have been elected.
(6) Where a vacancy occurs in the office of an office bearer because of his resignation or Chapter B2 [8]:
Operational Audit
ceasing to be a member of the Council, the Council shall elect another office-bearer to fill the vacancy
within one month from the date the vacancy occurs.
Chapter B3 [9]:
(7) If the Council fails to elect a new office-bearer as provided in sub-section (6), the Management Audit in Different function
Government may appoint any of the members of the Council to fill the vacancy, and the office bearer
so appointed shall be deemed to have been duly elected by the Council on the date of such appointment.
[Chapter 10]
12. Resignation of membership and casual vacancies − (1) Any member of the Council may, at
any time, resign his membership by writing under his hand addressed to the President, and the office of
such member shall be deemed to have fallen vacant from the date of acceptance of his resignation by
the President.
26
(2) The President may, at any time, resign his office by writing under his hand addressed to the
Government and the office of the President including his membership of the Council shall be deemed
to have fallen vacant from the date of acceptance of his resignation by the Government.
(3) A member of the Council shall be deemed to have vacated his seat if he absents himself,
without sufficient excuse, from three consecutive meetings of the Council, or if his name is, for any
cause, removed from the Register under section 20, or remains out of Bangladesh for a continuous
period exceeding one year. Click to jump on:
(4) A casual vacancy in the Council shall be filled by election, or by nomination, as the case
may be, and the person elected or nominated to fill the vacancy shall hold office for the remaining Home
period of the duration of the Council:
Provided that no election shall be held or no nomination shall be made to fill a casual vacancy Part A: Cost Audit
occurring within six months prior to the date of the expiry of the duration of the Council, but
such a vacancy may be filled by co-option by the Council. Chapter A1 [1]:
(5) No act done by the Council shall be called in question on the ground merely of the existence Cost Audit Concept & Legal issues
of any vacancy in, or defect in the constitution of, the Council.
Chapter A2 [2]:
13. Duration and dissolution of Council − (1) The duration of the Council shall be three years Cost Accounting Standards
from the date of its first meeting on the expiry of which a new Council shall be constituted in accordance
with the provisions of this Ordinance. Chapter A3 [3]:
(2) Notwithstanding the expiry of the duration of the Council under sub-section (1), it shall
continue to function until a new Council is constituted in accordance with the provisions of this
Chapter A4 [4]:
Ordinance, and upon such constitution, the Council so functioning shall stand dissolved. Legal Position of Cost Auditor
14. Functions of the Council − (1) The Council shall exercise such powers and perform such Chapter A5 [5]:
functions as may be necessary to carry out the purposes of this Ordinance. Reporting under Cost Audit
(2) In particular, and without prejudice to the generality of the foregoing provision, the powers
and functions of the Council shall include:- Chapter A6 [6]:
(a) the examination of candidates for membership of the Institute and the prescribing of fees for such Cost Audit in Information Technology (IT)
examination;
(b) the registration and training of students; Part B: Management Audit
(c) the prescribing of qualifications for entry of persons as members of the Institute;
(d) the recognition of foreign qualifications and training or experience for purposes of membership of Chapter B1 [7]:
the Institute; Internal Control & Internal Audit
(e) the granting, refusal and cancellation of certificates of practice;
(f) the maintenance of the Register and publication of the list of members of the Institute and also the Chapter B2 [8]:
Operational Audit
names of the members who hold certificates of practice;
(g) the levy and collection of fees from members, students and examiners;
Chapter B3 [9]:
(h) the removal of names from the Register and restoration to the Register of names which have been Management Audit in Different function
removed;
(i) the regulation and maintenance of the status and standard of professional qualifications of the
members of the Institute; [Chapter 10]
(j) the carrying out, by giving financial assistance to persons other than members of the Council or in
any other manner, of research in cost and management accounting;
4
(jj)the rendering of professional expertise service in the field of Cost and Management Accounting and
in such other related fields;
4
The clause (jj) was inserted by Act XXXIX of 1990.
27
(k) the maintenance of libraries and publication of books and periodicals relating to cost and
management accounting and allied subjects;
(l) the exercise of such disciplinary powers over the members, officers and employees of the Institute
as may be prescribed;
(m) the exercise of such other powers and the performance of such other functions as are required to be,
or may be, exercised or performed by the Council under this Ordinance or the regulations made
there under Click to jump on:
.
15. Appointment of officers and employees, etc. − For the efficient performance or its function, Home
the Council may:-
(a) appoint such officers and employees as it may consider necessary; Part A: Cost Audit
(b) require and take from officers and employees of the Institute such security for the due
performance of their duties as it may consider necessary; and Chapter A1 [1]:
(c) fix the salaries, fees, allowances and other conditions of service of the officers and employees of Cost Audit Concept & Legal issues
the Institute.
Chapter A2 [2]:
16. Committees of the Council − (1) The Council shall constitute from amongst its members the Cost Accounting Standards
following standing Committees, namely:-
Chapter A3 [3]:
(a) an Executive Committee;
(b) an Education Committee;
(c) an Examination Committee; Chapter A4 [4]:
5
(cc) a Research and Development Committee; Legal Position of Cost Auditor
(a) a Disciplinary Committee.
(2) The Council may also constitute such other Committees from amongst its members as it Chapter A5 [5]:
deems necessary for the purpose of carrying out the provisions of this Ordinance. Reporting under Cost Audit
(3) The Executive Committee shall consist of the President, 6one of the Vice-Presidents
nominated by the Council and three members nominated by the Council from amongst its members. Chapter A6 [6]:
(4) The Education Committee shall consist of 7one of the Vice-Presidents nominated by the Cost Audit in Information Technology (IT)
Council and four other members as may be nominated by the Council from amongst its members.
(5) The Examination Committee shall consist of 8one of the Vice-Presidents nominated by the Part B: Management Audit
Council and four members as may be nominated by the Council members.
(6) The Disciplinary Committee shall consist of the President, 9Secretary and two other Chapter B1 [7]:
members nominated by the Council from amongst its members. Internal Control & Internal Audit
10
(6A) The Research and Development Committee shall consist of the President one of the Vice-
Presidents nominated by the Council and four members nominated by the Council from amongst its Chapter B2 [8]:
Operational Audit
members.
(7) Every other Committee constituted under sub-section (2) shall consists of such members as
Chapter B3 [9]:
the Council may decide. Management Audit in Different function
5
The clause (cc) was inserted by Act XXXIX of 1990. Part C: Performance Analysis
6
The words "one of the Vice-Presidents nominated by Council and three" were substituted for the words "the [Chapter 10]
Vice-President and three other" by Act XXXIX of 1990.
7
The words "one of the Vice-Presidents nominated by Council and four" were substituted for the words "the
President and such" by Act XXXIX of 1990.
8
The words "one of the Vice-Presidents nominated by Council and four" were substituted for the words "the
President, or the Vice-President, as the Council may decide and such other" by Act XXXIX of 1990.
9
The word 'Secretary' was inserted by Act XXXIX of 1990.
10
The sub-section (6A) was inserted by Act XXXIX of 1990.
28
(8) The President shall be the Chairman of every Committee of which he is a member and, in
his absence, the Vice-President, if he is a member of the Committee, shall be the Chairman.
(9) The Standing Committee shall perform such functions as may be prescribed and the other
Committees shall perform such function as the Council may direct.
17. Branch Councils − (1) For the purpose of advising and assisting it in the discharge of its
functions, the Council may constitute such Branch Councils as and when it deems necessary. Click to jump on:
(2) A Branch Council shall be constituted in such manner and perform such function as may
be prescribed. Home
(3) The Council may, at any time, dissolve any Branch Council constituted under sub-
section(1). Part A: Cost Audit
18. Finance of the Council − (1) There shall be established a fund under the management and Chapter A1 [1]:
control of the Council into which shall be paid all moneys received by the Council and out of which Cost Audit Concept & Legal issues
shall be met all expenses and liabilities properly incurred by the Council.
(2) The Council may invest any money for the time being standing to the credit of the fund in Chapter A2 [2]:
any Government security or in any other security approved by the Council. Cost Accounting Standards
(3) The Council shall cause maintenance of proper accounts of the funds distinguishing capital
Chapter A3 [3]:
from revenue.
(4) The annual accounts of the Institute shall be subject to audit by a chartered accountant
within the meaning of the Bangladesh Chartered Accountants Order, 1973 (P.O. No. 2 of 1973): Chapter A4 [4]:
Provided that no member of the Council or a person who is in partnership with such member Legal Position of Cost Auditor
shall be eligible for appointment as auditor under this sub-section.
(5) As soon as may be practicable after the close of each financial year, but not later than the Chapter A5 [5]:
thirtieth day of November next following the Council shall cause to be published a copy of the audited Reporting under Cost Audit
accounts and report of the Council for that financial year and copies of the said Accounts and Report
shall be forwarded to the Government and to all the members of the Institute. Chapter A6 [6]:
19. Register − (1) The Council shall maintain in the prescribed manner a Register of the members
of the Institute. Part B: Management Audit
(2) The Register shall include the following particulars about every member of the Institute,
namely:- Chapter B1 [7]:
(a) his full name, date of birth, domicile, residential and professional addresses; Internal Control & Internal Audit
(b) the date on which his name is entered in the Register;
Chapter B2 [8]:
(c) his qualifications;
Operational Audit
(d) whether he holds a certificate of practice; and
(e) such other particulars as may be prescribed. Chapter B3 [9]:
(3) The Council shall cause to be published, in such manner as may be prescribed, a list of Management Audit in Different function
members of the Institute as on the first day of July of each year, and a copy of the list shall be sent to
every member of the Institute. Part C: Performance Analysis
(4) Every member of the Institute shall, on his name being entered in the Register, pay such [Chapter 10]
annual membership fee as may be prescribed and different fees may be prescribed for associates and
for fellows.
20. Removal of name from the Register − (1) The Council may remove from the Register the
name of any member of the Institute:-
(a) who is dead; or
29
(b) from whom a request has been received to that effect; or

11
(c) who has not paid any prescribed fee payable by him for a period of three years from the date
it fell due;
(d) who is found to have been subject at the time when his name was entered in the Register, or
who, at any time thereafter, has become subject to any of the disabilities mentioned in section
5, or who, for any other reason, has ceased to be entitled to have his name borne on the Register.
Click to jump on:
(2) The Council shall remove from the Register the name of any member who is not entitled to
remain a member under this Ordinance. Home
21. Penalty for falsely claiming to be a member of the Institute, etc. − A person shall, without Part A: Cost Audit
prejudice to any other proceedings which may be taken against him, be punishable, on first conviction,
with fine which may extend to one thousand taka and on any subsequent conviction, with imprisonment Chapter A1 [1]:
which may extend to six months, or with fine which may extend to five thousand taka or with both, if Cost Audit Concept & Legal issues
he:-
(a) not being a member of the Institute, represents that he is a member of the Institute, or uses the Chapter A2 [2]:
designation of Cost and Management Accountant, or Cost Accountant, Management Cost Accounting Standards
Accountant, Industrial Accountant or Works Accountant, or any abbreviation thereof in a
manner as to impress that he is a Cost and Management Accountant, or uses the letters ACMA Chapter A3 [3]:
or FCMA; or
(b) being a member of the Institute, but not having a certificate of practice, represents that he is in
Chapter A4 [4]:
practice or practices as cost accountant, management accountant, industrial accountant or Legal Position of Cost Auditor
works accountant or in some similar profession in the field of cost and management accounting.
Chapter A5 [5]:
22. Penalty for using the name of the Council, etc. − (1) Save as otherwise provided in this Reporting under Cost Audit
Ordinance, no person shall:-
(a) use any name or common seal which is identical with the name or the common seal of the Chapter A6 [6]:
Institute or so nearly resembles it as to deceive or as be likely to deceive the public; or Cost Audit in Information Technology (IT)
(b) grant or confer any degree, diploma certificate or designation which indicates or purports to
indicate the profession or attainment of any qualification or competence in cost and Part B: Management Audit
management accounting similar to that of a member of the institute.
(2) Any person contravening the provisions of sub-section (1) shall, without prejudice to any Chapter B1 [7]:
other proceedings which may be taken against him, be punishable, on first conviction, with fine which Internal Control & Internal Audit
may extend to one thousand taka and on any subsequent conviction, with imprisonment which may
extent to six months, or with fine which may extend to five thousand taka, or with both. Chapter B2 [8]:
Operational Audit
(3) Nothing contained in this section shall apply to any University established by law or to any
institution affiliated thereto.
Chapter B3 [9]:
(4) If the Government is satisfied that any diploma, certificate or designation granted or Management Audit in Different function
conferred by any person other than the Institute, which purports to be a qualification in cost and
management accounting but which, in the opinion of the Government, falls short of the standard of
qualifications prescribed for cost and management accountants and does not in fact indicate or purport [Chapter 10]
to indicate the profession or attainment of any qualifications or competence in cost and management
accounting similar to that of a member of the Institute, it may, by Notification in the official Gazette
and subject to such conditions as think fit to impose, declare that this section shall not apply to such
diploma, certificate or designation.
11
The clause (c) was substituted for the original clause (c) by Act XXXIX of 1990.
30
23. Companies not to engage in cost and management accounting in Bangladesh − (1) No
company, whether incorporated in Bangladesh or elsewhere, shall practice as cost and management
accountant in Bangladesh.
(2) If any company contravenes the provisions of sub-section (1), then, without prejudice
to any other proceedings which may be taken against the company, every director, manager,
secretary and other officer of such company who is knowingly a party to such contravention, shall
be punishable, on first conviction, with fine which may extend to one thousand taka and on any Click to jump on:
subsequent conviction, to five thousand taka.
Home
24. 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 and management accountant, industrial accountant, Part A: Cost Audit
management accountant or works accountant, or a firm of industrial, cost or management accountants
in his or its professional capacity. Chapter A1 [1]:
(2) Any person contravening the provisions of sub-section (1) shall be punishable, on first Cost Audit Concept & Legal issues
conviction, with fine which may extend to one thousand taka, and on any subsequent conviction, to
five thousand taka. Chapter A2 [2]:
25. Offences by companies − (1) If the person committing an offence under this Ordinance is a
Chapter A3 [3]:
company, the company, as well as every person in-charge of, and responsible to, the company for the
conduct of its business at the time of the commission of the offence shall be deemed to be guilty of the
offence and shall be liable to be proceeded and punished accordingly: Chapter A4 [4]:
Provided that nothing contained in this sub-section shall render any such person liable to any
punishment if he proves that the offence was committed without his knowledge or that he Chapter A5 [5]:
exercised all due diligence to prevent the commission of such offence. Reporting under Cost Audit
(2) Notwithstanding anything contained in sub-section (1), where an offence under this Chapter A6 [6]:
Ordinance has been committed by a company and it is proved that the offence has been committed with Cost Audit in Information Technology (IT)
the consent or connivance of, or that the commission of the offence is attributable to any neglect on the
part of, any director, manager, secretary or other officer of the company, such director, manager, Part B: Management Audit
secretary or other officer shall also be deemed to be guilty of the offence and shall be liable to be
proceeded against and punished accordingly. Chapter B1 [7]:
Explanation.-For the purposes of this section:-
Chapter B2 [8]:
(a) "company", with respect to an offence under section 21 or section 24, means any body
Operational Audit
corporate and includes a firm or other association of individuals and with respect to an offence
under section 23, a body corporate; and Chapter B3 [9]:
(b) "director", in relation to a firm, means a partner in the firm. Management Audit in Different function
26. Sanction to prosecute − No person shall be prosecuted under this Ordinance except on a Part C: Performance Analysis
complaint made by or under the order of, the Council or of the Government. [Chapter 10]
27. Alternation in the Register and cancellation of certificate − (l) Where an order is made under
this Ordinance reprimanding a member of the Institute a record of the punishment shall be entered
against his name in the Register.
(2) Where the name of any member is removed from the Register, the certificate of
membership and the certificate of practice, if any, granted to him shall be recalled and cancelled.
31
28. Indemnity − No suit, prosecution or other legal proceeding shall lie against the Government,
Council or any Committee thereof, or any officer or employee of the Council in respect of anything
which is in good faith done or intended to be done under this Ordinance or of any regulation or order
made there under.
29. Maintenance of branch offices − (1) Where a cost and management accountant or a firm of
such accountants has more than one office in Bangladesh, each one of such office shall be in the separate Click to jump on:
charge of a member of the Institute:
Provided that the Council may, in suitable cases, exempt any cost and management accountant or Home
a firm of such accountants from the operation of this sub-section.
(2) Every cost and management accountant in practice or a firm of such accountants Part A: Cost Audit
maintaining more than one office shall send to the Council a list of offices together with names of
the persons in charge thereof and shall keep the Council informed of any change in relation Chapter A1 [1]:
thereto. Cost Audit Concept & Legal issues
30. Reciprocity − (1) Where any country prevents persons Bangladesh domicile from becoming Chapter A2 [2]:
members of any institution similar to the Institute, or from practicing the profession of cost and
management accountancy, or subjects them to unfair discrimination in the country, no person of any
Chapter A3 [3]:
such country shall be entitled to become a member of the Institute or to practice the profession of cost
and management accountancy in Bangladesh.
(2) Subject to the provisions of sub-section (1), the Council may prescribe the conditions, Chapter A4 [4]:
if any, subject to which foreign qualifications relating to cost and management accounting shall Legal Position of Cost Auditor
be recognized for the purpose of entry in the Register of members.
Chapter A5 [5]:
(3) Nothing contained in sub-sections (1) and (2) shall apply to a person whose services as a Reporting under Cost Audit
cost and management accountant have been obtained by the Government.
Chapter A6 [6]:
31. Power to make regulations − (1) The Council may, by notification in the official Gazette make Cost Audit in Information Technology (IT)
regulation for carrying out the purposes of this Ordinance.
(2) In particular, and without prejudice to generality of the foregoing power, such regulations Part B: Management Audit
may provide for all or any of the following matters, namely :-
(a) the standard and conduct of examination under this Ordinance; Chapter B1 [7]:
(b) the qualifications for entry of the name of any person in the Register as a member of the Internal Control & Internal Audit
Institute;
Chapter B2 [8]:
(c) the qualification for the purpose of sub-section (4) of section 6;
Operational Audit
(d) the conditions under which any examination or training may be treated as equivalent to the
examination or training prescribed for the membership of the Institute; Chapter B3 [9]:
(e) the conditions under which any foreign qualifications may be recognized; Management Audit in Different function
(f) the manner in which and conditions, subject to which, applications for entry in the Register
may be made; Part C: Performance Analysis
(g) the fees payable for membership of the Institute and the annual fees payable for certificate of [Chapter 10]
practice;
(h) the manner in which elections to the Council and Branch Councils may be held;
(i) the particulars to be entered in the Register;
(j) the functions of the Branch Councils;
(k) the regulation and maintenance of the status and standard of professional qualifications of
members of the Institute;
32
(l) the carrying out of research in cost and management accounting;

(m) the maintenance of libraries and publication of books and periodicals relating to cost and
management accounting and allied subject;
(n) the management of the property of the Institute and the maintenance and audit of its accounts;
(o) the summoning and holding of meetings of the Council and Committees thereof, the times and
places of such meeting, the procedure to be followed thereat and the number of members
necessary to form a quorum; Click to jump on:
(p) recording and certifying minutes of meetings of the Council and the annual general meeting and
extraordinary meetings; Home
(q) appointment and removal of auditors of the Institute;
(r) the manner in which the annual list of members of the Institute shall be published; Part A: Cost Audit
(s) the powers, duties and functions of the President, Vice-Presidents, Secretary and Treasurer of
the Council and honorarium to be paid to the honorary office bearers and other members of the Chapter A1 [1]:
Council and its Committees; Cost Audit Concept & Legal issues
(t) the functions of the Standing Committees and other Committees and the conditions subject to
which functions shall be discharged; Chapter A2 [2]:
(u) the powers, duties and functions of the officers and other employees of the Council; Cost Accounting Standards
(v) rules of professional and other conduct and the exercise of disciplinary powers in relation
thereto; Chapter A3 [3]:
(w) the terms and conditions of service of the officers and employees of the Institute; Cost Auditing Standards and Quality control
(x) the registration of students and the fees to be charged for such registration; and
Chapter A4 [4]:
(y) any other matter which is required to be; or may be, prescribed under this Ordinance.
(3) All regulation, made by the Council under this Ordinance shall be subject to the condition Chapter A5 [5]:
of previous publication and to the approval of the Government. Reporting under Cost Audit
(4) The Council shall, as soon as practicable, send a copy of any regulation made by it to every
member of the Institute. Chapter A6 [6]:
32. Power to give directions for making regulations, etc. − (1) Where the Government considers
it expedient so to do, it may, by order in writing, direct the Council to make any regulation, or to amend Part B: Management Audit
or rescind any regulation already make within such period as it may specify in this behalf.
(2) If the Council fails or neglects to comply with such direction within the specified Chapter B1 [7]:
period, the Government may make or amend, with or without modifications, or rescinded, any Internal Control & Internal Audit
regulation directed to be made, amended or rescinded; and any regulation so made, amended or
rescinded by the Government shall by deemed to have been made, amended or rescinded by the Chapter B2 [8]:
Council and shall have effect accordingly. Operational Audit
Chapter B3 [9]:
33. Repeal and savings − (1) Upon the constitution of the Institute under section 3, the Cost and
Industrial Accountants Act, 1966 (XIV of 1966), hereinafter referred to as the said Act, shall stand
repealed.
(2) Upon the Repeal of the said Act:- [Chapter 10]
(a) the dissolved Institute and the Council of the dissolved institute constituted under the said Act
shall stand dissolved:
Provided that persons who were honorary office bearers and other members of the Council of
the dissolved Institute and functioning immediately before the repeal of the said Act shall, until
such time as the Council is constituted under section 9, be the honorary office bearers and other
33
members and perform the functions of, and be deemed to be, the Council constituted under this
Ordinance;
(b) all assets, rights, powers, authorities and privileges and all properties, both movable and
immovable, cash and bank balances, funds of the dissolved Institute and all other interests and
right in, or arising out of, such property shall stand transferred to, and vested in, the Institute;
(c) all debts, liabilities and obligations of whatever kind of the dissolved Institute subsisting
immediately before its dissolution shall, unless the Government otherwise directs, be the debts, Click to jump on:
liabilities and obligations of the Institute;
(d) all suits and other legal proceedings instituted by or against the dissolved Institute before its Home
dissolution shall be deemed to have been instituted by or against the Institute;
(e) services of all officers and employees of the dissolved Institute shall, notwithstanding anything Part A: Cost Audit
contained in any contract or agreement or in the terms and conditions of service, stand
transferred to the Institute and they shall be deemed to be officers and employees of the Institute Chapter A1 [1]:
appointed by it on the same terms and conditions of service as were applicable to them in the Cost Audit Concept & Legal issues
dissolved Institute unless such terms and conditions are altered, not being to their disadvantage,
by the Institute; Chapter A2 [2]:
(f) any certificate of practice or other document granted or made under the said Act and in force Cost Accounting Standards
immediately before the commencement of this Ordinance shall be deemed to have been granted
or made under the corresponding provisions of this Ordinance. Chapter A3 [3]:
Chapter A4 [4]:
Dhaka ZIAUR RAHMAN
The 8th November, 1977 Major General, B.U. Chapter A5 [5]:
President Reporting under Cost Audit
Chapter A6 [6]:

A. K. Talukdar
Deputy Secretary Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Interactive Question 1.9: Registration of Membership who Completed his CMA Degree from outside
of the country. [Difficulty Level: Intermediate] Chapter B3 [9]:
Mr. Alex Zubair Ahmed is a non-resident Bangladeshi who currently plan to stay at Bangladesh and
decide to practice as a Cost Accountant in Bangladesh with the Membership of ICMAB. So, he applied Part C: Performance Analysis
to the authority for registered his name as a member of the institute. Mr. Alex completed successfully [Chapter 10]
his Cost and Management Accountancy from CIMA, UK. But he is scentenced for punishement in a
case of offence committed by him and proved that was a technical nature. Do you think his application
for registration as a member in ICMAB should be granted?
Ans: Yes, I think Mr. Alex Zubair Ahmed’s application for registration as a member in ICMAB should
granted. Because, as per CMA Ordinance, 1977:
34
“any person who has passed such other examination and completed such other training outside
Bangladesh of such Institute of Cost and Management Accountancy and admitted as member of that
Institute as may be recognized by the Council as being equivalent to the examination and training
prescribed for the members of the Institute.” [Section 4 (c)]
and about his case of offence, under section 05 (e), presecribed that:
“has been convicted by a competent court, whether within or without Bangladesh, of an offence Click to jump on:
involving moral turpitude punishable with transportation or imprisonment, or of and offence, not of a
technical nature, committed by him in his professional capacity unless in respect of the offence Home
committed he has either been granted a pardon, or, on an application made by him in this behalf, the
Government has, by an order in writing, removed the disability” Part A: Cost Audit
Because his offence was proved that it was a technical nature, there should be no restriction for granting Chapter A1 [1]:
his application of membership in ICMAB. Cost Audit Concept & Legal issues
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
35
1.10 CMA Probidhanmala (Rules), 2019
Note: Students are requested to download the CMA Probodhanmala (Rules) 2019 from website
of ICMAB or following link:
https://www.icmab.org.bd/cost-and-management-accountants-probidhanmala-2022/
Click to jump on:
Interactive Question 1.10: Eligible to vote in national council election of ICMAB
[Difficulty Level: Primary] Home
Abu Roni recently successfully completed his CMA course and got membership in ICMAB. Next Part A: Cost Audit
month, national council election will be held on ICMAB and he want to give vote in this election. Can
he do such? Chapter A1 [1]:
Ans: As per Cost and Management Accountants Probidhanmala-2022 (Amendment):
“Any member of the institute included in the membership register 60 (sixty) days prior to the date fixed Chapter A2 [2]:
for the purpose of conducting the council election shall be considered eligible to vote in the election Cost Accounting Standards
and his name shall be included in the voter list prepared for the election.
Chapter A3 [3]:
Provided that such member shall not be eligible to vote if: (a) he has not paid the renewal fee payable
to him in accordance with regulation 92; or (b) his name is removed from the register of members under Chapter A4 [4]:
the provisions of section 19 of the Act before the date fixed for holding the election.” Legal Position of Cost Auditor
If Abu Roni full fill the both clauses said above, then he can give vote in the upcoming election. Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
36
1.11 Financial Reporting Council (FRC)

Cost Audit under the FRA:
The origin of the concept of cost audit could be traced to the Second World War period (1939-
1945) when the practice of assigning cost plus contracts started (ICAI, 2015: 16.1). But as noted
by Burrowes and Persson (2000), documentary evidence on the management audit in the private
sector in Sweden dates back to 16 September 1657, when the Swedish Tar Company,
Click to jump on:
Compagniets Directionen, was issued with an audit report which included an opinion on the
effectiveness of the management (Burrowes and Persson, 2000: 90) and the need for a Home
management audit was recognised in the UK as early as 1932 (Rose, 1944; vide Burrowes and
Persson, 2000: 85). Part A: Cost Audit
Chapter A1 [1]:
Although management audit is not under any statutory ambit, but cost audit is statutorily
prescribed in three countries (India, Bangladesh and Pakistan) of the Indian sub-continent. In
India, the statutory provision regarding cost audit was introduced in the Companies Act, 1956 Chapter A2 [2]:
by the Companies (Amendment) Act, 1965 (Tikhe, 1977: 6), but the Cost Audit (Report) Rules Cost Accounting Standards
were framed first in 1968 to provide for the cost auditors about their scope of work and
reporting. In Bangladesh, the statutory provision on cost audit was first introduced in the Chapter A3 [3]:
Companies Act, 1994 (effective from 01 December 1994) in section 220, which was on "Audit Cost Auditing Standards and Quality control
of certain matters by Cost and Management Accountants" (GOB, 1994). But the Ministry of
Commerce made the Cost Audit (Report) Rules, 1997 on 18 November 1997 to pave the way Chapter A4 [4]:
of cost audit in practice (see GOB, 2001). Pakistan introduced the provision on cost audit in the Legal Position of Cost Auditor
Companies Ordinance, 1984 (promulgated on 08 October 1984) in section 258, which was on
"Audit of Cost Accounts" (GOP, 1984). But the scope of practical cost audit was created when Chapter A5 [5]:
the Corporate Law Authority made the Companies (Audit of Cost Accounts) Rules, 1998 on 21 Reporting under Cost Audit
October 1998 (GOP, 1998).
Chapter A6 [6]:
Cost audit under the FRA 2015 is included in the statutory definition of "audit service" defined
u/s 2(16). Although, it is to be noted that in the Financial Reporting Ordinance, 2008 (Ordinance
No. LXIV of 2008), which was promulgated by the Honorable President on 28 December 2008
and published in the official Gazette on 30 December 2008 (GOB, 2008), there was no separate
Chapter B1 [7]:
definition on "audit service". Audit service was then included in definition of "professional Internal Control & Internal Audit
accounting service". The definition of "professional accounting service" was in sub-section (16)
of section 2 of the Financial Reporting Ordinance, 2008 (FRO 2008) which was as follows: Chapter B2 [8]:
"professional accounting service" means services provided by a professional accountant on Operational Audit
subjects related to accounts, audit, tax system, management advisory or financial management
(GOB, 2008). Chapter B3 [9]:
However, in the Financial Reporting Bill [which was placed on 26 January 2015 in the fifth
Session of the Parliament (held from 19 January 2015 to 02 April 2015) by the Finance Minister Part C: Performance Analysis
and the Bill was published in the official Gazette also on the same date as Bill No. 04/2015; [Chapter 10]
vide POB, 2015; GOB, 2015a], limiting the definition of "professional accountant" only to
'Chartered accountant' as defined in Article 2(1)(b) of the Bangladesh Chartered Accountants
Order, 1973 (P.O. No. 2 of 1973) under section 2(18), cost audit was excluded in the Financial
Reporting Bill. In the FRA 2015, under section 2(16), "audit service" means a service provided
in accordance with sections 210 to 220 of the Companies Act, 1994 (Act No. XVIII of 1994)
and equivalent service performed under other statutory acts. Thus, audit service defined here is
37
pervasive in term of coverage and beyond the scope of mandatory corporate annual statutory
audit by practicing chartered accountants (CAs) as follows:
• Statutory audit to be conducted by an appointed auditor being a "Chartered Accountant"

within the meaning of the Bangladesh Chartered Accountants Order, 1973 and provisions
of sections 210 to 219 of the Companies Act, 1994 are hereby applicable [Appointment and
remuneration of auditors (§ 210), Provisions as to resolutions for appointing or removing Click to jump on:
auditors (§ 211), Qualification and disqualification of auditors (§ 212), Power and duties
of auditors (§ 213), Audit of accounts of branch office of company (§ 214), Signature of Home
audit report, etc. (§ 215), Reading and inspection of auditor's report (§ 216), Right of auditor
to attend general meeting (§ 217), Penalty for non-compliance with sections 211 to 217 (§ Part A: Cost Audit
218) and Penalty for non-compliance by auditor with sections 213 and 215 (§ 219)];
• Audit of cost accounts or cost audit of those companies specified through a Government Chapter A1 [1]:
order under section 220 of the Companies Act, 1994 [Audit of certain matters by Cost and Cost Audit Concept & Legal issues
Management Accountants (§ 220)] and to be conducted by an auditor who shall be a 'cost
and management accountant'(CMA) within the meaning of the Cost and Management Chapter A2 [2]:
Accountants Ordinance, 1977 (Ordinance No. LIII of 1977); and Cost Accounting Standards
• Equivalent service performed under other statutory acts to be treated as "audit service." For
Chapter A3 [3]:
example, the professional accountancy institutes (ICAB and ICMAB) are not corporate
bodies, but their accounts are subject to audit by practicing CAs also. Under Bye-law 136(1)
of the Institute of Chartered Accountants of Bangladesh Bye-laws, 2004 (published in Chapter A4 [4]:
December 2004), for the audit of accounts of the ICAB, two auditors from the ICAB's Legal Position of Cost Auditor
members (except member of the Council of ICAB or a person who is in partnership with
such member) shall be appointed at each annual meeting (ICAB, 2004). Under section Chapter A5 [5]:
18(4) of the Cost and Management Accountants Ordinance, 1977, the annual accounts of Reporting under Cost Audit
the ICMAB shall be subject to audit by a chartered accountant (except member of the
Council of ICMAB or a person who is in partnership with such member) within the Chapter A6 [6]:
meaning of the Bangladesh Chartered Accountants Order, 1973 (GOB, 2015c). Cost Audit in Information Technology (IT)
Under section 2(18) of FRA, as a "Professional Accountant," in case of performing functions Part B: Management Audit
including cost audit, members of the Institute of Cost and Management Accountants of
Bangladesh (ICMAB) shall be run pursuant to the Cost and Management Accountants Chapter B1 [7]:
Ordinance, 1977. Hence, under section 2(14) of FRA, cost audit practice refers to cost audit Internal Control & Internal Audit
service provided by a cost auditor, who u/s 2(13) is any individual person, or owner or partner
of an audit firm or any person employed therein involved in audit service activities, who is
Chapter B2 [8]:
Operational Audit
registered as a member of ICMAB or cost audit firm, which u/s 2(15) is any enterprise or firm
run individually or through joint partnership, whether registered or not, providing cost audit
Chapter B3 [9]:
service. Management Audit in Different function
Here, this registration u/s 2(12) means a cost and management accountant (CMA) registered as Part C: Performance Analysis
a member of the ICMAB being a professional accountancy institute (PAI) defined u/s 2(19). [Chapter 10]
When the enlistment of auditor will be started by the FRC, the practicing cost auditor is also to
be enlisted and then u/s 2(9), "enlisted cost auditor" means any cost auditor enlisted in
accordance with the provisions of Chapter V titled "Enlistment, renewal etc." [i.e., Enlistment
of auditors (§31), Application for enlistment, etc. (§32), Postponement, cancellation of the
enlistment certificate (§33), Unauthorized audit practice (§34), Auditor's report and opinion
(§35), Serious irregularities (§36), Auditor's independence in case of observance of
38
responsibilities (§37), Conflict of interest (§38), and Public interest-related observation in

cooperation with professional accountancy institute (§39)] for operating activities as cost
auditor of PIEs under FRA. As per rule 2(1)(c) of the Cost Audit (Report) Rules 1997, "Cost
Auditor" means "Cost and Management Accountant" as defined in the Cost and Management
Accountants Ordinance 1977 and any Cost Audit firm also included in it.
As per rule 6 of the same Rules, a Cost and Management Accountant cannot be appointed as a Click to jump on:
Cost Auditor unless he deserves a certificate of practice issued by ICMAB and a cost audit firm
whereof all the partners practicing in Bangladesh are qualified as cost auditor may be appointed Home
by the name of its firm as the Cost Auditor of a company in which case any of the partners may
act in the name of the firm (ICMAB, 2004: 28-29). Regarding cost audit, the cost auditors, Part A: Cost Audit
where applicable, have to undertake the cost auditing activities after observance of the
Bangladesh Cost Accounting Standards (BCAs) set by ICMAB. ICMAB has already set ten Chapter A1 [1]:
BCASs (BCAS 1 to BCAS 10) in December 2014 and thirteen BCASs (BCAS 11 to BCAS 23) Cost Audit Concept & Legal issues
in November 2016 (ICMAB, 2014; ICMAB, 2016). Until any new standards are set by the
FRC, the applicability of these standards will continue u/s 69 of the FRA. Chapter A2 [2]:
Cost Auditors' Professional Accountancy Institute (PAI) in the FRA
Chapter A3 [3]:
and Implications Thereon: Cost Auditing Standards and Quality control
Under section 2(19) of the FRA, "professional accountancy institute" (PAI) means the Institute
of Chartered Accountants of Bangladesh (ICAB) established under the Bangladesh Chartered Chapter A4 [4]:
Accountants Order, 1973 and the Institute of Cost and Management Accountants of Bangladesh Legal Position of Cost Auditor
(ICMAB) established under the Cost and Management Accountants Ordinance, 1977 [u/s 2(19)
of the FRA]. Chapter A5 [5]:
Thus, ICAB and ICMAB are the two recognized PAIs in the FRA and the PAI of cost auditors
Chapter A6 [6]:
is the ICMAB. Except in the Chapter IX (Appurtenant Amendment of Certain Statutes) where
the two statutes governing the two PAIs (ICAB and ICMAB) have been mentioned, there are
13 sections [sections 13, 25, 27, 33, 34, 36, 39, 42, 52, 67, 69, 70 and 71] in 6 chapters (Chapters
III, IV, V, VI, VII and X), where the reference of 'professional accountancy institutes' (PAIs)
has been given. The relevant issues, which are equally related to ICMAB as well as ICAB, are
Chapter B1 [7]:
as follows: Internal Control & Internal Audit
• Disqualification of the Chairman and Executive Directors (sec. 13): A person cannot be the
Chairman or Executive Director (ED), if he is punished by any professional institute [u/s Chapter B2 [8]:
13(i)], which includes PAIs. Operational Audit
• Responsibilities of the Audit Practice Review Division (sec. 25): One of the responsibilities
of the Audit Practice Review Division (APRD) of the Financial Reporting Council (FRC) Chapter B3 [9]:
shall be observing the activities of the PAIs in relation to audit practice [u/s 25(1)(a)]. Management Audit in Different function
• Preparation of audit practice code, regulation, etc. (sec. 27): Notwithstanding anything
followed by any PAI, if any audit practice code, guideline or regulation is prepared under Part C: Performance Analysis
section 27(1), it shall be effective immediately and shall get supremacy [u/s 27(2)]. [Chapter 10]
• Postponement, cancellation of the enlistment certificate (sec. 33): If any enlisted auditor is
punished u/s 48, the FRC may: (i) send to the PAI for taking punitive measure against the
enlisted auditor pursuant to the laws concerned and intimating the FRC about the measure
taken within the stipulated time [u/s 33(1)(e)]; or (ii) send to the PAI for taking measure
for the cancellation of registration against the enlisted auditor pursuant to the laws
39
concerned and intimating the FRC about the measure taken within the stipulated time [u/s
33(1)(f)]
• Unauthorized audit practice (sec. 34): Any PIE shall not engage in audit function such a
person whose enlistment has been postponed by the FRC or whose enlistment has been
cancelled by the FRC or as per recommendation of the FRC the matter on taking necessary
measure against whom is under disposal by the PAI [u/s 34(1)].
• Serious irregularities (sec. 36): In case of not taking any measure by the concerned PIE on Click to jump on:
matter of severe irregularity within 30 (thirty) days of intimation in writing under section
36(1), the enlisted auditor shall intimate, the matter with other information in such form as Home
deemed fit, the FRC, PAIs, concerned regulatory body and any other statutory body
pursuant to the Act or rules related therewith as per requirement [u/s 36(2)]. Part A: Cost Audit
• Public interest-related observation in cooperation with professional accountancy institute
(sec. 39): The FRC and the PAIs, individually and where applicable, jointly, shall ensure Chapter A1 [1]:
the public interest-related oversight through taking effective measures with a view to Cost Audit Concept & Legal issues
expanding and developing the accountancy profession including the maintenance of the
highest standard of professional and business conduct mentioned in the certificate of the Chapter A2 [2]:
PAIs [u/s 39(1)]. The FRC and the PAIs shall meet at least 2 (two) times in a year in a Cost Accounting Standards
review meeting in relation to financial reporting, development of audit practice and overall
Chapter A3 [3]:
working plan including matters on making strategy and policy for reviewing under the FRA
[u/s 39(2)].
• Cooperation in setting standards (sec. 42): The FRC shall, for setting financial reporting Chapter A4 [4]:
standards and auditing standards u/s 42, take consultation and assistance of the PAIs and in Legal Position of Cost Auditor
case of seeking such consultation and assistance, that PAIs shall be bound to provide
necessary consultation and assistance [u/s 42]. Chapter A5 [5]:
• Objection and hearing on recommendation of the Enforcement Division (sec. 52): The PIE, Reporting under Cost Audit
enlisted auditor, audit firm or PAI may furnish objection on any recommendation of the
Enforcement Division [u/s 52(1)]. Chapter A6 [6]:
• Publication (sec. 67): The FRC may, from time to time, on the matters included in its scope Cost Audit in Information Technology (IT)
of work, publish circular, notice, advertisement, quarterly, half-yearly or yearly periodicals,
etc. for the functional use of the PAIs, enlisted auditors, public interest entities and others Part B: Management Audit
concerned [u/s 67(1)].
Chapter B1 [7]:
• Savings of standards issued by professional accountancy institutes (sec. 69):
Notwithstanding anything contrary in the FRA, the financial reporting and auditing
standards, if any, adopted and published by the PAIs for the auditors in order to provide Chapter B2 [8]:
professional accounting services, shall, until any similar standards are made under rules or Operational Audit
regulations of the FRA, stand in such a way as if it were made under the FRA [u/s 69].
• Power to make rules (sec.70): The Government (the Finance Division, Ministry of Finance) Chapter B3 [9]:
shall, for the purpose of making rules u/s 70(1), take consultation of the PAIs, and shall Management Audit in Different function
pre-publish those by advertisement in the official Gazette calling for opinion, advice or
objection of all others concerned [u/s 70(2)]. Part C: Performance Analysis
• Power to make regulations (sec. 71): The FRC shall, for the purpose of making regulations [Chapter 10]
u/s 71(1), take consultation of the PAIs, and shall pre-publish those by advertisement in the
official Gazette calling for opinion, advice or objection of all others concerned [u/s 71(2)].
FRC's Mandatory Public Interest-related Observation in Cooperation with PAIs: Sec. 39
• The FRC and the PAIs, individually and where applicable, jointly, shall ensure the public
interest-related oversight through taking effective measures with a view to expanding and
40
developing the accountancy profession including the maintenance of the highest standard
of professional and business conduct mentioned in the certificate of the PAIs [u/s 39(1)].
• The FRC and the PAIs shall meet at least twice a year in a review meeting in relation to
financial reporting, development of audit practice and overall working plan including
matters on making strategy and policy for reviewing under the FRA [u/s 39(2)].
Opportunity of Professional Accountants to be a Member of FRC: Click to jump on:

There is no legal barrier on the professional accountants for inclusion in the 12-member FRC.
Two members of the FRC must be from professional accountants (President of ICAB and Home
President of ICMAB). Since the Executive Directors (EDs) of the Standards Setting Division
(SSD), Financial Reporting Monitoring Division (FRMD) and Audit Practice Review Division Part A: Cost Audit
(APRD) may be a professional accountant u/s 12(1)(a), so the ED being the Member-Secretary
of the FRC (if chosen by the Chairman from among the three EDs of the SSD, FRMD and Chapter A1 [1]:
APRD) may be another professional accountant. Cost Audit Concept & Legal issues
Chapter A2 [2]:
Amendment to the Statute of the Cost Auditors' PAI and the Implication Thereof: The Cost and
Management Accountants Ordinance, 1977 (CMAO), which governs the cost and management
accountancy or cost auditing profession, has been amended by the FRA 2015 (the CMAO u/s Chapter A3 [3]:
64) as follows: Cost Auditing Standards and Quality control
• The functions of ICMAB shall be subject to the public interest oversight of the FRC in
accordance with the FRA 2015, which shall ensure that the Institute meets its Chapter A4 [4]:
responsibilities to maintain high professional standards and develop the CMA profession Legal Position of Cost Auditor
(new section 14A of CMAO).
• ICMAB shall ensure that all members of the Institute shall comply with the Financial Chapter A5 [5]:
Reporting Standards and Auditing Standards issued by the FRC pursuant to section 40 of Reporting under Cost Audit
the FRA 2015 (new section 14B of CMAO).
• A person shall not be entitled to have his name entered in or borne on the Register if he has
Chapter A6 [6]:
been removed from the membership of the Institute on being found on inquiry not to have
complied with the Financial Reporting Standards and Auditing Standards issued by the
FRC pursuant to section 40 of the FRA 2015 (new section 14C of CMAO). Thus, under the
FRC regime, ICMAB being under the public interest oversight of the FRC, must ensure its
Chapter B1 [7]:
responsibilities to maintain high professional standards and develop the cost and
management accounting profession, and its members' compliance with the FRC's Financial
Reporting Standards and Auditing Standards, and impose enforcement through cancellation Chapter B2 [8]:
of membership on non-compliance thereof. Operational Audit
Conclusion: Chapter B3 [9]:

Although in Bangladesh, cost audit provision was first introduced in the Companies Act, 1994, Management Audit in Different function
but the Cost Audit (Report) Rules were made on 18 November 1997. Under the FRA, cost audit
is included in the statutory definition of "audit service" to be conducted by practicing CMA Part C: Performance Analysis
after being enlisted in accordance with the provisions of Chapter V of the FRA. As the cost [Chapter 10]
auditors' professional accountancy institute, ICMAB has a number of responsibilities and
obligations under the FRA including:
(i) taking punitive measure against the enlisted cost auditor if punished by the FRC;
(ii) ensuring the public interest-related oversight through taking effective measures in
association with the FRC;
(iii) meeting with the FRC at least twice a year;
41
(iv) giving consultation and assistance to the FRC for setting standards;
(v) giving consultation to the FRC for the purpose of making rules u/s 70; and
(vi) giving consultation to the FRC for making regulations u/s 71.
In accordance with the provisions of the FRA, major implications on ICMAB or its members
or cost audit practice include: (i) ICMAB's punishment to any of its members to disqualify him
to be the Chairman or Executive Director of the FRC; (ii) FRC's Audit Practice Review Click to jump on:
Division's observance of ICMAB's activities regarding cost audit practice; (iii) FRC's cost audit
practice code, guideline or regulation to have supremacy over ICMAB's own cost audit related Home
rules or guidelines; (iv) cost audit practice to be unauthorized while ICMAB's action under
disposal on FRC's enforcement recommendation; and (v) enlisted cost auditor to intimate the Part A: Cost Audit
FRC, ICMAB or concerned regulator about PIE's inaction on severe irregularity within
prescribed time. Chapter A1 [1]:
As mentioned by Sen, Jain and Bala (2004):
Cost audit, as distinct from external financial audit conducted by chartered accountants, is not Chapter A2 [2]:
a phase of mere verification, authentication and certification of cost of production or cost of Cost Accounting Standards
performing other functions. Its purpose is to go deeper in order to judge and report upon the
overall and sectional operational efficiency of the organization subject to such an audit (Sen, Chapter A3 [3]:
Jain and Bala, 2004: 17). Cost Auditing Standards and Quality control
Chapter A4 [4]:
As claimed by Shil (2015), "the rapid economic rising of today's India largely because of vital
role of Cost Accountants after they have made the Cost Audit compulsory in India" (Shil, 2015:
11). Chapter A5 [5]:
We also expect that cost audit practice, with its limited mandatory applicability and more
limited real application, would ultimately flourish with its full potential under the FRC's Chapter A6 [6]:
oversight and enforcement regime on broader area of public interest entities' financial reporting Cost Audit in Information Technology (IT)
and auditing activities under the Financial Reporting Act.
Interactive Question 1.11: Professional Accountancy Institute in FRA and ICMAB’s Responsibility
[Difficulty Level: Moderate] Chapter B1 [7]:
Do you think as a professional CMA in Bangladesh you are considered as a member of PAI according
Chapter B2 [8]:
to FRA? If so, list out your professional body’s responsibility according to FRA.
Operational Audit
Ans: Yes as a professional CMA, I consider me as a member of PAI, as per FRA, Under section 2(19) Chapter B3 [9]:
of the FRA, "professional accountancy institute" (PAI) means the Institute of Chartered Accountants of Management Audit in Different function
Bangladesh (ICAB) established under the Bangladesh Chartered Accountants Order, 1973 and the
Institute of Cost and Management Accountants of Bangladesh (ICMAB) established under the Cost and Part C: Performance Analysis
Management Accountants Ordinance, 1977 [u/s 2(19) of the FRA]. Thus, ICAB and ICMAB are the [Chapter 10]
two recognized PAIs in the FRA and the PAI of cost auditors is the ICMAB.
As the cost auditors' professional accountancy institute, ICMAB has a number of responsibilities and
obligations under the FRA including:
(i) taking punitive measure against the enlisted cost auditor if punished by the FRC;
(ii) ensuring the public interest-related oversight through taking effective measures in association
42
with the FRC;

(iii) meeting with the FRC at least twice a year;
(iv) giving consultation and assistance to the FRC for setting standards;
(v) giving consultation to the FRC for the purpose of making rules u/s 70;
(vi) giving consultation to the FRC for making regulations u/s 71.
Click to jump on:
Home
Part A: Cost Audit

Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
43
Chapter A2 [2]
COST AUDIT CONCEPT & LEGAL ISSUES

Click to jump on:
2.1 Generally Accepted Cost Accounting Principles (GACAP)
2.2 Code of conduct and Ethics Home
2.3 Cost Accounting Standards
2.4 Guidance notes on Cost Accounting Standards Part A: Cost Audit
2.5 Cost Record and Audit Rules
Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
44
2.1 Generally Accepted Cost Accounting Principles (GACAP)

Generally Accepted Cost Accounting Principles means the principles of cost accounting issued
by the Institute of Cost & Management Accountants of Bangladesh (ICMAB). A conceptual
framework is 'a coherent system of interrelated objectives and fundamentals that is expected to
lead to consistent standards'. It doesn't refer to any rules rather it gives some overall guidelines.
The rules are usually set in standards which are formulated based on the framework. Click to jump on:
In emerging issues, standards are consulted first and if a desirable reference is not found, the Home
conceptual framework is used to reach to a solution. However, professional judgment always
holds a priori in situation where highest level of subjectivity and ambiguity exists. The Part A: Cost Audit
conceptual framework provides a solid foundation for developing future accounting standards.
In a broader sense, it can be seen as an attempt to define the nature and purpose of accounting. Chapter A1 [1]:
Conceptual frameworks can apply to many disciplines, but when specifically related to cost and Cost Audit Concept & Legal issues
management accounting, a conceptual framework can be seen as a statement of generally
accepted cost accounting principles (GACAP) that form a frame of reference for the evaluation Chapter A2 [2]:
of existing practices and the development of new ones.
Chapter A3 [3]:
Conceptual framework sets the boundaries you want to stay within as you build standards or a Cost Auditing Standards and Quality control
model. The framework provides guidelines to reach to a precise conclusion whether there is a
specific guideline or not. Thus, the Cost Accounting and Financial Reporting Standards Chapter A4 [4]:
Committee (CAFRSC) of the ICMAB feels the necessity of formulating a conceptual Legal Position of Cost Auditor
framework to supplement its standard setting process so that the practitioners may hold a
judgmental view while they search for a solution to any cost and managerial accounting related Chapter A5 [5]:
issues. The Framework works as the foundation for building a set of coherent cost accounting Reporting under Cost Audit
standards and is a reference of basic cost accounting theory for solving emerging practical
problems. The conceptual framework establishes objectives, scope, principles, constraints, and Chapter A6 [6]:
concepts. Cost Audit in Information Technology (IT)

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
45
Conceptual framework of Generally Accepted cost accounting Principles at a glance:
Click to jump on:
Home
Part A: Cost Audit

Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Note: Please read the details at Bangladesh Cost Accounting Standards Volume-1.
Chapter A4 [4]:
Interactive Question 2.1: Scope of Conceptual Framework of Generally Accepted Cost Accounting
Principles [Difficulty Level: Moderate] Chapter A5 [5]:
There is a set of Generally Accepted Accounting Principles and also International Accounting Standards
and International Financial Reporting Standards. Instead of all this why you think that there should be Chapter A6 [6]:
a conceptual framework of “Generally Accepted Cost Accounting Principles”? Cost Audit in Information Technology (IT)
Ans: Cost accounting provides the management of a company with the information it needs to operate Part B: Management Audit
the business effectively. It differs from financial accounting in its focus on principles of costing,
attributing costs to the activity that generates them and on cost reduction; rather than producing a Chapter B1 [7]:
balance sheet based on assets and liabilities. Cost accounting generally focuses on a particular product, Internal Control & Internal Audit
activity or project. It relies on the principle of collecting all the costs that fall within the area you are
Chapter B2 [8]:
analyzing, no matter how they are incurred or who generates them.
Operational Audit
But in the sense of integrity, there should be a set of rules which lead the cost accounting data to Chapter B3 [9]:
commonly acceptance. And these rules are usually set in standards which are formulated based on the Management Audit in Different function
framework. In emerging issues, standards are consulted first and if a desirable reference is not found,
the conceptual framework is used to reach to a solution. However, professional judgment always holds Part C: Performance Analysis
a priori in situation where highest level of subjectivity and ambiguity exists. The conceptual framework [Chapter 10]
provides a solid foundation for developing future accounting standards. In a broader sense, it can be
seen as an attempt to define the nature and purpose of accounting. Conceptual frameworks can apply to
many disciplines, but when specifically related to cost and management accounting, a conceptual
framework can be seen as a statement of generally accepted cost accounting principles (GACAP) that
form a frame of reference for the evaluation of existing practices and the development of new ones.
46
2.2 Code of conduct and Ethics

Cost Auditor should comply with the code of ethics for professional accountants. The
fundamental principles governing the professional responsibility of the Cost Auditors are
enumerated as follows:
Integrity Click to jump on:

A cost and management accountant should be straightforward and honest in performing his
services. Integrity implies not only honesty but fair dealings and truthfulness. Financial Home
involvement with the client effects independence and may lead a reasonable observer to
conclude that it has been impaired. A professional cost and management accountant should be Part A: Cost Audit
straightforward and honest in rendering professional services as a cost auditor.
Chapter A1 [1]:
Objectivity Cost Audit Concept & Legal issues
A cost and management accountant should be fair and should not allow prejudice or bias or the
influence of others to override objectivity. The principle of objectivity imposes the obligation Chapter A2 [2]:
on all professional accountants to be fair, intellectually honest and free of conflict of interest.
He has neither any ulterior motives nor any personal ends to serve. He should be fair and should
Chapter A3 [3]:
not allow any prejudice or bias, conflict of interest or any other influence to override objectivity. Cost Auditing Standards and Quality control
Competence Chapter A4 [4]:
A cost and management accountant must has the necessary professional knowledge, skill and Legal Position of Cost Auditor
competence to carry out the work with reasonable care and diligence, and in conformity with
the professional and technical standards, promulgated by the professional body or state Chapter A5 [5]:
legislation or the instructions of the client in so far as they are not incompatible with the Reporting under Cost Audit
requirements of integrity, objectivity and independence. He has also a continuing duty to
maintain his professional knowledge and skill at a level required to ensure that his client Chapter A6 [6]:
receives the advantage of competent professional advice based on the up-to-date developments Cost Audit in Information Technology (IT)
in practice, legislation and techniques. So, A cost and management accountant must refrain
from performing any service which he is not competent to carry out unless proper advice and Part B: Management Audit
assistance is obtained to ensure that the service is performed to the satisfaction.
Chapter B1 [7]:
Confidentiality Internal Control & Internal Audit
A cost and management accountant must not disclose information acquired during the course
Chapter B2 [8]:
of his engagement and should not use or disclose any such information without proper and
Operational Audit
specific authority or unless there is a legal or professional right or duty to disclose. The duty of
confidentiality continues even after the end of the relationship between the cost auditor and the Chapter B3 [9]:
client or the cost and management accountant and the employer. Management Audit in Different function
Professional Behavior Part C: Performance Analysis

A professional Cost and Management Accountant, being a member of the Institute of Cost and [Chapter 10]
Management Accountants of Pakistan, should act in a manner consistent with the good
reputation of the profession. He should meticulously avoid any such conduct or behavior as
may cast an unfavorable aspersion on the profession. He has to ensure professional behavior
while meeting his responsibilities to clients, third parties, other members of the cost and
management accounting profession, staff, employers and the general public.
47
Note: Please read the details the Code of Conduct of ICMAB [ https://www.icmab.org.bd/wp-
content/uploads/2019/12/Code-of-ethics.pdf ]
Interactive Question 2.2: Reviewing other members work as per “Code of Ethics”
[Difficulty Level: Moderate]
Click to jump on:
Mr. Adil Rahman, FCMA was working as Cost Auditor of ABC Private Limited for last four years.
Recently ABC requests you for reviewing last four years’ workings and reports of Mr. Adil Rahman. Home
Do you accept this request under the light of “Code of Ethics” for a professional cost and management
accountant? Part A: Cost Audit
Ans: My decision depends on a few things. Because as per “Code of Ethics” guideline prescribed by Chapter A1 [1]:
ICMAB, mentioned that, “not accept any engagement to review the work of another Member for the Cost Audit Concept & Legal issues
same employer except with the knowledge of that Member, or except where the connection of that
Member with the work has been terminated, unless the Member reviews the work of others as a normal Chapter A2 [2]:
part of his or her responsibilities”.
Chapter A3 [3]:
So, if Mr. Adil Rahman is continuing his role, then I need to ensure that such request is sent to me with
knowledge of Mr. Adil Rahman or not; or if Mr. Adil Rahman is no more continuing, then I accept the
request of ABC to review last four years’ workings and reports of Mr. Adil Rahman. Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
48
2.3 Cost Accounting Standards

Total number of Cost Accounting Standards are 31. All students are requested to read the
three volumes of Bangladesh Cost Accounting Standards.
Web links [ https://www.icmab.org.bd/professional-standards/]
List of BCASs Click to jump on:

Standard No Title Home
BCAS- 1 Cost Concept and Classifications
BCAS- 2 Cost Estimation Part A: Cost Audit
BCAS- 3 Cost Allocation Base
BCAS- 4 Indirect Costs Chapter A1 [1]:
Volume - 1
BCAS- 5 Indirect Cost Rate Cost Audit Concept & Legal issues
BCAS- 6 Support Department Costs
BCAS- 7 Job Order Costing Chapter A2 [2]:
BCAS- 8 Process Costing
BCAS- 9 Join Cost
Chapter A3 [3]:
BCAS- 10 Target Costing Cost Auditing Standards and Quality control
BCAS- 11 Life Cycle Costing
BCAS- 12 Kaizen Costing Chapter A4 [4]:
BCAS- 13 Standard Costing Legal Position of Cost Auditor
BCAS- 14 Activity Based Costing
BCAS- 15 Product Mix Decisions Chapter A5 [5]:
Volume - 2
BCAS- 16 Transfer Pricing

BCAS- 17 Performance Measurement
Chapter A6 [6]:
BCAS- 18 Cash Flows
BCAS- 19 Budget and Pro forma Financial Statements
BCAS- 20 Activity Based Management
BCAS- 21 Capital Budgeting
BCAS- 22 Enterprise Resource Planning Chapter B1 [7]:
BCAS- 23 Strategic Cost management Internal Control & Internal Audit
BCAS- 24 Material Costs
BCAS- 25 Employee Costs Chapter B2 [8]:
BCAS- 26 Cost of Utilities Operational Audit
Volume - 3
BCAS- 27 Cost of Production for Captive Consumption

BCAS- 28 Capacity Determination Chapter B3 [9]:
BCAS-29 Cost of Quality
BCAS-30 Service Costing
BCAS-31 Construction Contract Costing
[Chapter 10]
49
2.4 Guidance notes on Cost Accounting Standards

Cost Accounting Standards lay down a set of principles and methods of classification,
measurement and assignment of cost elements, determination of the cost of product or service
and the presentation and disclosure in the cost statements.
The Guidance Note deals with principles and methods as provided in the Cost Accounting Click to jump on:
Standards and practical aspects in connection with the determination of each Cost Element for
a product or service. In the preparation of cost statement and its attestation, cost of Product or Home
Service should be determined with reference to Cost Accounting Standards for each cost
element. Guidance Notes help the CMA Professionals and Other users, both internal and Part A: Cost Audit
external, to understand and implementation of various Cost Accounting Standards. Guidance
Note is an attempt to guide the members employed in various organizations and also those Chapter A1 [1]:
engaged in public practice to ensure that they follow a well-structured cost accounting system Cost Audit Concept & Legal issues
suited to the type, size & scale of operations that results in creating the intended cost accounting
records leading to collection, assignment, apportionment and absorption of correct cost data to Chapter A2 [2]:
the relevant cost objects in the organization.
Chapter A3 [3]:
This Guidance Note is neither intended to supersede any Rules/Regulations/Orders issued by Cost Auditing Standards and Quality control
the ICMAB or Government or by any other Authority nor may be construed as a mandatory
replacement of the system of cost accounting that exist and is well suited in any organization. Chapter A4 [4]:
It is mere guide to supplement the efforts made by the members employed in various Legal Position of Cost Auditor
organizations and also those engaged in public practice to enable these organizations to follow
a cost accounting system that conforms to the Generally Accepted Cost Accounting Principles Chapter A5 [5]:
and Cost Accounting Standards issued by the ICMAB and also complies with the Cost Reporting under Cost Audit
Accounting Records Rules. Therefore, all users of this Guidance Note should familiarize
themselves with all the Rules/Regulations/Orders and clarifications issued by the ICMAB and Chapter A6 [6]:
Government bodies and may take assistance of this Guidance Note in a manner that will meet Cost Audit in Information Technology (IT)
the requirement of the organizations without sacrificing with the fundamental principles that
are enshrined either in any Statute or in the Standards prescribed by the Institute of Cost and Part B: Management Audit
Management Accountants of Bangladesh.
Chapter B1 [7]:
Interactive Question 2.4: Guidance notes on Cost Accounting Standards
[Difficulty Level: Easy]
Chapter B2 [8]:
Operational Audit
Rather, there is a set of cost accounting standards, how “Guidance notes on Cost Accounting Standard”
helps the practicing cost accountants? Chapter B3 [9]:
Ans: When professionals go to practice the Cost Accounting Standards and preparing Cost Reports they
faced different critical issues and with the use of experience and knowledge they overcome from that. Part C: Performance Analysis
With the Guidance Notes, they share there experiences of that issues, which helps the practicing cost [Chapter 10]
accounting professionals as well as the users of cost reports to understand the Cost Accounting
Standards and their uses in different issues and situations.
50
2.5 Cost Record and Audit Rules

“Cost Records” means books of account relating to utilization of materials, labour and other
items of cost as applicable to the production of goods or provision of services. Every company
must maintain cost records in prescribed manner and forms within the laws and rules. The cost
records shall be maintained on regular basis in such a manner as to facilitate calculation of per
unit cost of production or cost of operations, cost of sales and margin for each of its products Click to jump on:
and activities for every financial year on monthly or quarterly or half yearly or annual basis.
The cost records shall be maintained in such a manner so as to enable the company to exercise, Home
as far as possible, control over the various operations and costs to achieve optimum economies
in utilization of resources and these records shall also provide necessary data which is required Part A: Cost Audit
to be furnished under these rules.
Chapter A1 [1]:
The purpose of cost record rules is to encourage firms to exercise control over their transactions Cost Audit Concept & Legal issues
and costs to optimize the use of resources within the economy. These Rules provide a system
for the systematic maintenance of these records according to generally accepted principles of Chapter A2 [2]:
cost accounting and on a uniform basis among the various companies in the industries. This
ensures the availability of a consistent and authentic database with industries that can be useful
Chapter A3 [3]:
to government in making appropriate decisions as required. Cost Accounting Record Rules are Cost Auditing Standards and Quality control
applicable only to selected companies incorporated under the Companies Act, 1994. Small
Scale units are generally exempted from the requirements of cost accounting records rules Chapter A4 [4]:
although they belong to the industries or categories of companies for which the maintenance of Legal Position of Cost Auditor
cost accounting has been prescribed. The Cost Accounting Records Rules merely refers to be
maintenance of cost records. It does not mean that there has to be a cost audit also. Cost Audit Chapter A5 [5]:
Order is separately issued after the initial notification of cost accounting records rules. These Reporting under Cost Audit
cost audit orders are issued on the selected companies only.
Chapter A6 [6]:
Interactive Question 2.5: Cost Record under Companies Act 1994 Cost Audit in Information Technology (IT)
You are appointed as a Cost Auditor in XYZ Pvt. Ltd. Company for the year ended just few days ago.
Which documents you asked to the company for cost audit purpose as per Companies Act 1994? Chapter B1 [7]:
Mention the related sayings in the Act. Internal Control & Internal Audit
Ans: As per Companies Act 1994, the company ordered to have its accounts audited under Sec. 220 Chapter B2 [8]:
shall make available to the cost auditor within 75 days from the end of the financial year of the company Operational Audit
cost accounting records maintained under section 181(1)(d) and such other cost statements books and
papers as may be prescribed by the concerned cost audit order that would be required conducting the Chapter B3 [9]:
cost audit, and shall render necessary assistance to the cost auditor so as to enable him/her to conduct Management Audit in Different function
and complete the cost audit smoothly.
I asked to the company for cost audit purpose the following specific records: [Chapter 10]
(a) Cost center wise installed machines showing machine available hours, actual operating hours, idle
hours, reasons for shortfall.
(b) Machine wise production capacity, Actual production achievement, Reasons for
shortfall/overproduction, if any.
(c) Percentage of achievement with reasons for difference.
(d) Cost center wise input of direct materials/indirect materials and actual output.
(e) Cost center wise direct and indirect labor showing machine wise, shift wise engagements and giving
51
break up of piece rate, time rate, incentive and other perquisites.

(f) Machine wise or cost center wise consumption of power, fuel, gas, water, treatment and other
utilities showing cost of each and production in the machine/cost center.
(g) Basis of ascertainment, allocation and absorption of different elements of costs including
depreciation, amortization or depletion.
(h) Records of Direct Material, Packing Materials, Stores and Spares, Work-in-process and Finished
Goods Stock.
(i) Cost Accounting Records, Statements and Assets Registers. Click to jump on:
(j) Registers of Purchases, Sales, Imports, Exports, Consumption of Materials, Stores and Production.
(k) Records of loose tools, equipment, foundry, civil works, machining, cold/heat treatment, plaiting, Home
painting, designing, workshop, etc.
(l) Records of Planning, Budgeting, Evaluation and Control.
Part A: Cost Audit
Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
52
Chapter A3 [3]
COST AUDITING STANDARDS
AND QUALITY CONTROL
Click to jump on:

3.1 Planning the Audit of Cost Statements Home
3.2 Cost Audit Documentation
3.3 Overall Objectives of the Independent Cost Auditor and the Conduct of an Audit Part A: Cost Audit
in Accordance with Cost Auditing Standards
3.4 Knowledge of Business, its Processes and the Business Environment Chapter A1 [1]:
3.5 Commencement of Cost Audit and Audit Procedures
3.6 Guidelines of Cost Audit in Bangladesh Chapter A2 [2]:
3.7 Framework of Quality Control Review (QCR) Program Cost Accounting Standards
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
53
3.1 Planning the Audit of Cost Statements

Cost Auditing Standard on Planning an Audit of Cost Statements – 101
The following is the Cost Auditing Standard (Cost Auditing Standard- 101) on “Planning an
Audit of Cost Statements”. In this Standard, the standard portions have been set in bold italic
type. This Standard should be read in the context of the background material, which has been
set in normal type.
Click to jump on:
INTRODUCTION
Home
Planning an audit of cost statements, records and other related documents is considered
necessary to ensure achievement of audit objectives with available resources and securing
Part A: Cost Audit
coordination with the auditee on audit work.
Chapter A1 [1]:
OBJECTIVE
The objective of this Standard is to guide the members in planning for the audit of cost Chapter A2 [2]:
statements so that it is performed in an efficient and effective manner. Audit planning shall also Cost Accounting Standards
include establishing the overall audit strategy and audit plan for the conduct of the audit.
Chapter A3 [3]:
SCOPE Cost Auditing Standards and Quality control
This Standard deals with the auditors’ responsibility to plan an audit of cost statements, records
and other related documents. The auditor shall prepare and document the overall audit strategy Chapter A4 [4]:
and audit plan.
Chapter A5 [5]:
DEFINITIONS Reporting under Cost Audit
The following terms are being used in this standard with the meaning specified:
• Audit: Audit is an independent examination of financial, cost and other related information Chapter A6 [6]:
of an entity whether profit oriented or not, irrespective of its size or legal form, when such Cost Audit in Information Technology (IT)
an examination is conducted with a view to expressing an opinion thereon.
• Audit Partner: Audit partner means the partner in the firm who is a member of the Institute Part B: Management Audit
of Cost Accountants of India and is in full time practice and is responsible for the audit and
its performance, and for the report that is issued on behalf of the firm, and who, where Chapter B1 [7]:
required, has the appropriate authority from a professional, legal or regulatory body. Internal Control & Internal Audit
• 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. Chapter B2 [8]:
Operational Audit
• Audit Risk: Audit risk is the risk that the cost auditor expresses an inappropriate audit
opinion on the cost statements that are materially misstated. Audit risk is a function of the
Chapter B3 [9]:
risk of material misstatement and detection risk.
− The risk of material misstatement has two components viz. Inherent Risk and Control
risk. Part C: Performance Analysis
 Inherent risk: The susceptibility of an assertion about the measurement, assignment [Chapter 10]
or disclosure of cost to a misstatement that could be material, either individually or
when aggregated with other misstatements, before consideration of any related
controls.
 Control risk: The risk that a misstatement that could occur in an assertion about
the measurement, assignment or disclosure of cost and that could be material, either
individually or when aggregated with other misstatements, will not be prevented,
54
or detected and corrected, on a timely basis by the entity’s internal, operational and
management control.
− Detection risk
The risk that the procedures followed by the cost auditor to reduce audit risk to an
acceptable low level will not detect a misstatement that exists and that could be
material, either individually or when aggregated with other misstatements.
Click to jump on:
• Audit Team: Audit team means all personnel performing an engagement, including any
experts contracted by the firm in connection with that engagement. Home
• Auditee: Auditee means a company or any other entity for which cost audit is being carried
out. Part A: Cost Audit
• Cost Audit: Cost audit is an independent examination of cost statements, cost records and
other related information of an entity including a non-profit entity, when such an Chapter A1 [1]:
examination is conducted with a view to expressing an opinion thereon. Cost Audit Concept & Legal issues
• Cost Auditor: “Cost Auditor” means an auditor appointed to conduct an audit of cost
records and shall be a cost & Management Accountant within the meaning of The Cost and
Chapter A2 [2]:
Management Accountants Act 2018. “Cost and Management Accountant” is a cost &
management accountant as defined in clause (cha) of sub-section (1) of section 2 of The
Chapter A3 [3]:
Cost and Management Accountants Act, 2018 and who holds a valid certificate of practice Cost Auditing Standards and Quality control
under subsection (2) of section 2 and who is deemed to be in practice under subsection (2)
of section 2 of that Act and includes a firm of cost & management accountants. Chapter A4 [4]:
• Firm: Firm means a sole practitioner, partnership including LLP (Limited Liability Legal Position of Cost Auditor
Partnership) or any other entity of professional cost & management accountants as may be
permitted by law and constituted under The Cost and Management Accountants Act & Chapter A5 [5]:
Regulations. Reporting under Cost Audit
• Initial Audit: Initial audit means an audit where:
(a) The entity is subject to audit for the first time, as per the applicable laws, or Chapter A6 [6]:
(b) The audit of the entity for the prior period was conducted by a different audit firm. Cost Audit in Information Technology (IT)
• Misstatement: A difference between the amounts, classification, presentation or disclosure
of a reported cost statement item and the amount, classification, presentation, or disclosure Part B: Management Audit
that is required for the item to be in accordance with the applicable cost reporting
Chapter B1 [7]:
framework. Misstatements can arise from error or fraud.
Where the cost auditor expresses an opinion on whether the cost statements give a true and Chapter B2 [8]:
fair view, misstatements also include those adjustments of amounts, classifications, Operational Audit
presentation, or disclosures that, in the cost auditor’s judgment, are necessary for the cost
statements to be presented fairly, in all material respects, or to give a true and fair view. Chapter B3 [9]:
• Overall Audit Strategy: Overall Audit Strategy sets the scope, timing and direction of the Management Audit in Different function
audit, and guides the development of the detailed audit plan.
• Risk Assessment: The audit procedures performed to obtain an understanding of the entity Part C: Performance Analysis
and its environment, including the entity’s internal control, to identify and assess the risks [Chapter 10]
of material misstatement, whether due to fraud or error, at the overall cost statement level
and at the assertion level including items of cost, cost heads and disclosure thereof.
REQUIREMENTS
1. Prior to entering the planning phase, the Cost Auditor shall ensure that:
55
(a) the appointment as cost auditor is proper, he has received the letter of appointment and
legal formalities regarding his appointment have been complied with;
(b) the ethical requirements as per the regulations continue to be satisfied; (Refer 6.3)
(c) an understanding of the terms of reference including the units to be covered, products/
services to be covered, scope of coverage where the regulations leave it to be agreed
between the auditor and the auditee.
2. The audit partner and other key members of an audit team shall be involved in planning the Click to jump on:
audit, including planning and participating in the discussion among audit team members.
(Refer 6.4). Home
3. The Cost & Management Auditor shall formulate an Overall audit strategy that sets the
scope, timing and direction of the audit. The overall audit strategy guides the development Part A: Cost Audit
of the audit plan.
4. In formulating the Overall audit strategy, the Cost Auditor shall consider all relevant Chapter A1 [1]:
factors. (Refer 6.5). These relevant factors include: Cost Audit Concept & Legal issues
(a) results of preliminary activities as specified in requirement 1 above
(b) knowledge from previous audits and other engagements with the auditee Chapter A2 [2]:
(c) knowledge of business Cost Accounting Standards
(d) nature and scope of the audit
(e) statutory deadlines and reporting format Chapter A3 [3]:
(f) relevant factors determining the direction of the audit efforts Cost Auditing Standards and Quality control
(g) nature, timing and extent of resources required for the audit.
Chapter A4 [4]:
5. The Cost Auditor shall develop an audit plan. The audit plan will include the nature, extent
and timing of risk assessment, audit procedures and other activities (Refer 6.5, 6.6)
6. The Cost Auditor shall plan the nature, extent and timing of the direction and supervision Chapter A5 [5]:
of audit team members and the review of their work. (Refer 6.7) Reporting under Cost Audit
7. The Cost Auditor shall update the Overall audit strategy and the audit plan as required
during the course of audit. (Refer 6.8) Chapter A6 [6]:
8. The Cost Auditor shall document the overall audit strategy, the audit plan and any Cost Audit in Information Technology (IT)
significant changes made therein during the audit engagements and the reasons for the
changes. Part B: Management Audit
9. In the initial audit, the Cost Auditor shall perform procedures regarding the acceptance of
the client relationship and the specific audit. In case where the audit of the entity for the Chapter B1 [7]:
prior period was conducted by a different audit firm, the auditor shall communicate with Internal Control & Internal Audit
the previous auditor. (Refer 6.9).
Chapter B2 [8]:
APPLICATION GUIDANCE Operational Audit
1. The nature and extent of planning activities will vary according to the:
Chapter B3 [9]:
(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 with the entity and the industry.
(c) changes in circumstances that occur during the audit.
[Chapter 10]
2. Planning is not a discrete phase of an audit, but rather a continuous and iterative process.
Planning includes scheduling which involves determining the priority of audit procedures
and their inter dependence. For example, the risk assessment procedures are planned early
in the audit process.
3. Prior to the performance of other significant activities for the current year’s audit, the
auditor shall ensure that {Refer 5.1 (b)}:
56
(a) After the Cost Auditor has accepted the appointment for an entity, there are no changes
in his position in relation to the entity that impede his arm’s length relationship with
the entity. Such as, acceptance of an assignment relating to designing and
implementation of cost accounting system for the entity.
(b) Subsequent to his acceptance of the assignment, no issues about management integrity
has cropped up that may affect the auditor’s willingness to continue the engagement.
4. The involvement of the audit partner and other key members of the audit team in planning Click to jump on:
the audit draws on their experience and insights, thereby enhancing the effectiveness and
efficiency of the planning process.(Refer 5.2) Home
5. Matters that are relevant in formulating the overall audit strategy and drawing up the audit
plan include, in addition to those mentioned earlier, the following (Refer 5.4, 5.5): Part A: Cost Audit
(a) The cost reporting framework generally prescribed, under the Companies Act and
Rules prescribed thereunder, as well as under any other law as applicable, on the basis Chapter A1 [1]:
of which the cost information to be audited has been prepared, including need for Cost Audit Concept & Legal issues
reconciliation with financial reporting framework.
(b) Industry regulators’ requirement as to how costs will be handled. Chapter A2 [2]:
(c) Unique features of an industry that influence audit requirements such as definition of Cost Accounting Standards
product in the newspaper industry.
(d) Reliance that can be placed on the work of financial auditors, other cost auditors Chapter A3 [3]:
appointed by the entity and internal auditors. such as their attendance in annual Cost Auditing Standards and Quality control
stocktaking
Chapter A4 [4]:
(e) State of IT (Information Technology) implementation, whether the entity is using an
ERP (Enterprise Resource Planning) system or internally developed systems and the
reliance that can be placed on them. (f) Statutory timelines for cost reporting, which Chapter A5 [5]:
can be modified by the management for early completion. (g) Timelines for Board/ Reporting under Cost Audit
audit committee meetings, which can set the time limits for completion of audit work.
(f) Resources required and available in terms of manpower, equipment and others and the Chapter A6 [6]:
assignment of these to specific parts of the work. Cost Audit in Information Technology (IT)
6. The audit plan is more detailed than the overall audit strategy as it includes the nature,
timing and extent of audit procedures to be performed by audit team members. Planning Part B: Management Audit
for these audit procedures takes place over the course of the audit as the audit plan for the
engagement develops. For example, planning of the auditor’s risk assessment procedures Chapter B1 [7]:
occurs early in the audit process. However, planning the nature, timing and extent of Internal Control & Internal Audit
specific further audit procedures depends on the outcome of those risk assessment
procedures. (Refer 5.5) Chapter B2 [8]:
7. The nature, extent and timing of the direction and supervision of audit team members and Operational Audit
review of their work vary depending on, among others, the size and complexity of the
Chapter B3 [9]:
entities activities, risk assessment results and the capabilities and competence of the
individual team members performing the audit work. (Refer 5.6)
8. As a result of unexpected events, changes in conditions or the audit evidence obtained from
the results of audit procedures, the auditor may need to modify the overall audit strategy
[Chapter 10]
and audit plan. (Refer 5.7)
9. Additional Consideration in Initial Audit Engagements (Refer 5.9): The purpose and
objective of planning the audit are the same whether the audit is an initial or recurring
engagement. However, for an initial audit, the auditor may need to expand the planning
activities because the auditor does not ordinarily have the previous experience with the
entity that is considered when planning recurring engagements. For the initial audit,
57
additional matters the auditor may consider in formulating the overall audit strategy and
audit plan include the following.
(a) The planning activities may expand to cover consultations with the previous auditor,
review of previous year’s audit working papers, if not prohibited by other Law or
regulation, and previous year’s transactions having an impact on current year’s cost.
(b) Any major issues (including the application of cost accounting principles or of auditing
and reporting standards) discussed with management in connection with the initial Click to jump on:
selection as cost auditor, the communication of these matters to those charged with
governance and how these matters affect the overall audit strategy and audit plan. Home
(c) The audit procedures necessary to obtain sufficient appropriate audit evidence
regarding opening balances (such as Inventory). Part A: Cost Audit
(d) Other procedures required by the firm’s system of quality control for initial cost audit
engagements (for example, the firm’s system of quality control may require the Chapter A1 [1]:
involvement of another partner or senior individual to review the overall audit strategy Cost Audit Concept & Legal issues
prior to commencing significant audit procedures or to review reports prior to their
issuance). Chapter A2 [2]:
10. In audits of small entities where the entire audit may be conducted by a small audit team Cost Accounting Standards
comprising the audit partner working with say one team member, formulating the audit
strategy and drawing up the audit plan need not be elaborate. Nonetheless it is necessary to Chapter A3 [3]:
have regard to the matters mentioned under Requirements. Cost Auditing Standards and Quality control
Chapter A4 [4]:
EFFECTIVE DATE Legal Position of Cost Auditor
This Standard is effective for audits on or after September 11, 2015
Chapter A5 [5]:
Interactive Question 3.1: Cost Audit Risk Reporting under Cost Audit
Chapter A6 [6]:
Recently you are appointed as Cost Auditor in ABC LLC. The management of the company ensure that Cost Audit in Information Technology (IT)
they kept all the records properly and accurately in all cost accounting record. As a cost auditor how do
you classified the audit risks in that organization to draw a Cost Audit Risk Model? In which Audit Part B: Management Audit
Risk you focused more?
Chapter B1 [7]:
Ans: There are three types of risks in every Audit Risk Model: Inherent risk, Control risk and detection
risk. Inherent risk and control risk are two of the three parts of the audit risk model, which auditors use
Chapter B2 [8]:
to determine the overall risk of an audit. Inherent risk is the risk posed by an error or omission in a
Operational Audit
records and statements due to a factor other than a failure of internal control. Control risk is the chance
of a material misstatement in a company's records and statements because there aren't any relevant Chapter B3 [9]:
internal controls to mitigate a particular risk or the internal controls in place malfunctioned. Detection Management Audit in Different function
risk refers to the risk when an auditor fails to identify a material misstatement. Inherent Risk and Control
Risk are jointly known as the risk of material misstatement (RMM). Other hand, Detection risk is the Part C: Performance Analysis
chance that an auditor will fail to find material misstatements that exist in an entity's records and [Chapter 10]
statements. These misstatements may be due to either fraud or error. Because of the nature of audit
procedures, some detection risk will always exist, as a cost auditor, my goal is to lower the detection
risk sufficiently for overall audit risk to maintain an acceptable level; I focused on this more.
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3.2 Cost Audit Documentation

Cost Auditing Standard on Cost Audit Documentation – 102
The following is the Cost Auditing Standard (Cost Auditing Standard- 102) on “Cost Audit
Documentation”. In this Standard, the standard portions have been set in bold italic type. This
Standard should be read in the context of the background material, which has been set in normal
type.
Click to jump on:
INTRODUCTION
Home
The purpose of this Standard is to provide guidance to the members in preparation of Audit
Documentation in the context of the audit of cost statements, records and other related
Part A: Cost Audit
documents.
Chapter A1 [1]:
Nature and Purpose of Cost Audit Documentation
Cost Audit documentation that meets the requirement of this Cost Auditing Standard and the Chapter A2 [2]:
specific documentation requirements of other relevant Cost Auditing Standards provides: Cost Accounting Standards
(a) Evidence of the cost auditor’s basis for a conclusion about the achievement of the overall
objectives of the cost auditor; and Chapter A3 [3]:
(b) Evidence that the cost audit was planned and performed in accordance with Cost Auditing Cost Auditing Standards and Quality control
Standards and applicable legal and regulatory requirements.
Chapter A4 [4]:
Cost Audit documentation serves a number of additional purposes, including the following: Legal Position of Cost Auditor
(a) Assisting the audit team to plan and perform the cost audit.
(b) Assisting members of the audit team responsible for supervision to direct and supervise the Chapter A5 [5]:
cost audit work, and to discharge their review responsibilities.
(c) Enabling the audit team to be accountable for its work.
Chapter A6 [6]:
(d) Retaining a record of matters of continuing significance to future cost audits.
(e) Enabling the conduct of quality control reviews in accordance with the Guidance Manual
for Audit Quality issued by Quality Review Board (QRB).
(f) Enabling the conduct of external inspections in accordance with applicable legal, regulators
or other requirements. Chapter B1 [7]:
OBJECTIVE
The objective of this Standard is to guide the members to prepare documentation that provides: Chapter B2 [8]:
(a) A sufficient and appropriate record of the basis for the Cost Auditor’s Report; and Operational Audit
(b) Evidence that the audit was planned and performed in accordance with Cost Auditing
Standards and applicable legal & regulatory requirements. Chapter B3 [9]:
SCOPE
This Standard deals with the cost auditor’s responsibility to prepare audit documentation for
[Chapter 10]
the audit of cost statements, records and other related documents. The specific documentation
requirements of other Cost Auditing Standard’s do not limit the application of this Cost
Auditing Standard. Laws or regulations may establish additional documentation requirements.
DEFINITIONS
The following terms are being used in this Standard with the meaning specified.
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• 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
• Audit documentation: Audit Documentation means the records, in physical or electronic
form, including working papers prepared by and for, or obtained and retained by the Cost
auditor, in connection with the performance of the audit.
• Audit file: Audit file means one or more folders or other storage media, in physical or Click to jump on:
electronic form, containing the records that comprise the audit documentation for a specific
Assignment or audit. Home
• Audit Partner: Audit partner means the partner in the firm who is a member of the Institute
of Cost Accountants of India and is in full time practice and is responsible for the audit and Part A: Cost Audit
its performance, and for the report that is issued on behalf of the firm, and who, where
required, has the appropriate authority from a professional, legal or regulatory body. Chapter A1 [1]:
• Audit Team: Audit team means all personnel performing an engagement, including any Cost Audit Concept & Legal issues
experts contracted by the firm in connection with that engagement.
Chapter A2 [2]:
• Audit working papers: Audit working papers are the documents which record all audit
evidence obtained during audit. Such documents are used to support the audit work done
in order to provide assurance that the audit was performed in accordance with the relevant Chapter A3 [3]:
Cost Auditing Standards. Cost Auditing Standards and Quality control
• Cost Auditor: “Cost Auditor” means an auditor appointed to conduct an audit of cost
records and shall be a cost & Management Accountant within the meaning of The Cost and Chapter A4 [4]:
Management Accountants Act 2018. “Cost & Management Accountant” is a cost & Legal Position of Cost Auditor
management accountant as defined in clause (cha) of sub-section (1) of section 2 of The
Cost and Management Accountants Act, 2018 and who holds a valid certificate of practice Chapter A5 [5]:
under subsection (2) of section 2 and who is deemed to be in practice under subsection (2) Reporting under Cost Audit
of section 2 of that Act and includes a firm of cost & management accountants.
• Firm: Firm means a sole practitioner, partnership including LLP (Limited Liability Chapter A6 [6]:
Partnership or any other entity of professional cost accountants as may be permitted by law
and constituted under. The Cost and Management Accountants Act & Regulations.
REQUIREMENTS Chapter B1 [7]:
1. The cost auditor as part of the audit documentation shall record audit procedures performed, Internal Control & Internal Audit
relevant audit evidence obtained, and conclusions reached. (Refer 6.1)
2. The Cost Auditor shall prepare audit documentation that is sufficient to enable another Chapter B2 [8]:
competent person, having no previous connection with the said audit, including person Operational Audit
undertaking peer review to understand:
(a) Conformance of audit procedures performed with legal and regulatory requirements; Chapter B3 [9]:
(b) Conformance to Cost Auditing Standards. (Refer 6.6) Management Audit in Different function
(c) The results of audit procedures performed
(d) The audit evidence obtained Part C: Performance Analysis
(e) Significant matters arising during the audit, the conclusions reached thereon, and [Chapter 10]
significant professional judgments made in reaching those conclusions. (Refer 6.7 &
6.8)
3. The Cost Auditor shall record the discussions of significant matters with client personnel
and outsiders. (Refer 6.9).
4. The Cost Auditor shall record any departure from the standard requirement in a Cost
Auditing Standard. (Refer 6.11)
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5. In documenting the nature, timing and extent of audit procedures performed, the Cost
Auditor shall record the characteristics of the specific items or matters tested, the persons
responsible for performing and reviewing such procedures with relevant dates and extent
of review. (Refer 6.12)
6. The Cost Auditor shall prepare audit documentation on a timely basis. (Refer 6.14)
7. If, in exceptional circumstances, Cost Auditor performs any new or additional audit
procedures or draws new conclusions, after the date of Cost Audit Report, then he shall Click to jump on:
document such circumstances and details of such procedures performed. (Refer 6.15)
8. The cost auditor shall assemble the audit documentation in an audit file. (Refer 6.16) Home
APPLICATION GUIDANCE Part A: Cost Audit

1. The Cost Audit documentation will usually contain:
(a) Checklists Example: Checklist of compliance with:-(1) The Rules, regarding Chapter A1 [1]:
maintenance of Cost Records, as prescribed under the Companies Act, (2) The Cost Cost Audit Concept & Legal issues
Accounting Standards (CAS) as prescribed by the Institute (3) The Generally Accepted
Cost Accounting Principles (GACAP) as prescribed by the institute. Chapter A2 [2]:
(b) Audit programs Example: Audit Program for Material Cost, Employee Cost and others. Cost Accounting Standards
(c) Analysis Cost Audit relies more on analytical review than on substantive testing to
Chapter A3 [3]:
establish true and fair view. Example: Calorific value of different fuels used and
average Cost per unit of calorific value and Specific Heat Consumption.
(d) Audit Query List Contains a log of audit queries raised and their resolution Chapter A4 [4]:
(e) Abstracts of significant contracts relating to costs and revenues Example: Supply of Legal Position of Cost Auditor
materials indicating price, quality terms, O & M contracts, Terms of supply of contract
labour and others. Chapter A5 [5]:
(f) Letters of confirmation Example: Stock of materials with subcontractors. Reporting under Cost Audit
(g) Letter of Representation from Management Correspondence (including e-mail)
concerning significant matters. Example: Correspondence regarding terms of supply of Chapter A6 [6]:
goods and services. Cost Audit in Information Technology (IT)
(h) Abstract or copies of the entity’s records.
2. Audit documentation may be in paper form or electronic form. Where it is in electronic Part B: Management Audit
form, special care may be required to protect against accidental deletion, or tampering.
3. The content and form of audit documentation will depend on a number of factors such as: Chapter B1 [7]:
(a) the size and complexity of the operations of the auditee, Internal Control & Internal Audit
(b) the extent of computerization of cost records,
Chapter B2 [8]:
(c) the assessed risks of material misstatement of cost,
Operational Audit
(d) the cost audit methodology and tools used. For example, whether automated queries
were used to get audit evidence from cost records. Chapter B3 [9]:
(e) the nature of the audit procedure to be performed. Management Audit in Different function
4. In particular, it is necessary to document the basis for a conclusion, not readily determinable
from other documentation. For example: consumption of materials by a product from Part C: Performance Analysis
technical norms, normal price for a related party contract from Cost Auditor’s own sources [Chapter 10]
of data of the industry.
5. Audit documentation must be sufficient and appropriate, and oral explanations by the Cost
Auditor cannot substitute for such documentation.
6. Audit documentation must contain evidence of conformance to requirements of Cost
Auditing Standards in respect of this Standard and other standards {Refer 5.2(b)}: Typical
of such evidence are: (a) an adequately documented audit plan (b) the signed appointment
61
letter from the auditee (c) Minutes of discussion with client personnel, with names of
members of audit team present, particularly of the audit partner when he is present (d)
Minutes of audit team discussions, with names of members of audit team present,
particularly of the audit partner when he is present.
7. Matters that give rise to significant risks of a material misstatement are significant matters.
Those that causes a revision of the Cost Auditor’s previous assessment of the risks of
material misstatement is also a significant matter. The Cost Auditor may have reached a Click to jump on:
certain conclusion regarding the misstatement of the Material Cost in a Cost statement
based on the availability of a well-documented Bill of Materials but his assessment of risk Home
may undergo a change if he finds that there is considerable use of substitute and alternate
materials in the actual production process. Matters that cause the Cost Auditor significant Part A: Cost Audit
difficulty in applying necessary audit procedures are also significant, as for example heaps
of bulk material in irregular shapes which make volumetric measurement of stock in a Chapter A1 [1]:
physical stock taking unreliable. {Refer 5.2(e)} Cost Audit Concept & Legal issues
8. Determining what are significant matters in an audit to warrant their inclusion in the
documentation must be objectively done. The conclusions reached and the application of Chapter A2 [2]:
professional judgment in respect of these also needs to be documented. For example the Cost Accounting Standards
determination of the normal capacity for applying overheads is a significant matter in Cost
Audit and requires not mere calculations but considerable judgment. These should be Chapter A3 [3]:
adequately documented. {Refer 5.2(e)} Cost Auditing Standards and Quality control
9. Records of discussions include Minutes of discussion of significant matters with
Chapter A4 [4]:
management, those charged with governance and others. It also includes Discussion with
third parties seeking information or confirmation. (Refer 5.3)
10. The Cost Audit Documentation in respect of smaller entities may be less detailed than what Chapter A5 [5]:
is indicated but must include at the minimum the following: Reporting under Cost Audit
(a) A description of the entity, the products produced, services provided and other
activities Chapter A6 [6]:
(b) An organization Chart showing the responsibility centres and the person responsible Cost Audit in Information Technology (IT)
(c) A description, preferably a flow chart of the manufacturing process
(d) Internal controls over material cost, labour cost and expenses Part B: Management Audit
(e) The risks of material misstatement assessed, for example, in respect of scrap recovery
and disposal Chapter B1 [7]:
(f) Tests of materiality used Internal Control & Internal Audit
(g) The overall audit strategy and audit plan
(h) Significant matters noted during the audit, and conclusions reached. Chapter B2 [8]:
11. If, in exceptional circumstances, the Cost Auditor finds it necessary to perform alternative Operational Audit
audit procedures different from a corresponding requirement in a Cost Auditing Standards,
Chapter B3 [9]:
the Cost Auditor shall document how the alternative audit procedures performed achieve
the aim of that requirement, and the reasons for the departure. (Refer 5.4)
12. It is necessary in a Cost Audit to identify the specific matters or items tested. In connection
with a Cost Audit these may include Purchase Orders for supply of key raw materials,
[Chapter 10]
Goods Receipt Notes for materials, Issue notes for materials, bills of contractors for supply
of contract labour among others. Where the Cost Auditor resorts to test checking, the basis
used for selection, for example issues of spares above a certain value, and the documents
selected. (Refer 5.5)
13. Names of the team member preparing specific audit documents and details of their review
by the Cost Auditor are a necessary part of the Audit Documentation.
62
14. Preparing the audit Documentation on timely basis helps to enhance the quality of audit.
Documentation prepared after the audit work has been performed is likely to be less
accurate than the documentation prepared during execution. (Refer 5.6)
15. Facts which become known to the Cost Auditor after the date of the audit report but which
if known earlier would have caused the cost statements to be changed or the Cost Audit
Report to be modified should be added to the Cost Audit Documentation. The resulting
changes to the audit documentation must also be reviewed as the original documentation. Click to jump on:
(Refer 5.8)
16. The Cost Audit Documentation must be assembled as the audit goes on and the final Home
assembly required of audited documentation must be limited. Assembly the final audit file
should be completed within a reasonable time after the completion of the audit. After the Part A: Cost Audit
assembly of the final audit file has completed, the auditor should not delete or discard audit
documentation of any nature before the end of its retention period. (Refer 5.9) Chapter A1 [1]:
17. The audit documentation is the property of the Cost Auditor. Unless otherwise specified by Cost Audit Concept & Legal issues
law or regulation, he may at his discretion, make portions of, or extracts from audit
documentation available to clients 6.18. The Cost Audit Documentation should be retained Chapter A2 [2]:
for at least ten years from the date of the Cost Audit Report. Cost Accounting Standards
Chapter A3 [3]:
EFFECTIVE DATE
This Standard is effective for audits on or after September 11, 2015.
Chapter A4 [4]:
Interactive Question 3.2: Cost Audit Documentation Legal Position of Cost Auditor
Chapter A5 [5]:
You are a team member of a Cost Audit Team. Your team leader asks you to make a statement about Reporting under Cost Audit
“Cost Audit Working Paper” as a Cost Audit Document for you subordinate team members who will
be working in ground field for collecting and preparing basic tasks of Cost Audit Working Paper. What Chapter A6 [6]:
is your statement about “Cost Audit Working Paper”?
Ans: As a Cost Auditor, I make the following statement about “Cost Audit Working Paper” for my
team subordinates:
Chapter B1 [7]:
“The cost auditor should document all matters which are important in providing evidence to support
the opinion given in the cost audit report. Documentation here means the working papers prepared by Chapter B2 [8]:
and for, or obtained and retained by the cost auditor in connection with the performance of cost audit. Operational Audit
Working papers may be in the form of data stored on paper, film, electronic media or other media.
Where it is in electronic form, special care may be required to protect against accidental deletion, or Chapter B3 [9]:
tampering. Working papers record the audit evidence, resulting from the cost audit work performed, to Management Audit in Different function
support the cost auditor’s opinion. The extent of working papers is a matter of professional judgment.
They may cover the detailed aspects of the cost audit or may include the daily work sheets or daily diary Part C: Performance Analysis
maintained by each member of the cost audit staff engaged on the assignment. The daily work sheets [Chapter 10]
should include all queries raised; with whom each was discussed and how; and if they were satisfied.
The form and content of the working papers will be determined by the nature and complexity of the
business, nature and condition of the entity’s cost accounting and internal control systems. Use of
standardized working papers (such as checklists, confirmation forms, standard letters etc.) may
improve the efficiency with which such working papers are prepared and reviewed. Standardized
working papers facilitate delegation of work and provide a means to control quality of work. Schedules,
63
statements, analyses and other documents prepared by the entity may be utilized and made a part of the
cost audit working papers, only after being satisfied that the materials have been properly prepared
with due care.”
Click to jump on:
Home
Part A: Cost Audit

Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
64
3.3 Overall Objectives of the Independent Cost Auditor and the

Conduct of an Audit in Accordance with Cost Auditing
Standards.
Cost Auditing Standard Overall Objectives of the Independent Cost
Auditor and the Conduct of an Audit in Accordance with Cost Auditing Click to jump on:
Standards – 103
The following is the Cost Auditing Standard (Cost Auditing Standard - 103) on “Overall
Home
Objectives of the Independent Cost Auditor and the Conduct of an Audit in Accordance with
Cost Auditing Standards”. In this Standard, the standard portions have been set in bold italic
Part A: Cost Audit
type. This Standard should be read in the context of the background material, which has been
Chapter A1 [1]:
set in normal type.
INTRODUCTION Chapter A2 [2]:

This Standard on Auditing deals with the overall objectives of the independent cost auditor, the Cost Accounting Standards
nature and scope of a Cost audit the independent auditor’s overall responsibilities when
conducting an audit of cost statements in accordance with Cost Auditing Standards. It also Chapter A3 [3]:
explains the requirements establishing the general responsibilities of the independent auditor Cost Auditing Standards and Quality control
applicable in all audits, including the obligation to comply with the Cost Auditing Standards.
The independent Cost Auditor is referred to as “Cost auditor” hereafter. Chapter A4 [4]:
OBJECTIVES
Chapter A5 [5]:
The objective of this Standard is to lay down the overall objectives of the Cost Auditor and Reporting under Cost Audit
ensuring the Conduct of the Audit of Cost Statements in accordance with the Cost Auditing
Standards. Chapter A6 [6]:
The Cost auditor‘s overall objectives are:
▪ to obtain reasonable assurance about whether the cost statements as a whole are free from Part B: Management Audit
material misstatement, whether due to fraud or error, and to enable the auditor to express
an opinion whether the Cost Statements are prepared, in all material respects, in accordance Chapter B1 [7]:
with the applicable Cost reporting framework, Cost Accounting Standards(CAS) and Internal Control & Internal Audit
Generally Accepted Cost Accounting Principles (GACAP) as issued by the Institute, and
give a true and fair view of the Cost of a product, activity or service. In the case of a Cost Chapter B2 [8]:
Audit under the Companies Act and Rules prescribed thereunder, the objective is to express Operational Audit
an opinion on whether the Cost Statements subject to audit represent a true and fair view
of the cost of production, cost of sales and margin of products covered by the Cost Audit. Chapter B3 [9]:
▪ to report on the cost statements in the form required by law or by the Cost Auditing Management Audit in Different function
Standards in accordance with the auditor’s findings. Where reasonable assurance cannot be
obtained, the cost auditor should qualify the opinion and in extreme cases disclaim an Part C: Performance Analysis
opinion. The Cost Auditors objective may extend to making observations and suggestions [Chapter 10]
where required by applicable regulations.
SCOPE
The scope of this standard is to establish overall objectives of the cost auditor while conducting
an audit of cost statements, in accordance with the cost auditing standards. It also describes
65
management responsibility for the preparation and presentation of the Cost Statement, to
identify the Cost Reporting framework and to lay down Cost Accounting policies.
DEFINITIONS
The following terms are being used in this standard with the meaning specified.
of an entity whether profit oriented or not, irrespective of its size or legal form, when such Click to jump on:
• Audit Partner: Audit partner means the partner in the firm who is a member of the Institute Home
of Cost Accountants of India and is in full time practice and is responsible for the audit and
its performance, and for the report that is issued on behalf of the firm, and who, where Part A: Cost Audit
required, has the appropriate authority from a professional, legal or regulatory body.
• Audit Risk: Audit risk is the risk that the cost auditor expresses an inappropriate audit Chapter A1 [1]:
opinion on the cost statements that are materially misstated. Audit risk is a function of the Cost Audit Concept & Legal issues
Chapter A2 [2]:
(a) The risk of material misstatement has two components viz. Inherent Risk and Control
risk.
• Inherent risk: the susceptibility of an assertion about the measurement, assignment Chapter A3 [3]:
or disclosure of cost to a misstatement that could be material, either individually or Cost Auditing Standards and Quality control
controls. Chapter A4 [4]:
• Control risk: the risk that a misstatement that could occur in an assertion about the Legal Position of Cost Auditor
measurement, assignment or disclosure of cost and that could be material, either
individually or when aggregated with other misstatements, will not be prevented, Chapter A5 [5]:
or detected and corrected, on a timely basis by the entity’s internal, operational and Reporting under Cost Audit
management control.
(b) Detection risk: the risk that the procedures followed by the cost auditor to reduce audit Chapter A6 [6]:
risk to an acceptable low level will not detect a misstatement that exists and that could
be material, either individually or when aggregated with other misstatements.
• Audit Team: Audit team means all personnel performing an engagement, including any
experts contracted by the firm in connection with that engagement.
Chapter B1 [7]:
• Auditee: Auditee means a company or any other entity for which cost audit is being carried Internal Control & Internal Audit
out.
• Auditor: Auditor is used to refer to the person or persons conducting the audit, usually the Chapter B2 [8]:
audit partner or other members of the audit team, or, as applicable the firm. Auditor includes Operational Audit
Cost Auditor.
• Cost Audit: Cost audit is an independent examination of cost statements, cost records and Chapter B3 [9]:
other related information of an entity including a non-profit entity, when such an Management Audit in Different function
examination is conducted with a view to expressing an opinion thereon.
• Cost Auditor: “Cost Auditor” means an auditor appointed to conduct an audit of cost Part C: Performance Analysis
records and shall be a cost & management accountant within the meaning of The Cost and [Chapter 10]
Management Accountants Act 2018. “Cost & Management Accountant” is a cost
accountant as defined in clause (cha) of sub-section (1) of section 2 of The Cost and
Management Accountants Act, 2018 and who holds a valid certificate of practice under
subsection (2) of section 2 and who is deemed to be in practice under subsection (2) of
section 2 of that Act and includes a firm of cost & Management accountants.
66
• Firm: Firm means a sole practitioner, partnership including LLP (Limited Liability
Partnership) or any other entity of professional cost accountants as may be permitted by
law and constituted under The Cost and Works Accountants Act & Regulations.
• Management: The person(s) with executive responsibility for the conduct of the entity’s
operations. For some entities in some jurisdictions, management includes some or all of
those charged with governance.
• Misstatement: A difference between the amounts, classification, presentation or disclosure Click to jump on:
of a reported cost statement item and the amount, classification, presentation, or disclosure
that is required for the item to be in accordance with the applicable cost reporting Home
framework.
Part A: Cost Audit
Where the cost auditor expresses an opinion on whether the cost statements give a true and
fair view, misstatements also include those adjustments of amounts, classifications, Chapter A1 [1]:
presentation, or disclosures that, in the cost auditor’s judgment, are necessary for the cost Cost Audit Concept & Legal issues
statements to be presented fairly, in all material respects, or to give a true and fair view.
• Non-compliance: Acts of omission or commission by the entity, either intentional or Chapter A2 [2]:
unintentional, which are contrary to the prevailing laws or regulations governing Cost
Accounting, Cost Records and Cost Audit. Such acts include transactions entered into by,
Chapter A3 [3]:
or in the name of, the entity, or on its behalf, by those charged with governance,
management or employees. Non-compliance does not include personal misconduct
(unrelated to the business activities of the entity) by those charged with governance, Chapter A4 [4]:
management or employees of the entity. Legal Position of Cost Auditor
• Overall Audit Strategy: Overall Audit Strategy sets the scope, timing and direction of the
audit, and guides the development of the detailed audit plan. Chapter A5 [5]:
• Professional Judgment: The application of relevant training, knowledge and experience, Reporting under Cost Audit
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 Chapter A6 [6]:
appropriate in the circumstances of the audit engagement. Cost Audit in Information Technology (IT)
• Professional Skepticism: An attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatements due to error or fraud, and a critical Part B: Management Audit
assessment of audit evidence.
Chapter B1 [7]:
• Risk Assessment: The audit procedures performed to obtain an understanding of the entity
and its environment, including the entity’s internal control, to identify and assess the risks
of material misstatement, whether due to fraud or error, at the overall cost statement level Chapter B2 [8]:
and at the assertion level including items of cost, cost heads and disclosure thereof. Operational Audit
• Those charged with governance: The person(s) or organization(s) (e.g., a corporate
trustee) with responsibility for overseeing the strategic direction of the entity and Chapter B3 [9]:
obligations related to the accountability of the entity. This includes overseeing the financial Management Audit in Different function
reporting process. For some entities in some jurisdictions, those charged with governance
may include management personnel, for example, executive members of a governance Part C: Performance Analysis
board of a private or public sector entity, or an owner-manager. [Chapter 10]
REQUIREMENTS
1. The cost auditor shall comply with the relevant ethical requirements including those
pertaining to independence in respect of cost audit engagements. (refer 6.1)
2. While conducting an audit, the cost auditor shall comply with each of the Cost Auditing
Standards relevant to the audit. A Cost Auditing Standard is relevant to the audit when the
67
Cost Auditing Standard is in effect and the circumstances addressed by the Cost Auditing
Standard exist. (refer 6.2)
3. The cost auditor shall have an understanding of the entire text of the Cost Auditing
Standard, including its application and other explanatory material, to understand its
objectives and to apply its requirements properly.
4. The cost auditor shall not represent compliance with the cost auditing standards in the cost
auditor’s report unless the auditor has complied fully with all of the Cost Auditing Click to jump on:
Standards relevant to the audit.
5. In exceptional circumstances, the cost auditor may judge it necessary to depart from a Home
relevant requirement in a Cost Auditing Standard. In such circumstances, the auditor shall
perform alternative audit procedures to achieve the aim of that requirement. {Refer 6.2(c)} Part A: Cost Audit
6. The cost auditor shall plan and perform an audit with an attitude of professional skepticism
recognizing that circumstances may exist that cause the Cost Statements to be materially Chapter A1 [1]:
misstated. (refer 6.3). Cost Audit Concept & Legal issues
7. The auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an
acceptably low level and thereby enable the auditor to draw reasonable conclusions on Chapter A2 [2]:
which to base the auditor’s opinion. (refer 6.4) Cost Accounting Standards
8. The cost auditor shall exercise professional judgment in planning and performing the audit.
9. The cost auditor shall determine whether the Cost Reporting Framework followed by Chapter A3 [3]:
management in preparing cost statements is in line with the Companies Act and the Rules Cost Auditing Standards and Quality control
prescribed thereunder. (refer 6.5)
Chapter A4 [4]:
10. The cost auditor shall not be required to perform audit procedures regarding the entity’s
compliance with laws and regulations governing cost audit in the absence of identified or
suspected noncompliance. (refer 6.6) Chapter A5 [5]:
11. If an objective in a relevant Cost Auditing Standard cannot be achieved, the auditor shall Reporting under Cost Audit
evaluate whether this prevents the auditor from achieving the overall objectives of the
auditor and thereby requires the auditor, in accordance with the Cost Auditing Standards, Chapter A6 [6]:
to modify the auditor’s opinion. Cost Audit in Information Technology (IT)
APPLICATION GUIDANCE Part B: Management Audit
 Audit and Ethics Chapter B1 [7]:

The cost auditor should comply with relevant ethical requirements as per Code of Ethics issued
by the Institute of Cost Accountants of India. This code establishes fundamental principles of
Chapter B2 [8]:
professional ethics relevant to the auditor while conducting an audit and provides a conceptual
Operational Audit
framework for applying these principles. The fundamental principles with which the auditor is
required to comply are Independence, Integrity, Objectivity, Professional competence and due Chapter B3 [9]:
care, Confidentiality and Professional conduct. In case of an audit engagement, it is in the public Management Audit in Different function
interest that the auditor should be independent of the entity subject to the audit. The cost
auditor’s independence from the entity safeguards the cost auditor’s ability to form an opinion Part C: Performance Analysis
without being affected by influences that might compromise that opinion. Independence [Chapter 10]
enhances the auditor’s ability to act with integrity to be objective and to maintain an attitude of
professional skepticism. (Refer 5.1)
For Example: The provision of services for maintenance of cost records, design and
implementation of Cost Systems and internal audit are considered to erode the independence.
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Conduct of audit (Refer 5.2)

(a) The Cost Auditing Standards provide the standards for the cost auditor’s work in fulfilling
the overall objectives of the cost auditor. The Cost Auditing Standards deal with general
responsibilities of the cost auditor, as well as cost auditor’s further considerations relevant
to the application of those responsibilities to specific topics.
(b) In performing an audit, the cost auditor may be required to comply with legal or regulatory
requirements in addition to Cost Auditing Standards. In such cases in addition to complying Click to jump on:
with each of the Cost Auditing Standard relevant to the cost audit, it may be necessary for
the cost auditor to perform additional audit procedures in order to comply with the Home
legislative and regulatory requirements. The Cost Auditing Standards do not override law
or regulations that govern audit process. The form of the cost auditor’s opinion will depend Part A: Cost Audit
upon the applicable cost reporting framework and any applicable laws or regulations such
as Companies Act and Rules prescribed thereunder. Chapter A1 [1]:
(c) The need for the auditor to depart from a relevant requirement is expected to arise only Cost Audit Concept & Legal issues
where the requirement is for a specific procedure to be performed and, in the specific
circumstances of the audit, that procedure would be ineffective in achieving the aim of the Chapter A2 [2]:
requirement. (Refer 5.5). Cost Accounting Standards
Chapter A3 [3]:
 Professional skepticism Cost Auditing Standards and Quality control
An attitude of professional skepticism means the cost auditor makes a critical assessment, with
a questioning mind, of the validity of audit evidence obtained and be alert to audit evidence that Chapter A4 [4]:
contradicts or brings into question the reliability of documents and responses to inquiries and Legal Position of Cost Auditor
other information obtained from management and those charged with governance. An attitude
of professional skepticism is necessary throughout the cost audit process for the auditor to Chapter A5 [5]:
reduce the risk of overlooking unusual circumstances, of over generalizing when drawing Reporting under Cost Audit
conclusions from cost audit observations, and of using faulty assumptions in determining the
nature, timing and extent of the cost audit procedures and evaluating the results thereof. When Chapter A6 [6]:
making inquiries and performing other cost audit procedures, the cost auditor should not be Cost Audit in Information Technology (IT)
satisfied with less-than-persuasive audit evidence based on a belief that management and those
charged with governance are honest and have integrity. Accordingly, representations from Part B: Management Audit
management are not a substitute for obtaining sufficient appropriate audit evidence to be able
to draw reasonable conclusions on which to base the cost auditor’s opinion. (Refer 5.6). Chapter B1 [7]:
(a) A cost auditor conducting an audit in accordance with Cost Auditing Standards obtains
Chapter B2 [8]:
reasonable assurance that the Cost Statements taken as a whole are free from material
Operational Audit
misstatement, whether due to fraud or error. Reasonable assurance is a concept relating to
the accumulation of the audit evidence necessary for the auditor to conclude that there are Chapter B3 [9]:
no material misstatements in the Cost Statements taken as a whole. Reasonable assurance Management Audit in Different function
relates to the whole audit process. A cost auditor cannot obtain absolute assurance because
there are inherent limitations in an audit that affect the cost auditor’s ability to detect Part C: Performance Analysis
material misstatements. These limitations result from factors such as the following: [Chapter 10]
(i) The use of sample testing.
(ii) The inherent limitations of internal control (for example, the possibility of
management override or collusion).
(iii) The fact that most audit evidence is persuasive rather than conclusive. Also, the work
undertaken by the cost auditor to form an audit opinion is permeated by judgment, in
particular regarding:
69
• The gathering of audit evidence, for example, in deciding the nature, timing and
extent of audit procedures; and
• The drawing of conclusions based on the audit evidence gathered, for example,
assessing the reasonableness of the estimates made by management in preparing
the Cost Statements.
(b) Further, other limitations may affect the persuasiveness of audit evidence available to draw
conclusions on particular assertions. (For example, transactions between related parties). In Click to jump on:
these cases, certain Cost Auditing Standard identify specified audit procedures which will,
because of the nature of the particular assertions, provide sufficient appropriate audit Home
evidence in the absence of:
(i) Unusual circumstances which increase the risk of material misstatement beyond that Part A: Cost Audit
which would ordinarily be expected; or
(ii) Any indication that a material misstatement has occurred. Chapter A1 [1]:
Accordingly, because of the factors described above, an audit is not a guarantee that the Cost
Statements are free from material misstatement, because absolute assurance is not attainable. Chapter A2 [2]:
Further, an audit opinion does not assure the future viability of the entity nor the efficiency or Cost Accounting Standards
effectiveness with which management has conducted the affairs of the entity.
Chapter A3 [3]:
 Audit Risk and Materiality
Entities pursue strategies to achieve their objectives and depending on the nature of their Chapter A4 [4]:
operations and industry, the regulatory environment in which they operate, and their size and Legal Position of Cost Auditor
complexity, they face a variety of business risks. Management is responsible for identifying
such risks and responding to them. However, not all risks relate to the preparation of the Cost Chapter A5 [5]:
Statements. The auditor is ultimately concerned only with risks that may affect the cost Reporting under Cost Audit
statements. (Refer 5.7)
(a) The cost auditor obtains and evaluates audit evidence to obtain reasonable assurance about Chapter A6 [6]:
whether the Cost Statements give a true and fair view or in accordance with the applicable Cost Audit in Information Technology (IT)
cost reporting framework. The concept of reasonable assurance acknowledges that there is
a risk the audit opinion is inappropriate. The risk that the cost auditor expresses an Part B: Management Audit
inappropriate audit opinion when the Cost Statements are materially misstated is known as
“audit risk”. The cost auditor reduces audit risk by designing and performing audit Chapter B1 [7]:
procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable Internal Control & Internal Audit
conclusions on which to base an audit opinion. Reasonable assurance is obtained when the
Chapter B2 [8]:
auditor has reduced audit risk to an acceptably low level.
Operational Audit
(b) Audit risk is a function of the risk of material misstatement in the cost statements (or
simply, the “risk of material misstatement”) (i.e., the risk that the Cost Statements are Chapter B3 [9]:
materially misstated prior to audit) and the risk that the auditor will not detect such Management Audit in Different function
misstatement (“detection risk”). The cost auditor performs audit procedures to assess the
risk of material misstatement and seeks to limit detection risk by performing further audit Part C: Performance Analysis
procedures based on that assessment. The audit process involves the exercise of [Chapter 10]
professional judgment in designing the audit approach, through focusing on what can go
wrong (i.e., what are the potential misstatements that may arise) at the assertion level and
performing audit procedures in response to the assessed risks in order to obtain sufficient
appropriate audit evidence.
(c) The cost auditor is concerned with material misstatements and is not responsible for the
detection of misstatements that are not material to the Cost Statements taken as a whole.
70
The cost auditor considers whether the effect of identified uncorrected misstatements, both
individually and in the aggregate, is material to the Cost Statements taken as a whole.
Materiality and audit risk are related. In order to design audit procedures to determine
whether there are misstatements that are material to the cost statements taken as a whole,
the cost auditor considers the risk of material misstatement at two levels: (1) the overall
cost statement level and (2) In relation to cost heads, items of cost and disclosures and the
related assertions. Click to jump on:
(d) The cost auditor considers the risk of material misstatement at the overall cost statement
level, which refers to risks of material misstatement that relate pervasively to the Cost Home
Statements as a whole and potentially affect many assertions. Risks of this nature often
relate to the entity’s control environment (although these risks may also relate to other Part A: Cost Audit
factors, such as declining economic conditions), and are not necessarily risks identifiable
with specific assertions at the cost heads, items of cost or disclosure level. Rather, this Chapter A1 [1]:
overall risk represents circumstances that increase the risk that there could be material Cost Audit Concept & Legal issues
misstatements in any number of different assertions, for example, through management
override of internal control. Such risks may be especially relevant to the cost auditor’s Chapter A2 [2]:
consideration of the risk of material misstatement arising from fraud. The auditor’s Cost Accounting Standards
response to the assessed risk of material misstatement at the overall cost statement level
includes consideration of the knowledge, skill, and ability of personnel assigned significant Chapter A3 [3]:
engagement responsibilities, including whether to involve experts; the appropriate levels of Cost Auditing Standards and Quality control
supervision;
Chapter A4 [4]:
(e) The cost auditor also considers the risk of material misstatement at the cost heads, items of
cost and disclosure level because such consideration directly assists in determining the
nature, timing, and extent of further audit procedures at the assertion level. The cost auditor Chapter A5 [5]:
seeks to obtain sufficient appropriate audit evidence at the cost heads, items of cost, and Reporting under Cost Audit
disclosure level in such a way that enables the auditor, at the completion of the audit, to
express opinion on the Cost Statements taken as a whole at an acceptably low level of cost Chapter A6 [6]:
audit risk. Auditors use various approaches to accomplish that objective. The discussion in Cost Audit in Information Technology (IT)
the following paragraphs provides an explanation of the components of audit risk.
(f) The risk of material misstatement at the assertion level consists of two components as Part B: Management Audit
follows:
• “Inherent risk” is the susceptibility of an assertion to a misstatement that could be Chapter B1 [7]:
material, either individually or when aggregated with other misstatements, assuming Internal Control & Internal Audit
that there are no related controls. The risk of such misstatement is greater for some
assertions and related cost heads, items of cost and disclosures than for others. For Chapter B2 [8]:
example, complex calculations are more likely to be misstated than simple calculations. Operational Audit
Cost heads consisting of amounts derived from cost estimates that are subject to
Chapter B3 [9]:
significant measurement uncertainty pose greater risks than do cost heads consisting of
relatively routine, factual data. External circumstances giving rise to business risks may
also influence inherent risk. For example, technological developments might make a
cause changes to a manufacturing process rendering the existing classification of
[Chapter 10]
variable and fixed costs inappropriate and cause product contribution to be misstated.
In addition to those circumstances that are peculiar to a specific assertion, factors in the
entity and its environment that relate to several or all of the classes of cost heads, items
of cost, or disclosures may influence the inherent risk related to a specific assertion.
These latter factors include, for example, external market constraints may cause normal
capacity as an unreliable basis for determining unit costs.
71
• “Control risk” is the risk that a misstatement that could occur in an assertion and that
could be material, either individually or when aggregated with other misstatements,
will not be prevented, or detected and corrected, on a timely basis by the entity’s
internal control. That risk is a function of the effectiveness of the design and operation
of internal control in achieving the entity’s objectives relevant to preparation of the
entity’s Cost Statements. Some control risk will always exist because of the inherent
limitations of internal control. Inherent risk and control risk are the entity’s risks; they Click to jump on:
exist independently of the audit of the Cost Statements. The auditor is required to assess
the risk of material misstatement at the assertion level as a basis for further audit Home
procedures, though that assessment is a judgment, rather than a precise measurement
of risk. When the auditor’s assessment of the risk of material misstatement includes an Part A: Cost Audit
expectation of the operating effectiveness of controls, the auditor performs tests of
controls to support the risk assessment. The Cost Auditing Standard do not ordinarily Chapter A1 [1]:
refer to inherent risk and control risk separately, but rather to a combined assessment Cost Audit Concept & Legal issues
of the “risk of material misstatement.” Although the Cost Auditing Standard ordinarily
describe a combined assessment of the risk of material misstatement, the auditor may Chapter A2 [2]:
make separate or combined assessments of inherent and control risk depending on Cost Accounting Standards
preferred audit techniques or methodologies and practical considerations. The
assessment of the risk of material misstatement may be expressed in quantitative terms, Chapter A3 [3]:
such as in percentages, or in non-quantitative terms. In any case, the need for the auditor
to make appropriate risk assessments is more important than the different approaches
Chapter A4 [4]:
by which they may be made. Legal Position of Cost Auditor
(g) “Detection risk” is the risk that the cost auditor will not detect a misstatement that exists
in an assertion that could be material, either individually or when aggregated with other Chapter A5 [5]:
misstatements. Detection risk is a function of the effectiveness of an audit procedure and Reporting under Cost Audit
of its application by the auditor. Detection risk cannot be reduced to zero because the
auditor usually does not examine all of cost heads, items of cost, or disclosure and because Chapter A6 [6]:
of other factors. Such other factors include the possibility that a cost auditor might select Cost Audit in Information Technology (IT)
an inappropriate audit procedure, misapply an appropriate audit procedure, or misinterpret
the audit results. These other factors ordinarily can be addressed through adequate planning, Part B: Management Audit
proper assignment of personnel to the audit team, the application of professional
skepticism, and supervision and review of the audit work performed. Detection risk relates Chapter B1 [7]:
to the nature, timing, and extent of the auditor’s procedures that are determined by the Internal Control & Internal Audit
auditor to reduce audit risk to an acceptably low level. For a given level of audit risk, the
acceptable level of detection risk bears an inverse relationship to the assessment of the risk Chapter B2 [8]:
of material misstatement at the assertion level. The greater the risk of material misstatement Operational Audit
the auditor believes exists, the less the detection risk that can be accepted. Conversely, the
Chapter B3 [9]:
less risk of material misstatement the auditor believes exist, the greater the detection risk
that can be accepted.
 Responsibility for the Cost Statements [Chapter 10]
The cost auditor is responsible for forming and expressing an opinion on the Cost Statements.
(Refer 5.9)
The term “Cost Statements” refers to a structured representation of the cost information, which
ordinarily includes accompanying notes, derived from cost accounting records and intended to
communicate an entity’s use of economic resources and the output obtained in accordance with
72
a Cost reporting framework. The term can refer to for example, a cost statement, reconciliation
with financial accounts and related explanatory notes.
(a) The requirements of the Cost reporting framework determine the form and content of the
Cost Statements and what constitutes a complete set of Cost Statements. For certain Cost
reporting frameworks, a single cost statement as such and the related explanatory notes
constitute a complete set of Cost Statements. For example: a Cost Statement under Cost
Accounting Standard 4. Click to jump on:
(b) The Cost auditor is not responsible for preparing and presenting the cost statements in
accordance with the applicable Cost reporting framework including inter-alia: Home
(1) Designing, implementing and maintaining internal control relevant to the preparation and
presentation of Cost Statements that are free from material misstatement, whether due to fraud Part A: Cost Audit
or error; (2) Selecting and applying appropriate Cost accounting policies; and
(3) Making cost estimates that are reasonable in the circumstances. Chapter A1 [1]:
 Non-compliance
The cost auditor shall request management to provide written representation that all known Chapter A2 [2]:
instances of non-compliance or suspected non - compliance with laws and regulations Cost Accounting Standards
governing Cost Accounting, Cost Records and Cost Audit have been disclosed to the cost
auditor. The representations provide necessary audit evidence about management knowledge
Chapter A3 [3]:
of identified or suspected non-compliance with laws and regulations whose effects may have a
material effect on the cost statement however, written representation does not provide sufficient
Chapter A4 [4]:
audit evidence on their own, and accordingly do not affect the nature and extent of other audit Legal Position of Cost Auditor
evidence that is to be obtained by the cost auditor. (Refer 5.10)
Chapter A5 [5]:
EFFECTIVE DATE Reporting under Cost Audit
Chapter A6 [6]:
Interactive Question 3.3: Cost Audit Documentation Cost Audit in Information Technology (IT)
During conducting Cost Audit, you find out some misstatement and non-compliance issues in
Chapter B1 [7]:
company’s cost accounting system and records. What you do in this point?
Ans: As a Cost Auditor, I shall request management to provide written representation that all known Chapter B2 [8]:
instances of non-compliance or suspected non-compliance with laws and regulations governing Cost Operational Audit
Accounting, Cost Records and Cost Audit have been disclosed to me. The representations provide
necessary audit evidence about management knowledge of identified or suspected non-compliance with Chapter B3 [9]:
laws and regulations whose effects may have a material effect on the cost statement however, written Management Audit in Different function
representation does not provide sufficient audit evidence on their own, and accordingly do not affect
the nature and extent of other audit evidence that is to be obtained by me. Part C: Performance Analysis
[Chapter 10]
And also, I express an opinion on whether the cost statements give a true and fair view, misstatements
also include those adjustments of amounts, classifications, presentation, or disclosures that, in my
judgment, are necessary for the cost statements to be presented fairly, in all material respects, or to give
a true and fair view.
73
3.4 Knowledge of Business, Its Processes and The Business

Environment
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 Click to jump on:
Business, its Processes and the Business Environment”. In this Standard, the standard portions
have been set in bold italic type. This standard should be read in the context of the background Home
material, which has been set in normal type.
Part A: Cost Audit
INTRODUCTION
In performing an audit of cost statement, records and other related documents, the cost auditor Chapter A1 [1]:
should have the knowledge of the client’s business to enable him to understand the processes Cost Audit Concept & Legal issues
and express his opinion on the cost statements. The cost auditor’s level of knowledge for a cost
audit engagement should include a general knowledge of the economy and the industry within Chapter A2 [2]:
which the entity operates, and a more particular knowledge of how the entity operates. Cost Accounting Standards
Chapter A3 [3]:
OBJECTIVE Cost Auditing Standards and Quality control
The objective of this standard is to enable the cost auditor to have knowledge of the client’s
business which is sufficient to identify and understand the events, transactions and practices Chapter A4 [4]:
that, in the cost auditor’s judgment may have a significant effect on the examination of cost Legal Position of Cost Auditor
statements or on the preparation of the cost audit report.
Chapter A5 [5]:
SCOPE Reporting under Cost Audit
This standard deals with obtaining the knowledge of the client’s business, its processes and
business environment as it is important for the cost auditor and members of the audit team Chapter A6 [6]:
working on an audit engagement.

DEFINITIONS
The following terms are being used in this standard with the meaning specified. Chapter B1 [7]:
• Audit: Audit is an independent examination of financial, cost and other related information Internal Control & Internal Audit
an examination is conducted with a view to expressing an opinion thereon. Chapter B2 [8]:
• Audit Plan: A record of the planned nature, timing and extent of risk assessment procedures Operational Audit
and further audit procedures at the assertion level in response to the assessed risk.
• Audit Risk: Audit risk is the risk that the cost auditor expresses an inappropriate audit Chapter B3 [9]:
opinion on the cost statements that are materially misstated. Audit risk is a function of the Management Audit in Different function
− The risk of material misstatement has two components viz. Inherent Risk and Control Part C: Performance Analysis
risk. [Chapter 10]
 Inherent risk: the susceptibility of an assertion about the measurement, assignment
or disclosure of cost to a misstatement that could be material, either individually or
controls.
 Control risk: the risk that a misstatement that could occur in an assertion about the
measurement, assignment or disclosure of cost and that could be material, either
74
individually or when aggregated with other misstatements, will not be prevented,

or detected and corrected, on a timely basis by the entity’s internal, operational and
management control.
− Detection risk: the risk that the procedures followed by the cost auditor to reduce audit
risk to an acceptable low level will not detect a misstatement that exists and that could
be material, either individually or when aggregated with other misstatements.
• Auditee: Auditee means a company or any other entity for which cost audit is being Click to jump on:
carried out.
• Cost Auditor: “Cost Auditor” means an auditor appointed to conduct an audit of cost Home
records and shall be a cost accountant within the meaning of The Cost and Works
Accountants Act 1959. “Cost Accountant” is a cost accountant as defined in clause (b) Part A: Cost Audit
of sub-section (1) of section 2 of The Cost and Works Accountants Act, 1959 (23 of
1959) and who holds a valid certificate of practice under subsection (1) of section 6 Chapter A1 [1]:
and who is deemed to be in practice under subsection (2) of section 2 of that Act and Cost Audit Concept & Legal issues
includes a firm of cost accountants.
• Overall Audit Strategy: Overall Audit Strategy sets the scope, timing and direction of the Chapter A2 [2]:
audit, and guides the development of the detailed audit plan.
• Risk Assessment: The audit procedures performed to obtain an understanding of the entity
Chapter A3 [3]:
and its environment, including the entity’s internal control, to identify and assess the risks Cost Auditing Standards and Quality control
of material misstatement, whether due to fraud or error, at the overall cost statement level
and at the assertion level including items of cost, cost heads and disclosure thereof. Chapter A4 [4]:
REQUIREMENTS
1. The Cost Auditor shall have adequate level of understanding of the knowledge of Business, Chapter A5 [5]:
its Processes and the Business Environment to develop a reasonable assurance in order to Reporting under Cost Audit
express an opinion on the cost statements on which he is expressing an opinion (refer 6.1).
2. 5.2 The Entity and Its Environment: The cost auditor should obtain an understanding of the Chapter A6 [6]:
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.
Chapter B1 [7]:
(b) Relevant industry, regulatory, and other external factors including the applicable cost
and financial reporting framework. (refer 6.2)
(c) The entity’s selection and application of cost accounting policies. (refer 6.3) Chapter B2 [8]:
(d) The measurement and review of the entity’s performance. (refer 6.4) Operational Audit
3. The Entity’s Internal Control: The cost auditor shall obtain an understanding of internal
controls relevant to the audit. (refer 6.5) Chapter B3 [9]:
• Control Environment: The cost auditor shall evaluate whether management has Management Audit in Different function
created and maintained a culture of honesty and ethical behaviour.
• The entity’s risk assessment process: The cost auditor shall obtain an understanding Part C: Performance Analysis
of whether the entity has a process for: (refer 6.6, 6.7, 6.8) [Chapter 10]
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
75
• Cost Information System/ Management Information System: The cost auditor shall
obtain an understanding of the Information System including Management Information
System, relevant to cost reporting, including the following areas: (refer 6.9)
(a) The classes of transactions and their analysis, that are significant to the cost
statements;
(b) The procedures, by which those transactions and their analysis are initiated,
recorded, processed, and reported in the management information systems and cost Click to jump on:
statements;
(c) The related cost accounting records, supporting information that are used to Home
initiate, record, process and report transactions; and
(d) The reporting process used to prepare the entity’s cost statements, including Part A: Cost Audit
significant estimates and disclosures.
• Control Activities: The auditor shall obtain an understanding of the control activities, Chapter A1 [1]:
relevant to the audit (refer 6.10). Cost Audit Concept & Legal issues
• Monitoring of controls:
(a) The auditor shall obtain an understanding of the major activities, that the entity Chapter A2 [2]:
uses to monitor internal control over reporting. (refer 6.11) Cost Accounting Standards
(b) The cost auditor shall evaluate the adequacy of the internal audit function in
Chapter A3 [3]:
relation to cost records. (refer 6.12).
4. IT (Information Technology) Environment and Control: The cost auditor shall evaluate and
assess: (refer 6.13) Chapter A4 [4]:
(a) IT Architecture, Systems and programs in use in the entity; Legal Position of Cost Auditor
(b) Controls on access to data;
(c) Controls on changes to data in master files, systems or programs; an Chapter A5 [5]:
(d) Integrity of information and security of the data. Reporting under Cost Audit
5. Identifying and Assessing the Risks of Material Misstatement: The cost auditor shall
identify and assess the risks of material misstatement at the cost statement level; and at the Chapter A6 [6]:
assertion level including items of cost, cost heads and disclosures thereof. Cost Audit in Information Technology (IT)
For this purpose, the cost auditor shall: (refer 6.14, 6.15, 6.16) Part B: Management Audit
(a) Identify risks including relevant controls that relate to the risk of material
misstatements or a risk of fraud; Chapter B1 [7]:
(b) Assess whether the risk is related to recent significant economic, accounting or other Internal Control & Internal Audit
developments and, therefore, requires specific attention;
(c) Assess whether the risk involves significant transactions with related parties;
Chapter B2 [8]:
Operational Audit
(d) Assess the degree of subjectivity in the measurement of information related to the risk.
(e) Assess whether there arises a need for revising the assessment of risk based on
Chapter B3 [9]:
additional audit evidence obtained. Management Audit in Different function
6. Documentation: The auditor shall document:
(a) Key elements of the understanding obtained regarding each of the aspects of the entity Part C: Performance Analysis
and its environment specified in paragraph 5.1 & 5.2 above and of each of the internal [Chapter 10]
control components specified in paragraphs 5.3 above; the sources of information from
which the understanding was obtained; and the risk assessment procedures performed;
(b) The identified and assessed risks of material misstatement at the cost statement level
and at the assertion level including items of cost, cost heads and disclosure thereof as
required by paragraph 5.5 above; and
(c) The risks identified, and related controls about which the auditor has obtained an
76
understanding, as a result of the requirements in paragraphs 5.5 above.
APPLICATION GUIDANCE
1. Obtaining an understanding of the entity and its environment, including the entity’s internal
control, is a continuous and dynamic process of gathering, updating and analysing
information throughout the audit. The understanding establishes a frame of reference within
which the cost auditor plans the audit and exercises professional judgment throughout the Click to jump on:
audit, for example, when: (Refer 5.2)
(a) Assessing risks of material misstatement of the cost statements; Home
(b) Considering the appropriateness of the selection and application of cost accounting
policies, and the adequacy of cost statement disclosures; Part A: Cost Audit
(c) Identifying areas where special audit consideration may be necessary, for example,
abnormal losses, lower yields, higher wastages, higher utilities consumption, related Chapter A1 [1]:
party transactions etc. Cost Audit Concept & Legal issues
(d) Developing Models for use in performing analytical procedures;
(e) Responding to the assessed risks of material misstatement, including designing and Chapter A2 [2]:
performing further audit procedures to obtain sufficient appropriate audit evidence; and Cost Accounting Standards
(f) Evaluating the sufficiency and appropriateness of audit evidence obtained, such as the
Chapter A3 [3]:
appropriateness of assumptions and of management’s oral and written representations.
2. Relevant industry factors include industry conditions such as the competitive environment, Chapter A4 [4]:
supplier and customer relationships, and technological developments etc. Examples of Legal Position of Cost Auditor
matters the cost auditor may consider include: {Refer 5.2(b)}
(a) The market and competition Chapter A5 [5]:
(b) Cyclical or seasonal activity Reporting under Cost Audit
(c) Changes in product technology
(d) Business risk (for example, high technology, high fashion, ease of entry for Chapter A6 [6]:
competition) Cost Audit in Information Technology (IT)
(e) Declining or expanding operations
(f) Adverse conditions (for example, declining demand, excess capacity, serious price Part B: Management Audit
competition)
(g) Key ratios and operating statistics Chapter B1 [7]:
(h) Specific cost accounting practices and problems Internal Control & Internal Audit
(i) Specific or unique practices (for example, relating to labour contracts, financing
Chapter B2 [8]:
methods, accounting methods).
Operational Audit
(j) Energy supply sources and cost
(k) Environmental requirements and problems Chapter B3 [9]:
3. An understanding of the entity’s selection and application of cost accounting policies may
encompass matters such as: {Refer 5.2(c)} Part C: Performance Analysis
(a) The methods the entity uses to account for significant and unusual transactions [Chapter 10]
(abnormal events).
(b) The effect of significant cost accounting policies in controversial or emerging areas for
which there is a lack of authoritative guidance or consensus.
(c) Changes in the entity’s cost accounting policies.
(d) Cost reporting framework, and laws and regulations that are new to the entity and when
and how the entity will adopt such requirements.
77
4. Management will measure and review those things they regard as important. Performance
measures, whether external or internal, create pressures on the entity. These pressures, in
turn, may motivate management to take action to improve the business performance or to
misstate the cost or financial statements. Accordingly, an understanding of the entity’s
performance measures assists the cost auditor in considering whether pressures to achieve
performance targets may result in management actions that increase the risks of material Click to jump on:
misstatement, including those due to fraud. Examples of internally-generated information
used by management for measuring and reviewing financial performance, and which the Home
cost auditor may consider, include: {Refer 5.2(d)}
(a) Key performance indicators and key ratios (financial and non-financial). Part A: Cost Audit
(b) Key trends and operating statistics.
(c) Period-on-period financial performance analyses. Chapter A1 [1]:
(d) Budgets, forecasts, variance analyses, segment information and divisional, Cost Audit Concept & Legal issues
departmental or other unit level performance reports.
(e) Employee performance measures and incentive compensation policies. Chapter A2 [2]:
(f) Comparisons of an entity’s performance with that of competitors. Cost Accounting Standards
5. While understanding controls that are relevant to the audit, cost auditor should evaluate the Chapter A3 [3]:
design of those controls and determine whether they have been implemented properly, by Cost Auditing Standards and Quality control
performing procedures in addition to discussions with the entity’s personnel. (Refer 5.3)
Chapter A4 [4]:
6. If the entity has established risk assessment process, the cost auditor should obtain an
understanding of it, and the results thereof. If the cost auditor identifies risks of material
misstatement that management failed to identify, the cost auditor should evaluate whether Chapter A5 [5]:
there was an underlying risk of a kind that the cost auditor expects would have been Reporting under Cost Audit
identified by the entity’s risk assessment process. If there is such a risk, the cost auditor
should obtain an understanding of why that process failed to identify it, and evaluate Chapter A6 [6]:
whether the process is appropriate to its circumstances or determine if there is a significant Cost Audit in Information Technology (IT)
deficiency in internal control with regard to the entity’s risk assessment process. {Refer
5.3(b)} Part B: Management Audit
7. As part of the risk assessment, the cost auditor should determine whether any of the risks
identified are, in the cost auditor’s judgment, a significant risk. In exercising this judgment, Chapter B1 [7]:
the cost auditor should exclude the effects of identified controls related to the risk. {Refer Internal Control & Internal Audit
5.3(b)}
8. An understanding of the business risks facing the entity increases the likelihood of Chapter B2 [8]:
identifying risks of material misstatement, since most business risks will eventually have Operational Audit
financial consequences and, therefore, an effect on the cost statements. However, the cost
Chapter B3 [9]:
auditor does not have a responsibility to identify or assess all business risks because not all
business risks give rise to risks of material misstatement. {Refer 5.3(b)}
9. The cost auditor should understand the related cost accounting records, supporting
information and specific accounts in the financial statements that are used to initiate, record,
[Chapter 10]
process and report transactions; this includes the correction of incorrect information and
how information is transferred primarily to the accounting system and subsequently to cost
accounting statement. {Refer 5.3(c)}
10. The cost auditor should obtain an understanding of control activities relevant to cost/
management information system in order to assess the risks of material misstatement at the
assertion level and design further audit procedures responsive to assessed risks. An audit
does not require an understanding of all the control activities related to each significant
78
class of transactions and disclosure in the cost statements or to every assertion relevant to
them. {Refer 5.3(d)}
11. The cost auditor should obtain an understanding of the major activities that the entity uses
to monitor internal control relevant to cost reporting, including those related to those control
activities relevant to the audit, and how the entity initiates remedial actions to deficiencies
in its controls. {Refer 5.3(e)(1)}
12. If an entity has an internal audit function, inquiries of the appropriate individuals within the Click to jump on:
function may provide information that is useful to the cost auditor in obtaining an
understanding of the entity and its environment, and in identifying and assessing risks of Home
material misstatement at the cost statement and assertion levels. If based on responses to
the cost auditor’s inquiries, it appears that there are findings that may be relevant to the Part A: Cost Audit
entity’s audit; the cost auditor may consider it appropriate to read related reports of the
internal audit function. {Refer 5.3(e)(2)} Chapter A1 [1]:
13. The cost auditor should assess the following with regard to IT environment and controls. Cost Audit Concept & Legal issues
(Refer 5.4)
(a) Reliance on systems or programs that are inaccurately processing data, processing Chapter A2 [2]:
inaccurate data, or both. Cost Accounting Standards
(b) Unauthorized access to data that may result in destruction of data or improper changes
to data, including the recording of unauthorized or non-existent transactions, or Chapter A3 [3]:
inaccurate recording of transactions. Particular risks may arise where multiple users Cost Auditing Standards and Quality control
access a common database.
Chapter A4 [4]:
(c) The possibility of IT personnel gaining access to privileges beyond those necessary to
perform their assigned duties thereby breaking down segregation of duties.
(d) Unauthorized changes to data in master files. Chapter A5 [5]:
(e) Unauthorized changes to systems or programs. Reporting under Cost Audit
(f) Failure to make necessary changes to systems or programs.
(g) Inappropriate manual interventions. Chapter A6 [6]:
(h) Potential loss of data or inability to access data as required. Cost Audit in Information Technology (IT)
14. Risks at the cost statement level may derive in particular from a deficient control Part B: Management Audit
environment (although these risks may also relate to other factors, such as declining
economic conditions). For example, deficiencies such as management’s lack of competence Chapter B1 [7]:
may have a more pervasive effect on the cost statements and may require an overall Internal Control & Internal Audit
response by the auditor. (Refer 5.5)
15. Risks of material misstatement at the cost statement level refer to risks that relate Chapter B2 [8]:
pervasively to the cost statements as a whole and potentially affect many assertions. Risks Operational Audit
of this nature are not necessarily risks identifiable with specific assertions at the class of
Chapter B3 [9]:
transactions, or disclosure level. Rather, they represent circumstances that may increase the
risks of material misstatement at the assertion level, for example, through management
override of internal control. Cost statement level risks may be especially relevant to the
auditor’s consideration of the risks of material misstatement arising from fraud. (Refer 5.5)
[Chapter 10]
6.16 The auditor’s assessment of the identified risks at the assertion level provides a basis
for considering the appropriate audit approach for designing and performing further audit
procedures. For example, the auditor may determine that only by performing tests of
controls may the auditor achieve an effective response to the assessed risk of material
misstatement for a particular assertion. (Refer 5.5)
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EFFECTIVE DATE
Interactive Question 3.4: Cost Audit Documentation

During conducting Cost Audit, you find out some misstatement and non-compliance issues in Click to jump on:
company’s cost accounting system and records. What you do in this point?
Home
Ans: As a Cost Auditor, I shall request management to provide written representation that all known
instances of non-compliance or suspected non-compliance with laws and regulations governing Cost Part A: Cost Audit
Accounting, Cost Records and Cost Audit have been disclosed to me. The representations provide
necessary audit evidence about management knowledge of identified or suspected non-compliance with Chapter A1 [1]:
laws and regulations whose effects may have a material effect on the cost statement however, written Cost Audit Concept & Legal issues
representation does not provide sufficient audit evidence on their own, and accordingly do not affect
the nature and extent of other audit evidence that is to be obtained by me. Chapter A2 [2]:
And also, I express an opinion on whether the cost statements give a true and fair view, misstatements
also include those adjustments of amounts, classifications, presentation, or disclosures that, in my Chapter A3 [3]:
judgment, are necessary for the cost statements to be presented fairly, in all material respects, or to give Cost Auditing Standards and Quality control
a true and fair view.
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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3.5 Commencement of Cost Audit and Audit Procedures

What is the Commencement of Cost Audit?
Cost Audit is the verification of accounts and cost records and a careful compliance accounting
process. It is performed by an independent, professionally qualified Cost and Management
Accountant. The cost auditor should inquire whether there is a good and efficient system of
internal check especially as records the receipt and issue of raw materials and stores to different
Click to jump on:
department units or jobs. It is performed by an independent, professionally qualified Cost and
Management Accountant. By the term cost audit is meant the detailed checking of the costing
Home
system technique and accounts to verify their correctness and to ensure adherence to the
objective of cost accountancy. Part A: Cost Audit
Chapter A1 [1]:
He should make the following inquiries:
(a) Whether goods received notes for all material applied by the appliers to the company are
received and record. Chapter A2 [2]:
(b) Whether package containing goods when received are opened in the presence of a Cost Accounting Standards
responsible official of the company.
(c) Whether the stores requisitions from different departments and sections are ermined by the Chapter A3 [3]:
storekeeper as regards the competency of the requisition. Cost Auditing Standards and Quality control
(d) Whether weighing machines in the stores department arc regularly checked and properly
maintained. Chapter A4 [4]:
(e) Whether such losses are assessed by the inspector whether the loss or the damage is Legal Position of Cost Auditor
reported.
(f) Whether known losses or shortages tram whether cast is reported at once to the authorities Chapter A5 [5]:
concerned. Reporting under Cost Audit
Chapter A6 [6]:
Cost audit procedures Cost Audit in Information Technology (IT)
Cost auditors need to pay close attention to the objectives of an organization’s cost audit,
ensuring that the cost audit plan is executed efficiently and cost-effectively. To manage the Part B: Management Audit
procedure for a cost audit, the cost auditor should distribute any excess work to their
subordinates. Also, to complete the audit properly, the cost auditor must possess detailed Chapter B1 [7]:
knowledge of the organization. Internal Control & Internal Audit
The cost audit program should be designed in such a way that the work can be finished within Chapter B2 [8]:
the minimum period and at the minimum cost. Cost audit comprises the following three steps: Operational Audit
1) Review
2) Verification Chapter B3 [9]:
3) Reporting Management Audit in Different function
Review Part C: Performance Analysis

• The cost auditor should familiarize himself with the memorandum and articles of [Chapter 10]
association, past audit reports on the financial accounts, annual reports issued by the board,
the chairman’s speech, etc.
• Review the costing system in vogue in relation to the production process and method,
• Should have detailed knowledge of the flow of production process and documents that arise
or received in that course.
• A list of cost account books maintained by client should also be obtained.
81
• Careful study and evaluation of internal controls and their operation on the cost account
books.
• Review the costing system in vogue in relation to the production process and method,
• Should have detailed knowledge of the flow of production process and documents that arise
or received in that course.
• A list of cost account books maintained by client should also be obtained.
• Careful study and evaluation of internal controls and their operation on the cost account Click to jump on:
books.
• Before audit work is taken up, all books and records should be posted up to date, vouchers Home
for the various transactions filed serially and all working sheets made available to the
auditors. Part A: Cost Audit
• Audit should be conducted with utmost co – operation of the staff.
• Auditor should have knowledge of various standards issued by the Institute [total 31 Chapter A1 [1]:
standards].
Chapter A2 [2]:
Verification Cost Accounting Standards
• A suitable programme for cost audit is made.
• The procedure and programme to be adopted for audit and the various forms and documents Chapter A3 [3]:
used for it should be laid down in Audit manual. Cost Auditing Standards and Quality control
• The audit programme should be drawn out in detail, specifying each item of audit work to
be carried out. Chapter A4 [4]:
 Verification of capacities
− Examination of licensed capacity, installed and utilised capacities of various products; Chapter A5 [5]:
− Reasons for abnormal variance may be noted;
 Verification of financial ratios
Chapter A6 [6]:
Financial ratios such as: Cost Audit in Information Technology (IT)
− Profit as percentage of capital employed,
− Profit as percentage of sales, Part B: Management Audit
− Current assets as a percentage of current liabilities,
− Net worth expressed as percentage of long-term borrowings and liabilities, Chapter B1 [7]:
− Net worth expressed as a percentage of capital employed, Internal Control & Internal Audit
− Cost of production as percentage of capital employed,
− Cost of production as percentage of working capital. Chapter B2 [8]:
 Verification of production data
Operational Audit
− Production in quantities for various products under reference.
Chapter B3 [9]:
− Percentage of production of the product in relation to installed capacity. Management Audit in Different function
 Verification of cost of raw materials consumed
− Verify the method of accounting followed for recording the quantities and value of Part C: Performance Analysis
receipts, issues and balances of all materials used in production. [Chapter 10]
− Verify consumption of major raw materials per unit of production compared with the
standard requirement.
− Verify variation in consumption of major raw materials per unit of production as
compared to the preceding two years.
− Verify confirmation received form the parties to whom materials are loaned.
− Verify the system or return of scrap and wastage.
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 Verification of cost of power & fuel

− Verify the adequacy of records maintained to ascertain the cost of power, fuel, steam
etc.;
− If purchased, it should be shown separately;
− Allocation of power cost to departments and products has to be verified.
 Verification of employee costs
− Verify the total man-days of direct labor available and actual worked in the year. Click to jump on:
− Verify the labor cost per unit of product or products under reference.
− Variations as compared to the previous two years. Home
− Contribution of incentive schemes towards increasing productivity and effect on the
cost. Part A: Cost Audit
 Cost of stores
− Verify the system of stores accounting for recording receipts, issues and balances. Chapter A1 [1]:
− Nonmoving items have to be checked.
− Cost per unit of production has to be verified. Chapter A2 [2]:
 Verify provision for depreciation Cost Accounting Standards
− Method of depreciation adopted by the company.
− Verify depreciation provided comply with that of companies act section 181, 3 rd Chapter A3 [3]:
Schedule of Income Tax Ordinance 1984. Cost Auditing Standards and Quality control
− The basis of allocation of depreciation of common assets to the different departments.
− The basis of charging depreciation to the cost of products. Chapter A4 [4]:
 Verification overheads and allocation Legal Position of Cost Auditor
− Variations as compared to the previous two years.
Chapter A5 [5]:
− Basis of allocation of overhead to cost centers and absorption to products. Reporting under Cost Audit
− Comparison of actual with budget and reasons for variation.
− Amount of expenditure compared to the volume of output. Chapter A6 [6]:
 Royalty and Technical aid payments Cost Audit in Information Technology (IT)
− Verify the record of basis of calculation and charging of royalty and other allied
payments to production cost. Part B: Management Audit
 Sales
− Sales in quantity and value for each of the product. Chapter B1 [7]:
− Average sales realisation per unit. Internal Control & Internal Audit
− Variations compared with last two years.
Chapter B2 [8]:
 Verification of abnormal, non-recurring and special costs
Operational Audit
− Strikes, lockouts, major breakdowns in the plants, substantial power cuts, serious
accident etc., may affect production. Chapter B3 [9]:
− Costs incurred during that period may verified and excluded from the product cost. Management Audit in Different function
 Verification of cost statements
− Determination of cost following the generally accepted cost accounting principles. Part C: Performance Analysis
− Application of costing system appropriate to the product. [Chapter 10]
− Consistency in the application of costing system and cost accounting principles.
− Verification of cost statements as to prescribed form and the prescribed content.
− Elimination of material prior – period adjustments.
− Abnormal wastes and losses and other unusual transactions being ignored in
determining of cost of product.
− The Costing Accounting Records Rules also prescribe the proforma of the various cost
83
statements.
 Reconciliation with financial books
− The cost records should be reconciled with the financial books of account to ensure
accuracy.
− The reconciliation should be done in such a manner the profitability of the product can
be correctly adjudged and reconciled with overall profit of the company.
− Variations should be correctly indicated and explained. Click to jump on:
 Audit notes
− In the course of audit, the auditor records on working papers the material facts Home
observed.
− Clarifications and answers may be recorded. Part A: Cost Audit
− The power to obtain information and explanations is a tool to accomplish the duty cast
on auditor. He should know how to use. Chapter A1 [1]:
− The auditor has to satisfy himself that the information and data collected and compiled Cost Audit Concept & Legal issues
therein are correct and the cost of production determined their form is fair.
Chapter A2 [2]:
Reporting
• With the help of the working papers, an audit report is issued on completion of audit. Chapter A3 [3]:
• It should summaries the final result of audit. Cost Auditing Standards and Quality control
• Certificate regarding correctness of the accounts should be include in the report.
• The report should consist of notes, observations and comments on the cost accounting Chapter A4 [4]:
system, financial position, Legal Position of Cost Auditor
• stores and spare parts, depreciation, sales, abnormal non- recurring costs, etc.
• The report may also highlight other points of interest like factors responsible for the
Chapter A5 [5]:
increase in cost of production.
• Suggestion regarding improvements and corrective measures to be taken. Chapter A6 [6]:
[Detailed discussion in chapter A5 - Reporting under Cost Audit]

Interactive Question 3.5: Verification of cost statements
Cost Auditors verify the inspect and verify the Cost Statements along with Cost Data to give opinion
on Cost Audit Report. As a Cost Auditor how do you verify Cost Data and Cost Statements? Chapter B2 [8]:
Operational Audit
Ans: As a cost auditor when I inspect Cost Data, firstly I determine that to maintain the cost accounting
records, does the company follow the generally accepted cost accounting principles or not? After that I Chapter B3 [9]:
need to find out that do the company apply appropriate costing system when they maintaining cost Management Audit in Different function
accounting records? If so, do the application of costing system is consistent with Cost Accounting
Principles? Then I need to check and verify the cost statements that all these are prepared in a prescribed Part C: Performance Analysis
form and the prescribed content according to Cost Accounting Principles and The Costing Accounting [Chapter 10]
Records Rules.
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3.6 Guidelines of Cost Audit in Bangladesh

Legal provision
As per provision of under section 220 of Companies Act,1994, the company is engaged
business in manufacturing that is described u/s 181 (1) (d) of Companies Act, 1994, the
management of that company must conduct cost audit.
Click to jump on:
Cost Audit (Report) Rules, 1997 Home
To facilitate cost audit in Bangladesh, Cost Audit (Report) Rules, 1997 was circulated on
November 18, 1997. Part A: Cost Audit
Chapter A1 [1]:
Statutory Orders Cost Audit Concept & Legal issues
At present, Govt. has declared several orders for cost audit.
Chapter A2 [2]:
Interactive Question 3.6: Cost Audit Guidelines in Companies Act, 1994 Cost Accounting Standards
Chapter A3 [3]:
As a cost auditor, you are asking by a business entrepreneur that what are the rules for cost audit as per Cost Auditing Standards and Quality control
Companies Act,1994. Because he is going to start a business of manufacturing goods and sale in local
market. He already registered his company as a Private Limited Company in RJSC. Make a statement Chapter A4 [4]:
in brief about the provisions on Cost Audit in Companies Act, 1994. Legal Position of Cost Auditor
Ans: In Companies Act 1994, a company engaged in production, distribution, marketing, Chapter A5 [5]:
transportation, processing, manufacturing, milling extraction and mining activities, such particulars Reporting under Cost Audit
relating to utilisation of material, labour and other items of overhead cost, the management of that
company must conduct cost audit, when in the opinion of the Government, it is necessary to do so. Cost Chapter A6 [6]:
Audit must be done by an auditor who shall be a Cost and management accountant" within the meaning Cost Audit in Information Technology (IT)
of the Cost and Management Accounts Ordinance, 1977. The company shall keep proper books of cost
accounts shall not be deemed to be kept with respect to the matters specified therein if there are not kept Part B: Management Audit
such books as are necessary to give a true and fair view of the state of the affairs of the company and to
explain its transactions. The books of account shall be kept at the registered office of the company and Chapter B1 [7]:
shall at all times be open to inspection by directors during business hours. Provided that all or any of Internal Control & Internal Audit
the books of account may, for a period not exceeding six months, be kept at such other place in
Bangladesh. Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
85
3.7 Framework of Quality Control Review (QCR) Program

Quality Control Review (QCR) Program comes with an objective to ensure quality in conduct
of audit under QCR program, that entails developing and issuing policies and procedures on
quality control and monitoring compliance of the same. This framework applies to all Cost and
Management Accountancy firms and practicing CMAs holding ICMAB from the institute,
carrying out audits of financial statements, cost audits, special statutory audits, tax audits, public Click to jump on:
sector audits and review of historical financial information and other assurance and related
service engagements having proper authority from a professional, legal or regulatory body. Home
There are a “Quality Control Reviewer" who is a Cost and Management Accountant engaged Part A: Cost Audit
by the Institute, to carry out the review of: (a) Audit working papers of firm engaged in audits;
and (b) Firm's system of quality control. The Quality Control Reviewers may be assisted by Chapter A1 [1]:
appropriately qualified and experienced staff. Cost Audit Concept & Legal issues
Firms shall undergo a QCR organized by the Board after specified period. However, an earlier Chapter A2 [2]:
review may be required under special circumstances. These circumstances may include cases
where a member is found guilty of professional misconduct by the Institute, or any other
Chapter A3 [3]:
circumstances, which in the opinion of the Board warrant an earlier review, in the public Cost Auditing Standards and Quality control
interest.
Chapter A4 [4]:
Quality Control Review (QCR) includes engagement review and firm review where: Legal Position of Cost Auditor
(a) "Engagement Review" - A review of the audit engagement performed by the firm to
determine whether the audit report(s) issued by the firm in respect of the reviewed client(s) Chapter A5 [5]:
was supported by appropriate audit evidence. Reporting under Cost Audit
Engagement review involves a detailed review of working paper files of specific audit
engagements selected from list of entities of the firm and shall be conducted to determine Chapter A6 [6]:
whether or not the audit report issued by the firm in respect of reviewed client(s), was Cost Audit in Information Technology (IT)
supported by appropriate audit evidence. However, the absence of any review comments
shall not be considered an endorsement that the financial statements were necessarily fairly Part B: Management Audit
presented or that all aspects of the audit were fully compliant with the International
Standards on Auditing as applicable in Bangladesh. Chapter B1 [7]:
(b) "Firm Review" - A review of the firm's system of quality control designed to provide it Internal Control & Internal Audit
with reasonable assurance that the firm and its personnel comply with the International
Chapter B2 [8]:
Standards on Auditing and regulatory and legal requirements as applicable in Pakistan, and
Operational Audit
that the reports issued by the firm are appropriate in the circumstances.
A Firm shall be reviewed by firm's system of quality control which shall include policies Chapter B3 [9]:
and procedures addressing each of the following element: (a) Leadership responsibilities Management Audit in Different function
for quality within the firm, (b) Ethical requirements of Institute of Cost & Management
Accountants of Bangladesh, (c) Acceptance and continuance of client relationships and Part C: Performance Analysis
specific engagements, (d) Human resources, (e) Engagement performance, (f) Monitoring [Chapter 10]
etc.
A key part of the firm review methodology shall be the assessment of a firm's monitoring
policies and procedures. If these are judged to be effective, the reviewer may rely on them by
performing tests of the conclusions of the applicable period's monitoring as a source of
evidence.
86
The reviewer shall discuss all issues identified during the review with the engagement partner.
After completion of the review, the reviewer shall prepare a review report, which will include
issues and weaknesses identified during the review, and recommendations for improvement. In
cases where major weaknesses are found, a draft report shall be sent to the firm requiring
comments in writing within four weeks from the date of the draft report. The comments
received shall be analyzed, in certain cases a second opinion may be obtained before presenting Click to jump on:
both the report and the comments to the Board. All reports shall be presented before the Board,
for approval, except for urgent cases where the report may be finalized and approved by Home
circulation to all the members. At least five members of Board, including the Chairperson and
/ or Vice Chairperson, shall approve the report for finalization. Reports, approved by Part A: Cost Audit
circulation, shall be ratified in the immediate next Board meeting.
Chapter A1 [1]:
After approval by the Board, report shall be issued to the firm covering the following: (a) Cost Audit Concept & Legal issues
Conclusion stating whether the audit report issued by the firm in respect of reviewed client(s),
was supported or not supported by appropriate audit evidence; (b) Conclusion stating whether Chapter A2 [2]:
or not appropriate evidence was available in the files; where the reviewer thinks appropriate for Cost Accounting Standards
the following aspects:
(a) Whether the firm's system of quality control has been designed to meet the audit Chapter A3 [3]:
requirements; Cost Auditing Standards and Quality control
(b) Whether the firm has complied with its system of quality control during the review period;
Chapter A4 [4]:
(c) Reasons for negative conclusions on the above; and
(d) Recommendations for improvements at both firm wide and engagement level.
Chapter A5 [5]:
Interactive Question 3.7: Needs of QCR Program Reporting under Cost Audit
Chapter A6 [6]:
Why you think that QCR Program is important for Cost Audit Profession? Cost Audit in Information Technology (IT)
Ans: QCR Program is important for Cost Audit Profession. QCR Program needs to enhance the quality Part B: Management Audit
of cost audit report and credibility of cost accountancy profession in public interest by evaluating the:
(i) cost audit engagements are conducted in accordance with the applicable Generally Accepted Cost Chapter B1 [7]:
Accounting Principles and Cost Accounting Rules and Laws, relevant ethical requirements and legal Internal Control & Internal Audit
and regulatory requirements as applicable in Bangladesh. Also, QCR Program ensure that system of
Chapter B2 [8]:
quality control has been appropriately designed and effectively implemented in accordance with the
Operational Audit
requirements or not. QCR Program make sure that Cost Audit Firm’s quality control policies and
procedures have been appropriately applied so that reports issued are appropriate in the circumstances. Chapter B3 [9]:

[Chapter 10]
87
Chapter A4 [4]
LEGAL POSITION OF COST AUDITOR

Click to jump on:
4.1 Appointment of cost auditor
4.2 Qualification and disqualification of Cost Auditor Home
4.3 Rights and Powers of cost auditors
4.4 Responsibilities and Duties of cost auditors Part A: Cost Audit
4.5 Qualities of a cost auditor
4.6 Resignation and Removal of cost auditors Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
88
4.1 Appointment of Cost Auditor

The provisions for cost audit have been inserted under section 220 of the Companies Act, 1984.
The section reads as follows:
Section 220: Audit of Certain Matters by Cost and Management Accountants.

1. Where in the opinion of the Government, it is necessary to do in relation to any company Click to jump on:
required under clause (d) of sub-section (1) of section 181 to include in its books of
accounts the particular referred to therein the Government may, by order, direct that an Home
specified in the order by an auditor who shall be a "cost and management accountant" Part A: Cost Audit
within the meaning of the Cost and Management Accountants Ordinance, 1977 (LIE of
1977). Chapter A1 [1]:
2. An audit conducted by an auditor under this section shall be in addition to an audit Cost Audit Concept & Legal issues
conducted by an auditor appointed under section. 210.
3. The provisions relating to audit of a company specified in this Act mutatis mutandis, and Chapter A2 [2]:
so far, as they are applicable, apply to an audit conducted under this section.
Chapter A3 [3]:
In view of the above, proper Rules were made through enactment of 'The Cost Audit (Report) Cost Auditing Standards and Quality control
Rules, 1997". According to Rule No. 4 each company shall have its cost accounting books
audited every year by a Cost Auditor and such audit shall be in addition to audit of accounts Chapter A4 [4]:
done under section 210 of the Companies Act. The Rule No. 5 reads as follows: Legal Position of Cost Auditor
1. The board of directors of a Company ordered to have its book of accounts audited as such
by the Government under section 220(1), shall appoint a cost auditor fixing his Chapter A5 [5]:
remuneration within a period of 30 days from the end of its each financial year: Reporting under Cost Audit
Provided that, a person cannot be appointed or re-appointed as cost auditor without his or Chapter A6 [6]:
her written consent. Cost Audit in Information Technology (IT)
2. The person 'appointed as cost auditor of a company under sub-rule (1) shall intimate the Part B: Management Audit
matter to the Government within a period of 15 days.
Chapter B1 [7]:
Interactive Question 4.1: Voluntary Cost Audit
Chapter B2 [8]:
Operational Audit
Recently the board of director of Smile & Jones Inc. Pvt. Ltd. decides to make a cost audit in their
organization for an important investment decision making. They are asking you as a CMA that do they Chapter B3 [9]:
need to intimate the matter to the Government? Management Audit in Different function
Ans: No, they need not to intimate the matter to the Government because as per law any company can Part C: Performance Analysis
appoint a Voluntary Cost Auditor for achieving any objectives or for any other purpose in connection
[Chapter 10]
with performance of the Company. In that case, intimation to the Government is not necessary. Besides,
cost audit under verbal instruction will be treated as cost audit.
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4.2 Qualification and Disqualification of Cost Auditor

The Rule No. 6 deals with qualification and disqualification of Cost Auditor. The Rule is as
follows:
1. A person cannot be appointed as a cost auditor unless s/he is a cost and management
accountant as defined in the said Ordinance [authors note - here Ordinance means the Cost
and Management Accountants Ordinance, 1977 (LIII of 1977)]. Click to jump on:
Provided that a cost and management accountant cannot be appointed as a cost auditor Home
unless he deserves a certificate of practice issued by the Institute of Cost and Management
Accountants of Bangladesh established under the said Ordinance: Part A: Cost Audit
Provided further that a firm whereof all the partners practicing in Bangladesh are qualified Chapter A1 [1]:
for appointment as aforesaid may be appointed by its firm name to be cost auditor of a Cost Audit Concept & Legal issues
company in which case any of the partners may act in the name of the firm.
Chapter A2 [2]:
2. None of the following persons shall be qualified for appointment as cost auditor of a
company, namely –
Chapter A3 [3]:
a) an employee of company under audit; Cost Auditing Standards and Quality control
b) a person who is a partner or served under an employee of the company under audit;
c) a person who is indebted to the company for an amount exceeding one thousand taka, Chapter A4 [4]:
or who has given any guarantee or provided any security in connection with the Legal Position of Cost Auditor
indebtedness of any third person to the company for an amount exceeding one thousand
taka; Chapter A5 [5]:
d) a person who is a director or member of a private company or partner of a firm, which Reporting under Cost Audit
is the managing agent of the company;
e) a person who is a director, or the holder of shares exceeding five percent in nominal Chapter A6 [6]:
value of the subscribed capital, of anybody corporate which is the managing agent of Cost Audit in Information Technology (IT)
the company.
Provided that where any shares held by a person as nominee or trustee for any third
person and in which the holder has not beneficial interest, such shares. shall be Chapter B1 [7]:
excluded in computing the extent of the subscribed capital for the purpose of this Internal Control & Internal Audit
clause.
Chapter B2 [8]:
Operational Audit
f) Appointed as an auditor of the company according to section 210.
Chapter B3 [9]:
Explanation - For carrying out the purpose of this sub-rule the word "employee" shall not Management Audit in Different function
include a cost auditor.
3. A person shall not be qualified for appointment as a cost auditor of a company, if [Chapter 10]
a) he, according to sub-rule (2), is disqualified for appointment as cost auditor of any other
body corporate which is subsidiary of that company or holding "company or a
subsidiary of that company's holding company;
b) he would be disqualified for such appointment, had the said body corporate been a
company.
90
4. If a cost auditor becomes subject, after his appointment to any of the

disqualifications specified in sub-rules (2) and (3), he shall be deemed to have vacated his
office as such.
Interactive Question 4.2: Disqualification of Non-Resident Cost Auditor

Click to jump on:
Mr. Jubair Khan, FCA, FCMA no permanently resident of United States of America. Southern Group
of Companies is a leading group of companies in Bangladesh appoint him as a cost auditor. Mr. Jubair Home
now plan to shall intimate the matter to the Government as per law. Do you think he can be appointed
as Cost Auditor? Part A: Cost Audit
Ans: No, Mr. Jubair Khan cannot be a cost auditor in any company of Bangladesh. Because, as per law, Chapter A1 [1]:
a member, not residing in Bangladesh and officially staying in New York, or London or any other Cost Audit Concept & Legal issues
city/area outside Bangladesh cannot be a Cost Auditor in this country. If there is any such instance, it
will be treated as irregular and the member concerned will be guilty of professional and other Chapter A2 [2]:
misconduct. Cost Accounting Standards
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
91
4.3 Rights and Powers of Cost Auditors

Sub-section (3) of section 220 of the Companies Act reads as follows that the provisions relating
to audit of a company specified in the Act mutatis mutandis, and so far, as they are applicable,
apply to an audit conducted under the section.
Rule 7 of the "Cost Audit (Report) Rules, 1997 is as follows: Click to jump on:
The company ordered to have its accounts audited under section 220 shall make available to
the cost auditor within 75 days from the end of the financial year of the company cost Home
accounting records maintained under section 181(l)(d) and such other cost statements, books
and papers as may be prescribed by the concerned cost audit order that would be required for Part A: Cost Audit
conducting the cost audit, and shall render necessary assistance to the cost auditor so as to
enable him to conduct and complete the cost audit smoothly. Chapter A1 [1]:
In view of the above law, it appears that a cost auditor has got the same powers and rights in
relation to an audit conducted by him as are provided under section 210 as an auditor of a Chapter A2 [2]:
company. According to. section.213 every auditor of a company shall have a right of access at
all times to the books and accounts and vouchers of the company whether kept at the head office
Chapter A3 [3]:
of the company or elsewhere and shall be entitled to require from the officers of the company Cost Auditing Standards and Quality control
such information and explanation as the auditor may think necessary for the performance of his
duties as an auditor. In other words, the cost auditor has a right to call for all records, vouchers, Chapter A4 [4]:
etc. as well as any other information and explanation as may be required. Legal Position of Cost Auditor
The duty of the cost auditor is to prepare and submit the cost audit report to the Board of Chapter A5 [5]:
Directors of the company. The Rule 8 of the Cost Audit (Report) Rules, 1997 reads as follows Reporting under Cost Audit
that every cost auditor shall prepare cost audit report (in duplicate) of the company under audit
and in accordance with the procedures as laid-down in the Schedule of these rules and submit Chapter A6 [6]:
within a maximum period of 150 days from the end of the financial year, a report on the Cost Audit in Information Technology (IT)
performance of its functions for that every year.
However, the cost auditor will remain responsible for any negligence committed by him during
the course of his audit. He is also responsible for presenting his notes and explanations in Chapter B1 [7]:
support of his audit observation, opinion and reports. Internal Control & Internal Audit
Chapter B2 [8]:
Interactive Question 4.3: Rights of Cost Auditor Operational Audit
Chapter B3 [9]:
During your cost audit work in ABC Inc., you faced a problem that in the morning session the employees Management Audit in Different function
of the related departments from where you need to verify and audit books of cost accounts, refuse you
to cooperate showing cause that they are busy with their office tasks. What extent of rights you have as Part C: Performance Analysis
a cost auditor about this matter. [Chapter 10]
Ans: As a cost auditor, I may give an indication or a qualified report along with the reasons for the non-
cooperation. As per law, I have right to of access at all times to look into the books of accounts and
vouchers of the company whether kept in Head Office of the company or elsewhere. And also, shall be
entitled to require from the officers of the company, such information and explanation as an auditor,
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may think for the purpose of this audit. The company cannot refuse to permit the cost auditor to conduct
the cost audit concurrently.
Click to jump on:
Home
Part A: Cost Audit

Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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4.4 Responsibilities and Duties of Cost Auditors

While providing for audit of cost accounts, the Companies Act, 1994 provides that the cost
auditors shall have the same powers, duties and liabilities as an auditor of the company.
The cost auditor, while preparing cost audit report, shall annex foot note, explanation and
reference in support of his audit report. He will also report that whether or not he has obtained Click to jump on:
all records, books of account and information he requires for the cause of such cost audit. He
also discharges his duties by giving observation and opinion in the cost audit report." Home
The cost auditor may make necessary comments on the following points as per Schedule of Part A: Cost Audit
Cost Audit (Report) Rules 1997 – para-19, namely-
1) Equitability of allocation of overhead and common costs; Chapter A1 [1]:
2) Quantification of idle machines and materials; Cost Audit Concept & Legal issues
3) Methods of identification of waste materials and their analysis, quantification and disposal
(including re-cycling or reuse); Chapter A2 [2]:
4) Usefulness of accounts maintained to record waste, spoiled materials, wastage, etc.;
5) Matters apparently wrong in principle or unjustifiable;
Chapter A3 [3]:
6) Negligence or inefficiency in using of company's funds; Cost Auditing Standards and Quality control
7) Matters that could have been controlled, but have not been done resulting increase of the
production cost; Chapter A4 [4]:
8) Contracts or agreements, if any, between the company and others relating to sales, Legal Position of Cost Auditor
purchases, etc. bringing out any peculiar features, under benefits;
9) Adequacy of the following systems: Chapter A5 [5]:
(a) Budgetary Control; Reporting under Cost Audit
(b) Credit Control;
(c) Internal Checking; Chapter A6 [6]:
(d) Internal Audit; Cost Audit in Information Technology (IT)
(e) Production Development; and
(10) Recommendations for improvements in performance, if any, by the following: Part B: Management Audit
(a) Reshuffling of machineries, etc.
(b) Best utilization of installed capacity of the machineries; Chapter B1 [7]:
(c) Concentration on areas offering scope for cost reduction, increased productivity, Internal Control & Internal Audit
decrease of anti-production activities, etc.
Chapter B2 [8]:
Operational Audit
A cost auditor, while examining the cost accounting records is liable and thus required to
exercise reasonable care and skill. What is reasonable care and skill must depend on the Chapter B3 [9]:
circumstances of such case. If an auditor does not take reasonable care and does not exercise Management Audit in Different function
skill, failing in his duty as a cost auditor even in one instance, he must be held to have been
negligent if not worse. An auditor is not bound to be a detective, his role becomes amply clear Part C: Performance Analysis
with the discussion of professional competence and professional ethics. However, failure on [Chapter 10]
the part of an auditor make him jointly and severally liable with those who are responsible for
the management of the company.
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Interactive Question 4.4: Responsibilities to Third Party of Cost Auditor

At present, do you think that cost auditors are held responsible for negligence in their duties only to the
appointing authorities?
Ans: In the past, cost auditors were held responsible for negligence in their duties only to the appointing Click to jump on:
authorities i.e., the Government Authorities or the company which appointed them. With the change in
time the responsibilities of the cost auditors have increased, and they are held liable to the third parties Home
also. A cost accountant has a moral responsibility towards the third party and is also responsible to
compensate for damages suffered by the third party due to any fraud or a false statement made by the Part A: Cost Audit
cost auditor.
Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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4.5 Qualities of A Cost Auditor

A cost auditor must possess costing knowledge of an organization and he must possess some
qualities those may be narrated as follows:
a) Ability to grasp the business problem as well as the company problems.
b) General understanding of the nature, purpose, and objectives of the organization e.g.
Nationalized or government-controlled organization, or private sector company. Click to jump on:
c) Ability to determine or assist the progress of the organization.
d) Knowledge of the principles of delegation of authority & control and the preparation of Home
different budgets viz., cash budget, production budget, sales budget, master budget, etc.
e) Power of grasping and understanding different internal control devices viz., flow chart, Part A: Cost Audit
flow of work, analysis of work scheduling, use of computer, cost data and financial data
flow, etc. Chapter A1 [1]:
f) Sufficient knowledge about engineering, statistical techniques, cost and management Cost Audit Concept & Legal issues
accounting, general financial accounting, production planning and control, etc.
g) General understanding of different laws viz. company law, tax law, VAT and other Chapter A2 [2]:
economic legislation including Finance Act, Securities Act, etc.
h) Sufficient knowledge and experience in preparing various reports for submission to
Chapter A3 [3]:
different levels of management including the top management. Cost Auditing Standards and Quality control
i) Tactfulness, perseverance, pleasing and dynamic personality.
Chapter A4 [4]:
Besides the above, a Cost Auditor handling a large organization on a continuous basis or a Legal Position of Cost Auditor
number audits at the same time has to build up a competent team of people, who possess the
qualifications attributed to a Cost Auditor. Chapter A5 [5]:
A Cost Auditor is concerned with all aspects of the business and the organization, ranging from
manufacturing to marketing and finance. The Cost Audit team should be multidisciplinary to Chapter A6 [6]:
make multidimensional approach to audit function. Cost Audit in Information Technology (IT)
Interactive Question 4.5: Expertise of Cost Auditor Part B: Management Audit

Chapter B1 [7]:
Do you think sufficient knowledge and expertise on Accounting and Costing is enough to act as a Cost
Auditor? Chapter B2 [8]:
Operational Audit
Ans: In short, most of time we think that Cost Auditor just examine the cost accounting records and
prepare his/her Cost Audit Report according to the findings. But to perform the said task, s/he needs a Chapter B3 [9]:
versatility in knowledge of overall business management topics. Besides of accounting and cost Management Audit in Different function
accounting, a cost auditor must have knowledge about business organization and financial
administration, statistics and mathematics, economics, general understanding of different laws, Part C: Performance Analysis
management science, knowledge of basic “Electronic Data Processing” system etc. Otherwise, s/he [Chapter 10]
can’t perform well in conducting cost audit procedure.
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4.6 Resignation and Removal of Cost Auditors

A cost auditor may resign from his office when he so desires, but a cost auditor will be treated
as removed when he suffers from any of the disqualification described earlier.
Interactive Question 4.6: Voluntary resignation of Cost Auditor

[Difficulty Level: Easy] Click to jump on:
Do you think a cost auditor can resign from his post any time? Home
Ans: A cost auditor may resign from his office when he so desires, but a cost auditor will be treated as Part A: Cost Audit
removed when he suffers from any of the disqualification prescribed in relates laws and regulations.
Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
97
Chapter A5 [5]
REPORTING UNDER COST AUDIT

Click to jump on:
5.1 Audit Risk Assessment
5.2 Preparation Cost audit report Home
5.3 Key points of a Cost Audit Report
5.4 Placement of the report to the Management Part A: Cost Audit
5.5 Finalization.
Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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5.1 Audit Risk Assessment

Standard on Cost Auditing
“The Cost Auditor’s Responses to Assessed Risks” Contents
INTRODUCTION Click to jump on:

1. The cost auditor performs risk assessment procedures (which include obtaining an
understanding of an entity, its control environment, its risk assessment process, undertake Home
inquiries of management, observation, inspection of relevant documents, and perform
analytical procedures) to assess risks of material misstatements at cost statement level and Part A: Cost Audit
at assertion level. After assessing the risks, the cost auditor is to design and implement
audit procedures responsive to the assessed risks of material misstatement and evaluate Chapter A1 [1]:
whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an Cost Audit Concept & Legal issues
acceptably low level.
2. This Standard on Cost Auditing establishes requirements and provides application and Chapter A2 [2]:
other explanatory material regarding the auditor’s responsibility to design and implement Cost Accounting Standards
responses to the assessed risks of material misstatement in audit of cost statements.
Chapter A3 [3]:
OBJECTIVES
The objective of this standard is to enable the cost auditor to design and implement appropriate
Chapter A4 [4]:
responses to obtain sufficient appropriate audit evidence regarding the assessed risks of Legal Position of Cost Auditor
material misstatement in audit of cost statements.
Chapter A5 [5]:
SCOPE Reporting under Cost Audit
This Standard on Cost Auditing (SCA) deals with the cost auditor’s responsibility to design
and implement responses to the risks of material misstatement identified and assessed in an Chapter A6 [6]:
audit of cost statements. Cost Audit in Information Technology (IT)
DEFINITIONS Part B: Management Audit

The following terms are being used in this standard with the meaning specified.
Chapter B1 [7]:
• Analytical Procedures: Evaluations of cost information through analysis of plausible
relationship among both cost and non-cost data. Analytical procedures also encompass
such investigation as is necessary of identified fluctuations or relationships that are Chapter B2 [8]:
inconsistent with other relevant information or that differ from expected values by a Operational Audit
significant amount.
• Appropriateness (of audit evidence): The measure of the quality of audit evidence; that Chapter B3 [9]:
is, its relevance and its reliability in providing support for the conclusions on which the Management Audit in Different function
cost auditor’s opinion is based.
• Assertions: Representations by management, explicit or otherwise, that are embodied in Part C: Performance Analysis
the cost statements, as used by the cost auditor to consider the different types of potential [Chapter 10]
misstatements that may occur.
99
• Audit documentation: Audit Documentation means the records, in physical or electronic

form, including working papers prepared by and for, or obtained and retained by the Cost
auditor, in connection with the performance of the audit.
• Audit Evidence: Information used by the cost auditor in arriving at the conclusions on
which the cost auditor’s opinion is based. Audit evidence includes both information
contained in the cost accounting records underlying the cost statements and all other
related information. Click to jump on:
• Auditor: Auditor is used to refer to the person or persons conducting the audit, usually the
audit partner or other members of the audit team, or, as applicable the firm. Auditor Home
includes Cost Auditor
• Cost Records: Cost Records means books of accounts relating to utilization of Part A: Cost Audit
materials, labour and other items of cost, to facilitate calculation of true and fair cost of
production or cost of operations, cost of sales, and margin for each product or Chapter A1 [1]:
service or activity, produced or provided by an entity including a non-profit entity, for any Cost Audit Concept & Legal issues
period, in compliance with Cost Accounting Standards issued by the Institute.
• Cost Audit: Cost audit is an independent examination of cost statements, cost records and
Chapter A2 [2]:
other related information of an entity including a non-profit entity, when such an
examination is conducted with a view to expressing an opinion thereon.
Chapter A3 [3]:
• Cost Auditor: “Cost Auditor” means an auditor appointed to conduct an audit of cost Cost Auditing Standards and Quality control
records and shall be a cost accountant within the meaning of The Cost and Works
Accountants Act 1959. “Cost Accountant” is a cost accountant as defined in clause (b) of Chapter A4 [4]:
sub-section (1) of section 2 of The Cost and Works Accountants Act, 1959 (23 of 1959) Legal Position of Cost Auditor
and who holds a valid certificate of practice under subsection (1) of section 6 and who is
deemed to be in practice under subsection (2) of section 2 of that Act and includes a firm Chapter A5 [5]:
of cost accountants. Reporting under Cost Audit
• Cost Reporting Framework: Cost Reporting Framework means the framework adopted
by the management and, where appropriate, by those charged with governance, in the Chapter A6 [6]:
preparation of the cost statements that is acceptable in view of the nature of the entity and Cost Audit in Information Technology (IT)
the objective of the cost report, or that is required by law or regulation.
• Cost Statements: Cost Statements, in relation to an entity, includes plant-wise, factory- Part B: Management Audit
wise or service centre-wise:
Chapter B1 [7]:
(i) quantitative details of capacity, production, trade purchases, sales and stocks;
(ii) quantitative, rates and value details of consumption of materials, utilities and other
inputs; Chapter B2 [8]:
(iii) cost sheet showing element-wise, total as well as per unit cost of production of goods Operational Audit
or provision of services, cost of sales and margin for each product or service;
(iv) reconciliation of profits, or in case of an entity carrying on any activity not for profit, Chapter B3 [9]:
of surplus, as per cost accounts and as per financial accounts; Management Audit in Different function
(v) reconciliation of indirect taxex showing details of total clearance of goods / services,
assessable value, duties/ taxes paid, CENVAT or VAT or Service Tax credit utilized, Part C: Performance Analysis
duties / taxes recovered and interest / penalty paid; [Chapter 10]
(vi) statement of value addition and distribution of earnings;
(vii) details of purchases and sales of goods and services with related parties showing
transfer price vis-à-vis normal price; and
(viii) any explanatory note annexed to, or forming part of, any document referred to in (i)
to (vii) above.
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• Fraud: An intentional act by one or more individuals among management, those

charged with governance, employees, or third parties, involving the use of deception
to obtain an unjust or illegal advantage.
• Internal Control: The process designed, implemented and maintained by those
charged with governance, management and other personnel to provide reasonable
assurance about the achievement of an entity’s objectives with regard to reliability of
cost and financial reporting, effectiveness and efficiency of operations, and Click to jump on:
compliance with applicable laws and regulations. The term “controls” refers to any
aspects of one or more of the components of internal control. Home
• Management: The person(s) with executive responsibility for the conduct of the
entity’s operations. For some entities in some jurisdictions, management includes Part A: Cost Audit
some or all of those charged with governance.
Chapter A1 [1]:
• Misstatement: A difference between the amounts, classification, presentation or
disclosure of a reported cost statement item and the amount, classification,
presentation, or disclosure that is required for the item to be in accordance with the
Chapter A2 [2]:
applicable cost reporting framework. Misstatements can arise from error or fraud. Cost Accounting Standards
• Professional Skepticism: An attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatements due to error or fraud, and a Chapter A3 [3]:
critical assessment of audit evidence. Cost Auditing Standards and Quality control
• Risk Assessment: The audit procedures performed to obtain an understanding of the
entity and its environment, including the entity’s internal control, to identify and assess Chapter A4 [4]:
the risks of material misstatement, whether due to fraud or error, at the overall cost Legal Position of Cost Auditor
statement level and at the assertion level including items of cost, cost heads and
Chapter A5 [5]:
disclosure thereof.
• Substantive procedure: Substantive procedures are intended to create evidence that
an auditor assembles to support the assertion that there are no material misstatements Chapter A6 [6]:
in regard to the completeness, validity, and accuracy of the cost records of an entity. Cost Audit in Information Technology (IT)
Thus, substantive procedures are performed by an auditor to detect whether there are
any material misstatements in transactions. It comprises of: Part B: Management Audit
(i) Tests of details (of classes of transactions, account balances, and disclosures);
and Chapter B1 [7]:
(ii) Substantive analytical procedures. (Substantive analytical procedures are types Internal Control & Internal Audit
of analytical procedures being used as a substantive procedure to obtain
evidence about particular assertions related to account balances or classes of Chapter B2 [8]:
transactions). Operational Audit
• Sufficiency (of audit evidence): The measure of the quantity of audit evidence. The
Chapter B3 [9]:
quantity of the audit evidence needed is affected by the cost auditor’s assessment of
the risk of material misstatement and also by the quality of such audit evidence.
• Test of controls: At the assertion level certain audit procedures are designed in
preventing, detecting and correcting, material misstatements to evaluate the operating
[Chapter 10]
effectiveness of controls.
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REQUIREMENTS
Overall Responses
1. The cost auditor shall design and implement overall responses to address the assessed risks
of material misstatement at the cost statement level. (Ref: Para.6.1 – 6.3) Audit Procedures
Responsive to the Assessed Risks of Material Misstatement at the Assertion Level
2. The cost auditor shall design and perform further audit procedures whose nature, timing Click to jump on:
and extent are based on and are responsive to the assessed risks of material misstatement
at the assertion level. (Ref: Para. 6.4 – 6.8) Home
3. In designing the further audit procedures to be performed, the cost auditor shall:
(a) Consider the reasons for the assessment given to the risk of material misstatement at Part A: Cost Audit
the assertion level for each item of cost in the cost statement, and disclosure, including:
(i) The likelihood of material misstatement due to the particular characteristics of Chapter A1 [1]:
the relevant items of cost in the cost statement, or disclosure (that is, the inherent Cost Audit Concept & Legal issues
risk); and
(ii) Whether the risk assessment takes account of relevant controls (that is, the Chapter A2 [2]:
control risk), thereby requiring the cost auditor to obtain audit evidence to Cost Accounting Standards
determine whether the controls are operating effectively (that is, the cost auditor
intends to rely on the operating effectiveness of controls in determining the
Chapter A3 [3]:
nature, timing and extent of substantive procedures); and (Ref: Para. 6.9 – 6.17)
(b) Obtain more persuasive audit evidence if the cost auditor’s assessment of risk is
Chapter A4 [4]:
higher. (Ref: Para. 6.18) Legal Position of Cost Auditor
Tests of Controls Chapter A5 [5]:

4. The cost auditor shall design and perform tests of controls to obtain sufficient appropriate Reporting under Cost Audit
audit evidence as to the operating effectiveness of relevant controls if:
(a) The cost auditor’s assessment of risks of material misstatement at the assertion level Chapter A6 [6]:
includes an expectation that the controls are operating effectively (that is, the cost Cost Audit in Information Technology (IT)
auditor intends to rely on the operating effectiveness of controls in determining the
nature, timing and extent of substantive procedures); or Part B: Management Audit
(b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at
the assertion level. (Ref: Para. 6.19-6.23) Chapter B1 [7]:
5. In designing and performing tests of controls, the cost auditor shall obtain more persuasive Internal Control & Internal Audit
audit evidence if the auditor places greater reliance on the effectiveness of a control. (Ref:
Para. 6.24) Chapter B2 [8]:
Operational Audit
Nature and Extent of Tests of Controls
Chapter B3 [9]:
6. In designing and performing tests of controls, the cost auditor shall:
(a) Perform other audit procedures in combination with inquiry to obtain audit evidence
about the operating effectiveness of the controls, including:
(i) How the controls were applied at relevant times during the period under audit;
[Chapter 10]
(ii) The consistency with which they were applied; and
(iii) By whom or by what means they were applied. (Ref: Para. 6.25-6.28)
(b) Determine whether the controls to be tested depend upon other controls (indirect
controls), and, if so, whether it is necessary to obtain audit evidence supporting the
effective operation of those indirect controls. (Ref: Para. 6.29 -6.30)
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Timing of Tests of Controls

7. The cost auditor shall test controls for the particular time, or throughout the period, for
which the auditor intends to rely on those controls, subject to paragraphs 5.8 and 5.11
below, in order to provide an appropriate basis for the cost auditor’s intended reliance.
(Ref: Para. 6.31)
Using audit evidence obtained during an interim period Click to jump on:
8. If the cost auditor obtains audit evidence about the operating effectiveness of controls
during an interim period, the cost auditor shall: Home
(a) Obtain audit evidence about significant changes to those controls subsequent to the
interim period; and Part A: Cost Audit
(b) Determine the additional audit evidence to be obtained for the remaining period. (Ref:
Para. 6.32 – 6.33) Chapter A1 [1]:
Using audit evidence obtained in previous audits
9. In determining whether it is appropriate to use audit evidence about the operating Chapter A2 [2]:
effectiveness of controls obtained in previous audits, and, if so, the length of the time Cost Accounting Standards
period that may elapse before retesting a control, the cost auditor shall consider the
following: Chapter A3 [3]:
(a) The effectiveness of other elements of internal control, including the control Cost Auditing Standards and Quality control
environment, the entity’s monitoring of controls, and the entity’s risk assessment
Chapter A4 [4]:
process;
(b) The risks arising from the characteristics of the control, including whether it is manual
or automated; Chapter A5 [5]:
(c) The effectiveness of general IT controls; Reporting under Cost Audit
(d) The effectiveness of the control and its application by the entity, including the nature
and extent of deviations in the application of the control noted in previous audits, and Chapter A6 [6]:
whether there have been personnel changes that significantly affect the application of Cost Audit in Information Technology (IT)
the control;
(e) Whether the lack of a change in a particular control poses a risk due to changing Part B: Management Audit
circumstances; and
(f) The risks of material misstatement and the extent of reliance on the control. (Ref: Para. Chapter B1 [7]:
6.34) Internal Control & Internal Audit
10. If the cost auditor plans to use audit evidence from a previous audit about the operating
effectiveness of specific controls, the cost auditor shall establish the continuing relevance Chapter B2 [8]:
of that evidence by obtaining audit evidence about whether significant changes in those Operational Audit
controls have occurred subsequent to the previous audit. The cost auditor shall obtain this
Chapter B3 [9]:
evidence by performing inquiry combined with observation or inspection, to confirm the
understanding of those specific controls, and:
(a) If there have been changes that affect the continuing relevance of the audit evidence
from the previous audit, the cost auditor shall test the controls in the current audit.
[Chapter 10]
(Ref: Para. 6.35)
(b) If there have not been such changes, the cost auditor may test the controls at least once
in every third audit. The cost auditor shall test some controls in each audit to avoid the
possibility of testing all the controls on which the cost auditor intends to rely in a single
audit period with no testing of controls in the subsequent two audit periods. (Ref: Para.
6.36 – 6.38)
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Controls over significant risks

11. If the cost auditor plans to rely on controls over a risk which the cost auditor has
determined to be a significant risk, the cost auditor shall test those controls in the current
period.
Evaluating the Operating Effectiveness of Controls

12. When evaluating the operating effectiveness of relevant controls, the cost auditor shall Click to jump on:
evaluate whether misstatements that have been detected by substantive procedures indicate
that controls are not operating effectively. The absence of misstatements detected by Home
substantive procedures, however, does not provide audit evidence that controls related to
the assertion being tested are effective. (Ref: Para. 6.39) Part A: Cost Audit
13. If deviations from controls upon which the cost auditor intends to rely are detected, the
auditor shall make specific inquiries to understand these matters and their potential Chapter A1 [1]:
consequences and shall determine whether: (Ref: Para. 6.40) Cost Audit Concept & Legal issues
(a) The tests of controls that have been performed provide an appropriate basis for reliance
on the controls; Chapter A2 [2]:
(b) Additional tests of controls are necessary; or Cost Accounting Standards
(c) The potential risks of misstatement need to be addressed using substantive procedures.
Chapter A3 [3]:
Substantive Procedures Cost Auditing Standards and Quality control
14. Irrespective of the assessed risks of material misstatement, the cost auditor shall design
Chapter A4 [4]:
and perform substantive procedures for each material item of cost in the cost statement,
and disclosure. (Ref: Para. 6.41-6.46)
15. The cost auditor shall consider whether external confirmation procedures are to be Chapter A5 [5]:
performed as substantive audit procedures. (Ref: Para. 6.47-6.50) Reporting under Cost Audit
Substantive Procedures Related to the Cost Statement Closing Process Chapter A6 [6]:
16. The cost auditor’s substantive procedures shall include the following audit procedures Cost Audit in Information Technology (IT)
related to the cost statement closing process:
(a) Agreeing or reconciling the cost statements with the underlying cost accounting Part B: Management Audit
records; and
(b) Examining material transactions and other adjustments made during the course of Chapter B1 [7]:
preparing the cost statements. (Ref: Para. 6.51) Internal Control & Internal Audit
Substantive Procedures Responsive to Significant Risks Chapter B2 [8]:

17. If the cost auditor has determined that an assessed risk of material misstatement at the Operational Audit
assertion level is a significant risk, the cost auditor shall perform substantive procedures
Chapter B3 [9]:
that are specifically responsive to that risk. When the approach to a significant risk consists
only of substantive procedures, those procedures shall include tests of details. (Ref: Para.
6.52-6.53)
[Chapter 10]
Timing of Substantive Procedures
18. If substantive procedures are performed at an interim date, the cost auditor shall cover the
remaining period by performing:
(a) substantive procedures, combined with tests of controls for the intervening period; or
(b) if the cost auditor determines that it is sufficient, further substantive procedures only,
that provides a reasonable basis for extending the audit conclusions from the interim
date to the period end. (Ref: Para. 6.54-6.56)
104
19. If misstatements that the cost auditor did not expect when assessing the risks of material
misstatement are detected at an interim date, the auditor shall evaluate whether the related
assessment of risk and the planned nature, timing or extent of substantive procedures
covering the remaining period need to be modified. (Ref: Para. 6.57)
Adequacy of Presentation and Disclosure

20. The cost auditor shall perform audit procedures to evaluate whether the overall Click to jump on:
presentation of the cost statements, including the related disclosures, is in accordance with
the applicable cost reporting framework. (Ref: Para. 6.59) Home
Evaluating the Sufficiency and Appropriateness of Audit Evidence Part A: Cost Audit
21. Based on the audit procedures performed and the audit evidence obtained, the cost auditor
shall evaluate before the conclusion of the audit whether the assessments of the risks of Chapter A1 [1]:
material misstatement at the assertion level remain appropriate. (Ref: Para. 6.59) Cost Audit Concept & Legal issues
22. The cost auditor shall conclude whether sufficient appropriate audit evidence has been
obtained. In forming an opinion, the auditor shall consider all relevant audit evidence, Chapter A2 [2]:
regardless of whether it appears to corroborate or to contradict the assertions in the cost Cost Accounting Standards
statements. (Ref: Para. 6.60)
23. If the cost auditor has not obtained sufficient appropriate audit evidence as to a material Chapter A3 [3]:
cost statement assertion, the cost auditor shall attempt to obtain further audit evidence. If Cost Auditing Standards and Quality control
unable to obtain sufficient appropriate audit evidence, the cost auditor shall express a
Chapter A4 [4]:
qualified opinion or disclaim an opinion on the cost statements. (Ref: Para. 6.61)
Documentation Chapter A5 [5]:
24. The cost auditor shall include in the audit documentation: Reporting under Cost Audit
(a) The overall responses to address the assessed risks of material misstatement at the cost
statement level, and the nature, timing and extent of the further audit procedures Chapter A6 [6]:
performed; Cost Audit in Information Technology (IT)
(b) The linkage of those procedures with the assessed risks at the assertion level; and
(c) The results of the audit procedures, including the conclusions drawn where these are Part B: Management Audit
not otherwise clear. (Ref: Para. 6.62)
25. If the cost auditor plans to use audit evidence about the operating effectiveness of controls Chapter B1 [7]:
obtained in previous audits, the auditor shall include in the audit documentation the Internal Control & Internal Audit
conclusions reached about relying on such controls that were tested in a previous audit.
26. The cost auditor’s documentation shall demonstrate that the cost statements agree or Chapter B2 [8]:
reconcile with the cost records. Operational Audit
Chapter B3 [9]:
APPLICATION GUIDANCE Management Audit in Different function
Overall Responses (Ref: Para. 5.1) Part C: Performance Analysis

1. Overall responses to address the assessed risks of material misstatement at the cost [Chapter 10]
statement level may include:
(a) Emphasizing to the engagement team the need to maintain professional skepticism.
(b) Assigning more experienced staff or those with special skills or using experts.
(c) Providing more supervision.
(d) Incorporating additional elements of unpredictability in the selection of further audit
procedures to be performed.
105
(e) Making general changes to the nature, timing or extent of audit procedures. For
example: performing substantive procedures at the period end instead of at an interim
date; or modifying the nature of audit procedures to obtain more persuasive audit
evidence.
2. The assessment of the risks of material misstatement is affected by the cost auditor’s
understanding of the entity’s control environment. An effective control environment may
allow the auditor to have more confidence in internal control and the reliability of audit Click to jump on:
evidence generated internally within the entity and thus, for example, allow the auditor to
conduct some audit procedures at an interim date rather than at the period end. Home
Deficiencies in the control environment, however, have the opposite effect; for example, Part A: Cost Audit
the cost auditor may respond to an ineffective control environment by:
(a) Conducting more audit procedures as of the period end rather than at an interim date. Chapter A1 [1]:
(b) Obtaining more extensive audit evidence from substantive procedures. Cost Audit Concept & Legal issues
(c) Increasing the number of locations to be included in the audit scope.
Chapter A2 [2]:
3. Such considerations, therefore, have a significant bearing on the cost auditor’s general Cost Accounting Standards
approach, for example, an emphasis on substantive procedures (substantive approach), or
an approach that uses tests of controls as well as substantive procedures (combined Chapter A3 [3]:
approach). Cost Auditing Standards and Quality control
Audit Procedures Responsive to the Assessed Risks of Material Misstatement at the
Chapter A4 [4]:
Assertion Level
The Nature, Timing and Extent of Further Audit Procedures (Ref: Para. 5.2) Chapter A5 [5]:
4. Appropriate audit approach for designing and performing further audit procedures depends Reporting under Cost Audit
upon the cost auditor’s assessment of the identified risks at the assertion level. For example,
the cost auditor may determine that: Chapter A6 [6]:
(a) Only by performing tests of controls may the auditor achieve an effective response to Cost Audit in Information Technology (IT)
the assessed risk of material misstatement for a particular assertion;
(b) Performing only substantive procedures is appropriate for particular assertions if the Part B: Management Audit
auditor’s risk assessment procedures have not identified any effective controls relevant
to the assertion, or because testing controls would be inefficient and therefore the Chapter B1 [7]:
auditor does not intend to rely on the operating effectiveness of controls in determining Internal Control & Internal Audit
the nature, timing and extent of substantive procedures; or
(c) A combined approach using both tests of controls and substantive procedures is an Chapter B2 [8]:
effective approach. Operational Audit
Chapter B3 [9]:
However, irrespective of the approach selected, the cost auditor designs and performs
substantive procedures for each material items of cost in the cost statement, and disclosure.
5. The nature of an audit procedure refers to its purpose (that is, test of controls or substantive
procedure) and its type (that is, inspection, observation, inquiry, confirmation,
[Chapter 10]
recalculation, re-performance, or analytical procedure). The nature of the audit procedures
is of most importance in responding to the assessed risks.
6. Timing of an audit procedure refers to when it is performed, or the period or date to which
the audit evidence applies.
7. Extent of an audit procedure refers to the quantity to be performed, for example, a sample
size or the number of observations of a control activity.
106
8. Designing and performing further audit procedures whose nature, timing and extent are
based on and are responsive to the assessed risks of material misstatement at the assertion
level provides a clear linkage between the auditor’s further audit procedures and the risk
assessment.
Responding to the Assessed Risks at the Assertion Level (Ref: Para. 5.3(a))
Click to jump on:
Nature
9. The cost auditor’s assessed risks may affect both the types of audit procedures to be Home
performed and their combination. For example, when an assessed risk is high, the auditor
may confirm the completeness of the terms of a contract with the counterparty, in addition Part A: Cost Audit
to inspecting the document. Further, certain audit procedures may be more appropriate for
some assertions than others. For example, while verifying the assessed risk of misstatement Chapter A1 [1]:
in material consumption in line with the Bill of material, the tests of controls and Cost Audit Concept & Legal issues
substantive procedures may be most responsive to assess the assertions made with respect
to the completeness and accuracy. Chapter A2 [2]:
10. The reasons for the assessment given to a risk are relevant in determining the nature of Cost Accounting Standards
audit procedures. For example, if an assessed risk is lower because of the particular
characteristics of a class of transactions without consideration of the related controls, then Chapter A3 [3]:
the cost auditor may determine that substantive analytical procedures alone provide Cost Auditing Standards and Quality control
sufficient appropriate audit evidence. On the other hand, if the assessed risk is lower
Chapter A4 [4]:
because of internal controls, and the cost auditor intends to base the substantive procedures
on that low assessment, then the cost auditor performs tests of those controls, as required
by paragraph 5.4(a). This may be the case, for example, for a class of transactions of Chapter A5 [5]:
reasonably uniform, non-complex characteristics that are routinely processed and Reporting under Cost Audit
controlled by the entity’s information system.
Chapter A6 [6]:
Timing Cost Audit in Information Technology (IT)
11. The cost auditor may perform tests of controls or substantive procedures at an interim date
or at the period end. The higher the risk of material misstatement, the more likely it is that Part B: Management Audit
the cost auditor may decide it is more effective to perform substantive procedures nearer
to, or at, the period end rather than at an earlier date, or to perform audit procedures Chapter B1 [7]:
unannounced or at unpredictable times (for example, performing audit procedures at Internal Control & Internal Audit
selected locations on an unannounced basis). This is particularly relevant when considering
the response to the risks of fraud. For example, the cost auditor may conclude that, when Chapter B2 [8]:
the risks of intentional misstatement or manipulation have been identified, audit procedures Operational Audit
to extend audit conclusions from interim date to the period end would not be effective.
Chapter B3 [9]:
12. On the other hand, performing audit procedures before the period end may assist the cost
auditor in identifying significant matters at an early stage of the audit, and consequently
resolving them with the assistance of management or developing an effective audit
approach to address such matters.
[Chapter 10]
13. In addition, certain audit procedures can be performed only at or after the period end, for
example:
(a) Agreeing the cost statements to the cost records;
(b) Examining adjustments made during the course of preparing the cost statements;
(c) Reconciliation of profits, or in case of an entity carrying on any activity not for profit,
of surplus, as per cost accounts and as per financial accounts;
107
(d) Reconciliation of indirect taxes showing details of total clearance of goods/services,

assessable value, duties/ taxes paid, CENVAT or VAT or Service Tax credit utilized,
duties/taxes recovered and interest / penalty paid;
(e) Statement of value addition and distribution of earnings.
14. Further relevant factors that influence the cost auditor’s consideration of when to perform
audit procedures include the following:
(a) The control environment. Click to jump on:
(b) When relevant information is available (for example, electronic files may
subsequently be overwritten, or procedures to be observed may occur only at certain Home
times).
(c) The nature of the risk (for example, if cost is being overstated in some products or Part A: Cost Audit
material cost wherever absorbed on standard basis, price differences, if any based-on
negotiations made later on not considered while booking the costs, the auditor may Chapter A1 [1]:
wish to examine contracts available on the date of the period end). Cost Audit Concept & Legal issues
(d) The period or date to which the audit evidence relates.
15. The extent of an audit procedure is determined after considering the materiality, the Chapter A2 [2]:
assessed risk, and the degree of assurance the cost auditor plans to obtain. When a single Cost Accounting Standards
purpose is met by a combination of procedures, the extent of each procedure is considered
separately. In general, the extent of audit procedures increases as the risk of material Chapter A3 [3]:
misstatement increases. For example, in response to the assessed risk of material Cost Auditing Standards and Quality control
misstatement due to fraud, increasing sample sizes or performing substantive analytical
Chapter A4 [4]:
procedures at a more detailed level may be appropriate. However, increasing the extent of
an audit procedure is effective only if the audit procedure itself is relevant to the specific
risk. Chapter A5 [5]:
16. The use of computer-assisted audit techniques (CAATs) may enable more extensive testing Reporting under Cost Audit
of electronic transactions and account files, which may be useful when the cost auditor
decides to modify the extent of testing, for example, in responding to the risks of material Chapter A6 [6]:
misstatement due to fraud. Such techniques can be used to select sample transactions from Cost Audit in Information Technology (IT)
key electronic files, to sort transactions with specific characteristics, or to test an entire
population instead of a sample. Part B: Management Audit
Considerations specific to smaller entities Chapter B1 [7]:

17. In the case of very small entities, there may not be many control activities that could be Internal Control & Internal Audit
identified by the cost auditor, or the extent to which their existence or operation have been
documented by the entity may be limited. In such cases, it may be more efficient for the Chapter B2 [8]:
auditor to perform further audit procedures that are primarily substantive procedures. In Operational Audit
some rare cases, however, the absence of control activities or of other components of
Chapter B3 [9]:
control may make it impossible to obtain sufficient appropriate audit evidence.
Higher Assessments of Risk (Ref: Para 5.3(b))
18. When obtaining more persuasive audit evidence because of a higher assessment of risk,
[Chapter 10]
the auditor may increase the quantity of the evidence, or obtain evidence that is more
relevant or reliable, for example, by placing more emphasis on obtaining third party
evidence or by obtaining corroborating evidence from a number of independent sources.
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Tests of Controls
Designing and Performing Tests of Controls (Ref: Para. 5.4)
19. Tests of controls are performed only on those controls that the cost auditor has determined
are suitably designed to prevent, or detect and correct, a material misstatement in an
assertion. If substantially different controls were used at different times during the period
under audit, each is considered separately.
20. Testing the operating effectiveness of controls is different from obtaining an understanding Click to jump on:
of and evaluating the design and implementation of controls. However, the same types of
audit procedures are used. The auditor may, therefore, decide it is efficient to test the Home
operating effectiveness of controls at the same time as evaluating their design and
determining that they have been implemented. Part A: Cost Audit
21. Although some risk assessment procedures may not have been specifically designed as
tests of controls, they may nevertheless provide audit evidence about the operating Chapter A1 [1]:
effectiveness of the controls and, consequently, serve as tests of controls. For example, the Cost Audit Concept & Legal issues
cost auditor’s risk assessment procedures may have included:
(a) Inquiring about management’s use of standards or budgets. Chapter A2 [2]:
(b) Observing management’s comparison of monthly budgetsor standard and actuals with Cost Accounting Standards
respect expenses & consumption quantities for items such as consumption of material,
utilities, labour etc. Chapter A3 [3]:
(c) Inspecting reports pertaining to the investigation of variances between budgets/ Cost Auditing Standards and Quality control
standard and actuals.
Chapter A4 [4]:
(d) These audit procedures provide knowledge about the design of the entity’s budgeting
policies and whether they have been implemented, but may also provide audit
evidence about the effectiveness of the operation of budgeting policies in preventing Chapter A5 [5]:
or detecting material misstatements in the classification of expenses. Reporting under Cost Audit
22. In addition, the auditor may design a test of controls to be performed concurrently with a
test of details on the same transaction. Although the purpose of a test of controls is different Chapter A6 [6]:
from the purpose of a test of details, both may be accomplished concurrently by performing Cost Audit in Information Technology (IT)
a test of controls and a test of details on the same transaction, also known as a dual-purpose
test. For example, the cost auditor may design and evaluate the results of a test to examine Part B: Management Audit
an invoice to determine whether it has been approved and to provide substantive audit
evidence of a transaction. A dual-purpose test is designed and evaluated by considering Chapter B1 [7]:
each purpose of the test separately. Internal Control & Internal Audit
23. In some cases, the cost auditor may find it impossible to design effective substantive
procedures that by themselves provide sufficient appropriate audit evidence at the assertion Chapter B2 [8]:
level. This may occur when an entity conducts its business using IT and no documentation Operational Audit
of transactions is produced or maintained, other than through the IT system. In such cases,
Chapter B3 [9]:
paragraph 5.4(b) requires the cost auditor to perform tests of relevant controls.
Audit Evidence and Intended Reliance (Ref: Para. 5.5)
24. A higher level of assurance may be sought about the operating effectiveness of controls
[Chapter 10]
when the approach adopted consists primarily of tests of controls, in particular where it is
not possible or practicable to obtain sufficient appropriate audit evidence only from
substantive procedures.
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Nature and Extent of Tests of Controls

Other audit procedures in combination with inquiry (Ref: Para. 5.6(a))
25. Inquiry alone is not sufficient to test the operating effectiveness of controls. Accordingly,
other audit procedures are performed in combination with inquiry. In this regard, inquiry
combined with inspection or re-performance may provide more assurance than inquiry and
observation, since an observation is pertinent only at the point in time at which it is made.
26. The nature of the particular control influences the type of procedure required to obtain Click to jump on:
audit evidence about whether the control was operating effectively. For example, if
operating effectiveness is evidenced by documentation, the cost auditor may decide to Home
inspect it to obtain audit evidence about operating effectiveness. For other controls,
however, documentation may not be available or relevant. For example, documentation of Part A: Cost Audit
operation may not exist for some factors in the control environment, such as assignment of
authority and responsibility, or for some types of control activities, such as control Chapter A1 [1]:
activities performed by a computer. In such circumstances, audit evidence about operating Cost Audit Concept & Legal issues
effectiveness may be obtained through inquiry in combination with other audit procedures
such as observation or the use of CAATs. Chapter A2 [2]:
Extent of tests of controls
27. When more persuasive audit evidence is needed regarding the effectiveness of a control, it Chapter A3 [3]:
may be appropriate to increase the extent of testing of the control, as well as the degree of Cost Auditing Standards and Quality control
reliance on controls. Matters the cost auditor may consider in determining the extent of
Chapter A4 [4]:
tests of controls include the following:
(a) The frequency of the performance of the control by the entity during the period.
(b) The length of time during the audit period that the cost auditor is relying on the Chapter A5 [5]:
operating effectiveness of the control. Reporting under Cost Audit
(c) The expected rate of deviation from a control.
(d) The relevance and reliability of the audit evidence to be obtained regarding the Chapter A6 [6]:
operating effectiveness of the control at the assertion level. Cost Audit in Information Technology (IT)
(e) The extent to which audit evidence is obtained from tests of other controls related to
the assertion. Part B: Management Audit
28. Because of the inherent consistency of IT processing, it may not be necessary to increase
the extent of testing of an automated control. An automated control can be expected to Chapter B1 [7]:
function consistently unless the program (including the tables, files, or other permanent Internal Control & Internal Audit
data used by the program) is changed. Once the cost auditor determines that an automated
control is functioning as intended (which could be done at the time the control is initially Chapter B2 [8]:
implemented or at some other date), the cost auditor may consider performing tests to Operational Audit
determine that the control continues to function effectively. Such tests might include
Chapter B3 [9]:
determining that:
(a) Changes to the program are not made without being subject to the appropriate program
change controls;
(b) The authorized version of the program is used for processing transactions;
[Chapter 10]
(c) Other relevant general controls are effective; and
(d) Such tests also might include determining that changes to the programs have not been
made, as may be the case when the entity uses packaged software applications without
modifying or maintaining them. For example, the cost auditor may inspect the record
of the administration of IT security to obtain audit evidence that unauthorized access
has not occurred during the period.
110
Testing of indirect controls (Ref: Para. 5.6(b))

29. In some circumstances, it may be necessary to obtain audit evidence supporting the
effective operation of indirect controls. For example, when the cost auditor decides to test
the effectiveness of a user review of supplementary budgets detailing spends in excess of
approved budgets the user review and related follow up is the control that is directly of
relevance to the auditor. Controls over the accuracy of the information in the reports (for
example, the general IT controls) are described as “indirect” controls. Click to jump on:
30. Because of the inherent consistency of IT processing, audit evidence about the
implementation of an automated application control, when considered in combination with Home
audit evidence about the operating effectiveness of the entity’s general controls (in
particular, change controls), may also provide substantial audit evidence about its operating Part A: Cost Audit
effectiveness.
Chapter A1 [1]:
Timing of Tests of Controls Cost Audit Concept & Legal issues
Intended period of reliance (Ref: Para. 5.7)
31. Audit evidence pertaining only to a point in time may be sufficient for the cost auditor’s Chapter A2 [2]:
purpose, for example, when testing controls over the entity’s physical inventory counting Cost Accounting Standards
at the period end. If, on the other hand, the auditor intends to rely on a control over a period,
tests that are capable of providing audit evidence that the control operated effectively at Chapter A3 [3]:
relevant times during that period are appropriate. Such tests may include tests of the Cost Auditing Standards and Quality control
entity’s monitoring of controls.
Chapter A4 [4]:
Using audit evidence obtained during an interim period (Ref: Para. 5.8(b))
32. Relevant factors in determining what additional audit evidence to obtain about controls Chapter A5 [5]:
that were operating during the period remaining after an interim period, include: Reporting under Cost Audit
(a) The significance of the assessed risks of material misstatement at the assertion level.
(b) The specific controls that were tested during the interim period, and significant Chapter A6 [6]:
changes to them since they were tested, including changes in the information system, Cost Audit in Information Technology (IT)
processes, and personnel.
(c) The degree to which audit evidence about the operating effectiveness of those controls Part B: Management Audit
was obtained.
(d) The length of the remaining period. Chapter B1 [7]:
(e) The extent to which the auditor intends to reduce further substantive procedures based Internal Control & Internal Audit
on the reliance of controls.
(f) The control environment. Chapter B2 [8]:
33. Additional audit evidence may be obtained, for example, by extending tests of controls Operational Audit
over the remaining period or testing the entity’s monitoring of controls.
Chapter B3 [9]:
34. In certain circumstances, audit evidence obtained from previous cost audits may provide
audit evidence where the cost auditor performs audit procedures to establish its continuing
relevance. For example, in performing a previous cost audit, the auditor may have
determined that an automated control was functioning as intended. The auditor may obtain
[Chapter 10]
audit evidence to determine whether changes to the automated control have been made that
affect its continued effective functioning through, for example, inquiries of management
and the inspection of logs to indicate what controls have been changed. Consideration of
audit evidence about these changes may support either increasing or decreasing the
expected audit evidence to be obtained in the current period about the operating
effectiveness of the controls. (Ref: Para. 5.9)
111
Controls that have changed from previous audits (Ref: Para. 5.10(a))
35. Changes may affect the relevance of the audit evidence obtained in previous audits such
that there may no longer be a basis for continued reliance. For example, changes in a system
that enable an entity to receive a new report from the system probably do not affect the
relevance of audit evidence from a previous audit; however, a change that causes data to
be accumulated or calculated differently does affect it.
Click to jump on:
Controls that have not changed from previous audits (Ref: Para. 5.10(b))
36. The cost auditor’s decision on whether to rely on audit evidence obtained in previous audits Home
for controls that:
(a) have not changed since they were last tested; and Part A: Cost Audit
(b) are not controls that mitigate a significant risk,
is a matter of professional judgment. In addition, the length of time between retesting such Chapter A1 [1]:
controls is also a matter of professional judgment but is required by paragraph 5.10 (b) to Cost Audit Concept & Legal issues
be at least once in every third year.
37. In general, the higher the risk of material misstatement, or the greater the reliance on Chapter A2 [2]:
controls, the shorter the time period elapsed, if any, is likely to be. Factors that may Cost Accounting Standards
decrease the period for retesting a control, or result in not relying on audit evidence
obtained in previous audits at all, include the following: Chapter A3 [3]:
(a) A deficient control environment. Cost Auditing Standards and Quality control
(b) Deficient monitoring of controls.
Chapter A4 [4]:
(c) A significant manual element to the relevant controls.
(d) Personnel changes that significantly affect the application of the control.
(e) Changing circumstances that indicate the need for changes in the control. Chapter A5 [5]:
(f) Deficient general IT controls. Reporting under Cost Audit
38. When there are a number of controls for which the cost auditor intends to rely on audit
evidence obtained in previous audits, testing some of those controls in each audit provides Chapter A6 [6]:
corroborating information about the continuing effectiveness of the control environment. Cost Audit in Information Technology (IT)
This contributes to the auditor’s decision about whether it is appropriate to rely on audit
evidence obtained in previous audits. Part B: Management Audit
Evaluating the Operating Effectiveness of Controls (Ref: Para. 5.12 – 5.13) Chapter B1 [7]:
39. A material misstatement detected by the cost auditor’s procedures is a strong indicator of Internal Control & Internal Audit
the existence of a significant deficiency in internal control.
40. The concept of effectiveness of the operation of controls recognizes that some deviations Chapter B2 [8]:
in the way controls are applied by the entity may occur. Deviations from prescribed Operational Audit
controls may be caused by such factors as changes in key personnel, significant seasonal
Chapter B3 [9]:
fluctuations in volume of transactions and human error. The detected rate of deviation, in
particular in comparison with the expected rate, may indicate that the control cannot be
relied on to reduce risk at the assertion level to that assessed by the cost auditor.
[Chapter 10]
Substantive Procedures (Ref: Para. 5.14)
41. The cost auditor has to design and perform substantive procedures for each material item
of cost in the cost statement, and disclosure, irrespective of the assessed risks of material
misstatement. This requirement reflects the facts that:
(a) the auditor’s assessment of risk is judgmental and so may not identify all risks of
material misstatement; and
(b) there are inherent limitations to internal control, including management override.
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Nature and Extent of Substantive Procedures (Ref: Para. 5.14)

42. Depending on the circumstances, the cost auditor may determine that:
(a) Performing only substantive analytical procedures will be sufficient to reduce audit
risk to an acceptably low level. For example, where the auditor’s assessment of risk is
supported by audit evidence from tests of controls.
(b) Only tests of details are appropriate.
(c) A combination of substantive analytical procedures and tests of details are most Click to jump on:
responsive to the assessed risks.
43. Substantive analytical procedures are generally more applicable to large volumes of Home
transactions that tend to be predictable over time.
44. The nature of the risk and assertion is relevant to the design of tests of details. For example, Part A: Cost Audit
tests of details related to the existence or occurrence assertion may involve selecting from
items contained in a cost statement amount and obtaining the relevant audit evidence. On Chapter A1 [1]:
the other hand, tests of details related to the completeness assertion may involve selecting Cost Audit Concept & Legal issues
from items that are expected to be included in the relevant cost statement amount and
investigating whether they are included. Chapter A2 [2]:
45. Because the assessment of the risk of material misstatement takes account of internal Cost Accounting Standards
control, the extent of substantive procedures may need to be increased when the results
from tests of controls are unsatisfactory. However, increasing the extent of an audit Chapter A3 [3]:
procedure is appropriate only if the audit procedure itself is relevant to the specific risk. Cost Auditing Standards and Quality control
46. In designing tests of details, the extent of testing is ordinarily thought of in terms of the
Chapter A4 [4]:
sample size. However, other matters are also relevant, including whether it is more
effective to use other selective means of testing.
Chapter A5 [5]:
Considering Whether External Confirmation Procedures Are to Be Performed (Ref: Para. Reporting under Cost Audit
5.15)
47. External confirmation procedures frequently are relevant when addressing assertions Chapter A6 [6]:
associated with account balances and their elements but need not be restricted to these Cost Audit in Information Technology (IT)
items. Situations where external confirmation procedures may provide relevant audit
evidence in responding to assessed risks of material misstatement may include, inventories Part B: Management Audit
held by third parties at bonded warehouses for processing or on consignment.
48. Although external confirmations may provide relevant audit evidence relating to certain Chapter B1 [7]:
assertions, there are some assertions for which external confirmations provide less relevant Internal Control & Internal Audit
audit evidence. For example, external confirmations provide less relevant audit evidence
relating to the recoverability of raw materials supplied to third part for job work purpose, Chapter B2 [8]:
than they do of their existence. Operational Audit
49. The cost auditor may determine that external confirmation procedures performed for one
Chapter B3 [9]:
purpose provide an opportunity to obtain audit evidence about other matters. For example,
confirmation requests for raw materials supplied to third part for job work purpose often
include requests for information relevant to other cost statement assertions. Such
considerations may influence the cost auditor’s decision about whether to perform external
[Chapter 10]
confirmation procedures.
50. Factors that may assist the cost auditor in determining whether external confirmation
procedures are to be performed as substantive audit procedures include:
(a) The confirming party’s knowledge of the subject matter – responses may be more
reliable if provided by a person at the confirming party who has the requisite
knowledge about the information being confirmed.
113
(b) The ability or willingness of the intended confirming party to respond – for example,
the confirming party:
(i) May not accept responsibility for responding to a confirmation request;
(ii) May consider responding too costly or time consuming;
(iii) May have concerns about the potential legal liability resulting from responding;
(iv) May account for transactions in different currencies; or
(v) May operate in an environment where responding to confirmation requests is not Click to jump on:
a significant aspect of day-to-day operations.
In such situations, confirming parties may not respond, may respond in a casual Home
manner or may attempt to restrict the reliance placed on the response.
(c) The objectivity of the intended confirming party – if the confirming party is a related Part A: Cost Audit
party of the entity, responses to confirmation requests may be less reliable.
Chapter A1 [1]:
Substantive Procedures Related to the Cost Statement Closing Process (Ref: Para. 5.16) Cost Audit Concept & Legal issues
51. The nature, and also the extent, of the auditor’s examination, of cost records and other
Chapter A2 [2]:
adjustments depends on the nature and complexity of the entity’s cost reporting process
and the related risks of material misstatement.
Chapter A3 [3]:
Substantive Procedures Responsive to Significant Risks (Ref: Para. 5.17) Cost Auditing Standards and Quality control
52. 6.52 The cost auditor is required to perform substantive procedures that are specifically
responsive to risks the auditor has determined to be significant risks. Audit evidence in the Chapter A4 [4]:
form of external confirmations received directly by the auditor from appropriate Legal Position of Cost Auditor
confirming parties may assist the auditor in obtaining audit evidence with the high level of
reliability that the cost auditor requires to respond to significant risks of material Chapter A5 [5]:
misstatement, whether due to fraud or error. Reporting under Cost Audit
53. 6.53 In most cases, audit evidence from a previous audit’s substantive procedures provides
little or no audit evidence for the current period. There are, however, exceptions, for Chapter A6 [6]:
example, a legal opinion obtained in a previous audit related to the structure of a Cost Audit in Information Technology (IT)
securitization to which no changes have occurred, may be relevant in the current period. In
such cases, it may be appropriate to use audit evidence from a previous audit’s substantive Part B: Management Audit
procedures if that evidence and the related subject matter have not fundamentally changed,
and audit procedures have been performed during the current period to establish its Chapter B1 [7]:
continuing relevance.
Chapter B2 [8]:
Using audit evidence obtained during an interim period (Ref: Para. 5.18) Operational Audit
54. In some circumstances, the cost auditor may determine that it is effective to perform
substantive procedures at an interim date, and to compare and reconcile information Chapter B3 [9]:
obtained at the period end with the comparable information at the interim date to: Management Audit in Different function
(a) Identify amounts that appear unusual;
(b) Investigate any such amounts; and Part C: Performance Analysis
(c) Perform substantive analytical procedures or tests of details to test the intervening [Chapter 10]
period.
55. Performing substantive procedures at an interim date without undertaking additional
procedures at a later date increases the risk that the cost auditor will not detect
misstatements that may exist at the period end. This risk increases as the remaining period
is lengthened. Factors such as the following may influence whether to perform substantive
procedures at an interim date:
114
(a) The control environment and other relevant controls.

(b) The availability at a later date of information necessary for the auditor’s procedures.
(c) The purpose of the substantive procedure.
(d) The assessed risk of material misstatement.
(e) The nature of the head of cost and related assertions.
(f) The ability of the auditor to perform appropriate substantive procedures or substantive
procedures combined with tests of controls to cover the remaining period in order to Click to jump on:
reduce the risk that misstatements that may exist at the period end will not be detected.
56. Factors such as the following may influence whether to perform substantive analytical Home
procedures with respect to the period between the interim date and the period end, whether
the information system relevant to cost reporting will provide information concerning the Part A: Cost Audit
cost of sales and margin for each product or service at the period end and the transactions
in the remaining period that is sufficient to permit investigation of: Chapter A1 [1]:
(a) Significant unusual transactions or entries (including those at or near the period end); Cost Audit Concept & Legal issues
(b) Other causes of significant fluctuations, or expected fluctuations that did not occur;
and Chapter A2 [2]:
(c) Changes in the composition of the heads of cost or classification of items of cost. Cost Accounting Standards
Misstatements detected at an interim date (Ref: Para. 5.19) Chapter A3 [3]:

57. When the cost auditor concludes that the planned nature, timing or extent of substantive Cost Auditing Standards and Quality control
procedures covering the remaining period need to be modified as a result of unexpected
Chapter A4 [4]:
misstatements detected at an interim date, such modification may include extending or
repeating the procedures performed at the interim date at the period end.
Chapter A5 [5]:
Adequacy of Presentation and Disclosure (Ref: Para. 5.20) Reporting under Cost Audit
58. Evaluating the overall presentation and disclosure of the cost statements relates to whether
the individual cost statements are presented in a manner that reflects the appropriate Chapter A6 [6]:
classification and description of cost information, and the form, arrangement, and content Cost Audit in Information Technology (IT)
of the cost statements and their appended notes. This includes, for example, the
terminology used, the classification of cost items in the statements, and the bases ofcost Part B: Management Audit
allocation and apportionment set forth.
Chapter B1 [7]:
Evaluating the Sufficiency and Appropriateness of Audit Evidence (Ref: Para. 5.21–5.23) Internal Control & Internal Audit
59. As the cost auditor performs planned audit procedures, the audit evidence obtained may
cause the auditor to modify the nature, timing or extent of other planned audit procedures. Chapter B2 [8]:
Information may come to the cost auditor’s attention that differs significantly from the Operational Audit
information on which the risk assessment was based. For example:
Chapter B3 [9]:
(a) The extent of misstatements that the cost auditor detects by performing substantive
procedures may alter the auditor’s judgment about the risk assessments and may
indicate a significant deficiency in internal control.
(b) The auditor may become aware of discrepancies in cost records, or conflicting or
[Chapter 10]
missing evidence.
(c) Analytical procedures performed at the overall review stage of the audit may indicate
a previously unrecognized risk of material misstatement.
In such circumstances, the cost auditor may need to reevaluate the planned audit
procedures, based on the revised consideration of assessed risks for all or some of the
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classes of transactions, consumption norms, each material items of cost in the cost
statement, or disclosures and related assertions.
60. The cost auditor cannot assume that an instance of fraud or error is an isolated occurrence.
Therefore, the consideration of how the detection of a misstatement affects the assessed
risks of material misstatement is important in determining whether the assessment remains
appropriate.
61. The cost auditor’s judgment as to what constitutes sufficient appropriate audit evidence is Click to jump on:
influenced by such factors as the following:
(a) Significance of the potential misstatement in the assertion and the likelihood of its Home
having a material effect, individually or aggregated with other potential misstatements,
on the cost statements. Part A: Cost Audit
(b) Effectiveness of management’s responses and controls to address the risks.
(c) Effectiveness of management’s responses and controls to address the risks. Chapter A1 [1]:
(d) Results of cost audit procedures performed, including whether such audit procedures Cost Audit Concept & Legal issues
identified specific instances of fraud or error.
(e) Source and reliability of the available information. Chapter A2 [2]:
(f) Persuasiveness of the audit evidence. Cost Accounting Standards
(g) Understanding of the entity and its environment, including the entity’s internal control.
Chapter A3 [3]:
Documentation (Ref: Para. 5.24) Cost Auditing Standards and Quality control
62. The form and extent of audit documentation is a matter of professional judgment, and is
Chapter A4 [4]:
influenced by the nature, size and complexity of the entity and its internal control,
availability of information from the entity and the audit methodology and technology used
in the audit. Chapter A5 [5]:
Interactive Question 5.1(a): Cost audit evidence obtaining during interim period
[Difficulty Level: Moderate] Chapter A6 [6]:
As a Cost Auditor, if you need to collect audit evidence during interim period of auditee, in which
points you need to focus or keep on mined for further period? Part B: Management Audit
Ans: As a cost auditor, If I need to obtain audit evidence about the operating effectiveness of controls Chapter B1 [7]:
during an interim period, I shall obtain audit evidence about significant changes to those controls Internal Control & Internal Audit
subsequent to the interim period; and determine the additional audit evidence to be obtained for the
Chapter B2 [8]:
remaining period.
Operational Audit
(a) Relevant factors in determining what additional audit evidence I need to obtain about controls that
were operating during the period remaining after an interim period, include: Chapter B3 [9]:
(b) The significance of the assessed risks of material misstatement at the assertion level. Management Audit in Different function
(c) The specific controls that were tested during the interim period, and significant changes to them
since they were tested, including changes in the information system, processes, and personnel. Part C: Performance Analysis
(d) The degree to which audit evidence about the operating effectiveness of those controls was [Chapter 10]
obtained.
(e) The length of the remaining period.
(f) The extent to which the auditor intends to reduce further substantive procedures based on the
reliance of controls.
(g) The control environment.
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Interactive Question 5.1(b): Cost audit evidence obtaining from previous audit
As a Cost Auditor, if you need to collect audit evidence from previous audit, in which controlling point
you think consider for testing the effectiveness of those in current audit period?
Ans: In determining whether it is appropriate to use audit evidence about the operating effectiveness Click to jump on:
of controls obtained in previous audits, and, if so, the length of the time period that may elapse before
retesting a control, as a cost auditor, I shall consider the following: Home
• The effectiveness of other elements of internal control, including the control environment, the
entity’s monitoring of controls, and the entity’s risk assessment process; Part A: Cost Audit
• The risks arising from the characteristics of the control, including whether it is manual or
automated; Chapter A1 [1]:
• The effectiveness of general IT controls; Cost Audit Concept & Legal issues
• The effectiveness of the control and its application by the entity, including the nature and extent of
Chapter A2 [2]:
deviations in the application of the control noted in previous audits, and whether there have been
personnel changes that significantly affect the application of the control;
• Whether the lack of a change in a particular control poses a risk due to changing circumstances; Chapter A3 [3]:
and Cost Auditing Standards and Quality control
• The risks of material misstatement and the extent of reliance on the control.
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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5.2 Preparation Cost Audit Report

Every cost auditor shall prepare cost audit report (in duplicate) of the company under audit and
in accordance with the procedures as laid down in the schedule of these rules and submit within
a maximum period of 90 days from the end of the financial year, a report on the performance
to of its function for that very year.
Click to jump on:
The cost auditor in his report has to confirm the conclusions drawn from the cost audit evidence
gathered during performance of cost audit. Any deviation or error of omission or commission Home
in the records or in the maintenance of cost accounting records observed during cost audit may
be rectified by the company during the course of the cost audit, in order to avoid an unfavorable Part A: Cost Audit
opinion in the cost auditor’s report.
Chapter A1 [1]:
The cost auditor has also to confirm in his report that all information and explanations required Cost Audit Concept & Legal issues
by him were readily provided, which to the best of his knowledge and belief were necessary for
the purpose of cost audit. The cost auditor has to confirm in his report that proper returns, Chapter A2 [2]:
statements, schedules for the purpose of audit of cost accounts were duly received from
branches and offices not visited by him, and that the books and records give or do not give the
Chapter A3 [3]:
information required by the rules in the manner required. Cost Auditing Standards and Quality control
S/he has also to give her/his opinion on the statements of capacity utilization and stock in trade Chapter A4 [4]:
and confirm that the same are in agreement with the books of the accounts of the company and Legal Position of Cost Auditor
exhibit true and fair view of the company’s affairs. The cost auditor has also to confirm whether
or not the cost accounting records maintained by the company give a true and fair view of the Chapter A5 [5]:
cost of production, processing, manufacturing and marketing of each product of the company Reporting under Cost Audit
under reference. In giving this opinion, the cost auditor uses his judgement, keeping in view all
his findings during the course of cost audit and the audit evidence collected by him. Chapter A6 [6]:
The Cost Auditor shall report on:
• matters which appear to him to be clearly wrong in principle or apparently unjustifiable; Part B: Management Audit
• cases where the company's funds have been used in a negligent or inefficient manner;
Chapter B1 [7]:
• factors which could have been controlled but have not been done resulting in increase in
the cost of production;
• contracts or agreements, if any, between the company and other parties relating to selling, Chapter B2 [8]:
purchasing, etc. by bringing out any peculiar features, undue benefits; Operational Audit
• the adequacy or otherwise of budgetary control system, if any, in vogue in the company.
Chapter B3 [9]:
The Cost Auditor shall suggest measures for improvements in performance, if any, in respect Management Audit in Different function
of the following, namely:
(a) rectification of general imbalance in production facilities; Part C: Performance Analysis
(b) fuller utilization of installed capacity; [Chapter 10]
(c) concentration on areas offering scope for: (i) cost reduction, (ii) increased productivity and
(iii) key limiting factors causing production bottlenecks;
(d) improved inventory policies.
The Cost Auditor may give his other observations and conclusions, if any, relevant to the cost
audit.
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The report, suggestions, observations and conclusions given by the Cost shall be based on
verified data, reference to which shall be made here and shall, wherever practicable, be included
after the company has been afforded an opportunity to comment on them. If as a result of the
examination of the books of account, the Cost Auditor desires to give a qualified report, he shall
indicate the extent to which he has to qualify the report and the reasons there for.
Click to jump on:
The Cost Auditor shall ensure that the report along with Annexures and Proforma is to be neatly
stitched and bound in a file and sent by registered post or otherwise delivered in person to the Home
Central Government through messenger and acknowledgment obtained.
Part A: Cost Audit
Interactive Question 5.2: Preparing Audit Report Chapter A1 [1]:
[Difficulty Level: Easy] Cost Audit Concept & Legal issues
As a Cost Auditor, which points you have to consider when preparing audit report? Chapter A2 [2]:
Ans: As a Cost Auditor, when I am preparing my audit report, firstly I choose the format which is
Chapter A3 [3]:
prescribed by current law. Then I confirm that the conclusions must draw from the cost audit evidence
gathered during performance of my audit. I summarized the list of books of accounts and records from
where I acquired sufficient data to complete my audit. I also give an opinion on the statements of Chapter A4 [4]:
capacity utilization of resources. It is my duty to express an opinion on my audit report about the cost Legal Position of Cost Auditor
accounting records maintained by the company give a true and fair view of the cost of production,
processing, manufacturing and marketing of each product of the company. Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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5.3 Key Points of a Cost Audit Report

In a cost audit report the following key points are presented:
• Auditor’s Opinion about:
(a) overall audit,
(b) cost accounting system,
(c) capacity utilization, Click to jump on:
(d) product summary,
(e) labor and machine hour utilization, Home
(f) raw materials utilization with variance analysis,
(g) key overheads: salaries and wages, store and spares, depreciation, utilities etc. with Part A: Cost Audit
variance analysis,
(h) reconciliation with financial statements, Chapter A1 [1]:
• General Information: Cost Audit Concept & Legal issues
(a) name of the company
Chapter A2 [2]:
(b) date of incorporation
(c) company’s financial year to which the Cost Audit Report relates
(d) location of head office Chapter A3 [3]:
(e) location of registered office Cost Auditing Standards and Quality control
(f) location of factory
(g) name, address, membership number and e-mail address of cost auditor Chapter A4 [4]:
(h) products name Legal Position of Cost Auditor
(i) SRN Number and filling date of Form 23C to the Government (if it is a mandatory cost
audit asked by Government) Chapter A5 [5]:
(j) Date of Board of Directors’ Meeting where in the Annexure to the cost audit report Reporting under Cost Audit
were approved
Chapter A6 [6]:
Seven parts of an audit report Cost Audit in Information Technology (IT)
Typically, and audit report includes few specific parts of elements. These are: report title,
introductory Paragraph, scope paragraph, executive summary, opinion paragraph, auditor’s
name, and auditor’s signature.
Chapter B1 [7]:
1. Report Title: This has the basic components of an audit report: date (which is usually the
last day of when an audit is held) and the addressee (which is stockholders or board of
directors of the audited company). Chapter B2 [8]:
2. Introductory Paragraph: This part is where it is stated that an audit is carried out in the Operational Audit
company stated above. It is also stated here the financial records that were used in the audit
that is conducted. This is also where it is stated that it is a company’s responsibility to Chapter B3 [9]:
ensure that its financial statements are correct and fair in accordance with the Management Audit in Different function
internationally accepted accounting standards.
3. Scope Paragraph: This is a paragraph that basically expresses that the rules and methods Part C: Performance Analysis
that were followed by an auditor in the audit were set by the Generally Accepted Audit [Chapter 10]
Standards. These were fundamentally for the intention of presenting companies a
reasonable assurance that whatever is shown in their financial statements is correct.
4. Executive Summary: This segment discusses the findings of an auditor. An auditor writes
here the matters that are important in their view for the management of a company to know.
This is merely the summary of what has been found by an auditor, not their opinion about
120
their findings. This is simply comprised of what they have assessed in their timeframe in
auditing.
5. Opinion Paragraph: This is where an auditor’s opinion is stated, whether they believe that
a company’s financial statements are correct and fair and follow the accounting standards
or not. They also state the methods used in how they have arrived at such a conclusion.
6. Auditor’s Name: An auditor’s name is then identified after all the information above,
ensuring that it is clear that the author of the audit report is the auditor who conducted the Click to jump on:
audit himself. In the event that an auditor works in a third-party organization, the name of
their firm needs to be included as well. Home
7. Auditor’s Signature: An auditor’s signature signifies that an auditor who writes an audit
report acknowledges the responsibility that they are held accountable for with regard to the Part A: Cost Audit
results of the audit they have conducted.
Chapter A1 [1]:
Interactive Question 5.3: Auditor’s Opinion Cost Audit Concept & Legal issues
Chapter A2 [2]:
As a cost auditor, what type of opinion you may express in your audit report? Which matters do affect
your audit opinion, and which do not?
Chapter A3 [3]:
Ans: There are four types of audit opinion from which anyone that can be expressed by a cost auditor
in his/her cost audit report depending upon the circumstance during performing the audit. Audit opinion Chapter A4 [4]:
types are: Unqualified Opinion, Qualified Opinion, Adverse Opinion and Disclaimer of Opinion Legal Position of Cost Auditor
Matters that Do Affect the Auditor’s Opinion: An auditor may not be able to express an unqualified Chapter A5 [5]:
opinion when either of the following circumstances exists and, in the auditor’s judgment, the effect of Reporting under Cost Audit
the matter is or may be material to the financial statements:
• There is a limitation on the scope of the auditor’s work; or Chapter A6 [6]:
• There is a disagreement with management regarding the acceptability of the accounting policies Cost Audit in Information Technology (IT)
selected, the method of their application or the adequacy of financial statement disclosures.
The circumstances described in (a) could lead to a qualified opinion or a disclaimer of opinion. The
circumstances described in (b) could lead to a qualified opinion or an adverse opinion. Chapter B1 [7]:
Matters that Do Not Affect the Auditor’s Opinion: Certain circumstances, while not affecting the
Chapter B2 [8]:
auditor’s unqualified opinion, may require that the auditor add an explanatory paragraph (or other Operational Audit
explanatory language) to the standard report. These circumstances include:
• The auditor’s opinion is based in part on the report of another auditor. Chapter B3 [9]:
• There is substantial doubt about the entity’s ability to continue as a going concern. Management Audit in Different function
• There has been a material change between periods in accounting principles or in the method of their
application. Part C: Performance Analysis
• Opinion on prior-period financial statements different from the opinion previously expressed. [Chapter 10]
• Prior period financial statements were audited by another auditor.
• Emphasis of a significant matter.
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5.4 Placement of The Report to The Management

Every cost auditor shall prepare cost audit report (in duplicate) of the company under audit and
in accordance with the procedures as laid down in the schedule of these rules and submit within
a maximum period of 150 days from the end of the financial year, a report on the performance
to of its function for that very year.
Click to jump on:
1. Every cost auditor shall prepare cost audit report (in duplicate) of the company under audit
and in accordance with the procedures as laid down in the schedule of these rules and Home
submit within a maximum period of 150 days from the end of the financial year, a report
on the performance to of its function for that very year. Part A: Cost Audit
2. The cost auditor shall submit the report prepared by him to the board of directors of the
company and a copy of the same shall be sent to the government. Chapter A1 [1]:
3. Cost auditor shall give clarification, if any, required by government, on the cost audit report Cost Audit Concept & Legal issues
submitted by him/her within the time, if the government thinks fit.
Chapter A2 [2]:
Interactive Question 5.4: Cost Audit Report Submit to Government
[Difficulty Level: Easy] Chapter A3 [3]:
Recently Arban Jute Mills are asked by Government for submitting cost audit report. The management
of Arban Jute Mills inform you the matter of submitting the cost audit report. As per law, who is Chapter A4 [4]:
responsible for submitting cost audit report to Government. Legal Position of Cost Auditor
Ans: As per section 8(2) and 8(3) of “Cost Audit (Report) Rules, 1997”, “The cost auditor shall submit Chapter A5 [5]:
the report prepared by him to the board of directors of the company and a copy of the same shall be sent Reporting under Cost Audit
to the Government. Also, cost auditor shall give clarification, if any, required by Government, on the
cost audit report submitted by her/him within the time, the Government thinks fit.” Chapter A6 [6]:
So, as a cost auditor, it is my responsibility to submit the cost audit report to Government and also Cost Audit in Information Technology (IT)
giving clarification, if any, required by Government.
Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
122
5.5 Finalization
The cost audit report should be prepared in the prescribed format as per Cost Audit (Report)
Rules, 1997. The report will contain the following:
(a) The main certificate; and
(b) The annexure to the main certificate
Click to jump on:
The main certificate is generally on the same lines as the certificate given by a financial auditor.
The certificate provides for more than one auditor to sign the report. The format facilitates Home
signing on behalf of a firm, of cost accountants. The main certificate contains five major points:
1. Whether the auditor has or has not obtained all the information and explanations necessary Part A: Cost Audit
for the purposes of the cost audit;
2. Whether proper cost accounting records as required by law have or have not been Chapter A1 [1]:
maintained by the company; Cost Audit Concept & Legal issues
3. Whether proper returns adequate for the purpose of cost audit have or have not been
received from branches not visited by the cost auditor; Chapter A2 [2]:
4. Whether the books and records give or do not give the information required by law in the
manner so required; and
Chapter A3 [3]:
5. Whether in the opinion of the auditor the cost accounting records have or have not been Cost Auditing Standards and Quality control
kept so as to give a true and fair view of the cost of production and marketing of the product.
Chapter A4 [4]:
The format prescribed in the Cost Audit (Report) Rules, 1997 are given below: Legal Position of Cost Auditor
Cost Audit Report Chapter A5 [5]:

I /We........................................................................................... being appointed under section 220(1) of
the Companies Act, 1994 (Act No. XVIII of 1994) as auditor (hereinafter called "Cost Auditor") of Chapter A6 [6]:
...................................................................... Ltd. (hereinafter called the "Company") have examined the
cost accounting books and other relevant papers maintained by the Company for the year ended on
………….......................... and subject to comments on enclosed annexure do hereby report that -
a) I/We have/have not obtained all the information and explanation which to the best of my/our
Chapter B1 [7]:
knowledge and belief were necessary for completion of this audit;
b) section 181(l)(d) of the Companies Act, 1994 and prescribed cost accounting records have/have not
been kept by the company; Chapter B2 [8]:
c) adequate information on returns, statement, etc. for the purpose of my/our cost audit have/have not Operational Audit
been received from the branches not visited by me/us;
d) information as prescribed by relevant rules are/are not available from the cost accounting records Chapter B3 [9]:
maintained by the "company and exhibit/do not exhibit a -true and fair view of the cost of Management Audit in Different function
production/distribution/marketing / transportation / processing / manufacturing / milling/mining or
extraction of minerals of the Company; and Part C: Performance Analysis
e) the enclosed statement of production and statement of inventories are/are agreement with the books [Chapter 10]
of accounts of the company.
Place :................................................. Name and signature of the person or firm

Dated : ................................................ Cost Auditor
N.B. Annexures those are to be enclosed with the report should be treated as integral part of the report.
123
Placement of the Report before the Board of Directors and finalization:

The cost audit report will be submitted before the Board of Directors of the company as per
Rule 8 of the Cost Audit (Report) Rules, 1997. The cost auditor will place his information and
explanations in support of the Cost Audit Report before the management of the company. Some
discussions may be held between the cost auditor and the representative of the management
after which the report will be finalized. The final report as per format prescribed in the Rule
will then be submitted to the Board of Directors. Rule 8 and 9 are as follows: Click to jump on:
Rule-8: Submission of report: Home

(1) Every cost auditor shall prepare cost audit report (in duplicate) of the-Company under
audit and in accordance with the procedures as laid- down in the Schedule of these rules and Part A: Cost Audit
submit within a maximum period of 150 days from the end of the financial year, a report on the
performance of its functions for that very year, Chapter A1 [1]:
(2) The cost auditor shall submit the report prepared by him to the board of directors of the Cost Audit Concept & Legal issues
company and a copy of the same shall be sent to the Governments.
(3) Cost auditor shall give clarification, if any, required by Government, on the cost audit Chapter A2 [2]:
report submitted by him within the time, the Government thinks fit. Cost Accounting Standards
Chapter A3 [3]:
Rule-9: Presentation of cost audit report: Cost Auditing Standards and Quality control
(1) The chief executive of the company shall present the cost audit report to the board of
directors within 30 days from' the date of submission of the same by the cost auditor. Chapter A4 [4]:
Such cost audit report may contain some annexures on general observations, cost accounting Legal Position of Cost Auditor
system, financial position, production, process of manufacture and other elements of cost and
risk factors of the company. Chapter A5 [5]:
Interactive Question 5.5: Annexure of Cost Audit Report Chapter A6 [6]:

[Difficulty Level: Easy] Cost Audit in Information Technology (IT)
As per “Cost Audit (Report) Rules, 1997”, list an annexure which should be there in a Cost Audit
Report.
Chapter B1 [7]:
Ans: As per “Cost Audit (Report) Rules, 1997”, there should be annexures on the following topics:
1. General 2. Cost Accounting System Chapter B2 [8]:
3. Financial Position 4. Production Operational Audit
5. Process of Manufacture 6. Materials (Raw Materials)
7. Power and Fuel 8. Wages and Salaries Chapter B3 [9]:
9. Stores and Spare parts 10. Depreciation Management Audit in Different function
11. Overhead Expenses 12. Royalty/technical aid payments
13. Abnormal and non-recurring expenses 14. Research and Development expenses Part C: Performance Analysis
15. Human Resource Development expenses 16. Other items [Chapter 10]
17. Production cost 18. Auditor’s observations and conclusions
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Chapter A6 [6]
COST AUDIT IN INFORMATION TECHNOLOGY (IT)

Click to jump on:
6.1 Cost Auditing in computer-based Environment (IT)
6.2 Computer aided auditing technique (CAAT) Home
6.3 IT Control and risk assessment
Part A: Cost Audit
Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
125
6.1 Cost Auditing in Computer-Based Environment (IT)

When planning the cost audit, the cost auditor should consider an appropriate combination of
manual and computer-assisted audit techniques (CAATs). In determining whether· to use
CAATs, he should take into account:
(a) His computer knowledge, expertise and experience.
(b) Availability of CAATs and suitable computer facilities. Click to jump on:
(c) Impracticability of manual tests.
(d) Effectiveness and efficiency. Home
(e) Timing.
Part A: Cost Audit
In an EDP environment, the control procedures take basically two stages:
1. Manual Procedure-i.e. the clerical work done up to the translation of data into machine- Chapter A1 [1]:
sensible form. This stage, being manual, is subjected to usual internal. control conditions Cost Audit Concept & Legal issues
and the Cost Auditor will have little difficulty in appraising them by means of 'compliance
test' and 'substantive' test'. Chapter A2 [2]:
2. Computer Procedures-i.e. the computer processing work. Auditing in this area is actually a
complex activity, for which the Cost Auditor as a prudent person should develop himself
Chapter A3 [3]:
for adequate EDP knowledge. Before he actually starts to conduct his audit in EDP Cost Auditing Standards and Quality control
environment, he should envisage to maintain an 'Audit Control File', as his valuable kit.
The Computer Audit Control File may be built up containing full details of the system Chapter A4 [4]:
including: Legal Position of Cost Auditor
(i) Copies of all source documents and the details of the checks that have been done to
ensure their accuracy. Chapter A5 [5]:
(ii) Details of physical control over source documents and any control totals on numbers, Reporting under Cost Audit
quantities, values, including the names of the personnel keeping these controls.
(iii) Full description of how the source documents are to be converted into input media, Chapter A6 [6]:
and the check-cum-control device. Cost Audit in Information Technology (IT)
(iv) A detailed account of the manual internal controls contained in the system, e.g.,
separation of programmers from operators, control of assets from record keeping, etc. Part B: Management Audit
(v) The arrangements for retaining source documents and input media for the required
periods necessitating reconstruction of stored files in the event of error, mishap, loss, Chapter B1 [7]:
etc. Internal Control & Internal Audit
(vi) A detailed Flow Diagram of what takes place during the process run.
Chapter B2 [8]:
(vii) Details of all tapes or discs produced, including their layout, labelling, storage and
Operational Audit
retention, and
(viii) Copies of all documents of output and details of subsequent sorting and checking. Chapter B3 [9]:
Steps for CAAT Applications:
The major steps to be undertaken by the cost auditor in the application of a CAAT in performing Part C: Performance Analysis
cost audit under EDP environment are as follows: [Chapter 10]
(a) Setting the objective of the CAAT application.
(b) Determining the content and accessibility of the entity's files.
(c) Defining the transaction types to be tested.
(d) Defining the procedures to be performed on the data.
(e) Defining the output requirements.
126
(f) Identifying the audit and computer personnel who may participate in the design and
application of the CAAT.
(g) Refining the estimates of costs and benefits.
(h) Ensuring that the use of the CAAT is properly controlled and documented.
(i) Arranging the administrative activities, including the necessary skills and computer
facilities.
(j) Executing the CAAT application. Click to jump on:
(k) Evaluating the results.
Home
CAAT Audit Working Papers:
The standard of working papers and retention procedures for a CAAT should be consistent with Part A: Cost Audit
that on the audit as a whole. It is advisable that the cost auditor should keep the technical papers
Chapter A1 [1]:
relating to the use of the CAAT separate from the other cost audit working papers.
The cost auditor is expected to keep the following documents relating to the stages enumerated Chapter A2 [2]:
below, and his audit working papers should contain sufficient documentation to describe the Cost Accounting Standards
CMT application, such as:
Chapter A3 [3]:
• Planning Cost Auditing Standards and Quality control
(i) CAAT objectives, duly defined in clear terms.
(ii) Specific CAAT to be used considering the audit area and its nature and volume. Chapter A4 [4]:
(iii) Controls to be exercised in test runs and final runs with reference to data files, etc. Legal Position of Cost Auditor
(iv) Staffing, timing and cost.
• Execution Chapter A5 [5]:
(i) CAAT preparation and testing procedures and controls .
(ii) Details of the tests performed by the CAAT.
Chapter A6 [6]:
(iii) Details of input, processing and output.
(iv) Relevant technical information about the computerised accounting system, such as
computer file layouts.
• Cost Audit Evidence
(i) Output provided. Chapter B1 [7]:
(ii) Description of the audit work performed on the output. Internal Control & Internal Audit
(iii) Audit conclusions.
• Others Chapter B2 [8]:
Recommendations to the management. Operational Audit
In addition, it may be useful for the cost auditor to document suggestions for using the CAAT Chapter B3 [9]:
in future years. Management Audit in Different function

Interactive Question 6.1: Annexure of Cost Audit Report [Chapter 10]
“Cost audit in EDP environment organization has significant effect in audit task” – explain.
Ans: An electronic data environment has a significant effect on audit planning, audit risk assessment
and audit testing. Auditing in an electronic data processing even though having the same objective as
127
the traditional auditing can be a more complex. The auditor in such an environment has to adapt
traditional audit techniques and use them electronically. This by far would depend on the extent of
knowledge the auditor has on the system and its programming; hence he might not be able to audit
beyond the point of his technical knowledge. However, Computer Assisted Audit Techniques have been
continually employed to perform EDP audits.
For an auditor to achieve his objectives in an EDP audit engagement he must understand the client and Click to jump on:
its environment; proper planning is essential as the staffing as well as timing required for an EDP audit
might differ from that of a traditional audit. The auditor must also access the level of audit risk in Home
expressing an opinion on the client’s financial statements. The risk an auditor faces in an EDP
environment would significantly be minimized if there are proper application and general controls in Part A: Cost Audit
the client’s firm. The auditor must also perform tests of compliance on the clients internal control system
as well as other substantive tests. The audit evidence gathered in performing these tests would form a Chapter A1 [1]:
vital part base upon which the auditor would draw his opinion. Cost Audit Concept & Legal issues
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
128
6.2 Computer Aided Auditing Technique (CAAT)

The expression CAATs means those auditing techniques that take the assistance of a computer
for being applied to an audit in an EDP environment. It assumes its importance especially when
there is absence of input documents or the lack of visible 'audit trail'. The audit techniques have
to be tailored to suit the particular EDP system. The most common two types of CAATs used
for audit purposes are: (i) Audit Software and (ii) Test Data. Click to jump on:
Audit Software: Home

Audit software consists of computer programmes used by the auditor to process data of audit
significance from the auditee's accounting system. It may consist of: (a) Package programmes, Part A: Cost Audit
(b) purpose-written programmes, and (c) utility programmes. Regardless of the source of the
Chapter A1 [1]:
programmes, the auditor should substantiate their validity· for audit purposes prior to actual
application.
• Package programmes are generalized computer programmes designed to perform data Chapter A2 [2]:
processing furnctions which include-reading computer files, selecting information, Cost Accounting Standards
performing calculations, creating data files and printing reports in a format as specified by
the auditor. Chapter A3 [3]:
• Purpose-written programmes are computer programmes designed to perform audit tasks Cost Auditing Standards and Quality control
in specific circumstances. These programmes may be prepared by the auditor, by the
organisation or by an outside programmer engaged by the auditor. In some cases, the Chapter A4 [4]:
programmes existing in the organisation may be used by the auditor in their original or in Legal Position of Cost Auditor
a modified state because it may be more efficient and effective their developing
independent programmes. Chapter A5 [5]:
• Utility programmes are used by the organisation to perform common data processing
functi.ons, such as sorting, creating and printing files. These programmes are generally not
Chapter A6 [6]:
designed for audit purposes and, therefore, may not contain such features as automatic Cost Audit in Information Technology (IT)
record counts or control totals.
This 'audit software' is mostly used by the auditor, as this technique converts machine readable
data into auditor readable data with an added advantage of data manipulation routines and Chapter B1 [7]:
allows the auditor a high degree of independence. Internal Control & Internal Audit
Test Data: Chapter B2 [8]:

Test data techniques are used in conducting audit procedures by entering data (e.g. a sample of Operational Audit
transactions) into the computer system of the organisation and comparing the results obtained
Chapter B3 [9]:
with predetermined results. Examples of such applications are:
• Test data used to test specific controls in computer programmes, such as, on-line password
and data access controls.
• Test transactions selected from previously processed transactions preferably historical data
[Chapter 10]
or created by the auditor to test specific processing characteristics of the organisation's
computer system. Such transactions are generally processed separately from the entity's
normal processing.
• Test transactions used in an integrated test facility where a "dummy' unit (e.g., a department
or employee) is established, and to which test transactions are posted during the normal
processing cycle.
129
The auditor should ensure that the test transactions are subsequently eliminated from the
accounting records of the organisation.
This 'test data' technique is useful for verifying computer generated totals, balances and such
other arithmetical processes where traditional manual approach of auditing cannot help. Some
of other CAATs are described below:
Click to jump on:
Integrated Test Data Facility (ITDF):
This technique is an extension of 'test data'. Here the auditor uses a 'dummy file' and processes Home
the data through the regular system. By this, the processing system during its operation can be
tested by him. Under this, removal of 'test data' is a problem which needs to 'be duly considered Part A: Cost Audit
by the auditor.
Chapter A1 [1]:
Tagging and Tracing (IT):
This is a technique developed by an improvement over the ITDF. It involves marking or tagging Chapter A2 [2]:
the client's input data in such a way that relevant information is displayed at key points. It uses Cost Accounting Standards
the actual data, and so the question of elimination of 'special entries' test data designed under
ITDF does not arise. Chapter A3 [3]:
Mapping:
There are a number of techniques under this. Cobol Mixed Branch Indicator (COMBI) is one Chapter A4 [4]:
of such techniques. It attempts to identify logical paths in a process and determines whether all
paths are traversed in a given run.
Chapter A5 [5]:
Concurrent Processing:
In this technique, the auditor participates in the system design function itself, inserting controls Chapter A6 [6]:
so as to detect any 'exceptions' in the operations. For example, in the Accounts Receivable Cost Audit in Information Technology (IT)
system the practice of accepting payments in cash can be tagged as an 'exception'.
Parallel Simulation:
Chapter B1 [7]:
This technique consists of the steps -(a) defining the application functions, (b) understanding
the logic, (c) defining the machine-readable inputs. and outputs of data to be used, (d) using a
'Software' to prepare a programme consistent with the logic at (b) above, (e) executing the
Chapter B2 [8]:
simulated system and calculating the deviation from the original results, and (f) identifying and Operational Audit
examining discrepancies.
Chapter B3 [9]:
This technique has an added facility to the extent that it is an automated version of 'auditing Management Audit in Different function
around the computer'.
Controlled Processing: [Chapter 10]
This technique emphasizes the authenticity of the process or programmes which generate
various cost and financial reports once these have been certified as conforming to given
standards. Here reprocessing is done of the sample data from the period under audit by the
auditor. This reprocessing only confirms that the programme has been reviewed, tested and
controlled by him, and does not check the process (or programme) code system. This method
130
is suitable when the system is very large and complex and poses difficulties to examine every
line of the process code itself.
Interactive Question 6.2: barriers in Computer Assisted Audit Techniques (CAATs)

Nowadays, computer is used as an ideal technology in various professions. An auditor may consider Click to jump on:
computer as an essential tool in for his auditing purposes which brings out the term “Computer Assisted
Audit Techniques (CAATs)” in popularity now a days. But there are a lot of barriers in working with Home
CAATs. As a professional cost auditor, what do you think about these barriers. List out the barriers in
Computer Assisted Audit Techniques (CAATs). Part A: Cost Audit
Ans: Many organizations have opted to utilize sophisticated information technologies for developing Chapter A1 [1]:
their business process support as well as improving their information processing activities. This Cost Audit Concept & Legal issues
increases the need for CAATTs in such businesses to allow auditors to continue to be able to perform
their review and monitoring tasks effectively, as well as to play key roles in the process of innovation Chapter A2 [2]:
in these businesses more generally. To meet the challenges of rapid advances in client information
technology usage, audit standards suggest that auditors adopt computer-assisted audit techniques
Chapter A3 [3]:
(CAATs).
Adoption of Computer Assisted Audit Techniques (CAATs) has not only become a beneficial choice Chapter A4 [4]:
for some businesses, but has become a fundamental part of many audit methodologies. Although Legal Position of Cost Auditor
application of information and communication technologies in transaction processing results in specific
risks, it also gives opportunities for improvement of control procedures. Computer Assisted Audit Chapter A5 [5]:
Techniques (CAATs) have been seen as an important element of both the external and internal audit Reporting under Cost Audit
process. But there is also existence of some barriers in going through Computer Assisted Audit
Techniques (CAATs). Here we are trying to list out few of them: Chapter A6 [6]:
- unfamiliarity of employees, managers, and auditors with computer-assisted auditing techniques. Cost Audit in Information Technology (IT)
- raining and expertise in employees, managers, and auditors.
- the high cost of training and implementing computer-assisted auditing techniques. Part B: Management Audit
- lack of appropriate auditing software.
- If there is exist appropriate auditing software, auditors are not informed of the existence of such Chapter B1 [7]:
software. Internal Control & Internal Audit
- the problems caused by using the software in real conditions.
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
131
6.3 IT Control and Risk Assessment

Every organization has a mission. In this digital era, as organizations use automated information
technology (IT) systems to process their information for better support of their missions, risk
management plays a critical role in protecting an organization’s information assets, and
therefore its mission, from IT-related risk. An effective risk management process is an
important component of a successful IT security program. The principal goal of an Click to jump on:
organization’s risk management process should be to protect the organization and its ability to
perform their mission, not just its IT assets. Therefore, the risk management process should not Home
be treated primarily as a technical function carried out by the IT experts who operate and
manage the IT system, but as an essential management function of the organization. Part A: Cost Audit
Risk management is the process that allows IT managers to balance the operational and Chapter A1 [1]:
economic costs of protective measures and achieve gains in mission capability by protecting Cost Audit Concept & Legal issues
the IT systems and data that support their organizations’ missions. The head of an
organizational unit must ensure that the organization has the capabilities needed to accomplish Chapter A2 [2]:
its mission. These mission owners must determine the security capabilities that their IT systems
must have to provide the desired level of mission support in the face of real-world threats. Most
Chapter A3 [3]:
organizations have tight budgets for IT security; therefore, IT security spending must be Cost Auditing Standards and Quality control
reviewed as thoroughly as other management decisions. Minimizing negative impact on an
organization and need for sound basis in decision making are the fundamental reasons Chapter A4 [4]:
organizations implement a risk management process for their IT systems. Legal Position of Cost Auditor
Risk management is a management responsibility. This section describes the key roles of the Chapter A5 [5]:
personnel who should support and participate in the risk management process. Reporting under Cost Audit
(1) Senior Management: Senior management, under the standard of due care and ultimate
responsibility for mission accomplishment, must ensure that the necessary resources are Chapter A6 [6]:
effectively applied to develop the capabilities needed to accomplish the mission. They must Cost Audit in Information Technology (IT)
also assess and incorporate results of the risk assessment activity into the decision-making
process. An effective risk management program that assesses and mitigates IT-related Part B: Management Audit
mission risks requires the support and involvement of senior management.
(2) Chief Information Officer (CIO): The CIO is responsible for the agency’s IT planning, Chapter B1 [7]:
budgeting, and performance including its information security components. Decisions Internal Control & Internal Audit
made in these areas should be based on an effective risk management program.
Chapter B2 [8]:
(3) System and Information Owners: The system and information owners are responsible for
Operational Audit
ensuring that proper controls are in place to address integrity, confidentiality, and
availability of the IT systems and data they own. Typically, the system and information Chapter B3 [9]:
owners are responsible for changes to their IT systems. Thus, they usually have to approve Management Audit in Different function
and sign off on changes to their IT systems (e.g., system enhancement, major changes to
the software and hardware). The system and information owners must therefore understand Part C: Performance Analysis
their role in the risk management process and fully support this process. [Chapter 10]
(4) Business and Functional Managers: The managers responsible for business operations and
IT procurement process must take an active role in the risk management process. These
managers are the individuals with the authority and responsibility for making the trade-off
decisions essential to mission accomplishment. Their involvement in the risk management
process enables the achievement of proper security for the IT systems, which, if managed
properly, will provide mission effectiveness with a minimal expenditure of resources.
132
(5) ISSO: IT security program managers and computer security officers are responsible for
their organizations’ security programs, including risk management. Therefore, they play a
leading role in introducing an appropriate, structured methodology to help identify,
evaluate, and minimize risks to the IT systems that support their organizations’ missions.
ISSOs also act as major consultants in support of senior management to ensure that this
activity takes place on an ongoing basis.
(6) IT Security Practitioners: IT security practitioners (e.g., network, system, application, and Click to jump on:
database administrators; computer specialists; security analysts; security consultants) are
responsible for proper implementation of security requirements in their IT systems. As Home
changes occur in the existing IT system environment (e.g., expansion in network
connectivity, changes to the existing infrastructure and organizational policies, introduction Part A: Cost Audit
of new technologies), the IT security practitioners must support or use the risk management
process to identify and assess new potential risks and implement new security controls as Chapter A1 [1]:
needed to safeguard their IT systems. Cost Audit Concept & Legal issues
(7) Security Awareness Trainers (Security/Subject Matter Professionals): The organization’s
personnel are the users of the IT systems. Use of the IT systems and data according to an Chapter A2 [2]:
organization’s policies, guidelines, and rules of behavior is critical to mitigating risk and Cost Accounting Standards
protecting the organization’s IT resources. To minimize risk to the IT systems, it is essential
that system and application users be provided with security awareness training. Therefore, Chapter A3 [3]:
the IT security trainers or security/subject matter professionals must understand the risk Cost Auditing Standards and Quality control
management process so that they can develop appropriate training materials and
Chapter A4 [4]:
incorporate risk assessment into training programs to educate the end users.
Risk assessment is the first process in the risk management methodology. Organizations use Chapter A5 [5]:
risk assessment to determine the extent of the potential threat and the risk associated with an Reporting under Cost Audit
IT system throughout its SDLC (The systems development life cycle). The output of this
process helps to identify appropriate controls for reducing or eliminating risk during the risk Chapter A6 [6]:
mitigation process. Risk is a function of the likelihood of a given threat-source’s exercising Cost Audit in Information Technology (IT)
a particular potential vulnerability, and the resulting impact of that adverse event on the
organization. To determine the likelihood of a future adverse event, threats to an IT system Part B: Management Audit
must be analyzed in conjunction with the potential vulnerabilities and the controls in place
for the IT system. Impact refers to the magnitude of harm that could be caused by a threat’s Chapter B1 [7]:
exercise of a vulnerability. The level of impact is governed by the potential mission impacts Internal Control & Internal Audit
and in turn produces a relative value for the IT assets and resources affected (e.g., the
criticality and sensitivity of the IT system components and data). Chapter B2 [8]:
Operational Audit
The risk assessment methodology encompasses nine primary steps, which are as follows:
Chapter B3 [9]:
• Step 1: System Characterization
• Step 2: Threat Identification
• Step 3: Vulnerability Identification Part C: Performance Analysis
• Step 4: Control Analysis [Chapter 10]
• Step 5: Likelihood Determination
• Step 6: Impact Analysis
• Step 7: Risk Determination
• Step 8: Control Recommendations
• Step 9: Results Documentation
133
Interactive Question 6.3: IT Risk Assessment

Why risk assessment is important in information technology?
Ans: In this century, information, along with other factors of production, is a valuable and vital
component of the organizations. With increasing technology advances, organizations have realized the Click to jump on:
undeniable benefits of Information Technology (IT) to increase the quality, accuracy and speed of
affairs and most managers have become aware of the importance of its use in increasing efficiency and Home
effectiveness of organizations and more satisfied customers and have established and used information
systems. Meanwhile for organizations to use the information technology, risk management plays a Part A: Cost Audit
crucial role in protecting their information. Effective risk management is one of the most important
parts of a security program in IT Systems of organizations. Chapter A1 [1]:
IT risk assessment is a process of analyzing potential threats and vulnerabilities to your IT systems to
establish what loss you might expect to incur if certain events happen. By identifying and analyzing Chapter A2 [2]:
potential vulnerabilities with an enterprise IT network, organizations can better prepare for cyber-
attacks and work to minimize the impact of a cyber incident, should it occur. The procedures and
Chapter A3 [3]:
policies implemented with an IT risk management program can help guide future decision-making about
how to control risk while focusing on company goals.
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
134
Click to jump on:
Home
Part A: Cost Audit

Part B
Chapter A1 [1]:
Management Audit Cost Audit Concept & Legal issues
Chapter A2 [2]:
Chapter B1 [7]: Internal Control & Internal Audit Cost Accounting Standards
Chapter B2 [8]: Operational Audit Chapter A3 [3]:
Chapter B3 [9]: Management Audit in Different function Cost Auditing Standards and Quality control
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
135
Chapter B1 [7]
INTERNAL CONTROL & INTERNAL AUDIT

Click to jump on:
7.1 Internal Control – Concept
7.2 Scope and Limitation of Internal Control Home
7.3 Structure of Internal Control
7.4 Evaluation of Internal Control Part A: Cost Audit
7.5 Internal Control and Internal Auditor
7.6 Internal Check and Internal Audit Chapter A1 [1]:
7.7 Internal Audit and its Scope Cost Audit Concept & Legal issues
7.8 Statutory Auditors and Internal Auditors
Chapter A2 [2]:
7.9 Assessment of Adequacy of Internal Audit Function Cost Accounting Standards
7.10 Compliance Audit
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
136
7.1 Internal Control – Concept

Internal controls are the mechanisms, rules, and procedures implemented by a company to
ensure the integrity of financial and accounting information, promote accountability, and
prevent fraud. An internal control system includes all the policies and procedures (internal
controls) adopted by the directors and management of an entity to assist in achieving their
objectives of ensuring, as far as practicable, the orderly and efficient conduct of a business, Click to jump on:
including adherence to internal policies, the safeguarding of assets, the prevention and detection
of fraud and error, the accuracy and completeness of the accounting records, and the timely Home
preparation of reliable financial information (CIMA Official Terminology).
Part A: Cost Audit
Internal control is:
The whole system of internal controls, financial and otherwise, established in order to provide Chapter A1 [1]:
reasonable assurance of: Cost Audit Concept & Legal issues
(a) effective and efficient operation;
(b) internal financial control; Chapter A2 [2]:
(c) compliance with laws and regulations (CIMA Official Terminology).
Chapter A3 [3]:
Therefore, Internal control – The process designed, implemented and maintained by those Cost Auditing Standards and Quality control
charged with governance, management and other personnel to provide reasonable assurance
about the achievement of an entity’s objectives with regard to reliability of financial reporting, Chapter A4 [4]:
effectiveness and efficiency of operations, and compliance with applicable laws and Legal Position of Cost Auditor
regulations. It follows that internal control is designed and implemented to address identify
business risks that threaten the achievement of any of these objectives. Chapter A5 [5]:
Internal controls are designed in part to prevent errors occurring in financial information or to
detect errors and correct them. Chapter A6 [6]:
In a narrow sense internal control is often seen as involving certain checks and procedures to
prevent direct financial fraud or misappropriation of assets. They are sometimes also seen as Part B: Management Audit
mere accounting guidelines. But now days the concept of internal control has undergone
complete change. It is now defined to include various methods and procedures to safeguard the Chapter B1 [7]:
assets of an organization, to ensure that accounting and statistical data produced are reliable Internal Control & Internal Audit
and accurate ensuring greater efficiency in operation. According to W.W. Bigg, internal control
Chapter B2 [8]:
“is best regarded as indicating the whole system of controls, financial or otherwise, established
Operational Audit
by the Management in the conduct of a business, including internal check, internal audit and
other forms of control”. So, it is clear from the above definition that the internal control is a Chapter B3 [9]:
very wide term which includes financial and other forms of control including internal checks. Management Audit in Different function
The Information Systems Control & Audit Association (ISACA) defines ‘internal control Part C: Performance Analysis
system’ as “The policies, procedures, practices and organizational structures, designed to [Chapter 10]
provide reasonable assurance that business objectives will be achieved and that undesired
events will be prevented, or detected and corrected.” The Institute of Chartered Accountants,
England and Wales, defines Internal Control as “By internal control is meant not only internal
check and internal audit but the whole system of controls, financial and otherwise, established
by the management in order to carry on the business of the company in an orderly manner,
safeguard its assets and secure as far as possible the accuracy and reliability of its records”. In
137
view of above, Internal control system can be defined to be the policies, practices, procedures,
and tools designed with the objective to: (1) safeguard corporate assets, (2) ensure accuracy and
reliability of data captured and information products, (3) promote efficiency, (4) measure
compliance with corporate policies, (5) measure compliance with regulations, and (6) manage
the negative events and effects from fraud, crime, and deleterious activities.
Interactive Question B1.1: IT Risk Assessment Click to jump on:

Home
“Internal controls are processes designed to help safeguard an organization and minimize risk to its
objectives.” – Do you agree? Part A: Cost Audit
Ans: Yes, I agree with the statement. Internal controls not only ensure compliance with laws and Chapter A1 [1]:
regulations as well as accurate and timely financial reporting and data collection, but also are designed Cost Audit Concept & Legal issues
to help safeguard an organization and minimize risk to its objectives. Internal controls minimize risks
and protect assets, ensure accuracy of records, promote operational efficiency, and encourage adherence Chapter A2 [2]:
to policies, rules, regulations, and laws. Every organization exists to accomplish some objectives, but
there are many risks that impact achieving those objectives. Internal control compliance is put in place
Chapter A3 [3]:
to mitigate the risks to give the organization a better chance at achieving its objectives. Well-designed
internal controls keep the organization operating efficiently and effectively and the controls can help
maintain compliance with regulations. Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
138
7.2 Scope and Limitation of Internal Control

SCOPE OF INTERNAL CONTROL
It is clear from above that internal control is an essential pre-requisite for efficient and effective
management of any organization and is therefore, a fundamental ingredient for the successful
operation of the business in modern days. In fact, an effective internal control system is a critical
success factor for any organization in the long term. They are indispensable tools for the ever- Click to jump on:
increasing risks, exposures, and threats to accounting systems, data, and assets. It embraces the
whole system of controls – financial, operational or otherwise, established by the management Home
in the functioning of a business including internal check, internal audit and other forms of
control. In fact, internal control has now been recognized as fundamental and indispensable to Part A: Cost Audit
modern auditing. Thus, internal control has its all-embracing nature and is concerned with the
controls operative in every area of corporate activity as well as with the way in which individual Chapter A1 [1]:
controls interrelate. Cost Audit Concept & Legal issues
The scope of internal control, according to the aforesaid definitions, extends well beyond Chapter A2 [2]:
accounting control. Thus, the latest definition of internal control encompasses operational
controls like quality control, work standards, budgetary control, periodic reporting, policy
Chapter A3 [3]:
appraisals, quantitative control, etc., as all parts of the internal control system. In an independent Cost Auditing Standards and Quality control
financial audit or the statutory audit, the auditor is concerned mainly with the financial and
accounting controls. However, in an operational audit (as part of internal controls), the auditor Chapter A4 [4]:
reviews all the controls including operational functions. The internal controls can be broadly Legal Position of Cost Auditor
classified into following four main categories: financial & accounting controls, administrative
controls, operational controls and compliance controls. Chapter A5 [5]:
1. Administrative control – Administrative controls include all types of managerial controls Reporting under Cost Audit
related to the decision-making process. An example of administrative controls is the
maintenance of records giving details of customers contacted by the salesmen. Chapter A6 [6]:
2. Operational control – This is exercised through “management accounting” techniques viz. Cost Audit in Information Technology (IT)
budgetary control, standard costing etc.
3. Financial and Accounting control – This control refers primarily the management plans, Part B: Management Audit
objectives and procedures that are concerned with the safeguarding of assets, prevention
and detection of fraud and error, accuracy and completeness of accounting records, and Chapter B1 [7]:
timely preparation of reliable financial information. Internal Control & Internal Audit
4. Compliance control - These controls aim at ensuring compliance with applicable laws and
Chapter B2 [8]:
regulations. These Controls also help to ensure compliance with laws regarding the system
Operational Audit
and intellectual property.
Chapter B3 [9]:
LIMITATIONS OF INTERNAL CONTROL Management Audit in Different function
No matter how well internal controls are designed, they can only provide reasonable assurance
that objectives have been achieved. Some limitations are inherent in all internal control Part C: Performance Analysis
systems. These include: [Chapter 10]
1. Judgment: The effectiveness of controls will be limited by decisions made with human
judgment under pressures to conduct business based on the information at hand.
2. Breakdowns: Even well-designed internal controls can break down. Employees
sometimes misunderstand instructions or simply make mistakes. Errors may also result
from new technology and the complexity of computerized information systems.
3. Management Override: High level personnel may be able to override prescribed policies
139
and procedures for personal gain or advantage. This should not be confused with
management intervention, which represents management actions to depart from prescribed
policies and procedures for legitimate purposes.
4. Collusion: Control systems can be circumvented by employee collusion. Individuals
acting collectively can alter financial data or other management information in a manner
that cannot be identified by control systems.
5. Missing Segregation of Duties: A control system might have been designed with an Click to jump on:
insufficient segregation of duties, so that one person can interfere with its proper operation.
Home
Consequently, it must be accepted that no system of internal controls is perfect. There is always
a way in which it can fail or be circumvented. Part A: Cost Audit
Chapter A1 [1]:
Interactive Question B1.2: IT Risk Assessment Cost Audit Concept & Legal issues
Chapter A2 [2]:
“At present, Compliance Control are in top priority to Management Level” – why this statement is true?
Chapter A3 [3]:
Ans: Today’s business environment is complex. Exponential growth and change in risks, regulations,
globalization, employees, distributed operations, competitive velocity, technology, and business data
encumber organizations of all sizes. Organizations need to understand how to design effective Chapter A4 [4]:
compliance controls, implement them, and review whether the risks they were designed to control are Legal Position of Cost Auditor
effectively mitigated continuously. There is a growing awareness among executives and directors that
control management needs to be taken seriously. It is part of their fiduciary compliance obligations to Chapter A5 [5]:
oversee controls as an integrated part of business strategy and execution. Furthermore, regulations that Reporting under Cost Audit
increase personal liability within these roles emphasize business leaders taking greater interest and
accountability for risk, control, and compliance. Internal control management is often misunderstood, Chapter A6 [6]:
misapplied, and misinterpreted due to scattered and uncoordinated approaches that get in the way of Cost Audit in Information Technology (IT)
sharing data. Controls aid the organization in reliably achieving objectives, controls manage uncertainty
by mitigating risk, and controls are a critical part of meeting compliance obligations and enabling the Part B: Management Audit
organization to act with integrity. Failure to compliance with applicable laws and regulations
appropriately causes various penalty and law suits for the organization as well as loss of reputation and Chapter B1 [7]:
public image. Internal Control & Internal Audit
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
140
7.3 Structure of Internal Control

There is no uniform or identical in its approach of internal control in all the organizations. It
often varies in concept and applications, having regard to the following:
(a) Type of business;
(b) Magnitude of the business;
(c) Infrastructure available in the organization; Click to jump on:
(d) Potentiality of the human resources and their outlook;
Home
Therefore, while designing an internal control system, the following factors must be considered
to ensure greater chances of successful internal control system. The internal control structure Part A: Cost Audit
consists of five inter-related components:
• Control environment – The control environment sets the tone of an organization, Chapter A1 [1]:
influencing the control consciousness of its people. Control environment factors include Cost Audit Concept & Legal issues
(1) the integrity, ethical values and competence of the entity's people; (2) management's
philosophy and operating style; (3) the way management assigns authority and Chapter A2 [2]:
responsibility and organizes and develops its people; and (4) the attention and direction
provided by the University. Additional examples are:
Chapter A3 [3]:
− Tone from the top
− Organizational policies
− Organizational authority Chapter A4 [4]:
• Risk assessment – Risk assessment is the identification and analysis of relevant risks to Legal Position of Cost Auditor
achievement of the objectives, forming a basis for determining how the risks should be
managed. Examples include: Chapter A5 [5]:
− Monthly meetings to discuss risk issues Reporting under Cost Audit
− Internal audit risk assessment
− Formal internal departmental risk assessment Chapter A6 [6]:
• Control activities – Control activities are the policies and procedures that help ensure Cost Audit in Information Technology (IT)
management directives are carried out. They include a range of activities as diverse as
approvals, authorizations, verifications, reconciliations, reviews of operating performance, Part B: Management Audit
security of assets and segregation of duties. Additional examples are:
− Purchasing limits Chapter B1 [7]:
− Approvals
− Security
Chapter B2 [8]:
− Specific policies
Operational Audit
• Information and communication – Pertinent information must be identified, captured and
communicated in a form and timeframe that enable people to carry out their responsibilities. Chapter B3 [9]:
Information systems produce reports containing operational, financial and compliance- Management Audit in Different function
related information that makes it possible to run and control the organization. Effective
communication also must occur in a broader sense, flowing down, across and up the Part C: Performance Analysis
organization. Examples include: [Chapter 10]
− Vision and values or engagement survey
− Issue resolution calls
− Reporting
− Organizational communications (e.g., emails, meetings)
• Monitoring – Internal control systems need to be monitored, a process that assesses the
quality of the system's performance over time. This is accomplished through ongoing
141
monitoring activities, separate evaluations or a combination of the two. Ongoing

monitoring occurs in the course of operations. Internal control deficiencies should be
reported upstream, with serious matters reported to top management and the Regents.
Examples include:
− Monthly reviews of performance reports
− Internal audit function
Click to jump on:
Therefore, while designing an internal control system, the following factors must be considered
to ensure greater chances of successful internal control system. Home
• Segregation and Rotation of duties: It is very necessary for successful internal control
system that no one person handles the complete transaction i.e., those who physically Part A: Cost Audit
handle assets are not those who record the asset movements also. The systems are so
designed that no single individual is responsible for all the stages involved in a transaction Chapter A1 [1]:
i.e., duties are allocated in such a way that no single individual has an exclusive control Cost Audit Concept & Legal issues
over any one transaction or a group of transactions. Similarly, the people responsible for
authorizing these transactions or reconciling of the records should also be different i.e., the Chapter A2 [2]:
work done by one person is either complementary to the work done by other person or the Cost Accounting Standards
accuracy or correctness of work done by one person is independently checked by another
person. The broad functions which are generally segregated are: Chapter A3 [3]:
(a) Execution of transactions;
(b) Authorization of transactions;
Chapter A4 [4]:
(c) Maintenance of records and documents; and Legal Position of Cost Auditor
(d) Physical custody of related assets.
Chapter A5 [5]:
Apart from segregation of duties, it is sometimes considered more desirable to rotate the Reporting under Cost Audit
duties of various officers and staff in an attempt to ensure that a fraud or error, if any may
not remain undetected for a very long time. It also ensures that a person does not develop Chapter A6 [6]:
a vested interest by holding to a post for a very long time. In addition, it removes the Cost Audit in Information Technology (IT)
impression of indispensability about an employee. This also ensures that the job profile of
each post is well defined because employees can be rotated only if the content of each Part B: Management Audit
respective job is well defined.
Chapter B1 [7]:
• Competence and integrity of people: Internal control systems are not an end to themselves Internal Control & Internal Audit
unless these systems are manned by the competent people, who are honest enough to
consistently do so. The controls to be successful and effective necessitate the need for Chapter B2 [8]:
Operational Audit
competent people to enforce such controls. In other words, the presence of detailed
procedures may have no meaning unless these procedures are carried by the competent
Chapter B3 [9]:
people, who can also envisage the changes required in the system over a period of time.
• Appropriate levels of authority: A common error usually made is to grant too much Part C: Performance Analysis
authority within control boundaries. Sometimes, this is deliberately done to expedite the [Chapter 10]
things or to handle the emergencies. This is sometimes done to reduce the number of people
i.e., cost reduction. However, controls to be effective require the authority to be granted on
a need-to have basis only. If there is no need for a particular person to have a specific
authority, he/she should not be granted such authority.
• Accountability: The internal controls to be successful presuppose that there is full

142
accountability for all the decisions taken and there are controls present, which allow the
determination with acceptable level of confidence of a person taking particular decision or
authorizing particular transaction or took specific action. However, mere presence of these
controls may have no meaning or may give a false sense of security unless strict action is
taken every time, a discrepancy is noticed. Otherwise these controls may be left with no
meaning.
Click to jump on:
• Adequate resources: Controls that are enforced with inadequate resources (manpower,
finance, equipment, materials, and methodologies) will generally fail whenever they come Home
under stress. Therefore, it is very necessary that minimum resources necessary to enforce
the controls must always be present to enable the controls to be successful and effective. Part A: Cost Audit
• Supervision and periodical updating: Unfortunately, many people prefer to work only if Chapter A1 [1]:
they are being supervised or watched. It is, therefore very necessary for the controls to be Cost Audit Concept & Legal issues
adequately supervised and periodically updated in line with changing environment to be
effective and successful. For example, in case of banks, if new service i.e., internet banking Chapter A2 [2]:
is also being started, it is very necessary that internal control system is also updated Cost Accounting Standards
accordingly.
Chapter A3 [3]:
Interactive Question B1.3: Control Activities differ in Organizations
“Organizations set specific control activities which one is the best framework to align with its needs of
internal control purpose” – Explain. Chapter A5 [5]:
Ans: Risks that management determines that the entity must mitigate in order to achieve its objectives
are addressed by control activities. Through policies and procedures, control activities or actions are Chapter A6 [6]:
put into place to address those risks. Control activities can be any number of actions within an Cost Audit in Information Technology (IT)
organization and are categorized by type and nature. It is important that an organization use a risk-based
approach in designing its control activities or internal control framework. This means that controls are Part B: Management Audit
designed to address the risk factors identified in its internal risk assessments rather than using a pre-
defined control list. In the real-world situation, each organization is different and faces different Chapter B1 [7]:
challenges and risks. This requires that an organization customize even the best framework to align with
its needs. So, organizations must set specific control activities which one is the best framework to align
Chapter B2 [8]:
with its needs of internal control purpose. Operational Audit
Chapter B3 [9]:

[Chapter 10]
143
7.4 Evaluation of Internal Control

An evaluation of internal control involves an examination of the effectiveness of an
organization's system of internal controls. By engaging in this evaluation, an auditor can
determine the extent of other tests that must be performed in order to arrive at an opinion
regarding the fairness of the entity's financial statements. A robust system of internal
controls reduces the risk of fraudulent activity, which moderates the need for additional Click to jump on:
audit procedures. The examination concentrates on such issues as the separation of duties,
checks and balances, safeguarding of records, the training level and competence of Home
employees, and the effectiveness of the entity's internal audit function.
Part A: Cost Audit
The steps involved in this evaluation process include the following:
1. Determine the extent and types of controls being used by the client. Chapter A1 [1]:
2. Determine which of these controls the auditor intends to rely upon. Cost Audit Concept & Legal issues
3. Based on the first two steps, determine which audit procedures should be expanded
or reduced. Chapter A2 [2]:
4. Make recommendations to the client regarding how to improve its system of internal
controls.
Chapter A3 [3]:
The last of the preceding steps is useful for improving the control environment for the
auditor in the following year's audit. Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:
The following are the methods of evaluating internal control system: Part C: Performance Analysis
1. Narrative Record or Memorandum Approach: It is a complete and exhaustive [Chapter 10]
description of the system. It is appropriate in circumstances where a formal control system
is lacking, like in case of small businesses. Gaps in the control system are difficult to
identify using a narrative record.
2. Check List: It is a series of instructions that a member of the audit staff is required to
follow. They have to be signed initialled by the audit assistant as proof for having followed
the instructions given. A specific statement is required for every weakness area.
144
3. Flow Chart: It is a pictorial representation of the internal control system depicting its
various elements such as operations, processes and controls, which help in giving a concise
and comprehensive view of the organization’s working to the auditor. A complete flow
chart would depict the process of raising documents, personnel involved in doing so, the
flow of documents through various departments, maintenance of records, flow of goods
and consideration, and dealing with results. The internal control evaluation process
becomes easier through a flow chart as a broad picture of all the controls involved can be Click to jump on:
gauged in a glimpse.
4. Internal Control Questionnaire: This is the most widely used method for collecting Home
information regarding the internal control system and involves asking questions to various
people at different levels in the organization. The questionnaire is in a pre-designed format Part A: Cost Audit
to ensure collection of complete and all relevant information. The questions are formed in
a manner that would facilitate obtaining full information through answers in “Yes” or Chapter A1 [1]:
“No’’. Cost Audit Concept & Legal issues
Role of Audit Committee: Chapter A2 [2]:

The Audit Committee shall have powers to investigate any activity within its terms of reference, Cost Accounting Standards
to seek information from any employee, to obtain outside legal or other professional advice, to
secure attendance of outsiders with relevant expertise, if it considers necessary. The role of the Chapter A3 [3]:
Audit Committee to Cost Auditing Standards and Quality control
(i) evaluation of internal financial controls and risk management systems;
Chapter A4 [4]:
(ii) reviewing, with the management, performance of statutory and internal auditors,
adequacy of the internal control systems;
(iii) reviewing the adequacy of internal audit function, if any, including the structure of the Chapter A5 [5]:
internal audit department, staffing and seniority of the official heading the department, Reporting under Cost Audit
reporting structure coverage and frequency of internal audit;
(iv) discussion with internal auditors of any significant findings and follow up there on; Chapter A6 [6]:
(v) reviewing the findings of any internal investigations by the internal auditors into matters Cost Audit in Information Technology (IT)
where there is suspected fraud or irregularity or a failure of internal control systems of a
material nature and reporting the matter to the board; Part B: Management Audit
(vi) discussion with statutory auditors before the audit commences, about the nature and
scope of audit as well as post-audit discussion to ascertain any area of concern. Chapter B1 [7]:
The Audit Committee shall mandatorily review the Internal audit reports relating to internal
control weaknesses; and the appointment, removal and terms of remuneration of the Chief Chapter B2 [8]:
internal auditor shall be subject to review by the Audit Committee. The evaluation of internal Operational Audit
controls including internal accounting controls gives an opportunity to the auditor to a clearer
Chapter B3 [9]:
insight into the operational systems and an overall view of the organizational workings to spot
weaknesses in the systems and procedures both in respect of financial and operational areas of
the business. The audit process effectively evaluates the auditee’s existing internal controls
through the use of questionnaires and flow charts. The internal control questionnaire is a list of
[Chapter 10]
systematically and logically prepared questions designed to find out and evaluate the
effectiveness of internal control systems regarding various aspects and accounting transactions
of an organization. The questionnaires are to be comprehensive in nature to ensure that all
aspects and accounting transactions are covered which are be replied by the officials of the
department or division concerned. The criteria for replies against each question are “yes”, “no”,
“not applicable”, “explanatory notes” and comments”. Normally the affirmative answers
145
suggest satisfactory internal controls while negative answers suggest weaknesses of internal
controls.
INTERNAL CONTROL QUESTIONNAIRE

While conducting audit, the statutory auditor will submit to the organization a complete
questionnaire for reply by the relevant officials, which will help the former to form an opinion
as to the adequacy and reasonableness of the internal systems. The statutory auditor may make Click to jump on:
do test checks or in-depth checking depending on the circumstances to make sure that the replies
to the questionnaires are accurate and complete. In respect of many of the replies, the statutory Home
auditor may have to make sure that the internal control systems are really in operation through
proper verification. In respect of negative replies, he may have to qualify his audit report Part A: Cost Audit
depending on the seriousness of the situation. In other words, the auditors will use sample
testing techniques as a means of validations. Such sampling techniques will vary depending Chapter A1 [1]:
upon the internal control evaluation and results of prior tests. These techniques allow the Cost Audit Concept & Legal issues
auditors to review a limited number of transactions as a representative to the whole. In essence,
the more testing required due to lack of internal control and lack of accuracy in the accounting Chapter A2 [2]:
records takes additional audit time therefore increases the cost of the audit also. Cost Accounting Standards
Internal Control Questionnaire regarding Purchases and Creditors: Chapter A3 [3]:

Comments regarding all
Chapter A4 [4]:
Yes/ Not negative answers and
Questions Legal Position of Cost Auditor
No Applicable further information as to
answer Chapter A5 [5]:
Internal Control Questionnaire regarding Purchases and Creditors: Reporting under Cost Audit
1. Whether Purchase Department is centrally
responsible for all purchases? Chapter A6 [6]:
2. Whether purchases are initiated only against Cost Audit in Information Technology (IT)
the valid demands for procurements?
3. Whether the authorities competent for Part B: Management Audit
sanctioning of purchases have been clearly
specified? Whether limits or ceilings have been Chapter B1 [7]:
prescribed within which purchases can be Internal Control & Internal Audit
sanctioned by respective authority?
Chapter B2 [8]:
4. Whether a list of approved suppliers is
Operational Audit
maintained for each major item? Whether the
list is updated regularly? Chapter B3 [9]:
5. Whether there is competitive bidding for costly Management Audit in Different function
items or there is a list of approved short listed
suppliers? Part C: Performance Analysis
6. Whether deviations for procurement from [Chapter 10]
other than approved short listed vendors
permitted? If so, under what circumstances?
7. Whether any long-term purchase contracts
have been entered into with the suppliers?
Whether the stipulations regarding price,
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Questions
answer
Internal Control Questionnaire regarding Purchases and Creditors:
specification of goods, etc., in such contracts
clear and unambiguous? Click to jump on:
8. Whether cash purchases or other direct small
purchases by production deptts. allowed. If so, Home
under what circumstance?
9. Whether specific approvals required for the Part A: Cost Audit
following:
(a) Purchase from organizations in which Chapter A1 [1]:
managerial personnel are interested or Cost Audit Concept & Legal issues
stakeholders (related party transactions).
Whether there is a system by which all Chapter A2 [2]:
managerial personnel up to a certain level Cost Accounting Standards
are required to disclose their interest in
Chapter A3 [3]:
various organizations?
(b) High value purchases.
(c) Long-term purchase contracts involving Chapter A4 [4]:
large amount in the long run. Legal Position of Cost Auditor
10. Whether the same procedure followed in
respect of purchase of both trading and capital Chapter A5 [5]:
goods? Reporting under Cost Audit
11. How reasonability of prices is ensured
especially in case of non-competitive biddings Chapter A6 [6]:
or emergency purchases or purchases Cost Audit in Information Technology (IT)
involving small amounts? Whether the system
is reasonable? Part B: Management Audit
12. Where tenders/competitive quotations are
invited, Whether it is ensured that no supplier Chapter B1 [7]:
gets an undue advantage? For example, What
is the procedure for custody of sealed priced
Chapter B2 [8]:
bids?,Whether sealed price bids opened
Operational Audit
transparently in presence of senior official and
the representatives of the suppliers? If Chapter B3 [9]:
negotiations are conducted after the opening of Management Audit in Different function
the price bids, whether an equal opportunity
given to all the shortlisted suppliers or to the Part C: Performance Analysis
lowest quoted vendor only? [Chapter 10]
13. Whether a record of the prices quoted by
different suppliers maintained to serve as the
basis for authorizing any purchase?
14. Whether an item-wise (or code head wise)
record of all the prices paid during previous
procurements maintained?
147

Questions
answer
15. Whether a special approval necessary where
any procurement is not based on the lowest Click to jump on:
price bid received?
16. Whether the procurement prices are firm and Home
fixed?
17. Whether special authorization is required for Part A: Cost Audit
insertion of price variance clause in a
procurement contract? Chapter A1 [1]:
18. Whether purchase orders serial numbered? Cost Audit Concept & Legal issues
19. Whether unused blank purchase orders kept in
proper custody? Chapter A2 [2]:
20. Whether purchase orders contain the following
information:- (a) Serial Number (b) Name of
Chapter A3 [3]:
supplier; (c) Quantity; (d) Detailed Technical Cost Auditing Standards and Quality control
Specifications (e)Price; (d) Terms of delivery;
(e) Terms of transport; (f) Terms of payment; Chapter A4 [4]:
(g) Any other terms, such as packing, etc. Legal Position of Cost Auditor
21. Whether there are standard terms and
conditions for all procurements Chapter A5 [5]:
22. Whether any variation from these standard Reporting under Cost Audit
terms and conditions need any special
authorization? Chapter A6 [6]:
23. Whether the copies of the purchase orders are Cost Audit in Information Technology (IT)
marked to the Accounts Department and the
Goods Receipt Department? Part B: Management Audit
24. Whether the purchase department keeps a track
Chapter B1 [7]:
record of pending purchase orders?
25. Whether follow up action is taken with the user
department w.r.t. pending Purchase Orders, so Chapter B2 [8]:
that the production schedule is not affected. Operational Audit
26. Whether all goods and materials purchased are
received by the Goods Receipt Department Chapter B3 [9]:
along with copy of invoice from Supplier Management Audit in Different function
(sometimes without price)?
27. Whether the Goods Receipt Department Part C: Performance Analysis
physically counts, weighs or measures the [Chapter 10]
goods received?
28. Whether the Goods Received are also
inspected w.r.t. their technical specifications?
29. Whether the Goods Receipt Department
prepares a Goods Received Note and Goods
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Questions
answer
Inspection Note in respect of each
consignment? Click to jump on:
30. Whether the copies of the Goods Received
Note and Goods Inspection Note are marked to Home
the Accounts Department, Purchase
Department, Stores Department and the Part A: Cost Audit
demand initiating department?
31. Whether the Goods Received Notes are serial Chapter A1 [1]:
numbered? Cost Audit Concept & Legal issues
32. Whether the Goods Inspection Notes are serial
numbered? Chapter A2 [2]:
33. Whether the Goods Receipt Department rejects
the materials in case of shortage of quantity,
Chapter A3 [3]:
defective goods or variations from Cost Auditing Standards and Quality control
specifications given in the purchase order?
Whether whole consignment is rejected or Chapter A4 [4]:
defective goods only rejected. Legal Position of Cost Auditor
34. Whether in case of defective goods, an outward
return note is prepared indicating the quantity Chapter A5 [5]:
and specifications of goods to be returned? Reporting under Cost Audit
35. Whether the goods returned promptly and an
acknowledgement or return of goods obtained Chapter A6 [6]:
from the supplier? Where materials are Cost Audit in Information Technology (IT)
accepted despite shortage or variations from
specifications, whether these facts are Part B: Management Audit
mentioned on the challan sent to the supplier as
well as on the goods received note? Chapter B1 [7]:
36. Whether the Accounts Department is informed
about short-receipts or defective goods
Chapter B2 [8]:
returned to the suppliers, so that Debit Notes Operational Audit
may be prepared in the name of the suppliers?
37. Whether claims are filed with the insurers in Chapter B3 [9]:
case of goods lost or damaged in transit? Management Audit in Different function
38. Whether debit notes are serial numbered and
the unused ones are kept in safe custody? Part C: Performance Analysis
39. Whether the invoices are received directly by [Chapter 10]
the Accounts Department from?
40. Whether each invoice received given a running
serial number? Whether this serial number as
marked on an invoice also marked on the
supporting documents attached to the invoice
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Questions
answer
such as purchase order, goods received note,
etc.? Click to jump on:
41. Whether it is ensured that duplicate invoices
are accepted only with proper authorization Home
and only in such cases where the original
invoices were not received? Whether duplicate Part A: Cost Audit
invoices prominently marked ‘duplicate’ and
attached with the supporting documents Chapter A1 [1]:
regarding the relevant purchase? Cost Audit Concept & Legal issues
42. Whether there are adequate precautions to
prevent double payments against duplicate Chapter A2 [2]:
invoices? Cost Accounting Standards
43. Whether there is a procedure for processing the
Chapter A3 [3]:
invoices and credit notes along with check-list
at each stage?
44. Whether proper records are maintained to link Chapter A4 [4]:
the respective invoices with all advance Legal Position of Cost Auditor
payments and stage payments to suppliers?
45. Whether the accounts department reconciles Chapter A5 [5]:
the quantity/value of goods received and as Reporting under Cost Audit
specified in the invoices and the stock records?
46. Whether the Accounts Department keeps track Chapter A6 [6]:
of those Goods Received Notes or Goods Cost Audit in Information Technology (IT)
Inspection Notes, where payment is pending
for want of any reason including non-receipt of Part B: Management Audit
invoice despite satisfactory receipt of goods?
47. Whether all invoices are entered promptly in
Chapter B1 [7]:
the purchase book?
48. Whether the first copy of all Goods Received Chapter B2 [8]:
Notes and Goods Inspection Notes is linked to Operational Audit
respective invoices before the invoices are
processed for payments? Chapter B3 [9]:
49. Whether the Accounts Department compares Management Audit in Different function
the quantities and value as shown in the
suppliers’ invoice with the Goods Received Part C: Performance Analysis
Note and the purchase order? [Chapter 10]
50. Whether the goods received without
corresponding invoices are accepted at the
Goods Receipt Department? If yes, whether
these are independently checked by persons
other than those in Goods Receipt Department?
150

Questions
answer
51. Whether the invoices are finally cleared for
payment only after linking with first copy of Click to jump on:
Goods Received Note, Goods Inspection Note
and the relevant purchase order? Home
52. Whether the Accounts Department reviews the
accounts of vendors, who are both customer as Part A: Cost Audit
well as suppliers to determine set-off of mutual
claims? Chapter A1 [1]:
53. Whether the debit notes are serial numbered? Cost Audit Concept & Legal issues
Whether the missing numbers duly enquired
into? Chapter A2 [2]:
54. Whether there is a proper control over the issue
of debt notes especially with regard to the
Chapter A3 [3]:
competent authority to ensure their accuracy?
55. Whether all debit notes are recorded promptly
in the books of account? Chapter A4 [4]:
56. Whether there is a periodic review of the Legal Position of Cost Auditor
accounts statements received from suppliers’
with the respective ledger accounts? Chapter A5 [5]:
57. Whether the differences between the Reporting under Cost Audit
statements received from suppliers’ and their
respective ledger accounts properly Chapter A6 [6]:
investigated and reconciled? Cost Audit in Information Technology (IT)
58. Whether cash, cheques etc., are received only
by persons authorized to do so? Part B: Management Audit
59. Whether there is a clear-cut policy regarding
Chapter B1 [7]:
granting of cash discounts and rebates, issue of
credit notes, etc? Whether the officials, who
are entitled to grant cash discounts / rebates are Chapter B2 [8]:
clearly specified in the policy along with the Operational Audit
broad limits within which they can operate?
60. Whether cash receipts are recorded in cash Chapter B3 [9]:
registers and serial numbered cash receipts Management Audit in Different function
issued?
61. What are the controls over miscellaneous Part C: Performance Analysis
receipts like sale of scrap/waste etc.? Whether [Chapter 10]
these transactions are executed under the
supervision of a responsible officer?
62. Whether cash receipts are issued in all cases of
cash received, or receipts are issued only if so
required by the party making the payment?
63. Whether the cash receipts are prenumbered?
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Questions
answer
64. Whether sufficient controls are there to ensure
that the details on counterfoils/ copies of Click to jump on:
receipts are the same as those on the original
receipts? (For example, use of receipts having Home
automatic carbons whereby anything written
on the original gets automatically transcribed Part A: Cost Audit
on the copy or issue of cash receipt through the
automatic cash register.) Chapter A1 [1]:
65. Whether all cash receipts are entered in the Cost Audit Concept & Legal issues
cash book on the same day? Whether the
supervisor independently checks the cash book Chapter A2 [2]:
everyday to ensure up-to-date recording? Cost Accounting Standards
66. Whether there is a system ensuring that all
Chapter A3 [3]:
alterations in the copies/counterfoils of
receipts, other documents, cash book and the
ledger are made clearly, without overwriting Chapter A4 [4]:
and only under the initials of the supervisor? Legal Position of Cost Auditor
67. Whether a specific person is responsible for
opening all the mails containing remittances. Chapter A5 [5]:
Whether he is required to prepare immediately Reporting under Cost Audit
a list of all cheques, drafts, etc., and mark them
‘Account Payee Only’ ? Chapter A6 [6]:
68. Whether the customers and all other parties Cost Audit in Information Technology (IT)
required or encouraged to make payment only
through account payee cheques / drafts? Part B: Management Audit
69. Whether all cheques, drafts, cash etc., which
are received up to a stipulated time during the Chapter B1 [7]:
day required to be deposited n the bank on the
same day?
Chapter B2 [8]:
70. Whether there is a system to ensure that cash,
Operational Audit
cheques, etc., collected by the authorized
representatives of the enterprise (e.g. sales Chapter B3 [9]:
representatives) are recorded, deposited and Management Audit in Different function
reconciled promptly?
71. Whether there is a system of sending periodic Part C: Performance Analysis
statements of account to customers and other [Chapter 10]
parties from whom cash, cheques or drafts are
received on a regular basis and requesting them
to confirm the correctness of the statements?
72. Whether there is a regular reconciliation of
cash-in-hand as per the books of accounts and
the physical balance in hand?
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Questions
answer
73. Whether the counter-foils of the pay-inslips
used for deposits in bank are retained by the Click to jump on:
cashier?
74. Whether there is a daily cross-checking Home
between total receipts in cash or by cheques,
and total credits to customers’ accounts in the Part A: Cost Audit
ledger?
75. Whether all unused cash receipts books and Chapter A1 [1]:
cheques books kept in safe custody under the Cost Audit Concept & Legal issues
charge of a senior official and issued only after
verifying that the previous cash receipt book / Chapter A2 [2]:
cheque book has been fully accounted for? Cost Accounting Standards
76. Whether an internal audit of cash receipts
Chapter A3 [3]:
conducted regularly? Whether surprise count
of cash balance carried out periodically by the
internal auditor or by another independent Chapter A4 [4]:
official, who does not have any duties relating Legal Position of Cost Auditor
to handling of cash or accounting for it?
77. Whether the bank reconciliation statement is Chapter A5 [5]:
prepared periodically say every week to ensure Reporting under Cost Audit
proper reconciliation? Whether proper follow-
up action is taken with regard to outstanding Chapter A6 [6]:
entries? Cost Audit in Information Technology (IT)
78. Whether the balances in the Debtors’ Accounts
are periodically reviewed to keep them to Part B: Management Audit
minimum?
79. Whether the old creditors’ accounts, where Chapter B1 [7]:
payments are not being claimed by the
suppliers are periodically reviewed to know the
Chapter B2 [8]:
exact reasons?
Operational Audit
Chapter B3 [9]:
Interactive Question B1.4: Role of Audit Committee to ensure internal control effectiveness Management Audit in Different function
How can audit committee helps the board of directors to establish and continue an effective internal [Chapter 10]
control system?
Ans: Management is responsible to establish and maintain an effective system of internal control. An
effective internal control system provides reasonable assurance that policies, processes, tasks, behaviors
and other aspects of an organization, taken together, facilitate its effective and efficient operation, help
153
to ensure the quality of internal and external reporting, and help to ensure compliance with applicable
laws and regulations.
The performance of the system of internal control should be assessed through ongoing monitoring
activities, separate evaluations such as internal audit, or a combination of the two. While effective
monitoring throughout the organization is an essential component of a sound system of internal control,
the board cannot rely solely on embedded monitoring processes to discharge its responsibilities. The Click to jump on:
board, with the assistance of the audit committee, should regularly receive and review reports on internal
control and be informed about how the reviews giving rise to the reports have been undertaken. Home
The audit committee is to oversee these controls and to review the effectiveness of the system as a Part A: Cost Audit
whole. The audit committee should be satisfied that proper control policies, procedures and activities
have been established and are operating as intended. Chapter A1 [1]:
It is essential to have a frank, open dialogue between management and the audit committee on matters
of risk and controls. The audit committee should define the process to be adopted for its (annual) review Chapter A2 [2]:
of the effectiveness of internal control and risk management systems. The annual review exercise should Cost Accounting Standards
consider the issues dealt with in the reports reviewed during the year, together with additional
information necessary to ensure that the board has taken account of all significant aspects of internal Chapter A3 [3]:
control. Cost Auditing Standards and Quality control
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
154
7.5 Internal Control and Internal Auditor

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) had
recently issued the “COSO report”, which was jointly sponsored by the Institute of Internal
Auditors (IIA), the American Institute of CPAs, the Financial Executives Institute, the
American Accounting Association, and the Institute of Management to provide a common,
widely accepted definition of internal control and provide a framework of internal control which Click to jump on:
can be used as a benchmark for assessing its effectiveness. The COSO report defines internal
control as follows: Home
………………….…a process, effected by an entity’s board of directors, management and other
personnel, which is designed to provide reasonable assurance regarding the achievement of Part A: Cost Audit
objectives in one or more categories:
− effectiveness and efficiency of operations Chapter A1 [1]:
− reliability of financial information Cost Audit Concept & Legal issues
− compliance with applicable laws and regulation
Chapter A2 [2]:
The COSO definition of internal control acknowledges that both management and non-
management personnel play a significant role in making the internal control process function. Chapter A3 [3]:
The COSO study identifies five interrelated components of internal control: Cost Auditing Standards and Quality control
(a) the control environment;
(b) risk assessment; Chapter A4 [4]:
(c) control activities; Legal Position of Cost Auditor
(d) information and communication;
(e) monitoring. Chapter A5 [5]:
The underlying foundation of internal control, termed as ‘the control environment’ is dependent
on the people in an organization including their competence, attributes and their ethical values. Chapter A6 [6]:
The management must assess the anticipated risks (risk assessment) and devise mechanisms
(control activities) to manage those risks to achieve its goals and objectives. Information and
communication among people are vital links in the effective control system. Lastly, monitoring Part B: Management Audit
of internal controls is an ongoing process like managerial reviews or periodic reviews like
Chapter B1 [7]:
internal self-assessment or an audit. The internal audit function is a part of internal control as
part of the monitoring process.
Chapter B2 [8]:
Internal auditing has been defined as an independent, objective assurance and consulting Operational Audit
activity designed to add value and improve an organization’s operations. It helps an
organization accomplish its objectives by bringing a systematic, disciplined approach to Chapter B3 [9]:
evaluate and improve the effectiveness of risk management, control, and governance processes. Management Audit in Different function
It is essentially a management control mechanism that operates through measurement and
evaluation of effectiveness of other controls. Part C: Performance Analysis
[Chapter 10]
We know control compels events to conform to plans. Internal control is an essential part of
control mechanism within an organization, which functions for the success of an organisation
by way of implementation of organizational objectives, policies, plans and philosophy. To
assess the effectiveness of internal control measures, it is essential to measure the extent of
accomplishment of objectives through appraisal, review and evaluation of the related factors.
Now, because appraisal, review and evaluation, in most of the organizations are done by the
155
internal auditor through internal audit functioning, the importance of role of an internal auditor
in the context of internal control cannot be exaggerated.
The importance of internal auditor in the field of internal control can also be brought about if
reference is made to “Standards for professional practice of Internal audition” issued by the
Institute of Internal Auditors Inc., USA, which inter alia include:
(a) The purpose of the review of the systems of internal control is to ascertain whether the Click to jump on:
system established provides reasonable assurance that the organization’s objectives and
goals will be met efficiently and economically. Home
(b) The purpose of the review for effectiveness of the system of internal control is to ascertain
whether the system is functioning as intended. Part A: Cost Audit
(c) The purpose of the review for quality of performance is to ascertain whether the
organization’s objectives and goals have been achieved. Chapter A1 [1]:
(d) The primary objectives of internal control are to ensure- Cost Audit Concept & Legal issues
(i) reliability and integrity of information
(ii) compliance with policies, plans, procedures, laws and regulations. Chapter A2 [2]:
(iii) the safeguarding of assets. Cost Accounting Standards
(iv) the economical and efficient use of resources.
(v) the accomplishment of established objectives and goals of operation or programmes. Chapter A3 [3]:
As a matter of fact, management is usually on the lookout for someone who can assure them
Chapter A4 [4]:
that control systems implemented are being followed and periodically reviewed/cross checked
for their suitability vis-à-vis adaptability to changing circumstances, so that management can
earn confidence is managing the business in the desired direction. Then, the question arises as Chapter A5 [5]:
to the scope of appraisal by the internal auditor to aid management is keeping up confidence in Reporting under Cost Audit
running a business and in achieving organizational objectives. The internal auditor is to go
beyond the ambit of control measures determined by appraising and assessing the extent of Chapter A6 [6]:
implementation of the management control systems, ensuring as well as assuring the Cost Audit in Information Technology (IT)
management control systems are as effective as these are expected to be and thereby converting
hopes and aspirations of the organization into reality and accomplishments. Part B: Management Audit
Internal auditing, as has been seen, can therefore reveal a sound internal control system but Chapter B1 [7]:
nevertheless the support of the top and middle management is a must. Since control mechanism Internal Control & Internal Audit
operates through men only, the human side of the enterprise is to be relied on for efficient of
control functions. Hence along with appraisal of control measures there has to be appraisal of Chapter B2 [8]:
performance of personnel. Operational Audit
Chapter B3 [9]:
Interactive Question B1.5: Control Activities differ in Organizations
[Chapter 10]
The internal auditors play an important role in the field of internal control – Explain.
Ans: Internal control is broadly defined as a process, affected by an entity's board of directors,
management, and other personnel, designed to provide reasonable assurance regarding the achievement
of objectives. And also, internal controls are tools that help managers be effective and efficient while
avoiding serious problems such as overspending, operational failures, and violations of law. The
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internal audit helps an organization accomplish its objectives by conducting a systematic and disciplined
approach to evaluate and improve the effectiveness of risk management, control and governance
processes. So, the internal auditors play an important role in the field of internal control of an
organization. In many organizations, internal auditors spend a great deal of time and effort explaining
to others (including management) what constitutes internal controls, who is responsible for establishing
controls and who evaluates those controls to determine if they are adequate and working as designed.
The internal auditor is to go beyond the ambit of control measures determined by appraising and Click to jump on:
assessing the extent of implementation of the management control systems, ensuring as well as assuring
the management control systems are as effective as these are expected to be and thereby converting Home
hopes and aspirations of the organization into reality and accomplishments.
Part A: Cost Audit
Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
157
7.6 Internal Check and Internal Audit

The basic difference between internal check and internal audit is that internal check is a routine
checking procedure, which involves cross-checking of every aspect of the work performed, at
the time when it is performed, and recording the same. On the contrary, in internal audit, each
and every component of the work is examined, by an independent staff, specially recruited for
the purpose. Click to jump on:
The aim of internal audit is to provide an independent and objective assurance that the Home
company’s risk management, governance, internal check and internal control systems are
functioning in a satisfactory manner. Further, it is important to note that the effectiveness of Part A: Cost Audit
any system implemented in the organization greatly depends on the staff employed to undertake
the same. This written account will help you clear all the doubts regarding the differences Chapter A1 [1]:
between internal check and internal audit. Cost Audit Concept & Legal issues
Comparison Chart Chapter A2 [2]:

BASIS FOR
COMPARISON
INTERNAL CHECK INTERNAL AUDIT Chapter A3 [3]:
Meaning Internal Check is a system, wherein Internal Audit is the ongoing critical
division of work and allocation of examination of the financial and
Chapter A4 [4]:
responsibilities are organized in such a operational activities of the concern, by Legal Position of Cost Auditor
manner that the work of one employee is an internal auditor.
spontaneously looked over by another. Chapter A5 [5]:
Method Work of one person is automatically Work performed by the employees is
checked by another person. examined by a separate group. Chapter A6 [6]:
Commencement Commences from the moment a Once the transaction has been recorded
of Work transaction is entered. in the books. Part B: Management Audit
Involved Accounting and clerical accuracy Effectiveness of management control Chapter B1 [7]:
evaluation of Internal Control & Internal Audit
Chapter B2 [8]:
Performed by Existing staff A specially dedicated team of auditors
Operational Audit
Cost Involvement Economical Comparatively Expensive
Thrust of System Prevention of errors and frauds Detection of errors and frauds Chapter B3 [9]:
Tool for Arrangement of the work Examination of the work Management Audit in Different function
Time of Checking is performed simultaneously Examination of the work takes place
Checking when the work is performed. after the work is completed. Part C: Performance Analysis
Report Summary of day-to-day transactions acts Submits his/her report to the [Chapter 10]
as a report to the supervisor. management.
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Key Differences Between Internal Check and Internal Audit

The points stated hereunder will explain to you the differences between internal check and
internal audit:
1. Internal Check is a system implemented in the firm, in which the work performed by one
staff member is by itself checked up by the other staff member so that the chances of error
or fraud is least. On the other hand, internal audit, as the name suggests, is the audit
conducted internally in the organization. It implies the systematic critical examination of Click to jump on:
the books of accounts by the staff of the concern.
2. In an internal check, the entire process is designed in a logical manner by dividing the work Home
so that no person has absolute control on each and every aspect of the transaction.
Conversely, in internal audit, the work performed by the employees, are examined and Part A: Cost Audit
cross-verified by a separate group, specifically appointed for the purpose.
3. The internal check begins from the moment a transaction is entered. As against, internal Chapter A1 [1]:
audit starts from the point, when the transaction has been recorded in the books. Cost Audit Concept & Legal issues
4. The internal check involves checking of accounting and clerical accuracy, whereas internal
audit is all about checking the effectiveness and scope of management control. Chapter A2 [2]:
5. The internal check is performed by the existing employees. In contrast, for the purpose of Cost Accounting Standards
internal audit, the company appoints a special team of auditors.
6. As an internal check is carried out by the existing workers, no extra cost is involved in it.
Chapter A3 [3]:
On the contrary, in internal audit, as the work is performed by a specially dedicated team
recruited for the purpose of conducting an audit, it is a bit expensive.
Chapter A4 [4]:
7. While internal check prevents the occurrence of errors and frauds, internal audit detects Legal Position of Cost Auditor
errors and frauds.
8. The internal check is well known for arrangement (designing) of work, by the allocation of Chapter A5 [5]:
responsibilities and tasks. As opposed, an internal audit involves an examination of work. Reporting under Cost Audit
9. The internal check is performed simultaneously, i.e. the checking is done, at the same time
when the work is performed, so mistakes are checked at an early stage. On the other hand, Chapter A6 [6]:
an internal audit takes place, after the recording of the transactions. Cost Audit in Information Technology (IT)
10. In an internal check, the summary of the day to day transactions acts as a report to the
supervisor. Conversely, in an internal audit, the audit report is submitted by the auditor to Part B: Management Audit
the management.
Chapter B1 [7]:
DEFINITION OF INTERNAL CHECK Internal Control & Internal Audit
Internal Check can be defined as a method of arrangement of the operations of factory, office,
Chapter B2 [8]:
warehouse, store, etc., wherein the work of one employee automatically comes under the
Operational Audit
scrutiny of another employee, so as to minimize the risk of errors and frauds. So, for the
commitment of fraud one employee has to collude with another. Chapter B3 [9]:
It is one of the major segments of the internal control system, enforced in the firm whereby no
one person is authorized to undertake and enter every facet of the financial transaction. Part C: Performance Analysis
Therefore, the work is divided into different parts and each part is assigned to a different [Chapter 10]
employee and in this way, the work of one employee is subject to the perusal of another
employee.
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Features of Internal Check

The salient features of Internal Check are illustrated below:
Click to jump on:
Home
Part A: Cost Audit

Chapter A1 [1]:
Elements of Internal Check
• Introducing checks on everyday transactions. Chapter A2 [2]:
• Continuous operation of checks as a part of the routine system.
• Work of one person complements the work of another. Chapter A3 [3]:
Objectives of Internal Check
• To prevent the occurrence of error or fraud. Chapter A4 [4]:
• To minimize the misappropriation of cash or goods by any staff member. Legal Position of Cost Auditor
• To ensure that the firm accounting system provides reliable, complete, up-to-date and
accurate information of each and every business transaction.
Chapter A5 [5]:
• To identify error or fraud at an early stage and correct them promptly.
• To enable protection to the firm’s resources against theft, carelessness, and Chapter A6 [6]:
inefficiency. Cost Audit in Information Technology (IT)
• To delegate work in a way that no segment of the business remains unchecked or
unrecorded. Part B: Management Audit
• To locate errors and frauds as and when they are committed, through independent
checking. Chapter B1 [7]:
Advantages of Internal Check
The figure given hereunder explains the advantages of internal check: Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
160
DEFINITION OF INTERNAL AUDIT

Internal Audit refers to the systematic and continuous assessment activity which takes place
within an organization, wherein operations relating to accounting and finance are reviewed by
the team of auditors, so as to provide protective and constructive service to the company’s
management. It ensures that:
• Business transactions are accurately and appropriately recorded.
• Books of accounts are systematically maintained as per the relevant provisions. Click to jump on:
• No possibility of manipulation of accounts and misappropriation of business property.
Home
An Internal Audit is a form of control, whose aim is to measure and appraise the effectiveness
of other types of control. It involves the verification of business operations by the staff specially Part A: Cost Audit
appointed for the purpose.
Chapter A1 [1]:
Features of Internal Audit Cost Audit Concept & Legal issues
The salient features of internal audit are depicted in the figure below:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:
Scope of Internal Audit

The scope of internal audit is represented below:
Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
161
The primary objective of the internal audit is to support the management in effectively
discharging the responsibilities by providing them with logical analysis, recommendations and
suggestions with respect to the reviewed operations.
Conclusion
So, Internal Audit is a significant tool of management, which authenticates the accuracy of the
accounting records on a regular basis. It reports to the management about the effectiveness of Click to jump on:
the internal check system as well as other kinds of control, implemented in the concern.
Home
Interactive Question B1.6: Internal Checking helps Internal Auditor
[Difficulty Level: Easy] Part A: Cost Audit
Can internal auditor depend on internal checking? Chapter A1 [1]:

Ans: No, Internal Auditor cannot depend on internal checking. Internal check and internal audit are not
Chapter A2 [2]:
the same. Although both systems are an integral part of a company’s overall internal control mechanism,
they differ in their functioning. An internal check refers to a system of allocating duties among the staff
in such a manner that no one person is allowed to record more than one aspect of a single transaction.
Chapter A3 [3]:
Whereas internal audit is an independent review of operations and records of a company, performed by Cost Auditing Standards and Quality control
staff specifically aligned for this purpose. Let’s find out the scope of each of these two terms in detail.
Internal Check is an integral function of the internal control system. It is an arrangement of duties of Chapter A4 [4]:
the staff members in such a way that the work performed by one person is automatically and Legal Position of Cost Auditor
independently checked by the other. Good system of Internal Check provides accurate, reliable and
genuine accounting record and data to the owner of the business on which he can rely upon. The goal Chapter A5 [5]:
of an internal check system is to prevent errors, whereas the goal of an internal audit system is to detect Reporting under Cost Audit
errors and frauds.
Chapter A6 [6]:
The nature and extent of the scope of the Auditor’s work depends upon the system of Internal Check in Cost Audit in Information Technology (IT)
an organization. The system of Internal Check will determine the reliability on work which an Auditor
can place. Internal Check system cannot relieve the Auditor of his contractual responsibilities in case Part B: Management Audit
anything goes wrong in the final accounts, therefore it is the duty of the Auditor to check the whole
transaction in detail. But a good Internal Check system may relieve the Auditor of detailed checking Chapter B1 [7]:
and he can utilize the saved time to any other work of more importance.
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
162
7.7 Internal Audit and its Scope

Internal auditing is an independent appraisal activity within an organization for the review of
operations as a service to management. It improves managerial control by measuring and
evaluating the effectiveness of other controls, and by maintaining a vigilant watch over risks.
It comprises a complete intra-company financial and operational review, which is undertaken Click to jump on:
within an organisation by specifically assigned staff. The usual meaning attached to the concept
of internal audit are as follows :- Home
a) Internal audit is a continuous and a systematic process of examining and reporting the
operations and records of a concern by its employees, or external agencies specially Part A: Cost Audit
assigned for this purpose. It is, in essence, auditing for the management and its scope may
vary, depending upon the nature and size of the concern. Chapter A1 [1]:
b) H. Wasbrook in his book, “The Board and Management Auditing” has defined internal Cost Audit Concept & Legal issues
audit as “in its narrow sense, such an audit is one that is carried out by the specialist staff
of the organisation being audited, it concerns itself mainly with the routine checking of Chapter A2 [2]:
(usually) accounting transactions on a daily basis, with the object of quickly locating
irregularities, thus making it more difficult to perpetrate a fraud, because of the constant
Chapter A3 [3]:
nature of the checking”. Cost Auditing Standards and Quality control
c) Internal audit is a management tool, performed by employees of the organisation to ensure
correctness in accounting data and to detect fraud by way of periodical review of Chapter A4 [4]:
organizational systems and procedures. Legal Position of Cost Auditor
This definition is also quite clear in explaining the term and has laid emphasis upon Chapter A5 [5]:
“independent appraisal” of the related individuals in the organisation and is not mainly with the Reporting under Cost Audit
routine checking. This requires the internal auditor to go beyond the records in the books and
to review and report the performance in the area of finance, accounting and other related Chapter A6 [6]:
operations. Cost Audit in Information Technology (IT)
Internal audit is in fact a control system that functions through examination and appraisal of Part B: Management Audit
other control mechanisms operating within the organisation. It keeps close eyes on the business
to ensure that all transactions are duly recorded in complete form and that faulty, inefficient or Chapter B1 [7]:
fraudulent operations are revealed and corrected. It provides a proper foundation where all Internal Control & Internal Audit
assets get properly protected and the structure for better operations and higher profitability is
Chapter B2 [8]:
embodied.
Operational Audit
According to the Institute of Internal Auditors, internal audit involves five areas of operations: Chapter B3 [9]:
1. Reliability and integrity of financial and operating information: Internal auditors should Management Audit in Different function
review the reliability and integrity of financial and operating information and the means
used to identify, measures, classify and report such information. Part C: Performance Analysis
2. Compliance with laws, policies, plans, procedures and regulations: Internal auditor [Chapter 10]
should review the systems established to ensure compliance with those policies, plan and
procedures, law and regulations which could have a significant impact on operations and
reports and should determine whether the organisation is in compliance thereof.
3. Safeguarding of Assets: Internal auditors should verify the existence of assets and should
review the means of safeguarding assets.
4. Economic and efficient use of resources: Internal auditor should ensure the economic and
163
efficient use of resources available.

5. Accomplishing of established objectives and goals for operations: Internal auditor should
review operation or programmes to ascertain whether results are consistent with established
objectives and goals and whether the operations or programmes are being carried out as
planned.
It is said that scope of internal audit is very much related to business phases. The first phase of Click to jump on:
business is basically the planning stage, and the decisions are on issues like whether to make or
buy, whether to undertake a new project or export etc. These are more of managerial decisions Home
and the scope of internal audit is often not much practical, in the initial stage, unless it takes to
what is called management audit. The 2nd phase is the execution stage having its base in the Part A: Cost Audit
subsequent recording in the books of account. In this stage, the scope of internal audit emerges
out of need for correctness of accounts and proper classification of heads in a required manner. Chapter A1 [1]:
The third and final phase is the review of transactions where scope of internal auditing is Cost Audit Concept & Legal issues
immense. This internal auditing is a function distinct from authorization and recording, which
concerns not only with examination of the transactions as recorded in the books of account, but Chapter A2 [2]:
also the appraisal of the procedures with a view to affecting change for better efficiency, as far Cost Accounting Standards
as practicable. For a better understanding of nature and scope vis-à-vis objectives of internal
audit, the following may be of interest:- Chapter A3 [3]:
I ----- Independent appraisal, review and evaluation
Chapter A4 [4]:
N ---- Necessity of specialist service
T -----Thorough in making study
E ---- Ensure complete objectivity Chapter A5 [5]:
R ---- Reporting without fear or favour Reporting under Cost Audit
N----- Narrow down the gap between management objectives and the efficiency achieved.
A -----Assure better management Chapter A6 [6]:
L ------Look for all round efficiency Cost Audit in Information Technology (IT)
A -----Aid to management
U -----Understanding operational and management auditing Part B: Management Audit
D -----Discuss to find out acceptable solution
I ------Improving internal control Chapter B1 [7]:
T -----Test for efficiency and effectiveness Internal Control & Internal Audit
A proper organization structure for internal auditing department ensures its relative Chapter B2 [8]:
independence so that it can carry out its work freely and objectively and render impartial and Operational Audit
unbiased decision. The institute of Internal Auditors has stated that “organizational status of the
Chapter B3 [9]:
internal auditing department should be sufficient to permit the accomplishment of the audit
responsibilities”. So to ensure this the management and the Board of Directors must give full
support to the internal auditors. The functions, responsibility and authority of the internal
auditing department should be clearly and specifically laid down in a written document. The
[Chapter 10]
chief internal auditor should have direct communication with the Board of Directors. He should
submit periodic reports to be the Board highlighting significant audit findings.
164

“Scope of internal audit is very much related to business phases” - Explain
Ans: It is said that scope of internal audit is very much related to business phases. The first phase of
business is basically the planning stage, and the decisions are on issues like whether to make or buy, Click to jump on:
whether to undertake a new project or export etc. These are more of managerial decisions and the scope
of internal audit is often not much practical, in the initial stage, unless it takes to what is called Home
management audit. The 2nd phase is the execution stage having its base in the subsequent recording in
the books of account. In this stage, the scope of internal audit emerges out of need for correctness of Part A: Cost Audit
accounts and proper classification of heads in a required manner. The third and final phase is the review
of transactions where scope of internal auditing is immense. This internal auditing is a function distinct Chapter A1 [1]:
from authorization and recording, which concerns not only with examination of the transactions as Cost Audit Concept & Legal issues
recorded in the books of account, but also the appraisal of the procedures with a view to affecting change
for better efficiency, as far as practicable. Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
165
7.8 Statutory Auditors and Internal Auditors

An internal audit is conducted by the permanent staff of the office to detect weakness in system,
procedures and for the improvement. Auditor employed by individual companies, partnership,
Govt., agencies, individual and other entities are called internal auditors. These auditors may
review employee performance, compliance with company regulations and financial and
accounting systems. Click to jump on:
Statutory audit is the act of checking books of accounts as per the provision of company act. Home
Both of them check books of account; detect errors and frauds even though they have certain
differences which are as follows: Part A: Cost Audit
Internal audit Chapter A1 [1]:

• Appointment: An internal auditor is generally appointed by the management. Cost Audit Concept & Legal issues
• Legal Requirement: Internal audit is the need of management but it is not a legal obligation.
Chapter A2 [2]:
• Qualification: It does as require specific qualification as per provision of law.
• Conducting of audit: It is a regular nature.
• Status: An internal auditor is a staff. Chapter A3 [3]:
• The scope of work: It is related to the examination of books of accounts and other activities Cost Auditing Standards and Quality control
of an organization.
• Removal: Internal auditor can be removed by management. Chapter A4 [4]:
• Remuneration: Internal auditor is fixed by the management. Legal Position of Cost Auditor
• Report: Internal auditor needs to give suggestions to improve weakness but no need to
Chapter A5 [5]:
present report.
Statutory audit Chapter A6 [6]:
• Appointment: Statutory auditor is appointed by the shareholders or Annual General Cost Audit in Information Technology (IT)
Meeting.
• Legal Requirement: It is legal obligation. Part B: Management Audit
• Qualification: To do Statutory audit, auditor must be a CA holder.
• Conducting of audit: It is conducted after the preparation of final account. Chapter B1 [7]:
• Status: A statutory auditor is an independent person. Internal Control & Internal Audit
• The scope of work: It checks the books of accounts and related evidential documents.
• Removal: Statutory auditor can be removed by the annual general meeting only. Chapter B2 [8]:
Operational Audit
• Remuneration: Remuneration of a statutory auditor is fixed by the shareholders.
• Report: Statutory auditor requires preparing the report after the completion of work on the Chapter B3 [9]:
basis of facts found during the course of audit and presenting such report to the appointing Management Audit in Different function
authority.
In view of the similarity between much of the work of internal and external auditors, it is [Chapter 10]
appropriate to consider the fundamental difference between these two. The objective of internal
auditing is mainly to assist the organization in the effective discharge of responsibilities by
furnishing them with analyses, appraisals, and recommendations concerning all the activities
reviewed. The internal auditor is concerned with every phase of business activity where he may
provide service to the organization. This scope goes beyond the accounting and financial
166
records to obtain the full understanding of the operations of the organisation. The attainment of
this overall objective inter-alia includes the following activities:
• Reviewing and appraising the correctness and adequacy of accounting, financial, and other
operating controls ensuring effective internal control at optimum cost;
• Validation to ensure the compliance with established policies, plans, procedures and
applicable laws and regulations;
• Accounting and safeguarding the assets of the company from losses of all kinds; Click to jump on:
• Validation to ensure the reliability of management data developed within the organization;
• Validating the quality of performance in carrying out assigned responsibilities; and Home
• Recommending operational improvements and corrective measures.
Part A: Cost Audit
The external auditor, on the other hand has a statutory responsibility to report on the true and
fair view of the accounts of the company and whether proper books of accounts and other Chapter A1 [1]:
accounting record have been kept. These responsibilities cannot be delegated to others. Cost Audit Concept & Legal issues
However, the objectives and scope of the internal audit on the other hand are determined by
Chapter A2 [2]:
management. It is actually a managerial control which functions within the scope determined
by the management. The external auditor is appointed by the shareholders of the company in
the annual general meeting in accordance with the provisions of the relevant Companies Act Chapter A3 [3]:
and is therefore accountable to them. The internal auditor is appointed by the management and Cost Auditing Standards and Quality control
is, therefore responsible to the management. The exact role and scope of internal audit shall
very from company to company, whereas the ultimate objective of statutory audit is same in all Chapter A4 [4]:
the companies. Legal Position of Cost Auditor
The qualifications of the statutory auditors are prescribed under the provisions of section 212 Chapter A5 [5]:
of the Companies Act 1994. However, there are no minimum qualifications prescribed under Reporting under Cost Audit
the companies act for the persons appointed to act as internal auditors. Similarly, section 212
of the Companies Act allows to the statutory auditor, the right of access at all times to the books Chapter A6 [6]:
and accounts and vouchers of the company, whether kept at the head office of the company or Cost Audit in Information Technology (IT)
elsewhere. Statutory auditor is also entitled to require such information and explanation as he
may think necessary for the performance of his duties as statutory auditor. However, there are Part B: Management Audit
no such rights available to the internal auditor. In other words, the internal audit is an internal
control from the point of view of statutory auditor, which functions by appraising and Chapter B1 [7]:
evaluating other controls. The statutory auditor evaluates the extent of the scope of the internal
audit and takes this into account in determining the exact scope of his own work.
Chapter B2 [8]:
Operational Audit
Can an internal auditor be appointed as a statutory auditor?
Ans: Where an Internal Auditor is an employee of the company, he is disqualified for appointment as [Chapter 10]
a Statutory Auditor. But where a company employs an outside firm to conduct its Internal Audit, the
Internal Auditor even though they are independent, they'll be reporting to the management and even
management only decide their scope of work which affects their independence to be appointed as
statutory auditors. Even in such a case, the Internal Auditor cannot be appointed as a statutory Auditor,
because it will not be possible for him to give as independent and objective report. As per legal aspect
any person has a beneficiary relation with the company cannot be appointed as a statutory auditor.
167
Because Internal Auditor, who is not an employee of the company, also have a beneficiary relationship
with the company; s/he cannot be appointed as a statutory auditor of the company.
Click to jump on:
Home
Part A: Cost Audit

Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
168
7.9 Assessment of Adequacy of Internal Audit Function

Sometimes it is required to assess the adequacy of internal audit function of an organisation.
The following questionnaire will enable to evaluate the work of the internal auditor and assess
the adequacy of the internal audit function:
1. What is the organizational set up of the department?
2. Is the staff employed in the department adequate? Click to jump on:
3. Are the qualifications of the staff adequate?
4. Is the staff competent? Home
5. Is the staff independent?
6. To whom do they report frequently and with what effect? Part A: Cost Audit
7. Is there any internal audit manual?
8. Is a programme of internal audit drawn up before the commencement of the financial year? Chapter A1 [1]:
9. Does the programme cover the audit of all the important transactions and records of the Cost Audit Concept & Legal issues
company including statutory cost accounting records?
10. Is the scope of internal audit wide enough to extend to areas such as, management audit, Chapter A2 [2]:
operational audit and system analysis?
11. What is the system of reporting irregularities noticed during internal audit?
Chapter A3 [3]:
12. Is prompt corrective action taken by the management on the basis of internal audit reports? Cost Auditing Standards and Quality control
13. Is there much duplication of work between the statutory audit and internal audit?
Chapter A4 [4]:
Interactive Question B1.9: Adequacy of Internal Control
Discuss the approaches for assessing adequacy of internal control.
Chapter A6 [6]:
Ans: An effective system of internal control provides reasonable assurance regarding achievement of Cost Audit in Information Technology (IT)
an entity’s objectives. There are some approaches in assessing adequacy of internal control. Each
approach is used in different situation: Part B: Management Audit
- Overall assessment of internal control, concluded from a single engagement.
- Overall assessment of internal control, concluded from multiple individual engagements. Chapter B1 [7]:
- Assessment of control related objectives/ activities/ financial statements, concluded from individual Internal Control & Internal Audit
engagements / financial audit.
- Assessment of internal control over financial reporting, concluded from engagement as
Chapter B2 [8]:
requirements.
Operational Audit
Which approach is used will much depend on the objective of the internal control assessment
engagement and the objective will affect the assessor how to develop procedures to assess the adequacy Chapter B3 [9]:
and the effectiveness of the internal control. The approaches can be used to identify deficiencies, Management Audit in Different function
significant deficiencies, and material weaknesses in the design of internal control are:
(1) Understand the identified significance risks. Part C: Performance Analysis
(2) Identify existing controls [Chapter 10]
(3) Identify the absence of key controls
(4) Consider the possibility of compensating controls.
(5) Decide whether there is a significant deficiency or material weakness.
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7.10 Compliance Audit

A compliance audit is the type of audit service that their performance or procedure is mainly
focusing on whether the entity complying with local law, regulation, and related rule. A
compliance audit also reviews whether an entity complying with internal rules, regulations,
policies, decisions, and procedures. An entity required to comply with the local law and
regulations or they will face penalties or fine. Some fine is only for a certain monetary amount Click to jump on:
and some fine requires a close operation.
Home
Part A: Cost Audit

Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Types of compliance review:
In general, the compliance audit performs its audit against certain requirement as follows: Chapter A6 [6]:
Local law and regulation:
The entity needs to make sure that they are operating in compliance with the law, and related
law. To ensure this business might need to set up proper business procedures and processes. Or
Chapter B1 [7]:
sometime, they might need the legal consultant to have their decision advised. Entity sometime
setting the legal department to review on the certain significant process. It wants to make sure
that the penalty is minimized and the right procedure that complies with the law is in place. Chapter B2 [8]:
Along with this, the entity might need its internal audit department to have its review on the Operational Audit
compliance section with local law requirements. The internal auditor might need to assess the
significant procedures and process, as well as certain official documentation. Chapter B3 [9]:
Business-related regulation and framework:
Besides reviewing against local law and regulation, compliance auditors might need also to Part C: Performance Analysis
review compliance with related regulations and frameworks. For example, if the corporation is [Chapter 10]
listed on the stock exchange outside the country that they are operating. Then they need to make
sure that the entity complies with the requirement of that stock exchange requirement. The
compliance auditor also needs to review these areas by checking whether the related entity’s
current practices follow the requirement.
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If not complying with, the compliance auditor needs to discuss with related departments as well
as chief executive that the findings found, as well as the recommendation that makes by the
auditor.
All the finding needs to report to the audit committee and the board of directors for their action.
Entity’s policy, procedure, and processes:

The compliance auditor also performs its audit again entity’s internal policy, procedure, and Click to jump on:
processes. Those internal policies and procedures are very important to the entity for sustainable
growth. Fail to comply with the internal policy and procedure might lead to a waste of time and Home
resources. Serious in-compliance could lead to serious fraud.
Part A: Cost Audit
Compliance audits sometimes performed by the compliance officer and sometime performed
by internal auditors. The big company has compliance departments work separately from Chapter A1 [1]:
internal audit departments. A compliance audit is normally conducted by the internal auditor Cost Audit Concept & Legal issues
and sometime services could be offered by external auditors. Sometime internal audit
department leaks of resources or leak of competency to provide the services. In such a case, the Chapter A2 [2]:
entity might need to seek services from an external firm to provide the services. Internal audit Cost Accounting Standards
is the independence department and works under the direct supervision of the audit committee.
Chapter A3 [3]:
The compliance audit report is communicated to the related department or division, CEO, and Cost Auditing Standards and Quality control
CFO. The reporting result is direct to the board of directors and the audit committee. For the
Chapter A4 [4]:
big corporations, compliance officers are the one that enforces each unit, department, or
division to compliance with the required procedures, policy, regulations, and laws. The
compliance officer is also the one who performed a compliance audit sometime. Chapter A5 [5]:
Interactive Question B1.10: Importance of Compliance Audit
Why compliance audit is so important for organizations.
Ans: Compliance auditing, whether internal or external, enables a company to identify weaknesses in
regulatory compliance processes and create ways for improvement. Sometimes, guidance determined Chapter B1 [7]:
by a compliance audit can help reduce risk while also avoiding potential risks or federal fines for Internal Control & Internal Audit
noncompliance. Compliance auditing provides an outline of the internal business processes that can be
Chapter B2 [8]:
improved or changed according to changes in regulations and requirements.
Operational Audit
Chapter B3 [9]:

[Chapter 10]
171
Chapter B2 [8]
OPERATIONAL AUDIT

Click to jump on:
8.1 Operational Audit – Technique and Procedure
8.2 Budgetary Control System Home
8.3 Capacity Utilization
8.4 Inventory Control Part A: Cost Audit
8.5 Management Information System (MIS)
8.6 Business Risk Assessment and Mitigation Chapter A1 [1]:
8.7 Nature and Scope of Management Audit Cost Audit Concept & Legal issues
8.8 Audit of Management Process and Functions
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
172
8.1 Operational Audit – Technique and Procedure

The internal audit function in any organisation can be broadly categorized into three major
functions namely (a) financial audit (b) compliance audit and (c) operational audits. However,
an operational audit is sometimes defined as an extension of a financial audit. It may be added
here that even though the statutory auditors may place a degree of reliance on work performed
by the internal auditors, the firm of chartered accountants still has the responsibility for Click to jump on:
certifying the true and fair view of the financial statements. Similarly, regulatory agencies or
other organizations concerned with compliance generally either send in their own auditors or Home
hire an external audit firm. Therefore, Internal Audit mainly plays a supplementary role only in
financial and compliance audits, but operational auditing is the primary, albeit not the exclusive, Part A: Cost Audit
domain of the internal auditor.
Chapter A1 [1]:
An operational audit (or value-for-money audit) has been defined as an organized search for Cost Audit Concept & Legal issues
ways of improving efficiency and effectiveness. The objective is to assist the organization in
performing functions more effectively and economically with focus on the efficiency and Chapter A2 [2]:
effectiveness of operations, it is also stated to be an early warning system for the detection of
potentially destructive problems.
Chapter A3 [3]:
An operational audit can lead to better management of all aspects of business organisation
whether it is production area or service area. Traditionally, operational audits have been Chapter A4 [4]:
conducted by means of a questionnaire interview of departmental employees. Virtually all large Legal Position of Cost Auditor
companies conduct operational audits in their major production and service departments. The
financial audit tells where the entity was and where it is on the date of the balance-sheet. Chapter A5 [5]:
However, an operational audit tends to answer the questions as to why the entity is where it is Reporting under Cost Audit
and how it got there. It means the evaluation of management’s performance and efficiency.
Therefore, Operations Audit is a process to determine ways to improve production. It falls into Chapter A6 [6]:
the category of a management service by evaluating the four functions of management: (1) Cost Audit in Information Technology (IT)
planning, (2) organizing, (3) directing, and (4) controlling. The operational audit can also be
broken down further as a functional review; for example, Purchasing as a department versus Part B: Management Audit
the overall Procurement operation in coordination with production scheduling and market
forecasting. The following table highlights the salient features of the traditional form of internal Chapter B1 [7]:
audit and operational audit: Internal Control & Internal Audit
Chapter B2 [8]:
INTERNAL AUDIT OPERATIONAL AUDIT
Operational Audit
Compliance objective Risk identification, process improvement objective
Financial accounts focus Business focus Chapter B3 [9]:
Audit focus Efficiency & improvement focus Management Audit in Different function
Transaction-based Process-based
Policies and procedures focus Risk management focus Part C: Performance Analysis
Cost Centre wise budget monitoring Accountability for performance improvement results [Chapter 10]
Methodology: Focus on policies, Methodology: Focus on goals, strategies and risk
transactions and compliance management processes
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) had

recently issued the “COSO report”, which was jointly sponsored by the Institute of Internal
Auditors (IIA), the American Institute of CPAs, the Financial Executives Institute, the
173
American Accounting Association, and the Institute of Management to provide a common,

widely accepted definition of internal control and provide a framework of internal control which
can be used as a benchmark for assessing its effectiveness. The COSO report defines internal
control as follows:
A process, effected by an entity’s board of directors, management and other personnel, which
is designed to provide reasonable assurance regarding the achievement of objectives in one or
more categories: Click to jump on:
• effectiveness and efficiency of operations
• reliability of financial information Home
• compliance with applicable laws and regulations
Part A: Cost Audit
Operational audits concerned with the objectives of efficiency and effectiveness. There are
many reasons for performing an operational audit: compliance with policies and procedures, Chapter A1 [1]:
excessive sales returns, proposed product mix, equipment down time or personnel turnover etc. Cost Audit Concept & Legal issues
Therefore, an auditor must establish the scope of an operational audit before formulating the
approach to initiate an operational audit. This step will determine the extent of the scope of Chapter A2 [2]:
audit. The second step shall be to understand the auditee’s operation, its purpose in the total Cost Accounting Standards
environment of the entity, its history, its image, its staff, their skills and competence and its
Chapter A3 [3]:
reporting path. The reporting path is of very critical importance because this path is the
communication route along which, the audit results and conclusions will flow.
Chapter A4 [4]:
The prime records to be obtained in an operational audit are the organizational chart of the Legal Position of Cost Auditor
function/ operation, applicable policies, guidelines and procedures etc. These will outline each
employee’s responsibility and authority. The function’s/operation’s performance reports for the Chapter A5 [5]:
reasonable period prior to the audit should be reviewed to do trend analyses or the critical Reporting under Cost Audit
analyses. These analyses or reports could indicate potential critical areas such as over- or under-
staffing, noncompliance with corporate policies and procedures, weaknesses in internal Chapter A6 [6]:
controls, or inadequate job rotations etc. These indications could help the management auditor Cost Audit in Information Technology (IT)
in determining scope of investigation and areas of potential improvement. Reports must be
based on facts, informative, submitted in time and directed to the proper levels of management. Part B: Management Audit
Operational auditing process: Chapter B1 [7]:

The process of operational auditing is not much different from other audits performed by Internal Control & Internal Audit
the internal auditor. Those include planning, execution, reporting and follow up.
• Planning: The auditor needs to obtain an understanding of the business as well as its
Chapter B2 [8]:
Operational Audit
operation. Then, they need to make an assessment and target which key operation should
they perform.
Chapter B3 [9]:
• Execution: Validating the key control and operation involve obtaining the key documents, Management Audit in Different function
observing how certain key control is performing and inspecting certain documents like sales
invoices, goods delivery note. Part C: Performance Analysis
• Reporting: Once the key operation and control are validated, the report needs to be [Chapter 10]
prepared and submit to the audit committee.
• Follow up: Same as other internal audits, any key findings, and recommendations that
prepare by the auditor need to follow up whether those key findings are mitigated by related
management or department.
174

“Operational Audit focuses on possible improvements for your business processes, not on fraud and
mistakes” – Do you agree with this statement? Explain your opinion.
Ans: An operational audit examines the processes, systems, and procedures of an organization. Click to jump on:
Operational audit deep dives into management practices to find all the loopholes current system has and
giving an outline of the issues in play. A company's internal processes are the primary focus of an Home
operational audit. Organizations can operate more efficiently and effectively by identifying trouble
spots. Operational audits allow to evaluate the impact of internal control systems on each operational Part A: Cost Audit
area by analyzing their potential. Understanding the weaknesses of each department and the factors
behind employee underperformance allows management to develop policies and procedures to improve Chapter A1 [1]:
efficiency. Operating audits help companies build an effective organizational structure by setting Cost Audit Concept & Legal issues
policies and standards based on careful observation. Each business runs different operational risks. It
could range from cyber threats to technology issues, fraud, and health and safety concerns. Operational Chapter A2 [2]:
auditors can discover risks and provide insights on dealing with the current situation, so your business
can help you adapt accordingly. Moreover, it allows management to see if the business conforms with
Chapter A3 [3]:
applicable laws and regulatory requirements in its industry.
So, an operational audit is comprehensive and focuses on possible improvements for business processes; Chapter A4 [4]:
it isn’t just concerned with your mistakes and achievements. Its surely saying that “Operational Audit Legal Position of Cost Auditor
focuses on possible improvements for your business processes, not on fraud and mistakes”.
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
175
8.2 Budgetary Control System

Budget and Budgetary Control – Nature and Scope
A budget is a financial and/or quantitative statement prepared and approved prior to a period of
time, to the policy to be pursued during that period for the purpose of attaining a given objective.
Budgetary control is the establishment of budget relating to the responsibilities of executives

Click to jump on:
to the requirements of policy, and the continuous comparison of actual with budgeted results
either to secure by individual action the objective of that policy or to provide a basis for its
Home
revision (CIMA), Budgetary control is not a type of costing but is extensively used in all types
of industries, businesses, Government departments as a system of control through responsible Part A: Cost Audit
persons – such as executives, departmental heads, foremen, supervisors, etc. The main steps
Chapter A1 [1]:
under budgetary control are as follows –
1. Establishment budgets for each section of the organization and incorporating the functional
budgets in summary or master budget consisting of a forecast or budgeted profit and loss Chapter A2 [2]:
account and balance sheet; Cost Accounting Standards
2. Recording of actual performances and continuous comparison of the actual performances
with that of the budget so as to determine the variances from the budget; and Chapter A3 [3]:
3. Ascertainment of reasons for such variances and taking suitable actions to remedy the Cost Auditing Standards and Quality control
defects in order to achieve the objective under original policy or to provide a basis for its
revision wherever necessary. Chapter A4 [4]:
Budgetary control is designed to assist management in the allocation of responsibility and
authority, to aid in making estimates and plans for the future, to assist in the analysis of the Chapter A5 [5]:
variation between estimated and actual results, and to develop bases of measurement or Reporting under Cost Audit
standards with which to evaluate the efficiency of operations. The objectives and consequently
Chapter A6 [6]:
the advantages of budgetary control will be felt throughout the whole organization, as a sound
system of budgetary control –
1. combines the ideas of different levels of management in the preparation of the budget;
2. coordinates all the activities of business in order to centralize control but decentralize
responsibility onto each manager involved;
Chapter B1 [7]:
3. plans and controls income and expenditure so as to achieve the highest profitability acts as Internal Control & Internal Audit
a guide for management decisions;
4. ensures sufficient working capital and other resources for the efficient operation of the Chapter B2 [8]:
business; Operational Audit
5. directs capital expenditure in the most profitable direction;
6. reduces wastes and losses to minimum and thus ensures in increase in productivity as Chapter B3 [9]:
regards men, machines and materials; Management Audit in Different function
7. provides a yardstick against which actual results can be compared; and
8. shows management where effort is needed to remedy the situation without any delay. Part C: Performance Analysis
[Chapter 10]
In order that a budgetary control is operated effectively, there must be an efficient ogranisation
for budgetary control. The budgetary control organisation is responsible to the chief executive
of a business. An advantage to this system is that decisions can be taken at the highest level
where there is a conflict between the aims of the managers of two or more divisions. Moreover,
where budgetary control has the support of the chief executive, those executives or managers
who are responsible to him will fully cooperate and place more reliance on budgetary control.
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While the chief executive bears the responsibility for the effectiveness of the budget, the
detailed preparation and administration of budgetary control is always delegated to
subordinates as a functional responsibility and particularly to the budget committee with the
budget officer as a secretary to the budget committee.
The different types of budgets are – (1) Functional budgets and (2) Master budget. The master
budget summarizes all the functional budgets in the form of budgeted profit and loss account Click to jump on:
and the budgeted balance sheet. Such master budget shows the target profit to be achieved by
the organisation as its main objective. Home
Adequacy of Budgetary Control System Part A: Cost Audit

While determining the adequacy or otherwise of the budgetary control system of an
organisation, it is essential that management auditor should evaluate its coverage and Chapter A1 [1]:
effectiveness i.e., whether the system in operation covers all functions rather than an accounting Cost Audit Concept & Legal issues
exercise. For this purpose, he should examine whether the system contributes towards
accomplishing the basic task of planning, coordinating and controlling the activities of the
Chapter A2 [2]:
organisation in relation to the product under management audit. The management auditor
should examine and appraise the following points: -
Chapter A3 [3]:
In the area of planning:
1. Where it covers all interrelated functions like production, sales, purchasing and finance. Chapter A4 [4]:
2. Whether it determines the linkage between budget centres and responsibility centres. Legal Position of Cost Auditor
3. Whether it establishes definite goals and limits for this function well in advance. The
system must answer the questions such as “what they are expected to operate?” What will Chapter A5 [5]:
be the financial requirement for the functional areas? What would be the potential problems Reporting under Cost Audit
in the key areas?
4. Whether there are imbalances in the fixation of performance levels of functional budgets Chapter A6 [6]:
in relation to sales budgets. Cost Audit in Information Technology (IT)
5. Whether budget monitoring cell exists for operating the system in right perspective.
In the area of coordination:
1. Whether the budget monitoring committee holds its meeting regularly with a view to ensure Chapter B1 [7]:
performance evaluation.
2. Whether it helps to prevent waste that results in duplicate or cross purpose activities.
Chapter B2 [8]:
3. Whether it reveals timelines in the process of preparation and approval of all functional
Operational Audit
budgets and master budget.
Chapter B3 [9]:
In the area of control: Management Audit in Different function
1. Whether system exists for measuring, comparing and quantifying the results of all
functional areas. Part C: Performance Analysis
2. Whether the budget incorporates a degree of flexibility with a provision of its periodical [Chapter 10]
review.
3. Whether the variance reports are issued in time and appropriate corrective action is taken
on these variances.
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What do you mean by effective budgetary control? List out the essentials of effective budgetary control.
Ans: Effective Budgetary Control is the management of business funds, income, and costs to run
company operations effectively. This often includes analyzing actual financial results against the budget Click to jump on:
plan and optimizing for future allocation based on the results.
Home
Essentials of effective budgetary control are:
1. sound forecasting Part A: Cost Audit
2. goal orientation
3. proper recording system Chapter A1 [1]:
4. participation Cost Audit Concept & Legal issues
5. top management support
6. flexibility Chapter A2 [2]:
7. enforce timeliness
8. efficient organization
Chapter A3 [3]:
9. proper co-ordination
10. sound administration
11. constant review Chapter A4 [4]:
12. reward and punishment Legal Position of Cost Auditor
13. results take time
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
178
8.3 Capacity Utilization

8.3.1 Need for Capacity Determination
The need for determining “production capacity” in respect of industrial organisation in
Bangladesh arises from the following reasons:
1. To meet the requirement under Section 183 of the Companies Act, 1994, that prescribes
the form and contents of the balance sheet as well as profit and loss account (Schedule XI
Click to jump on:
of the Companies Act).
2. For purpose of Cost Audit Report under section 220 of the Companies Act, 1994 where a
Home
cost audit has been ordered by Government.
3. For internal management purpose, to be used: Part A: Cost Audit
(a) in planning, scheduling and controlling production, and
Chapter A1 [1]:
(b) in planning expansion of capacity and correction of imbalances.
4. For assessment of capacities for national level planning.
5. For fixing the price of product(s) after ascertaining the capacity costs and per unit incidence Chapter A2 [2]:
thereof, and Cost Accounting Standards
6. For determination of allotment of scarce raw-materials in the form of quotas, import
licenses, etc. Chapter A3 [3]:
8.3.2 Adequacy of Capacity Determination and Utilisation Mechanism
Capacity can be defined as the rate of output at which there is no incentive to alter the size of Chapter A4 [4]:
the plant if the rate of output is expected to be permanent. The management auditor is required
to give his suggestions on rectification of general imbalance in production facilities under Para
Chapter A5 [5]:
4 of the Annexure to the Cost Audit Report. He is also required to give his suggestions for
improvement in capacity utilization. Capacity planning and production planning and control
are the prerequisites to capacity utilization control mechanism. For capacity planning, he must Chapter A6 [6]:
consider such factors as – Cost Audit in Information Technology (IT)
(a) level of capacity planned and operated by the company,
(b) whether the capacity is expressed in machine hours, labour hours or a combination of both, Part B: Management Audit
(c) whether capacity is planned on single, double or triple shift basis,
(d) whether capacity is planned at normal production level or at practical production level, Chapter B1 [7]:
(e) key areas of production constraints in capacity achievement. Internal Control & Internal Audit
The management auditor shall consider the following points in the evaluation and measurement Chapter B2 [8]:
of capacity utilization – Operational Audit
1. Method of measuring base machine capacity.
2. Clear guidelines should be available regarding assessment of capacity. Technical Chapter B3 [9]:
terminology like licensed capacity, installed capacity, rated capacity etc. should be properly Management Audit in Different function
defined.
3. In some industries capacity is influenced by a number of factors and determining the single Part C: Performance Analysis
base figures requires adjustment of various variables such as volume of vessels, yield of [Chapter 10]
product, recovery factor, cycle time etc.
4. Whether the system provides for comparative studies such as :
(i) Rated output and actual output per unit of time.
(ii) Normal output and actual output per unit of time.
5. Determine whether the capacity utilization report is being complied by a person not
responsible for production.
179
6. Whether capacity measurement is based on “capital output ratio” or sundry other factors.
Estimation of capacity = Real fixed capital ÷ Minimum capital output ratio

* Capital ÷ Real output
Capacity utilization = Real fixed capital ÷ Minimum Capital Output Ratio × 100
Click to jump on:
ICWAI has issued COST ACCOUNTING STANDARD 2 (CAS 2) regarding ‘CAPACITY
DETERMINATION’. The object of CAS 2 is to prescribe the method of determination of Home
capacity to be applied uniformly and consistently. The standard will also help the management
to identify the bottlenecks, imbalances and idle capacity for effective use of various resources. Part A: Cost Audit
The standard has been recommended to be followed for capacity determination required to be
carried out for any purpose or under provisions of any Act, Rules or Regulations except where Chapter A1 [1]:
capacity determination has been prescribed otherwise. The standard is applicable for an Cost Audit Concept & Legal issues
undertaking, whether existing or new, where there is expansion of more than 5% of the existing
capacity due to introduction of new machines or productive resources. Similarly, the standard Chapter A2 [2]:
is also applicable where there is more than 5% reduction of the existing capacity due to disposal Cost Accounting Standards
or withdrawal or impairment of old machines or productive resources. In other words, whenever
more than 5% variation in capacity (whether positive or negative) takes place in any of the units Chapter A3 [3]:
covered under Companies (Cost Records and Audit) Rules, 2014 the Cost Auditor is required Cost Auditing Standards and Quality control
to undertake the capacity determination under these rules as per this standard.
Chapter A4 [4]:
The Cost Accounting Standard explains the detailed methodology to determine ‘installed
capacity’ in para 5, ‘practical / achievable capacity’ in para 6 and ‘normal capacity’ in para 7 Chapter A5 [5]:
of the standard. In view of above, it is imperative that the management auditor should determine Reporting under Cost Audit
the capacity as per the said CAS 2.
Chapter A6 [6]:
8.3.3 Suggestions to Rectify Imbalance in Production Facilities Cost Audit in Information Technology (IT)
Imbalance in production facilities is resulted when the capacities of different equipment of a
plant does not match. One type of equipment is capable of producing more than the receiving Part B: Management Audit
equipment. As a cost auditor following suggestions can be made to rectify such imbalance: -
1. The measurement must opt for “sub-contracting” outside the firm that part of the job which Chapter B1 [7]:
is restricting the production.
2. Install balancing equipment with higher output potential.
Chapter B2 [8]:
3. Introduce shift working among the operatives.
Operational Audit
4. If there is consistent imbalance in the production facilities, entire plant can be replaced by
installing new automatic plant. Chapter B3 [9]:
5. Idle equipment can be sold so that entire attention can be diverted to the critical equipment. Management Audit in Different function

[Chapter 10]
180
Interactive Question 2.3: Significance of Capacity Utilization as per economic scale of efficiency
Explain the Economic Significance of Capacity Utilization in business organization.
Ans: An economic measure of scale efficiency is the ratio of the minimum average cost to the average
cost at the actual output level of a firm. It is easily measured by the ratio of the total cost of this output Click to jump on:
under the constant and variable returns to scale assumptions. In standard microeconomic theory, the
capacity output of a firm has been defined in several different ways. The simplest of them is the Home
maximum level of output that can be produced from a given level of quasi-fixed inputs (like plant and
machinery) even when variable inputs (like labor or materials) are available without restriction. If Part A: Cost Audit
demand in the market increases, it will raise the capacity utilization rate, but if demand decreases, the
rate will fall. Economists use the rate as an indicator of inflation pressures. A low-capacity utilization Chapter A1 [1]:
rate will result in a decrease in price because there are excess capacity and insufficient demand for the Cost Audit Concept & Legal issues
output produced.
Chapter A2 [2]:
Capacity utilization is a measure of the extent to which the productive capacity of a business is being
used. The capacity utilization rate is used by companies to assess their current operating efficiency. It
Chapter A3 [3]:
also provides insight into the cost structure of the business in the short term or long term because it can
be used to determine the point at which unit costs will rise as it increases production. The capacity
utilization rate is an important indicator for companies because it can be used to assess operating Chapter A4 [4]:
efficiency and provides an insight into cost structure. It can be used to determine the level at which Legal Position of Cost Auditor
costs per unit go up or fall. When there is a rise in output, the average cost of production will decrease.
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
181
8.4 Inventory Control

Introduction
The term “inventory” includes all idle resources kept in stock for business purpose. Thus, it
includes mainly stock of raw materials, work-in-progress and finished goods, stores and spare
parts, etc. Inventory control is possible with the help of Perpetual Inventory System along with
continuous stock taking. The following aspects may be taken into consideration for proper
Click to jump on:
inventory control –
1. Maximum, minimum and reorder level fixation
Home
2. Fixed order quantity system and different replenishment systems.
3. ABC method Part A: Cost Audit
4. Pareto distribution
Chapter A1 [1]:
5. VED analysis
6. Just-in time (JIT) purchasing
7. Fast moving, slow moving and non-moving analysis Chapter A2 [2]:
The cost auditor can get an idea about the internal control relating to inventory from the
following questionnaire. Chapter A3 [3]:
Internal Control Questionnaire Relating to Inventory
1. Is the storage accommodation adequate to provide production against Chapter A4 [4]:
• Deterioration?
• Access by unauthorized persons?
Chapter A5 [5]:
• Any other local hazards? Reporting under Cost Audit
2. Are issues from stores made only on properly authorized requisition?
3. Who are authorized to sign requisition? Specify name, position etc. Chapter A6 [6]:
4. Are bin cards or similar records maintained at stores location? Cost Audit in Information Technology (IT)
5. Are continuous stock records maintained for - raw materials? - bought out components? -
consumable stores? - finished goods? - stocks held on behalf of third parties? Part B: Management Audit
6. Are these records maintained - in quantity only? - In value only? - In both quantity and
value? Chapter B1 [7]:
7. Are stores record maintained by a person independent of - The stores keepers? - Those Internal Control & Internal Audit
responsible for physically counting or checking stocks?
8. Are independently maintained control accounts kept for each category of stock set out in Chapter B2 [8]:
5? Operational Audit
9. Is the counting system fully integrated with the financial records?
Chapter B3 [9]:
10. If not, are totals of various categories of costs (including overheads) regularly reconciled
with the actual costs in the financial records?
11. Are works orders issued - against specific orders? - on the basis of predetermined
production targets? - on some other basis. (describe)
[Chapter 10]
12. How are works orders authorized? Specify:
13. On what basis are materials, labour and other direct costs charged to work-in-progress
accounts? Specify.
14. Are overheads clearly divided into fixed and variable overheads?
15. What is the basis of allocation of overheads to costs and what overheads are recovered in
this way? Specify:
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16. Does the system ensure that excess or abortive costs are written off and not carried forward
in work-in-progress
Interactive Question B2.4: Significance of operational audit of inventory control

Click to jump on:
Why do you think that operational audit of inventory control is very important for business
organizations? Home
Ans: Inventory plays an important role in almost all organizations, whether in trade, services, or Part A: Cost Audit
manufacturing. Inventory exists because there is an imbalance between supply and demand
(consumption). That imbalance is a consequence that must be faced by all organizations. When an Chapter A1 [1]:
organization fails to control its inventories, the impact it will face is an inflated or inadequate inventory, Cost Audit Concept & Legal issues
loss of customers, decreased competitiveness of the company, and loss of revenues. If this continues to
happen, it will affect the business continuity (going concern) of an organization. The existence of the Chapter A2 [2]:
operational audit aims to evaluate the company’s performance in inventory management with regard to
effectiveness, efficiency, and economy, so the company can improve its performance. The aims of this
Chapter A3 [3]:
operational audit are analyzing and assessing the adequacy of inventory management procedures and
evaluating the inventory management activities that have been running with effectiveness, efficiency,
and economy which lead to assist the organizational goal. Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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8.5 MANAGEMENT INFORMATION SYSTEM (MIS)

Introduction
Management information system or MIS is an information system making use of available
resources to provide managers at all levels in all functions with the information from all relevant
sources to enable them to make timely and effective decisions for planning, directing and
controlling the activities for which they are responsible. Management information is an
Click to jump on:
essential management tool. MIS provides for the identification of relevant information needs
the collection of relevant information, processing of the same to become usable by the business
Home
managers, and timely dissemination of processed information to the users of the information
for properly managing the affairs of an enterprise by informed decisions. The design of MIS Part A: Cost Audit
reflects not only a rational approach for optimization of benefits but takes due note of
Chapter A1 [1]:
behavioural impacts on organizational decision-making.
On account of enormous technological advances in computer engineering in data capture, Chapter A2 [2]:
storage, processing and transmission, it is now practicable in most cases to record and store all Cost Accounting Standards
the information generated by any operation or decision within an organisation in one mammoth
set of storage files. The comprehensive data stored in this way will then be available to provide Chapter A3 [3]:
management with any information which may be required in the future to deal with any Cost Auditing Standards and Quality control
problem. With the introduction of LAN (Local Area Network) and WAN (Wide Area Network)
and INTERNET, today it is possible to obtain data through computers from one place although Chapter A4 [4]:
the manufacturing units are situated at different parts of the country. Legal Position of Cost Auditor
Using the computer for audition there is no doubt that computer obviates several intermediate Chapter A5 [5]:
printouts and the hidden records in the magnetic media could be problems for the auditor not Reporting under Cost Audit
adequately trained in computer data processing, but the very facts that records are in a machine-
Chapter A6 [6]:
readable form suggests possibility for using the capabilities of the computer to assist the auditor
in his burdensome task. This however requires that the cost auditor is sufficiently proficient in
computer data processing and programming. Where the control in both data processing and
user’s department is adequately reliable. The stipulations of an audit may be dropped, and
instead the cost auditor may comply special technique.
Chapter B1 [7]:
Management Information System and Cost Auditor
The cost auditor has to consider various aspects while evaluating the effectiveness of a Chapter B2 [8]:
Management Information System. At first, he should consider the following aspects while Operational Audit
appraising the MIS –
(i) the content, quality and source of information. Chapter B3 [9]:
(ii) flow of information from the originator to the receiver, and Management Audit in Different function
(iii) correlation of information in the decisional areas.
Contents and sources of information: [Chapter 10]
This may include the following:
(i) Whether the information collected is relevant to the decision problem or whether it will
result in the improvement in the quality of decisions.
(ii) Whether there is any tendency of the manager to use control data for postmortem exercise
(iii) Whether the reporting of MIS is regular and uniform for financial and non-financial
information.
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(iv) Whether the information contain unwanted information.

(v) Whether the MIS adequately caters to the requirements of decision makers.
Flow of information: A cost auditor has to proceed on the following lines:

(i) System organisation :
(a) system is centralized or decentralized,
(b) flow of information from various units to the control section, Click to jump on:
(c) estimating the volume of data, transmission time and cost,
(d) cost-benefit analysis of centralized v. decentralized information. Home
(ii) Data collection and management: Appraisal should include the following aspects:
(a) methodology of collecting data, Part A: Cost Audit
(b) whether the data is filtered and classified,
(c) whether the data is properly matched with decision problems, Chapter A1 [1]:
(d) whether the management carried out detailed study regarding existing frequency, Cost Audit Concept & Legal issues
(e) whether system design is free or any possible constraints.
Chapter A2 [2]:
Correlation of MIS with the decision areas: Cost auditor should examine this aspect from Cost Accounting Standards
the following angles:
(i) Whether input-output analysis is attempted. Chapter A3 [3]:
(ii) Whether MIS is helpful in reducing the effects of uncertainty. Cost Auditing Standards and Quality control
(iii) Whether MIS is cost-effective.
Chapter A4 [4]:
(iv) Whether the information is being supplied to the users very effectively.
(v) Whether MIS is providing a feedback for corrective action, and
(vi) Whether MIS is able to optimize the value of information? Chapter A5 [5]:
Interactive Question B2.5: Characteristics of information in MIS
As an auditor, which characteristics feature you consider to verify an information quality in a MIS
System? Part B: Management Audit
Ans: As an auditor, the following essential characteristics feature I consider to verify an information Chapter B1 [7]:
quality in a MIS System: Internal Control & Internal Audit
- Reliability: It should be verifiable and dependable.
Chapter B2 [8]:
- Timely: It must be current and it must reach the users well in time, so that important decisions can
Operational Audit
be made in time.
- Relevant: It should be current and valid information and it should reduce uncertainties. Chapter B3 [9]:
- Accurate: It should be free of errors and mistakes, true, and not deceptive. Management Audit in Different function
- Sufficient: It should be adequate in quality, so that decisions can be made on its basis.
- Unambiguous: It should be expressed in clear terms. Part C: Performance Analysis
- Complete: It should meet all the needs in the current context. [Chapter 10]
- Unbiased: It should be impartial, free from any bias.
- Explicit: It should not need any further explanation.
- Comparable: It should be uniform collection, analysis, content, and format.
- Reproducible: It could be used by documented methods on the same data set to achieve a consistent
result.
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8.6 Business Risk Assessment and Mitigation

What Is Business Risk?
Business risk is the exposure a company or organization has to factor(s) that will lower its
profits or lead it to fail. Anything that threatens a company's ability to achieve its financial goals
is considered a business risk. There are many factors that can converge to create business risk.
Sometimes it is a company's top leadership or management that creates situations where a
Click to jump on:
business may be exposed to a greater degree of risk.
However, sometimes the cause of risk is external to a company. Because of this, it is impossible
Home
for a company to completely shelter itself from risk. However, there are ways to mitigate the
overall risks associated with operating a business; most companies accomplish this through Part A: Cost Audit
adopting a risk management strategy.
Chapter A1 [1]:
KEY TAKEAWAYS
• Business risk is any exposure a company or organization has to factor(s) that may lower
Chapter A2 [2]:
its profits or cause it to go bankrupt. Cost Accounting Standards
• The sources of business risk are varied but can range from changes in consumer taste
and demand, the state of the overall economy, and government rules and regulations. Chapter A3 [3]:
• While companies may not be able to completely avoid business risk, they can take steps Cost Auditing Standards and Quality control
to mitigate its impact, including the development of a strategic risk plan.
Chapter A4 [4]:
Understanding Business Risk Legal Position of Cost Auditor
When a company experiences a high degree of business risk, it may impair its ability to provide
investors and stakeholders with adequate returns. For example, the CEO of a company may Chapter A5 [5]:
make certain decisions that affect its profits, or the CEO may not accurately anticipate certain Reporting under Cost Audit
events in the future, causing the business to incur losses or fail.
Chapter A6 [6]:
Business risk is influenced by a number of different factors including:
• Consumer preferences, demand, and sales volumes
• Per-unit price and input costs
• Competition
Chapter B1 [7]:
• The overall economic climate
• Government regulations
Chapter B2 [8]:
A company with a higher amount of business risk may decide to adopt a capital structure with Operational Audit
a lower debt ratio to ensure that it can meet its financial obligations at all times. With a low
debt ratio, when revenues drop the company may not be able to service its debt (and this may Chapter B3 [9]:
lead to bankruptcy). On the other hand, when revenues increase, a company with a low debt Management Audit in Different function
ratio experiences larger profits and is able to keep up with its obligations.
To calculate risk, analysts use four simple ratios: contribution margin, operation leverage effect, [Chapter 10]
financial leverage effect, and total leverage effect. For more complex calculations, analysts can
incorporate statistical methods. Business risk usually occurs in one of four ways: strategic risk,
compliance risk, operational risk, and reputational risk.
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Types of Business Risk
Strategic Risk
Strategic risk arises when a business does not operate according to its business model or plan.
When a company does not operate according to its business model, its strategy becomes less
effective over time and it may struggle to reach its defined goals. If, for example, Walmart
strategically positions itself as a low-cost provider and Target decides to undercut Walmart's Click to jump on:
prices, this becomes a strategic risk for Walmart.
Home
Compliance Risk
The second form of business risk is referred to as compliance risk. Compliance risk primarily Part A: Cost Audit
arises in industries and sectors that are highly regulated. For example, in the wine industry,
there is a three-tier system of distribution that requires wholesalers in the U.S. to sell wine to a Chapter A1 [1]:
retailer (who then sells it to consumers). This system prohibits wineries from selling their Cost Audit Concept & Legal issues
products directly to retail stores in some states.
However, there are many U.S. states that do not have this type of distribution system;
Chapter A2 [2]:
compliance risk arises when a brand fails to understand the individual requirements of the state
that it is operating within. In this situation, a brand risks becoming non-compliant with state-
Chapter A3 [3]:
specific distribution laws. Cost Auditing Standards and Quality control
Operational Risk Chapter A4 [4]:

The third type of business risk is operational risk. This risk arises from within the corporation, Legal Position of Cost Auditor
especially when the day-to-day operations of a company fail to perform. For example, in 2012,
the multinational bank HSBC faced a high degree of operational risk and as a result, incurred a Chapter A5 [5]:
large fine from the U.S. Department of Justice when its internal anti-money laundering Reporting under Cost Audit
operations team was unable to adequately stop money laundering in Mexico.
Chapter A6 [6]:
Reputational Risk Cost Audit in Information Technology (IT)
Any time a company's reputation is ruined, either by an event that was the result of a previous
business risk or by a different occurrence, it runs the risk of losing customers and its brand Part B: Management Audit
loyalty suffering. The reputation of HSBC faltered in the aftermath of the fine it was levied for
poor anti-money laundering practices. Chapter B1 [7]:
Special Considerations Chapter B2 [8]:

Business risk cannot be entirely avoided because it is unpredictable. However, there are many Operational Audit
strategies that businesses employ to cut back the impact of all types of business risk, including
strategic, compliance, operational, and reputational risk. Chapter B3 [9]:
The first step that brands typically take is to identify all sources of risk in their business plan.
These aren't just external risks—they may also come from within the business itself. Taking Part C: Performance Analysis
action to cut back the risks as soon as they present themselves is key. Management should come [Chapter 10]
up with a plan in order to deal with any identifiable risks before they become too great.
Once the management of a company has come up with a plan to deal with the risk, it's important
that they take the extra step of documenting everything in case the same situation arises again.
After all, business risk isn't static—it tends to repeat itself during the business cycle.
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Finally, most companies adopt a risk management strategy. This can be done either before the
business begins operations or after it experiences a setback. Ideally, a risk management strategy
will help the company be better prepared to deal with risks as they present themselves. The plan
should have tested ideas and procedures in place in the event that risk presents itself.
Risk Management
Risk management means the process of identifying and assessing (analysing and valuating) Click to jump on:
risks and the development, implementation and monitoring of a strategy to respond to those
risks. Home
Risk management strategies Part A: Cost Audit

A risk management strategy involves the selection, implementation, monitoring and review of
suitable risk treatments for each risk identified. Chapter A1 [1]:
Risk strategies include: Cost Audit Concept & Legal issues
• Risk avoidance – not undertaking the relevant activity
Chapter A2 [2]:
• Risk reduction – taking steps to reduce the severity of the impact
• Risk transfer – passing the risk to a third party through hedging or insurance
• Risk retention – accepting the loss, if and when it occurs Chapter A3 [3]:
Effective risk management enables a business to:
• Reduce business threats to acceptable levels Chapter A4 [4]:
• Make informed decisions about potential opportunities Legal Position of Cost Auditor
This allows stakeholders (investors, lenders, customers, suppliers, employees etc.) to have Chapter A5 [5]:
confidence in the business and its future prospects. Reporting under Cost Audit
Chapter A6 [6]:
Risk management policy
In business, risk is unavoidable and the strategy must be to reduce risks to acceptable levels.
The effect of risk management should be to reduce the probability and/or consequences of any
failure whilst retaining, so far as possible, the benefits of successes.
Chapter B1 [7]:
Central to the risk management strategy, therefore, will be the organisation's risk management Internal Control & Internal Audit
policy describing its approach to and appetite for risk, along with any legal requirements the
business faces such as health and safety legislation. Chapter B2 [8]:
Operational Audit
In order to implement correctly any risk management strategy there will need to be an effective
system for risk management, risk reporting and communication involving all levels in the Chapter B3 [9]:
business: Management Audit in Different function
• The board – who are in a position to take an overall business view and has the authority to
demand policies be implemented and adhered to. Part C: Performance Analysis
• Managers of the business units – who are in a position to assess risks from a business unit [Chapter 10]
perspective but also must ensure that risk management policies are implemented.
• Individuals – who may need to be aware of or be responsible for managing certain risks.
Risk management strategy needs to be a top-down process to ensure it is integrated across the
entire business. In so far as it is possible, the risk treatments should be embedded within the
businesses' culture and systems so that it becomes an integral part of the operations and
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financing of the business. Senior management must translate the risk management strategy into
tactical and operational objectives, with managers and employees given the responsibility and
authority to deal with such matters. Examples of risk management policies for a large
corporation would include:
• Corporate codes of conduct: Regulates how managers and staff relate to each other and
to outsiders and will seek to control risks from discrimination, bullying, bribery, anti-social
behaviour. Click to jump on:
• Environmental policies: Issues such as energy use, emissions, recycling, waste disposal
etc. Home
• Health and Safety policies: Requiring H&S officers at all levels, setting up committees,
requirement for routine testing and risk assessments, fire procedures. Part A: Cost Audit
• Financial controls: Budgetary control to safeguard earnings and spending, capital
expenditure authorisation procedures, financial accounting systems, credit control Chapter A1 [1]:
procedures, cash management procedures, insurance of assets. Cost Audit Concept & Legal issues
• Information systems controls: Creation of information officers at all levels, regulations
on use by staff, password and access controls, requirements for back-ups and stand-by
Chapter A2 [2]:
systems, institution of firewalls and other security programmes.
• Personnel controls: Policies on identity and background checks on new recruits, discipline Chapter A3 [3]:
and grievance procedures, door entry controls and conventions on wearing of ID, Cost Auditing Standards and Quality control
attendance monitoring. Appraisals of staff and management can provide early warnings of
stress or potential inability to perform vital tasks. Chapter A4 [4]:
• Internal audit processes: In addition to its familiar role in assuring financial systems in Legal Position of Cost Auditor
relation to the requirement for a statutory audit, many internal audit functions have an
expanded business assurance remit which will report on the adequacy of the controls above. Chapter A5 [5]:
Many of these policies fulfil other functions too. Here we are concerned with how they are used
to mitigate the danger of financial loss to the organisation. Such financial loss can arise from: Chapter A6 [6]:
• Litigation from persons injured by the activities of the organisation and its staff
• Fines from regulatory bodies
• Loss of assets due to theft or damage
• Costs of making up for errors, e.g. replacing lost data, apologising to injured parties, Chapter B1 [7]:
restoring lost corporate reputation Internal Control & Internal Audit
• Revenues lost due to breakdowns, e.g. factory burned down, operations temporarily
grounded by authorities Chapter B2 [8]:
• Loss of reputation: customers, suppliers, investors etc lose faith in management. Operational Audit
Risk assessment Chapter B3 [9]:

Establishing the financial consequences of each risk event and its likelihood of occurrence is Management Audit in Different function
part of risk assessment. In many cases the financial consequences are easy to measure, e.g. the
value of lost inventories or the cost of rebuilding premises. Some consequences may be more Part C: Performance Analysis
awkward, particularly where loss of life is concerned. [Chapter 10]
More problematic, however, is the assessment of the probability of occurrence, particularly for
the less likely events such as natural disasters.
• Quantitative methods of risk estimation

Quantitative risk assessment involves the determination of measured figures for
189
probabilities and consequences producing a specifically quantified measure of likelihood

and of impact.
Some types of risk lend themselves to this process. Insurance companies have detailed
statistical information on the occurrence of many risk events. They also have detailed
estimates of the cost of repairing the insured loss, of say a car or house.
Others are very difficult to assess. For example, the impact of an event on the reputation of Click to jump on:
a business is much harder to quantify, and from this perspective risk assessment is more
subjective. In subjective assessments numerical measures may be applied to likelihood and Home
to impact derived from:
• Quantification of the opinion of a single manager or expert Part A: Cost Audit
• A median average of the assessments of a panel of experts (called the Delphi
Technique) Chapter A1 [1]:
• External sources such as OECD or Dunn and Bradstreet who will provide numerical Cost Audit Concept & Legal issues
measures of country risk based or default risk based on expert opinions
Chapter A2 [2]:
The effort required and cost incurred in undertaking a full quantitative assessment is liable Cost Accounting Standards
to be substantial, begging the question of its cost-effectiveness.
Chapter A3 [3]:
• Qualitative methods of risk estimation
A qualitative risk estimate is a subjective risk assessment perhaps using high-medium-low Chapter A4 [4]:
style assessments. The overall risk of an event can, by this system, be determined by Legal Position of Cost Auditor
reference to a risk matrix such as this.
Chapter A5 [5]:
Likelihood Reporting under Cost Audit
Consequence Almost
Frequent Regular Occasional Remote Very rare Chapter A6 [6]:
impossible
Catastrophic High High High Moderate Low Negligible Cost Audit in Information Technology (IT)
Critical High High Moderate Low Low Negligible
Marginal Moderate Moderate Low Low Negligible Negligible Part B: Management Audit
Negligible Negligible Negligible Negligible Negligible Negligible Negligible
Chapter B1 [7]:
A qualitative assessment has the advantage of being much easier to undertake, though it is
highly subjective. However, if it is consistently applied to all risks, it does facilitate Chapter B2 [8]:
identification and prioritization. Operational Audit
• Semi-quantitative methods of risk estimation Chapter B3 [9]:

Here risk estimates are obtained based on a mixture of qualitative and quantitative data. Management Audit in Different function
The technique requires an experienced team to judge risk utilizing a numerical rating
system that, although arbitrarily chosen, is internally consistent and provides a relative Part C: Performance Analysis
assessment of risk. [Chapter 10]
• Risk profile
The result of the risk analysis process is an overall risk profile detailing each of the risks
along with an estimate of the risk to the company. This risk profile ranks each identified
risk so as to give a view of the relative importance, forming the primary tool for prioritizing
and addressing risks.
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The risk profile will

• Describe the risk and the business area affected
• Describe the primary control procedures in place
• Indicate areas where the level of risk control investment might be increased, decreased
or reapportioned.
What is a risk assessment? Click to jump on:

Risk assessment is the identification of hazards that could negatively impact an organization's
ability to conduct business. These assessments help identify these inherent business risks and Home
provide measures, processes and controls to reduce the impact of these risks to business
operations. Part A: Cost Audit
Companies can use a risk assessment framework (RAF) to prioritize and share the details of the Chapter A1 [1]:
assessment, including any risks to their information technology (IT) infrastructure. The RAF
helps an organization identify potential hazards and any business assets put at risk by these
Chapter A2 [2]:
hazards, as well as potential fallout if these risks come to fruition. In large enterprises, the risk Cost Accounting Standards
assessment process is usually conducted by the Chief Risk Officer (CRO) or a Chief Risk
Manager. Chapter A3 [3]:
Risk assessment steps
How a risk assessment is conducted varies widely depending on the risks unique to the type of Chapter A4 [4]:
business, the industry that business is in and the compliance rules applied to that given business Legal Position of Cost Auditor
or industry. However, there are five general steps that companies can follow regardless of their
business type or industry. Chapter A5 [5]:
• Step 1: Identify the hazards. The first step in a risk assessment is to identify any potential Reporting under Cost Audit
hazards that, if they were to occur, would negatively influence the organization's ability to
conduct business. Potential hazards that could be considered or identified during risk
Chapter A6 [6]:
assessment include natural disasters, utility outages, cyberattacks and power failure.
• Step 2: Determine what, or who, could be harmed. After the hazards are identified, the next
step is to determine which business assets would be negatively influenced if the risk came
to fruition. Business assets deemed at risk to these hazards can include critical
Chapter B1 [7]:
infrastructure, IT systems, business operations, company reputation and even employee Internal Control & Internal Audit
safety.
• Step 3: Evaluate the risks and develop control measures. A risk analysis can help identify Chapter B2 [8]:
how hazards will impact business assets and the measures that can be put into place to Operational Audit
minimize or eliminate the effect of these hazards on business assets. Potential hazards
include property damage, business interruption, financial loss and legal penalties. Chapter B3 [9]:
• Step 4: Record the findings. The risk assessment findings should be recorded by the Management Audit in Different function
company and filed as easily accessible, official documents. The records should include
details on potential hazards, their associated risks and plans to prevent the hazards. Part C: Performance Analysis
• Step 5: Review and update the risk assessment regularly. Potential hazards, risks and their [Chapter 10]
resulting controls can change rapidly in a modern business environment. It is important for
companies to update their risk assessments regularly to adapt to these changes.
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Interactive Question B2.6: Risk Management Strategy – Risk Acceptance

“Sometime companies will not reduce the impact of a risk or even prevent it from happening” – discuss
the statement in reference of “Risk Acceptance”.
Ans: The idea of accepting risk refers to when a person or organization recognizes a risk, considers it Click to jump on:
acceptable, and then does nothing to lessen or mitigate it. The acknowledged and accepted risk has a
manageable potential loss. When a person or company recognizes that the possible loss from a danger Home
isn't significant enough to justify spending money to avoid it, they are said to have accepted the risk.
Part A: Cost Audit
To identify, evaluate, and prioritize risks with the goal of reducing, monitoring, and controlling them,
many firms utilize risk management approaches. Given the resources available, the majority of Chapter A1 [1]:
organizations and risk management employees will discover that they have bigger and more numerous Cost Audit Concept & Legal issues
hazards than they can manage, reduce, or avoid. As a result, organizations need to strike a balance
between the expense associated with avoiding or otherwise dealing with a risk and the potential costs Chapter A2 [2]:
of a problem arising from it. Risks can take many different forms, including as market uncertainty,
project failures, legal obligations, credit risk, accidents, natural disasters, and excessively aggressive
Chapter A3 [3]:
rivalry.
Accepting risk can be viewed as a type of self-insurance. Risks are said to be "retained" if they are not Chapter A4 [4]:
acknowledged, transferred, or avoided. The majority of instances of a firm taking a risk involve Legal Position of Cost Auditor
relatively minimal risks. But occasionally, a risk could be accepted by an entity that would be so
disastrous that it would be too expensive to insure against. Additionally, accepting risk includes any Chapter A5 [5]:
possible losses from a risk that are either not insured against or exceed the insured sum. Reporting under Cost Audit
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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8.7 Nature and Scope Of Management Audit

Introduction
An organisation is today ridden with a number of audits – financial audit, internal audit, social
audit, cost audit, energy audit, management audit, etc. Audit generally means examination taken
from the Latin term “Audire” (hear). Audit, therefore, means listening to someone and deriving
from the hearing, the usefulness of the action. In the case of a corporate body, audit takes the
Click to jump on:
shape of examination of specific field of working viz. financial activities, organizational
activities, management activities, social activities, etc. Each activity has a specific objective
Home
and responsibility and the function of Audit is to check and ensure fulfillment of responsibility
delegated to the activity. Part A: Cost Audit
Chapter A1 [1]:
Management Audit is the total examination of transaction of an organisation, or parts of it, and
includes checks on the effectiveness of managers, their compliances with company on
professional standard, the reliability of management date, the quality of performance of duties Chapter A2 [2]:
and recommendations for improvement. In this context, the distinction between administration Cost Accounting Standards
and management should be recognized. Administration is concerned with the structure of the
organisation and the mechanism of its operations, whereas management relates to the leadership Chapter A3 [3]:
and direction of the people, the way in which they are controlled to exercise their functions Cost Auditing Standards and Quality control
within the administrative frame work. The question of audit arises only because of the
ownership of many companies is widely spread between a large number of shareholders, and Chapter A4 [4]:
the running of the organisation lies with people holding comparatively a small portion of the Legal Position of Cost Auditor
equity. This dichotomy of dispersed ownership and entrenched management necessitates and
examination to be done of the Management function itself by an independent authority. Chapter A5 [5]:
In this context management audit undertakes examination of the effectiveness of management
Chapter A6 [6]:
in controlling the total activities of the organisation in the accomplishment of the organisation
objectives. Since a number of audits is conducted in various area, audit responsibility lies in
avoiding any overlapping and selecting such areas not covered by an audit already, e.g., if
internal audit examines adherence to procedures, management audit should examine the
effectiveness of such procedures. Management audit deals with:
Chapter B1 [7]:
(i) the objectives of an organisation; Internal Control & Internal Audit
(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. Chapter B2 [8]:
Operational Audit
Definition and Objects of Management Audit
Management audit is the unique process appraising the performance of directors, managers or Chapter B3 [9]:
in the other words, appraising the performance of the management. A working director is Management Audit in Different function
included as a manager for purposes of management audit. T is normally presumed to be a non-
routine investigation into a performance of a manage or group of managers. But in a number of Part C: Performance Analysis
organizations management audit is now a regular feature to examine and improve managerial [Chapter 10]
effectiveness.
It attempts to look into all aspects of the management performance. Management audit does not
concentrate on financial matters alone as in the case of financial audit. It looks into the
efficiency and effectiveness of performance in an organization.
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However, there is no general agreement as to the precise meaning of the term “management
audit”. The term has been various defined by different authorities as follows –
“Management audit may be defined as a comprehensive and constructive examination

of an organisation structure of a company and its plans and objectives, its means of operation
and its use of human and physical facilities”. - William P. Leonard;
“Management audit is an objective and independent appraisal of the effectiveness of the

Click to jump on:
managers and effectiveness of the corporate structure in the achievement of company objectives
and policies. Its aim is to identify existing and potential management weaknesses within an
Home
organisation and to recommend ways to rectify these weaknesses”. - CIMA Terminology;
Part A: Cost Audit
“Management audit may be more specifically defined as being an investigation of a
business from the highest level downwards in order to ascertain whether sound management Chapter A1 [1]:
prevails throughout, thus facilitating the most effective relationship with outside world and the Cost Audit Concept & Legal issues
most efficient organisation and smooth running internally.” - Leslie Howard;
Chapter A2 [2]:
The above definitions lead to the following conclusions: Cost Accounting Standards
Management audit is the systematic and dispassionate examination, analysis and appraisal of
management’s overall performance. It is a form of appraisal of the total performance of the
Chapter A3 [3]:
management by means of an objective and comprehensive examination of the organisation
structure, its components such as department, its plans and policies, methods of process or
Chapter A4 [4]:
operation and controls, and its use of physical facilities and human resources. Legal Position of Cost Auditor
Thus, management audit is concerned with evaluation and appraisal of the control system and Chapter A5 [5]:
information in the entire or in various segments of the organisation. Its scope has been widened Reporting under Cost Audit
to appraise in detail the systems and subsystems, procedures, job-description and assignment,
authorization, accountability, quality of personnel, quality of information generation etc. Chapter A6 [6]:
Management audit is carried out to –
1. appraise the management performance at all the levels; Part B: Management Audit
2. spotlight the decision or activities, that are not in conformity with organizational objectives.
3. ascertain that objective are properly understood at all levels; Chapter B1 [7]:
4. ascertain those controls provided at different levels are adequate and effective in Internal Control & Internal Audit
accomplishing management objectives or plans of operations;
5. evaluate plans which are projected to meet objectives. Chapter B2 [8]:
6. review the company’s organizational structure, i.e., assignment of duties and
Operational Audit
responsibilities and delegation of authority.
Chapter B3 [9]:
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;
[Chapter 10]
(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.
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Need for Management Audit

Since independence India has not achieved the desired economic development as planned.
Regional and Social imbalances have been continued over the years, leading to social unrest in
different part of country. In the industrial field there is an alarming growth of sickness of
industries large amount of resources of banks and financial institutions are involved in the
rehabilitation of sick industries. In the unorganized sector also, sickness is reported. Large
amount of loans is being written off by banks and financial institutions arising out of sickness Click to jump on:
and inability to recover the loans.
Home
The performance of the public sector enterprises is also dismal in spite of state protection in
respect of product monopoly, administered prices etc. A capital outlay of over Rs. 25,000 crores Part A: Cost Audit
are involved in the public sector enterprise, producing hardly any profits. Out of 150
manufacturing and 65 service enterprises in 1998-99, only 5 or 6 are reporting profits. Public Chapter A1 [1]:
sector also employs a large number of people. As per the report of BIFR a major cause for Cost Audit Concept & Legal issues
sickness is managerial weakness besides other causes like falling market demand, non-
availability of raw materials, shortage of working capital, labour unrest etc.
Chapter A2 [2]:
The main cause of all these economic and social problems can be attributed to managerial
Chapter A3 [3]:
ineffectiveness, which in turn causes other problems. It is therefore imminent than an appraisal Cost Auditing Standards and Quality control
of managerial effectiveness is undertaken to monitor, and remedy weaknesses wherever exist.
This is the function of management audit. Chapter A4 [4]:
Management audit is now becoming more popular everywhere. Almost all progressive
organizations undertake voluntary management audit due to its benefits as under:- Chapter A5 [5]:
(i) It helps management in framing basic policies for the organisation and to define Reporting under Cost Audit
objectives.
(ii) In pursuance of the objectives of the organizations, management audit helps in preparing Chapter A6 [6]:
a viable and achievable plan for the organization. Cost Audit in Information Technology (IT)
(iii) It helps in setting up an organizational framework to implement the plans.
(iv) It assists in designing systems and procedures for smooth operation of the organization. Part B: Management Audit
(v) It helps in designing and reviewing management information system (MIS) for decision
making to help in coordination, motivation and control of the operations. Chapter B1 [7]:
(vi) It assists in analyzing SWOT (strengths, weaknesses, opportunities and threats) of the
organisation and assists in marketing the organisation stronger.
Chapter B2 [8]:
(vii) In a developing country like India, management audit through CAG, public accounts
Operational Audit
committee and parliamentary committee on public undertakings, has helped the
Government in identifying improper or wasteful use of funds, checking extravagant Chapter B3 [9]:
organization practices and curving ineffective use of physical resources. Management Audit in Different function
(viii) Bangladeshi financial Institutions, banks and Board for Industrial Finance and
Reconstruction (BIFR) have found management audit (called concurrent audit) useful in Part C: Performance Analysis
monitoring sick industrial units and to help the units in their rehabilitation. [Chapter 10]
(ix) The Railways of India have subjected their finances to open discussion by public to
improve resource mobilization, reduce cost of operations and conserve their scarce
resources which are main objectives of management audit.
(x) It can help in analyzing social-cost benefit analyses for public projects like dams, power
houses, national highways etc.
(xi) It is essential whenever a unit is planned to be taken-over or an amalgamation or merger
195
with other unit is proposed.

(xii) Growing number of professional managers, the continuing separation of ownership from
management, the wider distribution of stockholders, increasing competition and sickness
in industry will sooner or later make certified management audit compulsory just as
financial audit has become statutory.
Scope and Usefulness of Management Audit Click to jump on:

The scope of management audit is decided by each organisation on its own needs. It has no
limitations. It generally extends over all the resources deployed and commercial activities of Home
the organisation including Directors and their functions.
― Managers, supervisors and their functions. Part A: Cost Audit
― Organizational structure.
― Equipment and facilities, and their utilization Chapter A1 [1]:
― Methods and systems. Cost Audit Concept & Legal issues
― Security of information.
― Resources utilization
Chapter A2 [2]:
― their adequacy and efficiency.
― Planning and control etc.
Chapter A3 [3]:
The scope of management audit extends over all the functions of an organisation viz.
management, personnel, administration, material administration, marketing, finance, etc. Chapter A4 [4]:
wherever the effectiveness of management needs to be examined. Legal Position of Cost Auditor
Accordingly, the scope of management audit may include –
(i) The suitability, practicability and present compliance or otherwise of the organisation Chapter A5 [5]:
with its desired objectives and aims. Reporting under Cost Audit
(ii) The current image of the organisation among customers, general public within its own
particular industrial or commercial field. Chapter A6 [6]:
(iii) Efficient utilization of resources of the organisation. Cost Audit in Information Technology (IT)
(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. Part B: Management Audit
(vi) Employee relation.
(vii) The aims and effectiveness of management at its various levels such as top level, middle Chapter B1 [7]:
level, and operational level.
(viii) Financial policies and control relating to production, sales and distribution and in other
Chapter B2 [8]:
functions of the organization.
Operational Audit
An organization is accountable not only to its internal owners like shareholders but also socially Chapter B3 [9]:
accountable to creditors, Government, tax payers and consumers. Management audit extends Management Audit in Different function
to examination of accountability between the management and others at large. Audit
mechanism ensures this accountability. Since the right to exercise control lies entirely with Part C: Performance Analysis
different set of people away from the owners, the examination of accountability and ensuring [Chapter 10]
shareholders’ and other participants’ welfare becomes important. This is based on “Agency
Theory” put forward by Jenson and Meckling.
The implications of separation of ownership and control were first analysed in depth by Berie
& Menes in their study of development of Corporate Business in the USA. They observed that
economic power was becoming increasingly concentrated in small number of people in large
196
corporations and that within the corporation itself the right to exercise control which in law was
vested in the hands of dispersed absentee shareholders, was effectively being usurped by
entrenched management. Berie & Menes do not however, envisage transfer of power per se but
lay emphasis on the initial conflict between the objectives of shareholders and managers. In this
process the certification by an independent auditor gains importance.
Accountability and appropriate means for enforcing it is the main criteria of audit, particularly Click to jump on:
management audit. The process of accountability includes following elements:
(i) Description of the organisation and its participants. Home
(ii) Identification of objectives and the provision of relevant information to those objectives.
(iii) Ability of action on the part of the participants. Part A: Cost Audit
The value of auditing can be only judged by its ability to promote accountability of an Chapter A1 [1]:
organisation through their participants. The process of accountability is concerned with the Cost Audit Concept & Legal issues
needs of the participants of an organisation to determine the extent to which the behaviour of
the organization conforms with their expectations. The monitoring mechanism should have Chapter A2 [2]:
sufficient variety to provide appropriate information to enable the participants to attempt the Cost Accounting Standards
affect the behaviour of the organization.
Chapter A3 [3]:
Uses of Management Audit
1. Management audit is useful in synthesizing, accounting, economic and other data required Chapter A4 [4]:
by management in constructing basic policy framework. Legal Position of Cost Auditor
2. Management audit assists in establishing, reviewing and improving the planning system.
3. Management audit makes substantial contribution to system of goal setting in the Chapter A5 [5]:
organization. Reporting under Cost Audit
4. Management audit ensures that the management is getting the adequate information for
correct decisions. Chapter A6 [6]:
5. Management audit ensures that the management properly uses the information that it is Cost Audit in Information Technology (IT)
getting.
6. Management audit aids in the design and maintenance of adequate authority structure. Part B: Management Audit
7. It helps in the improvement information system to expedite flow of information among
responsibility centres. Chapter B1 [7]:
8. It substantially contributes for improvement of entire communication system.
9. It helps management in pinpointing key functions or operations in the profit-making
Chapter B2 [8]:
process.
Operational Audit
10. It helps management in establishing better criterion for measuring results.
11. It helps management to avoid wasteful, unnecessary and extravagant use of resources. Chapter B3 [9]:
Coverage of Management Audit
Unlike statutory audits, management audit does not have any specific area for conducting audit. Part C: Performance Analysis
It covers the entire arena of management operations including organisation, personnel, [Chapter 10]
administration, manufacturing, marketing, finance, research and development and other areas.
The audit is expected to cover every activity of the organisation undertaken in pursuance of
organizational objectives or policies decided by the Board of Directors from time to time. It is
left to the creativity of the auditor to lay down for himself the areas to be taken up for audit. In
the result, management audit covers examination of efficient performance of the activities of
the organization.
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Interactive Question B2.7: Need for Management Audit

Do you think need for management audit increasing with the growth of modern business environment?
Ans: Business management is becoming increasingly complex day by day. This has given rise to the Click to jump on:
need for management consultancy. Management auditors are often called on to advise firms about how
to maximize the production of high-quality goods. Management audits (or consultancies) help to Home
improve the operations of a business. The benefits derived from these services are usually far greater
than the costs incurred. Management audit is essentially a review of the performance of various Part A: Cost Audit
managers. It does not examine whether the procedures have been followed or not or whether all the
formalities are completed or not. It evaluates the actual performances and compares them with the pre- Chapter A1 [1]:
determined targets. It concentrates on results and not on the files. This attempts to evaluate the Cost Audit Concept & Legal issues
performance of various management processes and functions. It is an audit to examine, review and
appraise various policies and actions of the management on the basis of certain objective standards. It Chapter A2 [2]:
goes beyond the conventional audit which involves a scrutiny of financial transactions and the books of
account. It is a comprehensive and a critical review of all aspects of management.
Chapter A3 [3]:
So, with critically growth of business environment in modern days needs management audit to examine
the effectiveness of all the functions of an organization viz. management, personnel, administration, Chapter A4 [4]:
material administration, marketing, finance, etc. Legal Position of Cost Auditor
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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8.8 Audit of Management Process and Functions

Concept of Management Audit
The concept of management audit was developed by T.G. Rose as a logical system of evaluating
the quality of management. He employed it for evaluation 52 publicly owned companies over
a period from 1948 to 1960. The demand for information on performance had become necessary
subsequent to the oil crisis of 1073 to evaluate the performance of the management and to take
Click to jump on:
consequent decisions.
Home
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 Part A: Cost Audit
comprises of the appraisal of management effectiveness in various areas of managerial
Chapter A1 [1]:
operations.
Management function include – (i) Planning. (ii) Organising. (iii) Staffing. (iv) Coordinating. Chapter A2 [2]:
(v) Communicating. (vi) Directing. (vii) Motivating. (viii) Controlling. (ix) Communicating. Cost Accounting Standards
(x) Directing. (xi) Motivating. (xii) Controlling. (xiii) Innovating.
Chapter A3 [3]:
As such management audit covers the above functions of management in various areas of Cost Auditing Standards and Quality control
operations as detailed in the Table below:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Management audit should not be confused with organizational audit or administrational audit, Internal Control & Internal Audit
which may form part of management audit. Management audit by concept goes into the details
of managerial effectiveness in conducting the operations of an organization. Chapter B2 [8]:
Operational Audit
Functions
The functions of management audit extend to audit of the effective functioning of every area of Chapter B3 [9]:
operations coming under the management purview from the stage of its planning to proper Management Audit in Different function
implementation and execution. Every manufacturing or service organisation could broadly be
identified into the following functional areas – Part C: Performance Analysis
(i) Marketing, including selling and distribution. [Chapter 10]
(ii) Manufacturing/servicing, including maintenance of supply chain, machinery and
equipment, etc.
(iii) Human resource management from selection to recruitment, training, motivating,
retaining, advancement, etc.
(iv) Personnel policies and industrial relations.
199
(v) Finance including maintenance of accounts and providing accounting information to

guide the management of its performance and position.
(vi) Research & development including application research and basic research, if any.
An understanding of the objectives of each functional area at every level of the organisation
and effectively achieving such objectives shall be the prime responsibility of management.
Checking of such effective achievement is the function of management audit. These are dealt Click to jump on:
with in more detail in subsequent sections.
Home
Features of Different Types of Audits
The Table below brings out succinctly the distinguishing features of different types of audit Part A: Cost Audit
carried out in an organisation:-
Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Financial audit is statutory requirement for most of the businesses or public
organisations/institutions. Tax audit under the Income-tax Act can also be covered under this Chapter B1 [7]:
category. It is an exploratory critical review by an approved independent agency and a
monitoring mechanism to determine to the extent which the behaviour of the organisation
Chapter B2 [8]:
conforms to the expectations within a definite frame work. It leads to an opinion on the
Operational Audit
correctness of the presented data and information. It also ensures adherence to generally
accepted accounting principles applied on a consistent basis. However, financial audit has a Chapter B3 [9]:
major shortcoming. It is only a postmortem. It is procedural and rule oriented. It cannot be used Management Audit in Different function
as a management tool due to its annual reporting. The information therein comes too late, is too
much in aggregate and is too little for managerial decision. Part C: Performance Analysis
[Chapter 10]
Cost audit is also a legal reporting exercise, connected with annual reporting to the government
regarding efficiency of operations with particular reference to a specified product in a
prescribed format. It restricts the freedom of the auditor to report, being confined to specific
areas only. The report does not reach the investors i.e. shareholders. It does not examine and
analyse the role of top management in leading and decision making. However, cost audit deals
200
with many strategic functions of an organisation and can be developed into management audit
by interaction of cost auditor with Board of Directors and by widening its scope.
Internal audit is useful in ensuring a reliable accounting system. It helps internal monitoring
of the effectiveness of control procedures. It helps in generation of reliable financial
information depending on the reliability of accounting system itself. This is an indirect help to
financial auditors as it reduces their work. Internal audit is compulsory for companies above a Click to jump on:
prescribed size under Companies (Auditors’ Report) Order, 2015 under the Companies Act,
2013 in India. Gradually, the scope of internal audit in Indian Companies has been enlarged Home
from merely clerical activity to a management tool of great use. It is carried out by own
employees at middle level in large and medium companies who cannot report fearlessly. It is Part A: Cost Audit
mainly confined to verification or compliance of set procedures. It does not cover top
management appraisal or responsibility accounting. Chapter A1 [1]:
Operational audit concentrates on seeking out aspects of operations in which waste,
inefficiency and excessive costs would be subject to reduction by the introduction of Chapter A2 [2]:
improvement of operating controls. It is audit of the performance at mainly operating level i.e. Cost Accounting Standards
supervisory level. It is also termed as micro level management audit.
Chapter A3 [3]:
Management audit extends to the entire management decision making areas and has a broader Cost Auditing Standards and Quality control
time frame to analyze past, present and the future. Hence it becomes a qualitative audit and not
Chapter A4 [4]:
audit of only value and quantity. Management audit brings out errors or policy, decisions, and
actions with recommendations to avoid them. Management audit extends beyond operations
audit. Chapter A5 [5]:
Management Audit – Techniques and Procedures
Chapter A6 [6]:
• 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 Chapter B1 [7]:
not? Internal Control & Internal Audit
(a) Is the target too difficult?
(b) Is failure to achieve the target costing the organisation? Chapter B2 [8]:
4. Establish what is done to ensure the achievement of the norms, target and standards. Operational Audit
What steps are taken for –
(a) planning Chapter B3 [9]:
(b) operations, execution and implementation e.g. sue of up-to-date technology. Management Audit in Different function
(c) Measurement of performance and controls?
5. Carryout a detailed investigation, collective evidence as well as document for audit Part C: Performance Analysis
findings [Chapter 10]
6. Report the findings of the audit and make recommendations.
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• Management auditing procedure:

Audit procedures should be tailored to the specific needs of each situation examined. The
general approach in a management audit may be outlined as follows:
1. Make a preliminary survey of the activity under audit to obtain necessary background
and other working information for use in conducting the audit.
2. Study the basic charter or assignment of responsibility of the activity under audit
(applicable laws and related legislative history in the case of a government activity) to Click to jump on:
ascertain the authorized purposes and related authorities of the activity and any
applicable restrictions or limitations. Home
3. Review pertinent parts of the system of management control by studying the policies
established to govern the activities under audit, testing the effectiveness of specific Part A: Cost Audit
operating and administrative procedures and practices followed, and fully exploring all
significant weaknesses encountered. Chapter A1 [1]:
4. Report on the findings of the audit work performed to those responsible for receiving Cost Audit Concept & Legal issues
or acting them together with the recommendations for improvement. Techniques by
which the auditor can identify problems areas warranting detailed examination and Chapter A2 [2]:
source of his information are as follows: (i) Identification of possible control weakness Cost Accounting Standards
by survey During the preliminary survey work though which practical working
information is obtained on how the activity is supposed to function and on how the Chapter A3 [3]:
activity is supposed to function and on how control procedures are supposed to work,
key features or aspects can usually be identified which appear to be difficult to control
Chapter A4 [4]:
effectively or to be susceptible to abuse. In a purchasing organisation, for example, the Legal Position of Cost Auditor
key points in the purchasing process may be –
(a) the determination made of the quantities and the quality of materials to be Chapter A5 [5]:
purchased. Reporting under Cost Audit
(b) The procedure followed in obtaining the best prices, and
(c) The methods for determining whether the correct quantities and quality are actually Chapter A6 [6]:
received. Cost Audit in Information Technology (IT)
If, in relation to the total purchasing operation, the auditor concludes that these Part B: Management Audit
processes are the most critical from the standpoint of the need for good performance,
he would be justified in concentrating his testing work on them. Chapter B1 [7]:
i. Review of management reports
The auditor’s review of internal reports which the management itself regularly uses Chapter B2 [8]:
to obtain information on progress, status, or accomplishment of work can be Operational Audit
valuable sources of information on possible problem areas suggesting audit
Chapter B3 [9]:
attention.
ii. Review of internal audit or inspection reports.
These reports can also be a valuable source of information on problem areas. Of
particular interest to the management auditor are those reports which bring to light
[Chapter 10]
significant findings on which the management has taken no action. Inquiry into the
reasons and justification for inaction in such cases should be made, since these
circumstances could throw light on weaknesses in management system that have
not previously been referred to the management for resolution.
iii. Physical inspection
Physical inspections of the organisation’s activities and resources can be a useful
way of identifying possible inefficiencies. Examples are apparently excess
202
accumulations of material, idle or little used equipment, employee idleness,

rejections of product by inspectors (or customers), executive rework operations, or
disposal of apparently useful materials or equipment.
iv. Test examination of transactions
A very useful way to obtain a practical insight into the efficacy of procedures is to
pursue a number of transactions pertaining to the organisation’s operations from
initiation to final disposition. This kind of testing will provide the auditor with Click to jump on:
valuable information on the organisation’s business is actually transacted, on the
usefulness (or pertinence) of prescribed procedure, on the capabilities of personnel Home
involved in the various operating phases, and on possible weaknesses in procedures
or practices which could represent an unnecessary drain on the organisation’s Part A: Cost Audit
resources (i.e. ineffective or inefficient performance)
v. Discussions with the officials and employees Chapter A1 [1]:
The management auditor can obtain valuable information on problem areas Cost Audit Concept & Legal issues
warranting audit attention through discussions with responsible officials in the
organisation and other employees concerned. The degree of success in obtaining Chapter A2 [2]:
useful information in this way is, in large part, dependent on the auditor’s Cost Accounting Standards
reputation for independent and constructive inquiry. If he is regarded with fear
because of overly critical reporting in the past, this source of information may not Chapter A3 [3]:
be productive. Cost Auditing Standards and Quality control
Chapter A4 [4]:
Testing procedures and practices
Testing procedures and practices first requires some preliminary review work to obtain
information on how they actually work and an insight into their effectiveness and Chapter A5 [5]:
usefulness. On the basis of such review, specific matters may be identified as problem Reporting under Cost Audit
areas on weaknesses needing further probing. The general factors to be considered by
the auditor in his preliminary review work on management controls are: Chapter A6 [6]:
• Whether the policies of the organization comply with its basic charter or grant of Cost Audit in Information Technology (IT)
authority.
• Whether the system of procedures and management controls is designed to carry Part B: Management Audit
out those policies and result in activities being conducted as desired by the top
management, and in an efficient and economical manner. Chapter B1 [7]:
• Whether the system of management controls provides adequate control over the Internal Control & Internal Audit
organization’s resources, revenues, costs and expenditures.
Chapter B2 [8]:
Operational Audit
Specific factors which may well be considered by the auditor in assessing the
management control system and identifying problem area warranting more detailed
Chapter B3 [9]:
audit include – Management Audit in Different function
The use by management of standards or goals in judging accomplishment, productivity,
efficiency in the use of goods or services. Part C: Performance Analysis
[Chapter 10]
Lack of clarity in written procedures, misunderstandings or inconsistent interpretations
in the organisation may affect:
― capabilities of personnel
― failures to accept responsibilities
― duplication of effort
― improper or imprudent use of funds
203
― cumbersome or extravagant organsational patterns

― ineffective or useful use of employees and physical resources.
This; listing is indicative of the kinds of factors that an alert management auditor must keep in
mind in all his work. The knowledge gained in preliminary review that is conducted in
recognition of these kinds of factors provides a solid basis for more detailed examination work
that can lead to constructive improvements in the management system. Click to jump on:
• Techniques of management audit: Home

Techniques employed by a management auditor in effectively carrying out his audit are –
Part A: Cost Audit
Accounting or economic techniques-
(a) Break-even analysis Chapter A1 [1]:
(b) Budgetary control including flexible budget system Cost Audit Concept & Legal issues
(c) Cost management techniques indicating how an organisation’s assets should be
allocated over competing projects or to decide whether it is worth proceeding with the Chapter A2 [2]:
investment, keeping in view proportionate value of expenditure on such projects. Cost Accounting Standards
(d) Discounted cash flow and net present value methods.
(e) Cost benefit analysis. Chapter A3 [3]:
(f) Standard costing and marginal costing
(g) Activity based costing to test the relevance of costs to activities.
Chapter A4 [4]:
(h) Quality analysis of company transactions. Legal Position of Cost Auditor
Scientific techniques Chapter A5 [5]:
(a) Computer Models: There are many types of problems which can be solved on a Reporting under Cost Audit
computer e.g. decision on material mix, product, mix, make or buy etc.
(b) Network analysis: To analyse strings of tasks to arrange them in sequential or parallel Chapter A6 [6]:
order to complete the project in shortest possible time. Cost Audit in Information Technology (IT)
(c) Mathematical programming solving by heuristic (trial and error) techniques to
determine the best material mix, best use of organisation’s transport fleet, the best mix Part B: Management Audit
of products to obtain, to maximize profits and optimum use of labour, finance,
equipments, etc. Linear programming is usually effective when relationship vary in Chapter B1 [7]:
linear order whereas quadratic programming may be used when the variations are in Internal Control & Internal Audit
the order of square root of some other factors.
Chapter B2 [8]:
Statistical techniques Operational Audit
(a) Activity sampling: It is one of the many ways in which the present workloads can be
Chapter B3 [9]:
measured to obtain controls to be exercised by management.
(b) Monte Carlo Simulation: In this a number of variables are drawn from large statistical
population which have equal choice of being selected and obtain the best sample
possible.
[Chapter 10]
(c) Exponential smoothing
(d) Interfirm comparison.
Personnel techniques
(a) Attitude survey
(b) Ergonomic (Man-machine relationship)
(c) Training methods
204
(d) Profitability and productivity measurement.
General techniques
(a) Statistical theory of management is an attempt to emphasize what should be the
practical approach to a problem by –
― Analyzing the problem to establish the basic difficulties and factors involved.
― Establish management by objectives. Click to jump on:
― Identifying the likely ways of tackling the problems in the light of objectives to
develop a solution. Home
― Determine the key factors affecting management decision-making.
― Evaluating alternative courses of action Part A: Cost Audit
― Evaluating each alternative in terms of economy, efficiency and best fit.
― Specifying the action required to exploit the situation to the best advantage of the Chapter A1 [1]:
organization. Cost Audit Concept & Legal issues
(b) Brain storming
(c) Transfer pricing Chapter A2 [2]:
(d) Management by objectives Cost Accounting Standards
(e) Management by exception
(f) Corporate planning Chapter A3 [3]:
(g) Information theory. Cost Auditing Standards and Quality control
Chapter A4 [4]:
• Management Audit Evidence Legal Position of Cost Auditor
Unlike financial audit or other audits there can be no fixed items of evidence to be checked
by a management auditor. A management auditor has to rely more on his experience and Chapter A5 [5]:
acumen to identify areas of review and study, particularly areas of weaknesses to be Reporting under Cost Audit
overcome, strengths to be exploited and risk to be properly covered.
Chapter A6 [6]:
The auditor’s evidence comes from his discussions with the people concerned in the Cost Audit in Information Technology (IT)
organisation, the survey and review of various reports of the organisation, including internal
audit reports, inspection reports or any investigation reports, physical inspection, test Part B: Management Audit
examination of various transactions, inspection of important departmental files, monthly
performance review statements, minutes and notes and above all personal observations. Chapter B1 [7]:
Evidence can be gathered either by sampling techniques or by going into full details Internal Control & Internal Audit
depending upon what the samples reveal. The evidence should be such that an auditory can
draw valid conclusions, duly verifying the same with the people concerned. It should be Chapter B2 [8]:
understood that a management auditor does not rely on a voucher as an evidence, but shall Operational Audit
fall back on various records, including vouchers as evidence for his audit, if the samples
Chapter B3 [9]:
demand so. There is no area of restrictions for obtaining evidence.
• Management Audit Programme (MAP) :
Management audit programme is an essential prerequisite to conducting the audit. It is a
[Chapter 10]
plan of action drawn in advance of taking up the audit, and to help the auditor to cover the
entire area of his function thoroughly. He should lay down for himself a proper procedure
to be followed to complete the work in time, giving thorough coverage to all aspects.
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An efficient management audit programme shall comprise the following:

(i) Review of the organisational 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) Exercise of proper management control (viii) Maintain
suitable monitoring system through management information system (MIS) (ix) Check on
adherence to the statutory obligation and (x) Above all, review the efficiency of manpower Click to jump on:
handling, which ultimately results in the organisation’s success.
Home
An audit programme is laying down the path in its required details before conducting such
audit. A management auditor shall shrewdly assess weak and risk areas in the organisation Part A: Cost Audit
and deal with such areas in more detail. He has to lay down a programme by making a list
of such weak and risk areas and follow them up in his audit. Chapter A1 [1]:
• Management Auditor
A management auditory is expected to offer special skill and expertise to his clients. HE, Chapter A2 [2]:
therefore, has a special responsibility to exercise special care in the performance of his Cost Accounting Standards
duties to ensure positive response to his opinion to motivate action thereon.
Chapter A3 [3]:
A management auditor should be competent in the exercise of his audit function and
formulation of his opinion based on such audit. He should be a man of independent
Chapter A4 [4]:
thinking, who can maintain an unbiased view, without any influence, either financial, Legal Position of Cost Auditor
sentimental or otherwise. He should be technically competent in the discharge of his duties,
having had education, training and experience all round. The management auditory should Chapter A5 [5]:
be supported by a good organisation i.e. a team of people who can competently execute his Reporting under Cost Audit
audit.
Chapter A6 [6]:
Qualifications of Management and Administrative Auditors: Cost Audit in Information Technology (IT)
Prime qualification of a management auditory is to process broad business experience in
allied profession such as accountancy, statistics, engineering, marketing or administration. Part B: Management Audit
It is not possible that one person can possess all the specialized qualifications. But a special
qualification in one field could have a respective view of the whole system. If a team of Chapter B1 [7]:
auditors is appointed it will be preferable to have people from different facilities, because Internal Control & Internal Audit
a cross fertilisation of ideas from different business fields can be a stimulating factor.
Management audit should aim at highlighting any team of administration or managerial Chapter B2 [8]:
efficiency or otherwise affecting the performance of the organisation. Operational Audit
Chapter B3 [9]:
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 organisation e.g. nationalized or government controlled organisation etc.
(iii) Ability to determine or assist the progress of the organisation (iv) Knowledge of the
[Chapter 10]
principles of delegation of authority and control and the preparation of different budgets
viz. cash budget, production budget, master budget, etc (v) Power of grasping and
understanding different internal control devices viz., flow chart, flow of work, analysis of
work scheduling, use of computer, etc. (vi) Sufficient knowledge about engineering
statistical techniques, cost and management accounting, general financial accounting,
production planning and control etc. (vii) General understanding of different laws viz.
company laws, tax laws, FEMA, MRTP, and other economic legislations. (viii) Sufficient
206
knowledge and experience in preparing various reports for submission to different levels
of management including the top management (ix) Tactfulness, perseverance, pleasing and
dynamic personality.
• Management Audit Team – Organisation

A management auditor handling a large organisation on a continuous basis or a number of
audits at the same time has to build up a competent team of people, who possess the Click to jump on:
qualifications attributed to a management auditor.
As a management auditor is concerned with all aspects of the business and the organisation, Home
ranging from manufacture, to marketing and finance, the management audit team should
be multi-disciplinary to make multidimensional approach to audit function. Part A: Cost Audit
A competent management audit team, internal to an organisation, could effectively be Chapter A1 [1]:
represented by the heads of various departments viz., production, materials management, Cost Audit Concept & Legal issues
maintenance, personnel, marketing, finance, industrial engineering, quality control, etc.
Such a team can competently lead and direct the audit to attain the organisational Chapter A2 [2]:
objectives. Cost Accounting Standards
Chapter A3 [3]:
• Audit Checklist:
A management auditor shall normally maintain an audit checklist to ensure that he has not
omitted any areas that require to be audited. The organisational areas covered fall under the
Chapter A4 [4]:
broad categories of:- Legal Position of Cost Auditor
- Planning
- Organising Chapter A5 [5]:
- Staffing Reporting under Cost Audit
- Coordinating
- Communicating Chapter A6 [6]:
- Directing Cost Audit in Information Technology (IT)
- Motivating
- Controlling and Part B: Management Audit
- Innovating
Chapter B1 [7]:
In these areas an auditor should look for any weakness which may affect efficiency of the Internal Control & Internal Audit
organisation. His checklist can be made areawise and may be overlapping or
complementary between different areas. Chapter B2 [8]:
Operational Audit
(i) Directorial weakness (ii) Management weakness (iii) Organisational weakness (iv) Financial
Chapter B3 [9]:
weakness (v) Systems weakness (vi) Procedural weakness (vii) Functional weakness (viii) Management Audit in Different function
Operational weakness (ix) Marketing weakness (x) Industrial relations weakness (xi) Weakness
in meeting social responsibilities, and (xii) Security lapses etc. Part C: Performance Analysis
[Chapter 10]
A model list of audit checklist under various categories is attached in the Appendix hereto.
Management Audit Report (MAR)

It is of very great importance to prepare a good MAR. A good MAR can motivate the
management and get the required results, whereas a bad SMAR can defeat the very purpose of
audit, it may create an adverse reaction and result in the report being thrown out.
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Characteristics of a good management audit report

The detailed characteristics of a good management audit report can be summarized as follows:
- Pertinence
- Comprehensiveness
- Brevity
- Timeliness Click to jump on:
- Motivating
- Formatting. Home
Contents of the report: Part A: Cost Audit
The top policy executive is generally interested in four factors in operating statements – facts,
person responsible, deviations in actual performance from standards and the effect of the result Chapter A1 [1]:
on financial or physical status of the organisation. Cost Audit Concept & Legal issues
The report must allow management to study comparisons, to review organisation, and to Chapter A2 [2]:
appraise the effectiveness of the executives. Departmental weakness can be quickly seen by the Cost Accounting Standards
management, if the report is properly prepared.
Chapter A3 [3]:
Management audit report should create awareness among the management of prudent
management practices that can make organisation come alive. It is very important function of
Chapter A4 [4]:
management audit to help change of management mind-set.
A management audit report should also be discussed with the people concerned in various areas Chapter A5 [5]:
before reporting. Every point that is raised in the report should have the acceptance of the people Reporting under Cost Audit
involved in the concerned function. A report that indicates suggestions that had come from the
people themselves would have a better than coming as a suggestion from auditor. Chapter A6 [6]:
The report should be drafted and structured so that it makes a logical presentation to the
management and makes it easily readable. The report should contain not only the problems and Part B: Management Audit
defects in the working but also should come out with solutions as if given by the operational
people themselves so that it gains immediate acceptance for implementation. A management Chapter B1 [7]:
audit report relies heavily on accepted managerial practices and feasible solutions. Internal Control & Internal Audit
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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Interactive Question B2.8: Management Audit Team

“It is better to perform management audit with a team rather than individually” – explain.
Ans: A management auditor's primary qualification is the ability to process wide business experience
in related fields like accountancy, statistics, engineering, marketing, or administration. One individual Click to jump on:
cannot possibly hold every specialized qualification. However, a specialty in one area could have a
different perspective on the entire system. If a team of auditors is hired, it would be best to have Home
members from other facilities because the cross-pollination of ideas among various business disciplines
can be inspiring. Any administrative or managerial team that is inefficient or otherwise harming the Part A: Cost Audit
operation of the organization should be highlighted during a management audit. So, it is better to
perform management audit with a team rather than individually. Chapter A1 [1]:
Chapter A2 [2]:
Special Reports for Banks, Shareholders, Employees & Small Business Cost Accounting Standards
Sometimes, the reports have to be prepared and submitted for special persons or purposes.
Salient features for these special reports are briefly discussed below:- Chapter A3 [3]:
• Reports for banks and creditors Cost Auditing Standards and Quality control
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. Chapter A4 [4]:
They require accuracy in report and confirmation of statement made, which should be Legal Position of Cost Auditor
properly verified and certified. Bankers are more oriented towards security due to their
long-term expectation of debt servicing by the business. Hence, reliability of report is an Chapter A5 [5]:
important factor. All statements by the auditor should be clear and positive.
• Report to shareholders
Chapter A6 [6]:
The report is read by financial experts, bankers, tax authorities, public officials and research Cost Audit in Information Technology (IT)
people. The report should, therefore, be useful in analytical details for its user, and give full
facts of the organisation’s business. The report should also convey the right and correct Part B: Management Audit
message to a lay man. The reports are often used as a public relation exercise to improve
relations with investors and to promote loyalty. In India, auditor’s report in the prospectus Chapter B1 [7]:
at the time of public issue is very important. Experts read “between the lines” of the Internal Control & Internal Audit
auditor’s report. It will ultimately reflect in the auditor.
• Reports to employees Chapter B2 [8]:
Reports for employees are mainly prepared for better understanding of the business, to Operational Audit
dispel any misconceptions, counter charges by unions, or explain the need for continuance
of the business in times of strike, competitions or sickness. The report to employees must Chapter B3 [9]:
gain the confidence of employees and earn respect for the statements. The report should Management Audit in Different function
consider the needs of employees, when the employee morale is low or where the relations
with employees are strained. Auditor’s views will be expected to be totally unbiased. Part C: Performance Analysis
• Reports for small business [Chapter 10]
The form of annual accounts and other requirements under the Companies Act is the same
for a large or a tiny private company. However, 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. A great deal of reporting for small business is
subjective, due to lack of adequate data. This poses problems an analyzing and comparing
data. Suggestions in the report must be based on proper appraisal of the problem.
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Conclusion: The report of the management auditory will leave a permanent impact on the user
about his competence, integrity and honesty. He should, therefore, make his observations and
recommendations clear even if it may affect the job of any executives or affect the fortunes of
a few people concerned for interested for the organistion. He cannot escape the duty to judge
the right and the wrong. The best report is one which motivates the person receiving the report
to act in the manner desired in the report.
Click to jump on:
WORKED OUT QUESTION
Home
Question No. 1: Part A: Cost Audit
As a management consultant, you have an assignment to conduct a Management Audit of the
production function of a medium-scale engineering unit. Prepare a check list of the points on Chapter A1 [1]:
which you should undertake the study. Cost Audit Concept & Legal issues
Answer: Chapter A2 [2]:

Checklist for carrying out management audit of production function in a medium sized Cost Accounting Standards
engineering unit:
1. How is the production plan prepared? Is it based entirely on market forecasts, or does it Chapter A3 [3]:
also take into account limitations of materials, personnel and finance? Cost Auditing Standards and Quality control
2. Are the product-mix decisions based on optimum profitability? What is the proportion of
Chapter A4 [4]:
standard products and tailor-made items?
3. Whether all infrastructure like machinery, materials, manpower and money have been
assured at the scheduled time for uninterrupted production. Chapter A5 [5]:
4. Are there any constraints in achieving maximum capacity utilization? Are there any Reporting under Cost Audit
imbalances in the plant? If so, what steps are being contemplated to set right the imbalance?
5. Is it possible to subcontract some jobs to increase production capacity or maintain Chapter A6 [6]:
production in times of power-cuts etc.? Cost Audit in Information Technology (IT)
6. What is the percentage of scrap, waste and rejects? Is it reasonable?
7. Is the idle time being monitored regularly? Is it being analysed reason-wise? How much of Part B: Management Audit
it is due to machinery breakdown which is controllable by production department?
8. Is there excess or shortage of manpower? How is the control exercised – time & motion Chapter B1 [7]:
study, incentives, labour budgets or any other means? Internal Control & Internal Audit
9. Is there any wastage in consumption of utilities like power, fuel, steam, compressed air,
etc.? Chapter B2 [8]:
10. How effective is the material handling system? Are there any avoidable movements of Operational Audit
materials?
11. What is the system for preventive maintenance? If the in-house maintenance capability is Chapter B3 [9]:
not adequate, are there annual maintenance contracts for all important items of plant and
machinery?
12. How is the control exercised on inventory of stores and spares?
[Chapter 10]
13. What is the procedure to handle breakdown emergencies?
14. Are all statutory requirements in regard to safety measures complied with?
15. Are history cards available for all plant and machinery giving details of downtime,
replacement of parts, etc?
16. Does the system provide for flexibility or change of production schedules to execute urgent
orders or changes in the product mix?
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Question No. 2
Prepare a checklist/questionnaire for management audit of the purchase function of a
manufacturing company which has factories at different locations manufacturing the same
range of products.
Answer:
A central purchase organisation which caters to the needs of several factories manufacturing Click to jump on:
the same range of products, should aim at economies of scale, as it is in a better bargaining
position. At the same time, it should keep in mind the logistics aspects, i.e. cost of transporting Home
the raw materials and components from a single source to different (may be far-flung) locations.
The objective should be to ensure a more or less uniform delivered cost at each location. Where Part A: Cost Audit
the transportation cost is significant, the buyer should try to source the components from a
supplier who is the nearest to the point of consumption. Chapter A1 [1]:
Apart from the above special features, the auditor of purchase function should look into the
following major points :
Chapter A2 [2]:
(a) Organisation of purchase function, with special reference to the authorities who have been
delegated powers for the following :
Chapter A3 [3]:
• Make purchase requisitions or authorize them Cost Auditing Standards and Quality control
• Decide the vendors to whom enquiries should be sent
• Certifying the technical competence and production capacity of the vendors. Chapter A4 [4]:
• Final selection of the vendor. Legal Position of Cost Auditor
(b) What is the machinery for the technical appraisal of the vendor’s capacity and capability?
(c) Is there a regular vendor rating procedure and continuous monitoring of the performance Chapter A5 [5]:
of vendors? Reporting under Cost Audit
(d) What is the procedure for issue of enquiries, preparing comparative statements and
selection of supplier?
Chapter A6 [6]:
(e) Effectiveness of the market intelligence setup i.e., collection of data regarding various
sources, building up a data base of products/suppliers/prices/technical specifications.
(f) Is there a separate setup for follow up of supplies and taking corrective action in case of
delays?
Chapter B1 [7]:
(g) Are the terms of delivery standardized, or whether the purchase department is responsible
for collection of stores from the vendors in some cases and the vendor responsible for
delivery in some others? If the purchase department is responsible for collection, who is Chapter B2 [8]:
responsible for fixing transport charges? Operational Audit
(h) Is there close liaison between quality control (inward goods) and purchase department, so
that quality complaints are brought to the notice of purchase department promptly? Chapter B3 [9]:
(i) What are the built-in controls against misuse of purchasing powers? Management Audit in Different function
(j) What is the quantum of emergency purchases in relation to total purchases? Are the reasons
for emergency purchases analysed? - i.e. whether on account of vendor failure, or sudden Part C: Performance Analysis
change in production plans etc. [Chapter 10]
(k) Who certifies the payment of bills? Is the purchase department involved in deciding
priorities for payment?
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Question No. 3
A company manufacturing consumer electronic goods has a fairly Research and Development
set up. So far the company has been earmarking 2% of its turnover to R&D budget. Such an
approach has so far paid ample dividends to the company. The company has been able to
establish a reputation of introducing innovative products, which has excellent customer
acceptability. The company, however, is now worried that new players, some of whom are of
international repute, entering Indian market, whether their R&D efforts are really giving them Click to jump on:
value for their money. Since your firm is well known consultancy firm, they have approached
you to conduct a management audit of their R&D activities. List out five major questions, which Home
your audit will address. (Hints : This is a question to test your capacity to apply general
principles of management audit to a given situation. Hence the answer will reflect the creativity Part A: Cost Audit
of the student. Just ask yourself how to identify the projects, monitor and review the progress,
decided on whether to continue with the project or give it up. The question becomes one on Chapter A1 [1]:
management audit because the emphasis is not merely on recording accounting information and Cost Audit Concept & Legal issues
examining its accuracy but on managerial decision-making process).
Chapter A2 [2]:
Answer:
General principles of management audit:
Chapter A3 [3]:
The major five questions, which the management audit should address are :- Cost Auditing Standards and Quality control
1. Selection process: It is the project selection based on prediction of market needs or
responding to the market needs? What are the mechanics of consultation between the Chapter A4 [4]:
market research group and R&D group? Would the success of percentage of projects be Legal Position of Cost Auditor
better if R&D follows the perception of market research or would the initial advantage of
breakthrough in new area give the company a sharp competitive edge? Chapter A5 [5]:
2. Collection of project wise R&D costs: Are the costs collected project wise? Is there an Reporting under Cost Audit
agreed format for collecting such costs? Have the terms used in the format agreed upon
between the management accounts, who would be monitoring costs and R&D would be Chapter A6 [6]:
using the collected information? Cost Audit in Information Technology (IT)
3. Monitoring of costs: How are the R&D budgets prepared? At the time of approval of
projects for research, are any efforts made to indicated the value expected to flow from the Part B: Management Audit
successful completion of the projects and an attempt to match the expected cost and
anticipated benefits? Is there a regular system of responsibilities accounting? Are the Chapter B1 [7]:
accounting criteria like target rate of return, target pay back period, target net present value
built into the system? Are the criteria understood and accepted by R&D group?
Chapter B2 [8]:
4. Parameters for suspending further work: Who takes the decision about suspending or
Operational Audit
scrapping a project initiated? What are the criteria used to arrive at such decision? If the
criteria are already laid down, what is the process of authorizing deviation from such Chapter B3 [9]:
norms? Management Audit in Different function
5. Customizing the results for production: When the project considered to be successful? How
is the successful project customized for production? What are the responsibilities of R&D Part C: Performance Analysis
group in such customization vis-à-vis design and such other production support services. [Chapter 10]
212
Questions No. 4
Enumerate the points to be considered for assessing the requirements of working capital
requirements and borrowing limits on behalf of the lending bank:
General:
(a) What are the limits presently being enjoyed for the various components of working capital,
viz. inventory of raw materials, work-in-progress, finished goods, sundry debtors. Click to jump on:
(b) Are there separate limits other than cash credit, such as bill discounting, drawee bills, etc.?
(c) What is the actual drawing during the last two years under the various limits – month by Home
month? Was there any irregularity/excess drawal?
Part A: Cost Audit
Inventory:
(a) What is the method of material accounting followed? Are there priced stores ledgers for Chapter A1 [1]:
raw materials, components, stores and spares, etc.? Cost Audit Concept & Legal issues
(b) What is the method of valuation of stock (FIFO, LIFO, etc.) and is it being followed
consistently? Are the manufactured intermediates and finished products valued at total cost
Chapter A2 [2]:
or prime cost? Is there any difference of method of valuation between audited accounts and
bank statements?
Chapter A3 [3]:
(c) Are unpaid stocks included in bank statements? Cost Auditing Standards and Quality control
Assessment of the quantum of limits: Chapter A4 [4]:

(a) What is the total inventory in terms of number of months/days consumption for raw Legal Position of Cost Auditor
materials and stores and spares, number of days production for work-in-progress and umber
of days sales for finished goods? Chapter A5 [5]:
(b) What is the level of sundry debtors in terms of number of days’ sales? Reporting under Cost Audit
(c) Is the holding reasonable compared to industry standards as fixed by the bank?
(d) Is the industry seasonal? If so, what are their requirements for the peak production season Chapter A6 [6]:
and other periods? Cost Audit in Information Technology (IT)
(e) Does the company accept job works? If so, are the customers’ materials separately
identifiable and excluded from inventory hypothecated to bank? Part B: Management Audit
(f) What is the credit period available/availed for purchase of materials?
(g) What is the company’s history in writing off bad debts? Chapter B1 [7]:
(h) Is there any ageing analysis of book debts?
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
213
Question No. 5
Given below are the abridged balance sheets and profit & loss accounts of ABC Spinning Mills
Ltd.:
Click to jump on:
Home
Part A: Cost Audit

Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

The bankers to the company appointed you as a consultant for identifying the factors which [Chapter 10]
have contributed to the continuing losses. Prepare a short note highlighting the factors which
have prima facie led the company to sickness.
214
Answer:
Click to jump on:
Home
Part A: Cost Audit

From the above figures, it is apparent that the Company’s declining profitability is NOT due to Chapter A1 [1]:
market conditions as revealed by the following factors: Cost Audit Concept & Legal issues
(a) The sales price has been marginally increasing year to year
(b) The very small increase in material cost is also in step with the increase in sales realization. Chapter A2 [2]:
(c) The company has been able to control direct labour cost effective. Cost Accounting Standards
(d) The level of production has been maintained and has in fact improved in the latest year.
(e) Inventory and book debt levels have been brought down considerably. Chapter A3 [3]:
On the other hand, the following factors present a disturbing picture and lead to the inference
Chapter A4 [4]:
that the financial management is either incompetent, or the management was diverted the
borrowed working funds to some other activity or invested in unproductive assets like vehicles:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
The increase in working capital borrowings and the consequent interest thereon were not Internal Control & Internal Audit
warranted, especially when the funds blocked in inventory and book debts have come down.
The additional interest burden and additional expenses on vehicles amount to Tk 197 lakhs Chapter B2 [8]:
whereas the increase in loss as compared to the previous year is only Tk 115 lakhs. Operational Audit
Chapter B3 [9]:
Preliminary conclusion:
(i) Prima facie, it appears that the unit has become sick due to diversion of funds by the
management to other activities or for personal expenditure.
(ii) The fixed assets have doubled. But there is no profit accruing by the increased assets.
[Chapter 10]
215
Chapter B3 [9]
MANAGEMENT AUDIT IN DIFFERENT FUNCTION

Click to jump on:
9.1 Corporate Culture and Objectives
9.2 Corporate Services Audit Home
9.3 Corporate Development Audit
9.4 Evaluation of Personnel Development Part A: Cost Audit
9.5 Value for Money (VFM) Audit
9.6 Audit of Corporate Social Responsibility of Management Chapter A1 [1]:
9.7 Audit Checks of Different Functions Cost Audit Concept & Legal issues
9.8 Corporate Divisions/Departments/Functions
Chapter A2 [2]:
9.9 Corporate Governance and Audit Committee Cost Accounting Standards
9.10 Business Investigations
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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9.1 Corporate Culture and Objectives

Idea of Corporate Culture
What is Corporate Culture?

The term “corporate culture” is ubiquitous, it’s everywhere and anywhere. But that doesn’t
mean it’s easy to define, or defined correctly. Generally, it describes the overall environment
Click to jump on:
within an organization.
Home
Inc. magazine provided a commonly used definition: “Corporate culture refers to the shared
values, attitudes, standards, and beliefs that characterize members of an organization and Part A: Cost Audit
define its nature. Corporate culture is rooted in an organization’s goals, strategies, structure,
Chapter A1 [1]:
and approaches to labor, customers, investors, and the greater community.”
Corporate Culture – Concept Chapter A2 [2]:
“Culture is to know best that has been said and thought in the world” – Mathew Arnold. Cost Accounting Standards
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. Chapter A3 [3]:
In simple language, corporate culture is the operating working environment and is shaped by Cost Auditing Standards and Quality control
the way people conduct their work, the way customers are treated and served, the way workers
interact with each other or their supervisors or the way people present themselves. Chapter A4 [4]:
Corporate culture unites the enterprise as a family and develops closeness of feeling among all.
Like a family culture, customs and traditions Successful companies often boast about “our Chapter A5 [5]:
accomplishments” and “my failures”, whereas unsuccessful companies generally have as the Reporting under Cost Audit
three Rs in their corporate culture i.e., “resistance”, “resentment” and “revenge” and these
Chapter A6 [6]:
three ‘R’ send an organization on its way to “tiredness”. Thus, the corporate culture is always
visible in workers attitudes, work ethics and impacts heavily upon workers ability to make
decisions and respond to customer needs, workers satisfaction and ultimately the bottom line.
It must be understood that the corporate culture is always independent of corporate policies and
usually comes from the corporation’s leaders, even though it belongs to all employees
Chapter B1 [7]:
collectively. Internal Control & Internal Audit
An example, which is often given, is that some of the companies continue to introduce market Chapter B2 [8]:
innovations, dominate markets and are highly profitable, while other companies in the same Operational Audit
business continue to struggle with success eluding them. Since all the companies are in the
same business, one can easily rule out the external factors like market conditions. This leaves Chapter B3 [9]:
one with the conclusion that the lack of success is caused directly by the company and the type Management Audit in Different function
of environment or culture it has for taking decisions.
In this era of globalization, successful companies have a customer driven corporate culture. [Chapter 10]
They know that it is customers that can make a company successful and all employees are very
important in making the company successful. Successful companies listen to their customers
and provide the products that give the customer what he wants (customer satisfaction) and not
what the company wants to sell. Responsiveness to the consumer is the ultimate key. Employees
must believe that what they do every day has an effect upon the business’ success and that these
effects are cumulative. Many a times, we hear from managers in corporate life “I know it
217
doesn’t make sense, but it’s the policy as long as anyone remembers?” Dynamic leadership of
successful companies always constructively challenges rules and assumptions in favour of
customer satisfaction leading to building up of a successful company.
Culture is reflected in every activity, speech, habit, manners, behaviour, action, dress etc., and
in fact in every turn in the organization. Projection of good culture ensures a healthy corporate
life. Management is not only a technique; it is also a culture. An enterprise should be identified Click to jump on:
with its culture, like Mahatma Gandhi with Ahimsa or Harishchandra with truth, similarly a
corporate body with quality, schedule of delivery or ensuring payment promises etc. It is the Home
management’s responsibility to ensure the building up of a corporate culture comprising of:
• Commitment to honest productivity Part A: Cost Audit
• Planned performance and growth
• Informative, informing and informed, organization - Consideration for others in partnership Chapter A1 [1]:
with the organization Cost Audit Concept & Legal issues
• Participative management
• Good employee relations
Chapter A2 [2]:
• Good decisions and timely action
• Quality consciousness - Mutual trust Chapter A3 [3]:
• Futuristic outlook Cost Auditing Standards and Quality control
• Helpful nature, inter-institutional and towards neighbourhood
• Cleanliness, timeliness, truthfulness, open home, orderliness, humility, creativity, learning, Chapter A4 [4]:
and sense of values. Legal Position of Cost Auditor
Why is it Important? Chapter A5 [5]:

Every business has its own vision for success. Executives and founders then develop a set of Reporting under Cost Audit
goals for achieving it. Employees bring their diverse skills and abilities to the mix. These
Chapter A6 [6]:
elements make up the best types of corporate culture, which sets out how the company is going
to do business and treat its customers. Ideally, the company culture brings employees together
and helps to propel everyone in the organization forward so that the company reaches its goals.
The Role of Corporate Culture
Chapter B1 [7]:
1. Companies with good corporate cultures have higher employee engagement ratings Internal Control & Internal Audit
A healthy corporate culture makes employees feel that their contributions are valued.
Engaged employees are more productive in their work, which has a direct impact on the Chapter B2 [8]:
company’s bottom line. Operational Audit
2. A good corporate culture reduces turnover rates
When employees don’t feel as though they fit in, they will start looking for work elsewhere. Chapter B3 [9]:
They may not feel welcome due to a negative environment at work or when the company Management Audit in Different function
culture does not fit with their values. A good company culture is inclusive and recognizes
the value and contribution of each employee. Part C: Performance Analysis
3. A positive company culture can help attract higher-quality candidates [Chapter 10]
Job seekers will evaluate the corporate culture as part of making their decision of whether
they want to work for a particular organization. When the culture is a positive one, it attracts
top candidates and makes them excited at the prospect of working for the company.
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4 (Four) Types of Corporate Culture

The following are four main types of corporate culture. We’ll examine each one in some detail
without declaring whether one is better or more successful. There are too many variables and
differences to consider, each company must decide what works best for their situation.
1. Clan Culture
Clan culture, also called a collaborative culture, is mainly focused on teamwork. In this Click to jump on:
type of culture, relationships, participation, and company morale are at the forefront.
Managers are looked at as advisors and guides to employees, as opposed to an authoritarian Home
“boss” who gives instructions without context or assistance and disciplines those who make
mistakes. Part A: Cost Audit
This type of corporate culture is focused on keeping the barriers between the executive Chapter A1 [1]:
level and employees to a minimum. Clan culture is highly flexible and focused on thriving Cost Audit Concept & Legal issues
with change and taking action.
Chapter A2 [2]:
Advantages of Clan Culture Cost Accounting Standards
• The team enjoys working together.
• Communication between team members is open and effective. Chapter A3 [3]:
• Employees are likely to be highly engaged at work.
• High possibility for market growth.
Chapter A4 [4]:
Disadvantages of Clan Culture
• Difficult to maintain as a business grows. Chapter A5 [5]:
• Since it is a horizontal leadership structure, career paths might be unclear. Reporting under Cost Audit
• Productivity may be sacrificed due to too much collaboration.
• Taking other employees’ feelings into account may lead to an inability to take charge Chapter A6 [6]:
and make tough decisions. Cost Audit in Information Technology (IT)
2. Adhocracy Culture Part B: Management Audit

Adhocracy culture is primarily focused on innovation and risk-taking. Many successful
startups are considered to have this type of corporate culture. It creates an entrepreneurial Chapter B1 [7]:
environment in the workplace in which employees are encouraged to take risks. Ideas that Internal Control & Internal Audit
would be considered too unconventional for a more conservative workplace are actively
nurtured and pursued in an adhocracy culture. Chapter B2 [8]:
Operational Audit
These companies have aspirational goals and visions. They are always looking for the “next
Chapter B3 [9]:
big thing” and they need to be prepared to take risks.
Advantages of Adhocracy Culture
• High risk, high reward. Greater potential for growth and breakthroughs.
[Chapter 10]
• Employees are motivated to use their creativity and develop new ideas.
• Employees feel supported when suggesting new ideas.
• More likely to invest in professional development opportunities.
Disadvantages of Adhocracy Culture

• Potential for a lack of stability due to the number of new initiatives undertaken.
• Risk that new ventures will not be successful and will hurt the company.
219
• Junior employees may feel intimidated due to the need to work aggressively and
decisively.
• This work culture may create an environment where employees feel competitive
towards each other due to pressure to come up with new, fresh ideas all the time.
3. Market Culture
In a market culture, the bottom line is the main priority. Everything is gauged with the Click to jump on:
company’s profitability in mind. An organization that takes on this type of corporate culture
is primarily focused on results. Home
Often, the language used in a market culture surrounds meeting quotas and reaching targets. Part A: Cost Audit
It attracts people who are competitive and want to “win.” In a market culture, leaders are
demanding and expect employees to perform well in a high-pressure environment. Chapter A1 [1]:
Advantages of Market Culture
• Employees are enthusiastic about their work. Chapter A2 [2]:
• The competitive atmosphere encourages all workers to work hard and reach company Cost Accounting Standards
goals.
• The organization is focused on profitability; this is an objective that employees can get Chapter A3 [3]:
on board with. Cost Auditing Standards and Quality control
• Companies with market cultures are often successful and profitable.
Chapter A4 [4]:
Disadvantages of Market Culture
• It can be challenging for employees to engage with their work since each decision is Chapter A5 [5]:
tied to a number. Reporting under Cost Audit
• The constant competition this environment fosters can create a toxic work environment.
• Employees can feel stressed at work due to constant pressure to perform. Chapter A6 [6]:
• It’s not uncommon for employees to become burned out because they are expected to Cost Audit in Information Technology (IT)
constantly climb the ladder and deliver results no matter personal costs.
4. Hierarchy Culture
A hierarchy culture is one that follows the traditional corporate structure and has a clear Chapter B1 [7]:
chain of command. It has several management levels separating executives and employees. Internal Control & Internal Audit
This type of company has a specific way of doing things, which may include traditional
norms such as a dress code and rigid work hours. The company’s focus is on stability and Chapter B2 [8]:
reliability. Operational Audit
Chapter B3 [9]:
Advantages of Hierarchy Culture
• Since this corporate culture is conservative, the company remains stable.
• The company’s processes are clearly defined to meet its objectives.
• Employees know exactly what is expected of them when they go to work.
[Chapter 10]
• Workers experience a sense of security knowing that expectations and working
conditions are predictable.
Disadvantages of Hierarchy Culture

• It prioritizes procedures over people which creates an inflexible work culture.
• This culture can discourage innovation because employees are discouraged from
suggesting new ways to approach things.
220
• May be difficult to respond quickly to changes in the market.

• Company goals take priority over the individual, which means little attention is paid to
employee engagement.
Evaluation of Corporate Objectives

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 Click to jump on:
objective. These are the specific, realistic and measurable aims which an organisation plans to
achieve. These represent the charter that the organisation has laid down for itself. These Home
corporate objectives could either be written or unwritten. Many experts feel it would be better
to have a written charter for anybody in the organization or outside to know what the Part A: Cost Audit
organization stands for and to be understood and followed, rather than known by trial and error.
Moreover, all good plans must support the overall corporate objectives of the organisation. For Chapter A1 [1]:
example, the corporate objectives of a company could be to become global leader in the next Cost Audit Concept & Legal issues
five years. This means that all individual plans must support the achievement of this objective.
Similarly, the corporate objectives of world famous ‘NIKE’ company are reproduced as under:
Chapter A2 [2]:
• Protect & improve Nike’s position as the number one athletic brand in America;
• Build a strong momentum in growing fitness market; Chapter A3 [3]:
• Intensify the company’s effort to develop products that women need and want; Cost Auditing Standards and Quality control
• Explore the market for products specifically designed for the requirements of maturing
Americans; Chapter A4 [4]:
• Direct & manage the company’s international business as it continues to develop; Legal Position of Cost Auditor
• Continue the drive for increased margins through proper inventory management and fewer,
better products. Chapter A5 [5]:
The corporate objectives of ‘General Electric Company’, USA are:
Chapter A6 [6]:
“To become the most competitive enterprise in the world by being number one or number two
in market share in every business the company is in.”
The corporate objectives of ‘Apple Computers, USA are:
“To offer the best possible personal computing technology, and to put that technology in the Chapter B1 [7]:
hands of as many people as possible.” Internal Control & Internal Audit
Many companies do not have a clear understanding of their business objectives. Some of these Chapter B2 [8]:
companies go for acquiring of unrelated businesses just because others are also doing in the Operational Audit
hope of being equally successful despite the fact that they don’t know much of that business or
industry. Similarly, many companies do not successfully make their employees aware of its Chapter B3 [9]:
corporate objective or how they are very important part of it. Therefore, it is very important that Management Audit in Different function
corporate objectives are defined in concrete and understandable terms. These corporate
objectives need to be defined in broad terms that allow some degree of flexibility, but should Part C: Performance Analysis
not be defined in terms that make the objective nonexistent. For example, a company making [Chapter 10]
games can have any of the followings as their corporate objectives: (a) making children’s
games; (b) making games; or (c) providing entertainment. The set of assumptions and strategies
that go with each objective are totally different and the business operations will differ
dramatically depending upon the exact choice of corporate objective. Similarly, a company
planning to consolidate its marketing share in the country (national market) might have totally
221
different objectives for market as compared to another company seeking to become global
leader because the needs of customers may be totally different in each of the country.
Evaluation of Corporate Strategies

Corporate strategy or policy is the strategy that determines the means for utilizing resources in
the areas of production, finance, research and development, personnel, and marketing to reach
the Corporate Objectives. These policies are laid in conformity with the objectives of the Click to jump on:
organization and are generally laid down by top management and the board of directors. These
may be subject to change from time to time depending upon the external changes affecting the Home
corporate objectives. The policy however, should not deviate from the objectives of the
organization unless the objectives are restated. Therefore, it is vital for any organization that all Part A: Cost Audit
its deptt. objectives like marketing objectives, production objectives and human resource
objectives are all compatible with the overall corporate objectives. Chapter A1 [1]:
Evaluation of Corporate Image and Branding:
Corporate Branding is the process of creating and maintaining a favourable reputation of the
Chapter A2 [2]:
company and its constituent elements. It is an important organizational resource that enables to
create, strengthen and sustain competitive advantage. It is a strategic asset that creates
Chapter A3 [3]:
competitive advantage and favourable climate for the survival and development of an Cost Auditing Standards and Quality control
organization. Corporate Image is a reflection of any business. The term “image” of a company
refers as to how it is perceived by the public at large. In other words, the corporate image refers Chapter A4 [4]:
to the image, which is conjured up by mention of a company’s name. It is a first step of branding Legal Position of Cost Auditor
process. Corporate image is a strategic asset that creates competitive advantage and favourable
climate for the survival and development of an organization The big corporations and Chapter A5 [5]:
organizational buyers are mainly concerned with the company’s overall brand identity, rather Reporting under Cost Audit
than with the specific product they want to buy, and will generally remember the image of the
company longer than any particular product information. Thus, the purpose of corporate Chapter A6 [6]:
branding is to: Cost Audit in Information Technology (IT)
• Make the organization known, as unique, distinct and credible in the mind of potential
customers. Part B: Management Audit
• Facilitate the building of relationships and trust.
Chapter B1 [7]:
• Portray the benefits of the organization to the customer.
• Embody and convey the value system of the organization.
Chapter B2 [8]:
Google’s recent success with their public offering is an expression of corporate branding of Operational Audit
Google’s uniqueness and distinction. Similarly, nobody in India can dispute the corporate brand
and image of big companies like Reliance etc. Corporate image seeks to influence the people’s Chapter B3 [9]:
perceptions of a company through consistent presentation of the company to public. Management Audit in Different function
In developing a corporate image, an enterprise has to ensure an overall consistency while taking Part C: Performance Analysis
into account the various divergent factors such as checking the quality of its products, the ethics [Chapter 10]
of its management, the corporate values upon which its people act, its style of management,
attitudes towards customers, quality and service to customers and so on. The customers are
usually interested in the price, quality and reliability of the company’s products and services,
distributors in the assurance of product availability to influence the purchasing decisions of
customers and their own earnings out of them, creditors in their prompt payments and continued
relationship for suppliers, shareholders are looking for their return on their investments and
222
appreciation in investment growth, government in their realization of revenues, employees in

their expectation of stability of employment, higher remuneration and good working condition
and welfare measures etc.
The first point in a corporate sector is to have a definite mission – a mission to produce or to
render services to satisfy the needs of the consumers. In order to fulfill such mission, the
enterprise has to earn a favourable image either for its products or for itself or both. Generally, Click to jump on:
it is observed that corporate image and product image go hand in hand. The messages conveyed
through the medium of advertisement by an enterprise try to evoke a favourable response Home
towards its products and brands by building product image as well as corporate image.
Part A: Cost Audit
The magnitude and variety opportunities for external communication have considerably
expanded and the potential for “public” understanding has also increased considerably. Chapter A1 [1]:
Moreover, large corporations have diversified their products range and marketing areas they Cost Audit Concept & Legal issues
serve. As a result, the management of corporate branding and image assumes great importance
in the formulation of an effective corporate strategy. Chapter A2 [2]:
The evaluation of corporate image is a very complex psychological and behavioural activity. It
is seen many a times that corporate image has no relationship whatsoever with the corporate Chapter A3 [3]:
objectives. The evaluation involves a purposeful observation and critical examination of events Cost Auditing Standards and Quality control
and trends concerning business environmental factors operating inside (e.g. management and
Chapter A4 [4]:
employee) and outside the concern (e.g. shareholders, investors suppliers, public) despite the
fact that their expectations are totally different. In order to perform an audit in these areas, the
role of the management auditor will be that of an analyst. The product image may be defined Chapter A5 [5]:
as that of a brand or quality formed by the consumers’ belief about specific attributes of a Reporting under Cost Audit
product. Similarly, corporate images are the qualities which the ‘public’ attribute to a corporate
body. Thus different branded soaps such as Lux, Hamam, Margo etc. may be attached with Chapter A6 [6]:
different product attributes such as price, fragrance, medicinal values, smoothness on skin, Cost Audit in Information Technology (IT)
longer lasting etc. for determining product image as well as corporate image. The following
steps are included in the evaluation of product image:- Part B: Management Audit
(i) Developing a benchmark for products’ characteristics and that of the consumers’
attitudes, suitable to an enterprise. Chapter B1 [7]:
(ii) Collecting data based on actual observation of events and trends and restructuring them Internal Control & Internal Audit
by statistical or other methods so as to help comparison.
(iii) Identifying the strengths and weaknesses in relation to the objectives set and envisaged. Chapter B2 [8]:
Operational Audit
The various approaches of a management auditor to evaluate corporate image are –
Chapter B3 [9]:
(a) To prepare a list of desirable attributes;
(b) To select them into main groups and under each group dovetailing the specific
qualifications;
(c) To study their relative importance and assign respective weights or points to each one of
[Chapter 10]
them in order of priority, but keeping in view the aspects of objectivity, relevance, and
materiality that might have an impact on the image of a corporate sector;
(d) Rating the specific qualifications or attributes based on facts, judgments and interpretations
and technical studies made by experts in the respective fields;
(e) To summarize the rating under the selected groups; and
(f) To present to the management a comparative picture between the results anticipated and
actual results.
223
Thus, in order to arrive at the proper evaluation on a number of factors arbitrarily chosen on the
subject, a management auditor has to apply a greater degree of skill in factual analysis. His
approach for evaluation of corporate image should include attributes of dealing with financial
stability, production efficiency, sales effectiveness, economic, and social affluences, personal
satisfaction and development, growth in earnings, public relations and civic responsibility. In
the process of evaluation of corporate image, the management auditor may take the help of any Click to jump on:
one or more of the following techniques –
(a) Graphical method Up-to-date graphs are maintained for each of the attributes of a public Home
under evaluation (viz. product, consumers, investors, and shareholders).
(b) Point method: Points are attached to each attribute concerning a profile and scaling them Part A: Cost Audit
as very good, good, fair, poor, very poor, etc.
(c) Index method: Ideal indices are developed for comparison with actual ones for some Chapter A1 [1]:
attributes of a profile. Cost Audit Concept & Legal issues
(d) Survey method: It indicates questionnaires to elicit information attitudes, survey, etc.
(e) Ratio analysis: Analysis of events and trends with the help of ratios (viz. export to total Chapter A2 [2]:
sales, own sales in the same industry). Cost Accounting Standards
(f) Position analysis: Position of an enterprise with regard to market size, market share, market
stability, etc. Chapter A3 [3]:
(g) Method of comparison: Comparison of actual with budget on quantifiable attributes within Cost Auditing Standards and Quality control
the enterprise. It also includes inter-firm comparison within the same class of industry.
Chapter A4 [4]:
Evaluation of Corporate Culture
Every organization has some existing culture. Therefore, evaluation of corporate culture does Chapter A5 [5]:
not mean to create or invent a new culture, but to identify the existing culture, assess where Reporting under Cost Audit
improvements are needed, develop an action plan and implement it. Many organizations believe
that by summing up slogans like “we have a culture of innovation” etc., they can have a unique Chapter A6 [6]:
culture. Cost Audit in Information Technology (IT)
In this area, the management auditor forms his independent opinion about corporate culture by Part B: Management Audit
asking questions on the following patterns:
(a) Is the pressure on employees to perform unavoidable? Chapter B1 [7]:
(b) Is it sometimes difficult to ask questions or raise concerns?
(c) Whether the employees can act as “whistle blowers” against their seniors?
Chapter B2 [8]:
(d) Is bad conduct ignored or tolerated? Is good conduct encouraged?
Operational Audit
(e) Is there a close tie between performance and rewards?
(f) Does short term thinking dominate in decision making? Chapter B3 [9]:
(g) Are compliance or ethics issues marginalized or denigrated? Management Audit in Different function
(h) Do employees identify sufficiently with the interest of shareholders or other stakeholders?
(i) Do employees understand and sufficiently care about the needs of the customers. Part C: Performance Analysis
(j) Is the quality of product and/or services a high priority? [Chapter 10]
(k) Are employees proud of the products/services delivered by the organization?
(l) Are they proud of organization?
224
Interactive Question B3.1: Evaluation of Corporate Strategies

How do you evaluate “Corporate Strategies” of a company?
Ans: Any strategies a diverse firm chooses to improve its performance and position should be
thoroughly examined and assessed. To make the call, some organized steps must be taken. The many Click to jump on:
business divisions that fall under the corporate umbrella can be evaluated for their potential and current
quality by managers. In order to better the search, they would select what strategic action to take with Home
the aid of search analysis and evaluation. There are several steps in the strategic analysis of various
companies. When assessing the company's strategies, a manager must adhere to these steps: Part A: Cost Audit
• Identifying the present corporate strategy
• Evaluating industry attractiveness Chapter A1 [1]:
• Evaluating the competitive strengths of the business units Cost Audit Concept & Legal issues
• Strategic-fit analysis
Chapter A2 [2]:
• Resource-fit analysis Cost Accounting Standards
• Resource-fit analysis
• Determining priority for resource allocation Chapter A3 [3]:
• Formulating a corporate strategy Cost Auditing Standards and Quality control
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
225
9.2 Corporate Services Audit

In this era of globalization, companies are always mired in tough battles for achieving greater
efficiencies, differential products and services to improve their corporate services and enhance
their sustainable competitive edge. The term “Corporate Services” refers to the activities that
combine or consolidate certain enterprise-wide needed support services, provided based on
specialized knowledge, best practices, and technology to serve internal (and sometimes Click to jump on:
external) customers and business partners. These services co-ordinate the diverse
organizational units and helps them to focus on organizational goals by effectively exploiting Home
resources and developing core competencies that enable an organization to keep its edge over
its industry competitors. It sometimes amounts to combining operations with another Part A: Cost Audit
competitor in the same industry to increase competitive strengths and lower competition among
industry rivals. Chapter A1 [1]:
The business world is now becoming increasingly information intensive and complex.
Therefore, companies have begun to incorporate web-based services into the work place. This Chapter A2 [2]:
has opened up many new challenges and initiatives. This has radically affected many of the
established functions. Some of them have been reduced, combined or eliminated. This also
Chapter A3 [3]:
means that corporate boundaries are completely changing with advantageous partnering Cost Auditing Standards and Quality control
connections with outside service suppliers. Corporate services have now become integral part
of the business value chain. Chapter A4 [4]:
Corporate services are the support infrastructure of a company. These include public relations,
customer assistance or call centers, training, engineering, human resources and procurement Chapter A5 [5]:
etc. to create new business value and help the company function more effectively by improving Reporting under Cost Audit
internal processes, managing customer relationships and extending the organization. The
advantages of corporate services are productivity gains, cost savings and service improvements. Chapter A6 [6]:
The benefits of these services extend to core business areas in form of reduced costs, less Cost Audit in Information Technology (IT)
inventory, less working capital requirements, improved procurements and higher profits. It also
helps in much higher efficiency and productivity of the employees as new technologies can Part B: Management Audit
introduce an array of new possibilities with powerful computers and integration of database
with web technologies. For example, if departmental managers were earlier receiving weekly Chapter B1 [7]:
or monthly reports to help them take critical decisions, all this information shall be available Internal Control & Internal Audit
real time online now to help them to track the things which were important to them and take
Chapter B2 [8]:
decisions.
Operational Audit
The scope of corporate services audit extends to the critical examination of the different aspects Chapter B3 [9]:
of services and their extent that have been satisfactorily rendered by a corporate body, and of Management Audit in Different function
evaluation of degrees of responsiveness and awareness on the part of such enterprise. Thus, the
performance of management towards consumers, employees, shareholders, community, fellow- Part C: Performance Analysis
businessmen and Government is studied separately and properly evaluated by management [Chapter 10]
auditor. The areas of corporate services audit and the scrutiny and evaluation criteria can be
categorized as follows:
(i) Consumers: Quality goods in right quantities at right prices, place and time.
(ii) Employees: Pay, training, safety, welfare, industrial relations, etc.
(iii) Shareholders: Safety of investment, satisfactory return, appreciation.
(iv) Community: Social cost and social benefit, public relations.
226
(v) Fellow-businessmen: Business ethics and fair-trade dealings

(vi) State: Compliance with the spirit of laws, fair trade practices, payment of taxes.
The appraisal system of corporate services audit should consider the level of contribution a
business entity makes to society and its business environment towards raising the quality of life
through better product quality and services rather than profit maximization. The corporate
services audit thus attempts to distinguish between the ends (i.e. profits) and means (i.e. Click to jump on:
services) of business and provides a new dimension to the concept of audit approach. It is the
fulfillment of social responsibility of a business unit. Auditor’s responsibility lies in evaluating Home
the company’s response to social needs.
Part A: Cost Audit
Interactive Question B3.2: Needs of “Corporate Service Audit” Chapter A1 [1]:
[Difficulty Level: Easy] Cost Audit Concept & Legal issues
Why the needs of “Corporate Service Audit” is increasing day by day? Chapter A2 [2]:
Ans: The business world is currently becoming more complex and information-intensive. As a result,
Chapter A3 [3]:
businesses have started integrating web-based services into the workplace. This has given rise to
numerous new problems and projects. Numerous established functions have been drastically impacted
by this. Some of them have been scaled back, merged, or removed. Additionally, this implies that due Chapter A4 [4]:
to advantageous partnering relationships with outside service providers, corporate boundaries are Legal Position of Cost Auditor
completely changing. Corporate services are now a crucial link in the value chain of business.
Chapter A5 [5]:
Companies are constantly engaged in difficult conflicts for achieving greater efficiencies, unique goods, Reporting under Cost Audit
and services to improve their corporate services, and to strengthen their long-term competitive edge.
The term "Corporate Services" refers to the activities that group or consolidate specific enterprise-wide Chapter A6 [6]:
support services that are required. These services are offered based on specialized knowledge, industry Cost Audit in Information Technology (IT)
best practices, and technology to serve internal (and occasionally external) clients and business partners.
Utilizing resources wisely and building core competencies that give an organization a competitive edge Part B: Management Audit
over its industry rivals, these services coordinate the various organizational units and assist them in
focusing on organizational goals. To increase competitive advantages and reduce competition among Chapter B1 [7]:
industry rivals, it can occasionally amount to combining operations with another competitor in the same Internal Control & Internal Audit
industry.
Chapter B2 [8]:
Operational Audit
So, companies need to know about the efficiency and effectiveness of their initiatives employed in
Corporate Services. As a result, the needs of Corporate Service Audit is increasing day by day. Chapter B3 [9]:

[Chapter 10]
227
9.3 Corporate Development Audit

A corporate development audit is an independent objective study of an organization’s
capabilities. It aims at identifying strengths and weaknesses and moving toward state-of-the-art
performance. A Corporate Development Audit gives a comprehensive picture of the status of
corporate development effectiveness and highlights developmental needs. Many organizations
use the corporate development audit to identify the state-of-the-art in business development in Click to jump on:
their industry and determine exactly how much they differ from that ideal. The resulting
feedback report highlights all key findings, with specific recommendations for course Home
correction or improvement.
Part A: Cost Audit
Corporate development audit is a comprehensive task to assist the corporate management in
various aspects of development through a process of systematic review and evaluation of long- Chapter A1 [1]:
term strategies of the company. Such corporate development audit assures that – Cost Audit Concept & Legal issues
(a) The various factors and forces constituting a corporate enterprise are the right kind and
quality. Chapter A2 [2]:
(b) Communication remains the key to the functioning of an enterprise.
(c) The pattern of departmentalization in an enterprise adopted in the past and proposed for the
Chapter A3 [3]:
future for dealing with multidirectional responsibilities is fully responsive to circumstances Cost Auditing Standards and Quality control
and business environment.
(d) The personnel problems are handled appropriately considering the overall objectives of Chapter A4 [4]:
development of the corporate enterprise. Legal Position of Cost Auditor
(e) The responsibilities of planning, coordination, motivation and control at functional
management levels are discharged in proper spirit. Chapter A5 [5]:
A corporate development audit is best performed by a team consisting of different experts of
different disciplines as it requires multi-disciplinary approach. Large scale corporate enterprises Chapter A6 [6]:
offer opportunities to the conduct of corporate development audit. Contrary to other forms of Cost Audit in Information Technology (IT)
audit – statutory or non-statutory (viz. financial audit, cost audit, efficiency audit, propriety
audit, etc.) corporate development audit plays a vital role not only tying up the loose ends, but Part B: Management Audit
also to forge a link in the knowledge that emanates from different quarters and on the basis of
different types of experiences in dealing with varied types of problems. Chapter B1 [7]:
As the corporate development audit is more of an introspective nature, necessary initiation and
Chapter B2 [8]:
support should come from a firm decision taken by the Board of Directors and its chairman.
Operational Audit
Moreover, as this audit highlights the corporate strengths and weakness, especially failures,
inefficiencies and bottlenecks, it should be undertaken by a high-powered team with the Chapter B3 [9]:
corporation and acceptability of all those concerned with it. Management Audit in Different function
Checklists in Areas of Corporate Development Part C: Performance Analysis

Checklists on various areas of corporate development may be helpful in appraising the [Chapter 10]
structural aspect of a corporation, detailed below:
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 network, after sales services, technology improvement, corporate
structure and qualities of its members?
228
(c) What are the opportunities and threats in relation to rivalry among existing firms, threat of
new entrants, threat of opportunity of technical know-how, strategy of suppliers?
(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?
(f) What specific techniques are applied by the management for corporate planning, long and
short term exercise?
(g) Whether the corporate objectives and goals are clearly defined and qualified? Click to jump on:
(h) Whether the corporate planning premises and plans drawn up based on adequate
information? Home
B. Checklist on corporate objectives Part A: Cost Audit
(a) Whether the corporate objectives are clear and explicit?
(b) Whether the different elements of the enterprise have separate objectives? Chapter A1 [1]:
(c) How are these objectives defined? Cost Audit Concept & Legal issues
(d) Are the objectives in writing?
(e) Is there sufficient flexibility in then organizational design in the form of the responsiveness Chapter A2 [2]:
to changes taking place from time to time? Cost Accounting Standards
C. Checklist on delegation of authority Chapter A3 [3]:

(a) Whether there are clear lines of authority from top to bottom in the corporate enterprise? Cost Auditing Standards and Quality control
(b) Whether accountability has been properly coupled with corresponding authority?
Chapter A4 [4]:
(c) Whether responsibility and authority in each position clearly defined in writing?
(d) Whether the number of levels of authority kept minimum?
(e) Whether duties assigned to the subordinates indicative as to what exact activities are Chapter A5 [5]:
expected from them? Reporting under Cost Audit
(f) Whether responsibility via delegation of authority created among the subordinates to
complete the given task? Chapter A6 [6]:
(g) Whether the methods of delegation compatible to the organization structure? Cost Audit in Information Technology (IT)
D. Checklist on span of control and management Part B: Management Audit

(a) Whether span of control has been recognized in the organization?
(b) Whether everybody in department report only to one superior? Chapter B1 [7]:
(c) Whether the accountability of higher authority for the acts of its subordinates is in Internal Control & Internal Audit
accordance with current practices?
(d) Whether the corporate management recognizes the following factors that affect span of Chapter B2 [8]:
control? Operational Audit
(i) Degree of interaction between the units or personnel being supervised?
Chapter B3 [9]:
(ii) The incidence of new problems in any department?
(iii) The extent of standard procedures adopted?
(iv) The extent of non-managerial responsibilities?
(e) Whether the different activities and functions are grouped together in order to -
[Chapter 10]
(i) Obtain the most effective use of men and facilities
(ii) Meet the objective in the optimum way?
(iii) To run the most economical operation?
(f) Whether responsibilities are grouped, wherever possible, so that the overall control of a
function can be established so as to hold the superior manager accountable?
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Interactive Question B3.3: Corporate Development Audit

Recently Mr. Abdul Karim, owner of Karim Group of Companies, is thinking about rebranding his
organization to adjust with the globally changing business activities. You need to describe him how
“Corporate Development Audit” can helps him. Please write a short note on this regard.
Ans: Corporate development audit "looks at the structure and function of the organization, in both its
Click to jump on:
potential and its transformation into kinetic energy. The underlying idea is that an organization cannot
carry out the tasks assigned to it if it is structurally unprepared. This structural equipment can be viewed Home
from a variety of angles, including the scope and size of its operations, technology, employment,
investment, product and product mix, growth prospects in the current lines and diversification, manning, Part A: Cost Audit
adherence to appropriate and sensitive policies, departmental problems, delegation of power and
corresponding responsibilities to each position created in the organization, and mechanisms developed Chapter A1 [1]:
for both monitoring and application.
A corporate development audit identifies development needs and provides a thorough picture of the
Chapter A2 [2]:
state of corporate development effectiveness. The corporate development audit is frequently used by
organizations to identify the state-of-the-art in business development in their sector and ascertain
precisely how much they deviate from that ideal. The final feedback report summarizes all significant Chapter A3 [3]:
findings and offers detailed suggestions for course correction or improvement. A corporate Cost Auditing Standards and Quality control
development audit is designed to help the company's management in all areas of development through
a process of careful analysis and evaluation of its long-term business plans. Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
230
9.4 Evaluation of Personnel Development

Market changes require continuous innovation within companies to enable them to grow
successfully. Thus, successful personnel development aims at supporting and ensuring
innovation processes of a company by efficient and targeted development of staff ultimately
leading to organizational development. Personnel development, a vital aspect of corporate
development is systematic training of managers and specialists to fill present and future needs Click to jump on:
for the company. It also helps further individual growth to ultimately facilitate corporate growth
and expansion. The concept of personnel development is essentially long-range in nature. It is Home
aimed at development of efficient, loyal and hard-working employees. Since all the activities
in an organisation are accomplished by the people, for the people and with the people, the aspect Part A: Cost Audit
of personnel management gains significance.
Chapter A1 [1]:
Successful personnel development concepts must meet company-specific requirements and Cost Audit Concept & Legal issues
targets. Also, they should be efficient, economical and lean. Personal development teaches the
staff as to how to become more productive and effective at work. Essentially, personal Chapter A2 [2]:
development is about having more control of self-actions and emotions and staying motivated
irrespective of situation or environment.
Chapter A3 [3]:
Evaluation of personnel development may include the following criteria -
(a) Pre-planning as an essential feature of human resource development. Chapter A4 [4]:
(b) Ascertaining manpower needs for appropriate education, training and development. Legal Position of Cost Auditor
(c) Ascertaining the difference between future needs and existing talent i.e. gap or imbalance.
(d) Adopting a suitable programme of recruitment, selection, training and development to close Chapter A5 [5]:
the gap of imbalance. Reporting under Cost Audit
(e) Adequate manpower planning with an appropriate blending of manpower management
policies and manpower management programme. Chapter A6 [6]:
Scope of personnel function:
“Personnel Management” is that part of the management function which is primarily concerned Part B: Management Audit
with the human relationships within an organization. Its objective is essentially the maintenance
of those relationships, which enable all those engaged in the undertaking to make their Chapter B1 [7]:
maximum personal contribution to the effective working of that undertaking. Therefore, Internal Control & Internal Audit
personnel management is concerned with managing people at work. It is concerned with
Chapter B2 [8]:
employees, both as individuals as well as a group. It is essentially one of development of
Operational Audit
efficient, loyal and hard-working employees. Personnel management is concerned with helping
the employees to develop their potentialities and capacities to the maximum possible extent. Chapter B3 [9]:
The functional areas along with the scope of human resources management and development Management Audit in Different function
indicated below may be identified as the component of personnel function –
(a) Organization review and analysis: Continuous review and analysis of organization’s Part C: Performance Analysis
operation may be necessary in order to determine and develop appropriate work structure, [Chapter 10]
roles and responsibilities, inter and intra-department relationship, and levels of authority.
(b) Manpower, planning, recruitment and selection: Forecasting and planning is essential
to needs an organization for a sufficient number of qualified personnel for manning its
operations.
(c) Manpower training and development: Appropriate methods and techniques of training
and development may be adopted. Proper facilities and opportunities are to be provided for
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personnel to enable them to acquire necessary skills and knowledge to perform the jobs for
which they are employed.
(d) Performance appraisal: There should be proper measuring, rating and evaluation of
performance of personnel, guiding employee development and promoting motivation,
communication and equity.
(e) Employee remuneration: This function includes developing and administering
appropriate system of remuneration including job evaluation, wage and salary structure, Click to jump on:
incentive payments, fringe benefits and non-financial rewards.
(f) Employee services: There should be satisfactory services relating to the safety, health and Home
welfare of all employees, including social security plans and community development
programmes. Part A: Cost Audit
(g) Administration and records: This includes designing, implementing and controlling of
adequate records and administrative procedures to provide useful and pertinent information Chapter A1 [1]:
for planning purposes and for the documentation for all personnel in service. Cost Audit Concept & Legal issues
(h) Industrial relations: It includes establishing appropriate procedures for the resolution for
personnel and institutional differences by means of appropriate measures and machinery, Chapter A2 [2]:
e.g. standing orders, grievance procedures, conciliation, collective bargaining, and joint Cost Accounting Standards
consultation.
(i) Auditing and research in manpower management: These are the responsibilities of Chapter A3 [3]:
personnel management, which call for the attention of a management auditor. Cost Auditing Standards and Quality control
Chapter A4 [4]:
Consumer Services Audit Legal Position of Cost Auditor
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 Chapter A5 [5]:
price. The consumer services audit critically examines and appraise management on these Reporting under Cost Audit
aspects of services. It is therefore an audit of public responsibility of business enterprise in
relation to its customers and is a part of social audit. The audit is based on the philosophy that Chapter A6 [6]:
the role of business should be conducive to raising the quality of life through its contribution in Cost Audit in Information Technology (IT)
terms of better product-quality and services.
Checklist on ‘consumer services’ evaluation:
A management auditor while examining the consumer services policies and practices in an Chapter B1 [7]:
organization may use the following questionnaire –
Chapter B2 [8]:
A. Products related policies and practices:
Operational Audit
(a) Do the products manufactured meet the needs of the customers of different classes, different
tastes and different purchasing power? Chapter B3 [9]:
(b) Whether the prices are reasonable and consistent with the quality variations, efficiency Management Audit in Different function
variations?
(c) Whether the prices include reasonable profit? Part C: Performance Analysis
(d) Whether the prices have been fixed under competitive market or monopolistic conditions [Chapter 10]
subject of Government restrictions?
(e) Whether detailed information regarding the product, service, company profile and policies
etc. are adequately disseminated in order to ensure that the communication made to the
customers regarding price, quality, services, etc. are truthful?
(f) Whether after-sales service spare parts facility etc. enable customers to derive maximum
satisfaction?
232
(g) Whether the company undertakes adequate research in regard to products and customer
behaviour so as to make their products more satisfactory to the customers?
(h) Whether constant efforts are made for improvement of the product’s use value as well as
esteem value?
(i) Whether the management assumes responsibility of ‘product development’ function as a
continuous exercise in relation to society in general and the consumers in particular?
(j) Whether the product development programme considers the factors of standardization, Click to jump on:
simplification and specialization?
(k) Whether such programme is undertaken to meet only the short-term demand or long-term Home
requirements?
(l) Whether the company policies and practices, relating to the distribution of products among Part A: Cost Audit
different sections of customers, fair and equitable?
Chapter A1 [1]:
B. Customer Relationship Cost Audit Concept & Legal issues
(a) Whether the customer complaints are handled promptly and efficiently?
(b) Whether the company responds quickly to the customers’ enquiries relating to product or Chapter A2 [2]:
services? Cost Accounting Standards
(c) Whether the labels of the products contain adequate information to help the consumers to
appreciate quality and other characteristics of the products? Chapter A3 [3]:
(d) Whether the company cooperates with the groups and associations representing customers? Cost Auditing Standards and Quality control
(e) Whether the company provides useful suggestions and renders necessary assistance to
Chapter A4 [4]:
‘consumer’s cooperatives’ for distribution of quality goods at reasonable price?
C. General Considerations Chapter A5 [5]:
(a) Whether safety norms relating to products are maintained as per the accepted standards laid Reporting under Cost Audit
down by the statutory bodies, such as ISI, BSS, etc.?
(b) Whether performance guarantees are explicitly stated? Chapter A6 [6]:
(c) How do the merits of the company’s own products match the advantages to the consumers, Cost Audit in Information Technology (IT)
if mentioned in the advertisements?
(d) Whether the technical data given in the sales promotional media specific and not Part B: Management Audit
ambiguous?
(e) How does the company ensure proper remedy against customer complaints when products Chapter B1 [7]:
are made available to the consuming public through a large network of distributors as well Internal Control & Internal Audit
as retail outlets?
(f) Whether the policies and practices of the company are adequate to combat artificial Chapter B2 [8]:
scarcities? Operational Audit
(g) Whether all the “warranties” are explicitly stated? Is the procedure for invocation of
Chapter B3 [9]:
warranty stated in unambiguous terms?
(h) Whether the fundamental aspect of servicing responsibility to consumer recognized by the
enterprise as a policy measure
(i) Whether there are instances of relaxation of policy norms in respect of responsibilities to
[Chapter 10]
customers even when the distribution of goods is made through middlemen?
233
Interactive Question B3.4: Consumer Service Audit as Social Audit

Do you think “Consumer Service Audit” should be consider as social audit?
Ans: An audit of consumer services is a formal inspection of procedures, practices, policies, and/or
programs by an objective party to determine whether those services are what they are meant to be, and Click to jump on:
whether they are conducted according to accepted legal, ethical, and professional standards. Making
items of the appropriate qualities, in the right quantities, in the right locations, and for the right prices Home
is a business enterprise's main duty to its customers. The audit of consumer services looks closely at
and rates management on these service-related issues. Part A: Cost Audit
A social audit is a way of measuring, understanding, reporting and ultimately improving an Chapter A1 [1]:
organization's social and ethical performance. As such, it is a social audit of the public duty of the Cost Audit Concept & Legal issues
company enterprise in connection to its clients. The audit is founded on the idea that business should
play a role in improving people's quality of life through its supply of better products and services. So, Chapter A2 [2]:
consumer audit should be considered as a part of social audit.
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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9.5 Value for Money (VFM) Audit
Definition, Objective & More
Definition:
Value for money audit is an independent examination of an audit to assess whether the use of Click to jump on:
funds or resources is at the economy, efficiency, and effectiveness. Auditors will assess the use
of resources and funds against the intended objective, purpose, vision, and mission of projects, Home
entities, or organizations. This kind of audit service is normally engaged by non-profit
organizations and the public sector. It is normally not engaged by the corporation. However, Part A: Cost Audit
some corporations require this kind of assessment because shareholders or owners want to
assess agents (Managers or Directors of the Company) regarding the usage of their money. Chapter A1 [1]:
In general, with this kind of audit engagement, auditors will assess the entity’s achievement in
the economy, efficiency, and effectiveness. The following are the detail of this value-for-money Chapter A2 [2]:
audit: Cost Accounting Standards
Objective: Chapter A3 [3]:

1) Economic: Cost Auditing Standards and Quality control
The auditor will perform an audit assessment to assess whether the entity or organization uses
the available resources or fund to acquire material, labor, or other resources for the projects in Chapter A4 [4]:
the economic principle or not.
It is expected that the projects should have written procurement policies and procedures that
Chapter A5 [5]:
ensure that the procurement processes could perform in the best interest of the projects and that
the minimum fund will spend on the acceptable quality and quantity of products. If the
procurement policy and procedure are in place, then auditors still have to assess if there is any Chapter A6 [6]:
loophole in the acquisition policy and procedure that could prevent projects from acquiring the Cost Audit in Information Technology (IT)
material from the available fund. For example, no proper supplier selection process.
This could help them design the specific procedures that could target the suspected transactions.
Once the auditor completed their assessment process, auditors will review the actual acquisition Chapter B1 [7]:
transactions and assess if they are following the procurement policies. For example, they will Internal Control & Internal Audit
obtain and then select numbers of transactions base on their sampling technique and then review
if the purchasing prices and quality are in the best interest. Chapter B2 [8]:
Operational Audit
The documents to be review including contracts, invoices, goods received noted, services
delivery documents and etc. Weakness and recommendations will be made to the audit report Chapter B3 [9]:
if the auditor finds out that the process acquires the material and equipment or others related Management Audit in Different function
not to the economic principle.
2) Effectiveness: [Chapter 10]
Effectiveness review, on the other hand, is focusing on the effectiveness of getting the desired
output at the minimum resources. For example, the effectiveness rate of one truck could collect
ten square meter of trash in the city per hour. If the projects have one hundred trucks, then could
the projects collect the trash at the same rate? Also, auditors might also review if the currently
available trucks could collect the trash in the city effectively compare to the same size of the
city.
235
In case the auditor finds out that the usages of the truck are not at the effectiveness rate, then
the auditor will raise the finding and then make the recommendation. Therefore, effectiveness
review, auditors’ review of the effectiveness of resources usage, and comparing output and
input are one of the procedures that are normally used.
3) Efficiency: Click to jump on:

Efficiency is the review of the whole project and it is normally taking place at the end of the
project’s period. The auditor will identify what is the objective of projects that they are Home
reviewing, fund or resources, and output. Normally, the combination of economics and
efficiency will combine into efficiency. For example, the objective of the project is to have a Part A: Cost Audit
clean city or smart city.
Then, the assessment will focus on whether this objective is achieved or not. Maybe auditors Chapter A1 [1]:
break down the objective into ten lists of items to be achieved for the projects and then assess Cost Audit Concept & Legal issues
the achievement of each item.
Chapter A2 [2]:
The key to achieving good value for money is finding an appropriate balance between the three Cost Accounting Standards
Es (as summarised in Figure 1).
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Potential conflicts between the three Es
Although the aim of value for money is to achieve an appropriate balance between the three Es, Chapter B1 [7]:
this can often be difficult to achieve. Each of the Es aims to achieve different – potentially Internal Control & Internal Audit
conflicting – outcomes in an organisation.
Chapter B2 [8]:
For example, increasing the number of pupils in each class at a school could help to improve Operational Audit
efficiency (by reducing staff costs per pupil), but the quality of the pupils’ learning experience
might suffer as a result. So, in effect, increasing efficiency could be detrimental to Chapter B3 [9]:
effectiveness.
In recent years, there have been many stories in the news about cost savings or budget cuts in
[Chapter 10]
public sector services (health care; education; police forces). These suggest an emphasis on
‘economy’ – and potentially ‘efficiency’ – rather than the ‘effectiveness’ of the services.
However, it is very important to remember that the value for money framework highlights the
importance of measuring (and managing) all three Es, rather than focusing just on one aspect
of performance.
236
This also has implications in relation to choosing performance measures. Organisations will
need data to assess how well they are achieving value for money, and therefore in order to
assess value for money appropriately, the range of performance measures used will need to
address all three Es, rather than, for example, focusing primarily on cost (economy) or
efficiency.
Equity Click to jump on:

Sometimes a fourth ‘E’ is also included when measuring value for money performance: equity.
This reflects the extent to which services are available to, and reach, the people they are Home
intended for, and whether the benefits from the services are distributed fairly.
For example, if an advice service provided to residents by a local authority is provided in a Part A: Cost Audit
language that some residents do not speak, those residents will not be able to benefit from the
service. Chapter A1 [1]:
“3Es will help an organization to ensure it is delivering good value for money” – How it helps? Explain.
Chapter A3 [3]:
Ans: Value for money is regarded as an appropriate framework for evaluating performance in not-for-
profit organizations because it takes into account both the benefits realized from providing a service as Chapter A4 [4]:
well as its associated costs. Evaluating the benefits offered by a service is a crucial component of Legal Position of Cost Auditor
determining its performance when there is no overarching profit motive.
Chapter A5 [5]:
The concepts of economy, efficiency and effectiveness, commonly referred to as the three E’s, form the Reporting under Cost Audit
basis of any performance audit.
Chapter A6 [6]:
Economy refers to the terms and conditions under which an entity obtains the required resources. An Cost Audit in Information Technology (IT)
economical operation acquires these resources in appropriate quality and quantity at the right time and
place at the lowest possible cost. Efficiency defines the relationship between goods or services produced Part B: Management Audit
and the resources used to produce them. An efficient operation produces the maximum output for any
given set of resources input or it has minimum input for any given quantity and quality of service goods Chapter B1 [7]:
provided. The underlying management objective is therefore to increase productivity and lower unit Internal Control & Internal Audit
costs. Effectiveness is defined as how well a programme or activity is achieving its stated objectives,
Chapter B2 [8]:
its defined goals or intended effects/outcomes.
Operational Audit
Importantly also, value for money is not simply about minimising cost. Good value for money is the Chapter B3 [9]:
optimal use of resources to achieve the intended outcomes where ‘optimal’ means the most desirable Management Audit in Different function
possible given expressed or implied restrictions or constraints. The key to achieving good value for
money is finding an appropriate balance between the three Es. Part C: Performance Analysis
[Chapter 10]
For “Economy”, obtaining the appropriate quantity and quality of resources at the lowest cost possible;
optimising the resources (inputs) which an organisation has. For “Efficiency”, maximising the output
generated from units of resource used; optimising the process by which inputs are turned into outputs.
For “Effectiveness”, the relationship between the organisation’s intended and actual results (outputs);
the extent to which it achieves its objectives.
237
9.6 Audit of Corporate Social Responsibility Of Management ―

Environmental Pollution Control
• Environment includes entire biological, physical and social milieu in which man and other
organisms are placed and no organism however simple or complex can survive on their
removal from the environment. In order to make progress, man has produced destructive,
Click to jump on:
hazardous and often irreversible changes in the environment on which he is totally
dependent. With a view to improving living and nutritional standards, man has interfered
with practically every sphere in natural ecosystem. The man-made pollutants that greatly
Home
influence the quality of environment are – metals, petroleum products, volatile industrial
chemicals, heat and exhausts generated due to the burning of fossil fuels, radioactive
Part A: Cost Audit
species from reactors and nuclear reactors, organic and domestic wastes – as most of these
Chapter A1 [1]:
are discharged untreated into the environment. Pollution is thus a kind of interference to
the environment degradation. The problems of such environmental degradation – air, water,
noise pollution, solid wastes, radiation hazards, thermal pollution, are threats to wildlife, Chapter A2 [2]:
depletion and destruction of natural resources, etc. are all environmental crisis and threats Cost Accounting Standards
affecting the delicate balance of natural ecosystem. Pollution can be described in the
following ranges – Chapter A3 [3]:
(i) Pollution as any alteration of the environment. Cost Auditing Standards and Quality control
(ii) Pollution as the right of the territorial sovereign (it indicates the limit of pollution
allowed within geographical borders of a state). Chapter A4 [4]:
(iii) Pollution as a damage to man and to the environment. Legal Position of Cost Auditor
(iv) Pollution as interference with other uses of the environment
(v) Pollution as exceeding the assimilative capacity of the environment. Chapter A5 [5]:
• The level of pollution varies with the density of population and per capita income and
Chapter A6 [6]:
inversely with the extent of recycling, technology and waste treatment. 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 Chapter B1 [7]:
or biological materials that cause harm or discomfort to humans or other living Internal Control & Internal Audit
organisms or damage the environment. Air pollution is caused by burning coal or crude
oil like naptha in power stations, smoke from factories, exhaust fumes from Chapter B2 [8]:
automobiles, solvent losses and agricultural chemicals, etc. Air pollution leads to Operational Audit
deaths and respiratory diseases.
Chapter B3 [9]:
(b) Water pollution Management Audit in Different function
Water pollution is the contamination of water bodies such as lakes, rivers and/or oceans
caused by effluents from breweries and tanneries, coal washeries, chemical plants, Part C: Performance Analysis
discharge of coolants from nuclear power plants, pesticides and agricultural chemicals. [Chapter 10]
Water pollution affects public health and safety, causes damage to property and leads
to many economic losses.
(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
238
aircrafts, aircraft, drilling machines, etc. Noise pollution may lead to loss of efficiency
at work, loss of hearing and causes psychological disorders, even insanity.
(d) Smell pollution

Discharge of industrial products, unclear garbage dumps, open sewers, etc. It affects
physical well-being and even causes psychological disorders.
Click to jump on:
(e) Thermal pollution
Large inputs of heated water from a single plant or a number of plants using the same Home
lake or slow-moving stream can have harmful effects on aquatic life. Thermal pollution
is radiation of heat generated by plants in industries. Warmer temperatures lower Part A: Cost Audit
dissolved oxygen content and cause aquatic organisms to increase their respiration rates
consume oxygen faster and increases their susceptibility to disease, parasites, and toxic Chapter A1 [1]:
chemicals. Thermal pollution affects ecological balance and thereby the inhabitants. Cost Audit Concept & Legal issues
(f) Visual pollution Chapter A2 [2]:

Effluents from chemical plants and washeries are discharged into the waterways Cost Accounting Standards
causing reduced visibility. Industrial fumes and dust causing loss of landscape
attractiveness and strain to vision of pedestrians and motorists, may cause more road Chapter A3 [3]:
accidents and traffic deaths. Cost Auditing Standards and Quality control
Chapter A4 [4]:
(g) Climate pollution
Radiation of heat in highly industrial centres leading to “micro climate zones” causing
deforestation, shortening plants growth and affecting surroundings. It affects ecological Chapter A5 [5]:
balance and causes damages to plant and surroundings. Reporting under Cost Audit
(h) Radiation pollution Chapter A6 [6]:

Radioactive fallouts, leakage from nuclear reactors and prolonged exposures to small Cost Audit in Information Technology (IT)
doses of radiation results in a bio-accumulative process, causes a significant chronic
affect by increasing the rate of genetic mutation. Part B: Management Audit
(i) Soil/land pollution Chapter B1 [7]:

Indiscriminate use of fertilizers and pesticides, pollution of soil with man-made Internal Control & Internal Audit
chemicals, indiscriminate disposal of solid use etc. Due to pollution the quality of soil
deteriorates to the extent that they fail to support vegetation. It affects the global climate Chapter B2 [8]:
also. Operational Audit
Chapter B3 [9]:
“3Es will help an organization to ensure it is delivering good value for money” – How it helps? Explain. [Chapter 10]
Ans: The concept of corporate social responsibility (CSR) holds that an organization has a duty to the
society in which it operates. Businesses have obligations that go beyond satisfying customer demands.
In the business world, sustainability refers to safeguarding the economic, social, and environmental
wellness of both present and future clients.
239
Environmental responsibility is the idea that businesses should act in a way that is as ecologically
beneficial as feasible. One of the most widespread examples of corporate social responsibility is this.
Some businesses refer to these programs as "environmental stewardship." There are numerous ways for
businesses to embrace environmental responsibility:
• Cutting back on harmful behaviors, including pollution, greenhouse gas emissions, the usage of
single-use plastics, water use, and general waste production.
• Limiting energy use by relying more on sustainable resources, recyclable materials, and renewable Click to jump on:
energy sources
• Reducing adverse environmental effects, such as through supporting research, planting trees, and Home
making.
Part A: Cost Audit
Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
240
9.7 Audit Checks Of Different Functions

General
A management and administration auditor operating the following series of checks must
remember that many of them are complementary. A correct picture of the effectiveness of any
single function may not be completely obtainable from a review of checks in that area alone.
Each function must be seen as a balanced part of a whole organization.
Click to jump on:
Home
Directorial Checks
1. What routine reports are considered as directors’ meetings and do these prima facie provide Part A: Cost Audit
information for effective and efficient control of the business?
2. Do the directors receive projected information covering the various functions of the Chapter A1 [1]:
business, in addition to any figures which they receive to enable them to review the present Cost Audit Concept & Legal issues
performance of the business?
3. Is there evidence that directors established their control primarily on such projections Chapter A2 [2]:
4. secondarily on past records? Cost Accounting Standards
5. “Whether the Director review and approve the strategic and financial plans for achieving
long-term success of the company. Chapter A3 [3]:
6. What is the directors’ policy for ensuring that the right kind of senior managers including Cost Auditing Standards and Quality control
CEO are engaged?
7. What interest do directors take in R&D? In particulars, if formal R&D facilities are Chapter A4 [4]:
available, what significant efforts are made to relate these to market research?
8. Have the directors set out the objects of the organization in writing?
Chapter A5 [5]:
9. Are all activities of the organization within the scope of its objectives?
10. Whether they have been briefed about major risks faced by the business and strategies for
addressing these risks. Chapter A6 [6]:
11. Do these include the ratio of capital aimed to be employed in the business, the objectives Cost Audit in Information Technology (IT)
earning per share, the planned growth of the latter and the control of the former?
12. What control do directors exercise on the cash flow? Part B: Management Audit
13. What is the method of determining budgets and the reporting system in connection
therewith? Chapter B1 [7]:
14. What steps have the directors taken to see that the objectives of the business are effectively Internal Control & Internal Audit
communicated to their managers?
15. Have the directors defined the responsibilities of their various senior manages? Within such Chapter B2 [8]:
responsibilities have they set such senior managers defined objectives and established Operational Audit
procedures for measuring the managers’ performance against such objectives?
16. Do up-to-date organization structure exist? If so, do they show lateral as well as vertical Chapter B3 [9]:
relationships? Management Audit in Different function
17. What control do directors exercise over senior management training?
18. What steps have been taken to compare the results of the various units of the organization Part C: Performance Analysis
with each other? [Chapter 10]
19. What control is exercised on transfer prices within the group organisation?
20. How do the directors discharge their responsibilities for the certification of the stock for
balance sheet purposes?
21. Are special efforts made to control the management of technical and administrative service,
as well as the management of operating departments?
241
22. If the articles of association require a directors’ share qualifications, do the various
members of the board hold the number of shares required?
23. Is the Register of Directors’ shareholding maintained correctly?
24. Have the annual returns of the Register of Companies been made in accordance with
25. statutory requirements?
26. Is the register of charges correctly maintained?
27. Has the statutory AGM (where applicable) been held, and has not more than the statutory Click to jump on:
allowable time elapsed since the last AGM?
28. Have extraordinary general meetings been called when required, and the requisite Home
29. extraordinary land/or special resolution been passed where applicable?
30. Check there are no loans to directors except those which are statutory allowable? Part A: Cost Audit
31. Is the register of Directors and Securities correctly maintained?
32. What is the attendance record of directors at directors’ meeting? Chapter A1 [1]:
33. Are minutes of such meetings and of all general meting carefully kept? Cost Audit Concept & Legal issues
34. Does a scrutiny of the directors’ meetings minutes reveal that all necessary authorities and
actions are obtained or taken, in accordance with statutory requirements, and the Articles Chapter A2 [2]:
of Association? Cost Accounting Standards
35. What efforts do the directors make to coordinate the activities of the various departments
of the company, and to avoid duplication? Chapter A3 [3]:
36. What have the directors done to ensure the provisions of adequate management information Cost Auditing Standards and Quality control
and its dissemination?
Chapter A4 [4]:
37. Whether the details of management reports structured according to the levels to be
informed?
38. Are the principles of management by exception applied to management information? Chapter A5 [5]:
39. How do the directors exercise functional control of the business? Reporting under Cost Audit
40. For function specific function is each director responsible?
41. What arrangement have the directors made for effective internal communication? Chapter A6 [6]:
42. What arrangements have the directors made for effective external communication? Cost Audit in Information Technology (IT)
43. Do such arrangements made adequate provision for the upward flow of information.
44. Are communications with customers and the general market satisfactory? Part B: Management Audit
Managerial Checks Chapter B1 [7]:

1. Are all level of managers competent in their functions?
2. What evidence is there that managers are up-to-date in their particular function?
Chapter B2 [8]:
3. Do all managers sufficiently and efficiently delegate their function?
Operational Audit
4. Are there any example of delegation to the point where control is lost?
5. Are there adequately defined communication procedures? Chapter B3 [9]:
6. Is it possible to identify the management styles of the senior managers and assess their Management Audit in Different function
effectiveness?
7. Is there adequate definition of stuff responsibilities? Part C: Performance Analysis
8. Is there a precise organizational structure? [Chapter 10]
9. Is there a system of management by objectives?
10. Are job specifications available for each or the majority of positions?
11. Are job specification/staff responsibilities revised as circumstances change?
12. Are methods of work defined, or partly defined in writing?
13. Whether or not they are in witting, how are they communicated to the staff?
14. What arrangements are there for keeping such instructions up-to-date?
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15. Is there evidence of the enforcement of any authorizations required by such instructions,
for example, for transactions that only transactions so authorized are allowed?
16. What training facilities or arrangements are there for:
(i) Managers?
(ii) Staff generally?
(iii) Newly joined staff?
(iv) Trainees? Click to jump on:
17. Are career paths developed wherever possible?
18. Who is responsible for training? Home
19. Are the training tailored to the differing needs of the staff?
20. Have the possibilities of the various tutorial devices been investigated or exploited? Part A: Cost Audit
21. Are the efficient management for the recoupment of Training Board levies for all training
carried out? Chapter A1 [1]:
22. What means of measurement of staff performance exists? Cost Audit Concept & Legal issues
23. How do managers plan the staff work load and control its flow?
24. Is there evidence that the generally recognized management techniques are used as Chapter A2 [2]:
appropriate? Cost Accounting Standards
25. Is there evidence of coordinated planning?
26. How effective are managers in their use of computer facilities? Is there evidence of action Chapter A3 [3]:
other than the passive receipt of computer processed statistics? Cost Auditing Standards and Quality control
27. How effective are the managers generally?
Chapter A4 [4]:
28. Do managers use their time effectively?
Organisational Checks Chapter A5 [5]:

1. How effective is the coordination and integration of the various departments? Reporting under Cost Audit
2. Is there any evidence of duplication of function as between one department and another?
3. What is the management information system and who is responsible for it? Chapter A6 [6]:
4. Is the information supplied well and logically presented in the various reports? Cost Audit in Information Technology (IT)
5. Is the information structured in such a way that the information given in the highest level
reports is analysed in detail in the next level reports, and the information given in the second Part B: Management Audit
level reports analysed in the third level reports, etc.? If not, what is the detailed information
retrieval system? Chapter B1 [7]:
6. What strengths and weaknesses of the organisation are revealed by the scrutiny of the
special reports?
Chapter B2 [8]:
7. Do special reports in general evidence of critical appraisal?
Operational Audit
8. How is the budget structure related to operational responsibilities and how are expenditure
controlled within the budget and remedial actions taken? Chapter B3 [9]:
9. How is inflation catered for in budgets? Management Audit in Different function
10. Is reporting based on the exception principle, or what other methods are used to highlight
information areas requiring investigation? Part C: Performance Analysis
11. Has each manager defined the responsibilities of his staff? [Chapter 10]
12. What forms do such definitions take? Are they available to other members of the staff so
that they can see their relationship to each other?
13. Are common data files established for the use of several departments, particularly if the
data processing is carried by computer?
14. What checks are there on the accuracy of the information in such files? Are there strict
controls on their amendments?
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15. Who has authority to amend such file information?

16. What security controls are there on the various levels of management information?
17. Is there evidence of good vertical information flow?
18. Is there also evidence of satisfactory lateral information flow?
19. Does the typical manager consult his subordinates as well as his superiors?
20. What opportunities do subordinates have for brining their knowledge of detail to bear upon
their superiors’ problems? Click to jump on:
21. Is there evidence of an external communication policy?
22. Who has responsibilities for market communication? What are the principal policies and Home
types in this respect?
23. What is the quality of trade communication? Does this extend to inter-firm comparisons? Part A: Cost Audit
24. Has management, generally a good credibility rating?
25. How is the business controlled in general? Chapter A1 [1]:
26. Who is responsible for cash flow control? Is such control obviously effective? Cost Audit Concept & Legal issues
27. Especially in a vertically structured organisation what kind of planning takes place to
synchronize the timings and capacities of the various units? Chapter A2 [2]:
28. What part does transport play in point (aa) and who controls this? Cost Accounting Standards
29. In horizontally structured organizations, is sufficient advantage taken of comparative
statistics and the promotion of health being made to standardize procedure in the same type Chapter A3 [3]:
of unit? Cost Auditing Standards and Quality control
30. In a conglomerate organisation, what financial controls are employed, in addition to those
Chapter A4 [4]:
usual in other organisation, to take into account of the diverse production controls and
market conditions?
31. What degree of interchangeability of staff is possible? Do interchanges take place where Chapter A5 [5]:
economically viable? Reporting under Cost Audit
32. In case of centralized organisation, is the response time to stimuli from the units adequate?
33. What are the pros and cons for centralization in the organisation being studied? Chapter A6 [6]:
34. Is operational control of the various units largely decentralized? If so, what degree of Cost Audit in Information Technology (IT)
central control is there and how is it organized?
35. Is the central control adequate? Part B: Management Audit
36. Is the reporting structure from the operating units good?
37. In a largely decentralized business, are services which would otherwise be uneconomically Chapter B1 [7]:
duplicated, provided at the center? Internal Control & Internal Audit
Chapter B2 [8]:
Capital Checks
Operational Audit
1. Given that the directors ultimately control the cash flow in the sense of receiving reports
and acting thereon, who actually controls the cash flow on a day to day basis? Chapter B3 [9]:
2. How effective is the control of cash flow? Does the cash flow plan include control of Management Audit in Different function
important liquid assets other than cash? Is there evidence that temporary cash surpluses are
used to gain short term interest, if necessary on a day-to-day basis? Part C: Performance Analysis
3. Is the cash flow plan adequately linked to the sales budget finished goods, inventory budget [Chapter 10]
and raw materials procurement, e.g. to reflect the cash requirements for inflation, a sudden
demand for raw materials or extra labour, or to meet an unexpected sales upsurge? Is the
control system capable of quick response to the mix and quantity of transactions affecting
cash?
4. Is the working capital adequate?
5. Is the capital employed the optimum for the business?
244
6. Are the fixed assets valued carefully, especially in the sense that land and buildings can be
substantially undervalued in an inflationary environment and result in unrealistic business
decisions?
7. What authorizations are required for the purchase of fixed assets and are they effective?
8. Is there an up-to-date asset register, and how are the assets physically identifiable?
9. How often is the asset register compared with the actual fixed assets position?
10. Where asset purchase control is exercised by value, is there evidence of any circumvention Click to jump on:
of the controls by splitting orders, or by rental or lease arrangements, for instance?
11. Is the right amount of technical appraisal being made before the purchase of fixed assets? Home
12. Is there a similar commercial appraisal relating to the acquisition of capital assets in each
case to suit the business or the type of asset acquired, e.g. by purchase, lease or rental Part A: Cost Audit
alternatives?
13. Is there continual appraisal of the fixed assets of the company? In certain circumstances, Chapter A1 [1]:
might it not be advantageous to sell property and lease it back from the purchaser? Cost Audit Concept & Legal issues
14. Is the equity and loan capital adequate of the business?
15. How does the ratio of such capital compare with other business audited? Chapter A2 [2]:
16. What is the earnings ratio of such capital employed in the business? Cost Accounting Standards
17. How do the earnings ratios compare with the business of the same type, in the same trade
federation, etc.? Chapter A3 [3]:
18. What is the capital structure in relation to ordinary and preference share and between equity Cost Auditing Standards and Quality control
and loan capital, and how does this gearing affect the business?
Chapter A4 [4]:
9.7.6 Data Processing Systems Checks
1. What are the main categories of data processing system? How are they divided between Chapter A5 [5]:
manual, mechanical and computer methods? Reporting under Cost Audit
2. Has the right balance between such methods being achieved over all?
3. Are there adequate controls on the accuracy of all systems? Chapter A6 [6]:
4. Is efficient use made in manual systems of aids such as add-listing machine, to check, for Cost Audit in Information Technology (IT)
example, that the positing made to individual accounts total to the posting of a control
account? Part B: Management Audit
5. Are similar methods used in mechanical systems, e.g. to check that an accounting machine
total agrees with a pre listed total of items posted on accounting machine? Chapter B1 [7]:
6. Is use made of appropriate office techniques, such as photocopying, duplicating etc?
7. Is such equipment the best of the particular purpose for which it is being used?
Chapter B2 [8]:
8. Are the systems the best that can be devised?
Operational Audit
9. Are computer systems used where appropriate, for example, a mini computer instead of a
small selection of accounting machines? Chapter B3 [9]:
10. Is the computer installation appropriate in size and staffing? Management Audit in Different function
11. Is the computer process and its peripherals correctly balanced to the work load?
12. What control is exercised on input to an output from the computer installation, and if by a Part C: Performance Analysis
control system is this sufficiently independent? [Chapter 10]
13. Who has access to the computer installations?
14. Do programmers or system have any direct control of the data preparation unit?
15. Who has access to the computer installations?
16. How is the amendment of such programmes controlled?
17. What arrangements are there for the testing programmes before operational use?
18. Is there evidence of specific testing material rather than random selection of data from files?
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19. How is systems testing organized?

20. Does the systems testing cover operating systems, files management, operation messages,
data management, job control routines and fault detection?
21. Are recovery procedures featured in systems testing?
22. Does the systems testing cover throughout and response time under actual operating
conditions and stimulated faults, with all possible volumes, types and combination of
transactions? Click to jump on:
23. What is the utilization of the various pieces of computer equipment?
24. What is the percentage of down time or misuse time, due to programming error, data error, Home
or bad instructions,
25. How is data processing work scheduled through the computer? Part A: Cost Audit
26. If data transmission methods are used, are they necessary and do they justify their cost?
27. What evidence is there of the economic use of computer? Chapter A1 [1]:
28. Is input editing by computer methods at the data preparation stage? Cost Audit Concept & Legal issues
29. Is the editing carried out on a special purpose data preparation computer?
30. If so, is the cost justified by the extent of the utilization of the main computer on other data Chapter A2 [2]:
processing? Cost Accounting Standards
31. Is the maximum use made of such methods as spoiling, multiprogramming and 24 hour
shifts rather than extending the size of the computer? Chapter A3 [3]:
32. Is there full documentation of all programs and systems? Cost Auditing Standards and Quality control
33. What controls are there on the magnetic base library?
Chapter A4 [4]:
34. Are correct records kept of all program amendments?
35. Have all such amendments since the last audit been checked?
36. What methods of input to the computer are used? Chapter A5 [5]:
37. Are they the most efficient and economical for the installation in question? Reporting under Cost Audit
38. Has the same method of input been considered from even remote locations?
39. If such methods of input are used, is the quicker processing really economically justified? Chapter A6 [6]:
40. Are there adequate methods for ‘capturing’ all relevant data? Cost Audit in Information Technology (IT)
41. Are the computer output methods efficient?
42. What controls are there on the number of copies produced? Part B: Management Audit
43. Has careful consideration been given to the economy and effectiveness of exception
reporting? Chapter B1 [7]:
44. Is output only actually printed where necessary, e.g. other output stored on magnetic media Internal Control & Internal Audit
for random retrieval?
45. Has enough consideration given to graphical output methods and whether they would be a Chapter B2 [8]:
possible alternative method of information processing? Operational Audit
46. Are there satisfactory procedures for monitoring capital work flow?
Chapter B3 [9]:
47. Is there evidence for the continuance of ‘private’ manual system after computer systems
covering the same ground have been introduced?
48. Is there difficulty in measuring data processing effectiveness against management plans?
49. Is there adequate communication between the data processing section and user
[Chapter 10]
departments, and do liaison personnel change too frequently?
50. Are data processing personnel inefficiently employed by staffing for peak levels, or arising
from bad organisation or administration?
51. Is there evidence of the general achievement of system development estimated times,
bearing in mind that such times are often grossly under estimated and that development
times tend to be much too long, leading among other things, to difficulties through changes
of environment?
246
52. Are the computer systems designs generally too complex (efficient) at the expense of
practical applications (effectiveness)?
53. Is there evidence of adequate testing of programs and systems?
54. Are problems being encountered with the manufacturer’s software?
55. Is staff turnover too high, even allowing for the traditional mobility of computer staff?
56. Are report late, hard to understand, inaccurate or too voluminous?
57. Do programme changes take too long to implement? Click to jump on:
58. Are there adequate security, back up and recovery procedures?
Home
Standard Procedures Checks
1. Do standard procedures exist and are they in writing? Part A: Cost Audit
2. Who is responsible for keeping them up-to-date and are they in fact, so kept?
3. Do they adequately reflect changes in organization or responsibilities that have occurred Chapter A1 [1]:
since the date they were originated? Cost Audit Concept & Legal issues
4. To whom are they circulated?
5. Are any checks carried out on behalf of general management to verify that the procedures
Chapter A2 [2]:
are being adhered to?
6. If so, who is responsible for carrying out such checks and to whom does he report?
Chapter A3 [3]:
7. What determines whether it is the organization’s policy in any set of circumstances to cover Cost Auditing Standards and Quality control
them by a standard procedure, e.g. are standard procedures indicated if coordinated action
is required by more than one department, or may they be confined to one department only? Chapter A4 [4]:
8. Are the standard procedures written as general instructions, leaving the details to be Legal Position of Cost Auditor
determined by individual department heads, or is veery detail intended to be covered?
Chapter A5 [5]:
Planning Function Organisation Checks Reporting under Cost Audit
1. Who is responsible for overall planning within the organisation?
Chapter A6 [6]:
2. 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?
3. What arrangements are there for information feedback from the operating units to the
planners?
4. Is there a corporate planning unit?
Chapter B1 [7]:
5. Is there a corporate stimulation model? Internal Control & Internal Audit
6. If not, how far is stimulation used in the planning function?
7. How accurate are the models? Chapter B2 [8]:
8. How are the various models kept up-to-date? Operational Audit
9. To what use are the models put?
10. If the stimulation models are processed on a computer, is the terminal operated by a Chapter B3 [9]:
responsible person proficient in the function which is the subject of the model? Management Audit in Different function
11. Are environmental surveys carried out, and how is such information is used?
12. Do the computer facilities provide an effective medium for interactive operation? Part C: Performance Analysis
13. Are there adequate computer formula subordinates on call to the terminal operator? [Chapter 10]
14. Can backwards iteration be used on the computer model as a provided function, so enabling
a planner to choose a required result and iterate to the elements that builds up to the final
result?
15. Are there reasons of divergences from plans analyzed and the lessons learned used to
modify later projection?
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Purchasing Function Checks

1. Are there effective arrangements for minimizing the price of purchases, e.g. total purchases
for multi location organizations, contract pricing, forward purchasing, quantity controls and
correct timing?
2. 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? Click to jump on:
3. Is there evidence that the purchasing budget is developing on sound lines?
4. Is the budget, once prepared, used as an effective control on the purchasing function? Home
5. Are ‘make-or-buy’ proposals made to ensure optimum supply arrangements?
6. What is the system for synchronizing deliveries with the scheduled production Part A: Cost Audit
requirements?
7. What follow-up is there on scheduled deliveries? Chapter A1 [1]:
8. Is the receipt of goods adequately controlled? Cost Audit Concept & Legal issues
9. What procedures are there for dealing with over-deliveries and under-deliveries?
10. Is there an effective system of inspection of materials received?
Chapter A2 [2]:
11. Are 100 percent of the goods received inspected, or are they sampled, or what other
inspection method is used?
Chapter A3 [3]:
12. What accounting procedures are there for ensuring that rejected goods are debited to the Cost Auditing Standards and Quality control
supplier, either on return, or when scrapped, and for charging the supplier for any re-work
done to make the goods acceptable? Chapter A4 [4]:
13. Are there any statistical routines to determine the quality standards of suppliers and the Legal Position of Cost Auditor
rejection rates of goods supplied by them?
14. Are there similar routines to determine the supplier’s relative ability to deliver on time? Chapter A5 [5]:
15. Are standards conditions printed on the order forms, and do they adequately cover the Reporting under Cost Audit
purchaser for the commercial and business hazards applying to the purchase of goods? For
example, do the conditions make clear whether the carrier is to be construed the agent of Chapter A6 [6]:
the seller or the buyer? Cost Audit in Information Technology (IT)
16. What system is used for validating incoming invoices for goods?
17. What method of control prevents duplicate payment for goods? Part B: Management Audit
18. What purchasing measuring are taken to rationalize cash flow and the amount of capital
locked up in stocks? Chapter B1 [7]:
19. Are there means for assessing buyers’ workloads?
Chapter B2 [8]:
Inventory Control Function Checks Operational Audit
1. How are maximum and minimum stock controlled?
2. What customer service level is required? Chapter B3 [9]:
3. How are these limits determined? Management Audit in Different function
4. Within the permitted overall value coverage of stocks, how are permitted quantities of each
stock item determined? Part C: Performance Analysis
5. Is the stock of each item definitely related to the production program and the forecasted [Chapter 10]
sales?
6. Is stock control also a function of the economic batch quantities?
7. How is raw material stock valued for production purposes and for balance sheet purposes?
8. How is the issue of stock controlled?
9. What are the systems of stock security?
10. What are the procedures to be followed when stock is found to be defective in store?
248
11. Who has authority to scrap the stock?

12. Who has authority to issue stock at other than the normal prices to production or to
customers?
13. What control is there on samples?
14. Are all stock movements accounted for by any paper work?
15. Is there any security check that goods leaving the premises are covered by one or other of
the permitted authorizing documents? Click to jump on:
16. What system is in force for counting the stock to reconcile it with the book values, e.g.
continuous stock checking? Home
17. What is the procedure for investigating any discrepancies in stock? Who has authority to
consider any investigation closed? Part A: Cost Audit
18. In the case of discrepancies caused by system deficiencies, what follow up is there to ensure
that the systems re improved? Chapter A1 [1]:
19. What procedure is there for writing down the value of stock, say, for obsolescence? Cost Audit Concept & Legal issues
20. If material has been issued to the shop floor as work in progress, what facilities are there in
the production control system for establishing the point at which any stock deficiencies Chapter A2 [2]:
occur? Cost Accounting Standards
21. What controls are there on the over looking or work done by operators?
Chapter A3 [3]:
Production Function Checks
1. How are the production requirements for raw materials communicated to the purchasing Chapter A4 [4]:
function? Legal Position of Cost Auditor
2. How is the production scheduled and controlled against the schedule?
3. Are these methods suitable for the type, size and complexity of the production processes? Chapter A5 [5]:
4. What is the system for amendments to the production schedule? Reporting under Cost Audit
5. How is rescheduling carried out when production is not to schedule, or there are machinery
or labour troubles? Chapter A6 [6]:
6. What methods are used to control the supply of raw materials for production? Cost Audit in Information Technology (IT)
7. How are labour requirement determined?
8. What system is there for ensuring good utilisation for machinery and what statistics on the Part B: Management Audit
subject are available?
9. Similarly, what is the system for ensuring good utilisation of labour and what statistics on Chapter B1 [7]:
this subject are available?
10. What is the inspection system during production and at the final product stage?
Chapter B2 [8]:
11. How are scrap items to be re-worked and controlled?
Operational Audit
12. What methods are used for forecasting the production levels that will be required for the
future months/years? Chapter B3 [9]:
13. How is scheduled production broken down into its constituent items, to be produced at Management Audit in Different function
times which will make them available when required to merge with the part forming the
finished product? Part C: Performance Analysis
14. Are there efficient preventive maintenance programs for production equipment and [Chapter 10]
machinery?
15. Is replacement cost information readily available for major items of plant?
Marketing Function Checks

1. Have clear marketing objectives been set? What are they?
2. What plans have been developed to attain those objectives?
249
3. What is the extent and nature of market research?

4. What principles apply to product planning?
5. What arrangements are therefore the planning and control of packaging?
6. How is the effectiveness of special sales promotions and advertising analysed?
7. Is the selling administration adequate for the type of market served?
8. Are transport arrangements suitable for the average size of order, the type of customer
served and the pattern of distribution? Click to jump on:
9. Are there economically satisfactory arrangements for such matters as minimum order,
minimum quantities and particular item and packing carton quantities? Home
10. How is the sales force divided geographically, by specialization, according to category of
customer, or by any other method? Part A: Cost Audit
11. How is the performance of salesman measured? Are short falls against targets identifiable
to salesmen and specific customer? Chapter A1 [1]:
12. What special incentives are there for salesmen? Cost Audit Concept & Legal issues
13. How are customers’ orders received?
14. Has a standard order form been considered? Chapter A2 [2]:
15. Are any special support services given to customers, e.g. in the counting and replacement Cost Accounting Standards
of stock, extended credit?
16. Are there routine facilities for collecting information from salesmen on competitors and the Chapter A3 [3]:
reaction of customers? Cost Auditing Standards and Quality control
17. In the case of suppliers not dealing directly with the ultimate customer, e.g. suppliers who
Chapter A4 [4]:
service wholesaler only, what arrangements are there for appraising the requirements of the
ultimate customer?
18. Is there a meaningful analysis of customers’ complaints and is such analysis effectively Chapter A5 [5]:
used in the engineering and product development branches of the business? Reporting under Cost Audit
19. What is the coverage of the sales statistics? Are market forecasts compared with actual
results in sufficient detail to identify the reason for discrepancies? Chapter A6 [6]:
20. Are there comparative elements in such statistics with the budget, with the previous year Cost Audit in Information Technology (IT)
with other representatives and with the other locations?
21. What are the systems for controlling the amount and rate of credit to customers? Part B: Management Audit
Distribution Function Checks Chapter B1 [7]:

1. Are there arrangements for deciding the most viable means of transport of finished goods?
2. What are these arrangements? Are they well known by the transport staff?
Chapter B2 [8]:
3. Did the arrangements result from some kind of the study of the transport problem and, if
Operational Audit
not, how were they developed?
4. Has the limit of liability for claims on the various carriers in relation to the need of Chapter B3 [9]:
customers been considered in the choice of carriers? Management Audit in Different function
5. Have the economics of employing the company’s own transport fleet been examined,
particularly for high density and local deliveries? Part C: Performance Analysis
6. Has an attempt been made to compound claims with the carriers, so avoiding administrative [Chapter 10]
expense in dealing with abortive paperwork and lengthy investigatory procedures?
7. If the organisation uses its own transport fleet, have the pros and cons of contract hire or
contract maintenance been considered?
8. Are decentralized warehouses part of the distribution system? If not, have the possible
benefits of such an arrangement been considered?
250
9. Particularly where the organization’s own transport and computer facilities are involved,
has there been any attempt to optimize distribution patterns?
Financial Function Checks

Note : This check list assumes that a normal financial audit is also carried out.
1. Is there an internal audit department? If so, is it responsible to a person independent of the
accounts department? Click to jump on:
2. Does the internal audit department make regular reports and do these show a satisfactory
position? Home
3. Are control checks made of the agreement of the financial records with the control records
of other departments? For example, do the wages ‘books’ for the appropriate period agree Part A: Cost Audit
with standards wages plus or minus variances of the operations processed during the
period? Chapter A1 [1]:
4. What are the checks on non-row materials expenditure, e.g. capital expenditure, rental and Cost Audit Concept & Legal issues
lease of equipment expenditure, personnel expenditure? Are personnel authorized to
approve such expenditure listed, together with the appropriate limits, and does the accounts
Chapter A2 [2]:
departments edit the paper work to ensure that proper approval has been obtained in each
case?
Chapter A3 [3]:
5. Is there an appropriate system of approval for the engagement of labour, and do the Cost Auditing Standards and Quality control
accounts department check that this has been carried out before entering a person on the
pay roll? Chapter A4 [4]:
6. Is there a budgetary control system and what is the level of control exercised? Legal Position of Cost Auditor
7. Is there evidence that management and supervisory personnel have been personally
involved when their particular budget was fixed? Chapter A5 [5]:
8. How effective is the budget system? Reporting under Cost Audit
9. What is the method for presenting management and supervision with the actual results
against the budgets? Is this effective? Chapter A6 [6]:
10. Are the reasons for the discrepancies carefully ascertained and noted in the records? Cost Audit in Information Technology (IT)
11. How are especially serious discrepancies and the discrepancies which recur without
apparent reconciliation brought to the attention of senior management? Part B: Management Audit
12. Are the financial records so organized that the performance of senior managers can be
measured? Chapter B1 [7]:
13. Are the organizational relationships of the finance and accounts departments clearly
documented, e.g. in organizational charts?
Chapter B2 [8]:
14. Are the duties of various posts within the above departments also documented, e.g. in job
Operational Audit
specifications?
15. In such specifications are the holders of the posts given all the authority they require to Chapter B3 [9]:
fulfill the responsibilities of the posts and are the lines of communication and liaison clearly Management Audit in Different function
laid down.
16. What are the credit control rules and are they being adhered to? Part C: Performance Analysis
17. Do the staff understand their service role to operational departments and also their own [Chapter 10]
rules within the overall service function?
18. What is the organization’s policy on the acquisition and replacement of assets and the
provision of funds for their replacement?
19. How are fixed and movable machinery, etc. assets physically controlled?
20. What evidence is there of effective security of accounting information, particularly that
relating to personnel?
251
21. How is the personnel expenditure authorized?

22. How is the material expenditure authorized?
23. How is fixed asset expenditure authorized?
24. What controls are there on expenditure for labour?
25. Are the methods of payment for goods economical and adequately controlled?
Personal Function Checks Click to jump on:

1. Is there a manpower specification of the establishment of the organisation?
2. To what is the specification related e.g. level of sales, production? Home
3. Who has the authority to amend the manpower specification, other than in accordance with
established rules, e.g. in proportion to sales? Part A: Cost Audit
4. How do staff measure up to this manpower specification?
5. Has job evaluation been carried out throughout the organisation and what are the Chapter A1 [1]:
arrangements for evaluating new jobs as they occur? Cost Audit Concept & Legal issues
6. Do job specifications exist for all jobs in the organisation?
7. At what intervals is the structure, age, profession, grade, etc. of employees reviewed in
Chapter A2 [2]:
relation to the manpower specification?
8. Are adequate personnel records properly maintained at all times?
Chapter A3 [3]:
9. If such records are kept centrally, what arrangements are there for access to them by remote Cost Auditing Standards and Quality control
managers and supervisors?
10. Whether they personnel records kept in such a way that selection by employee Chapter A4 [4]:
characteristic can be made therefrom? Legal Position of Cost Auditor
11. Is there an active training programme?
12. Who is responsible for training managers Chapter A5 [5]:
13. What arrangements are there for the management development? Reporting under Cost Audit
14. Are adequate training records kept?
15. Are personnel records kept in such a way that trainable employees and the progress of those Chapter A6 [6]:
employees already being trained, can be monitored? Cost Audit in Information Technology (IT)
16. Are there definite career paths within the organisation?
17. How is basic training carried out? Part B: Management Audit
18. Is this carried out “in-house”, “externally” or a mixture of both?
19. Are promotable employees readily identifiable? Chapter B1 [7]:
20. Are forecasts prepared of the numbers and structure of personnel that will be required to
man the organisation at future dates?
Chapter B2 [8]:
21. Is there a definite personnel procurement program related to such forecasts showing how
Operational Audit
the difference between present and future structure is to be reconciled?
22. Is the case of direct operators; is there some definite relationship within the production Chapter B3 [9]:
schedules? Management Audit in Different function
23. Is there a regular system of individual employee appraisal?
24. In the absence of a full employee appraisal system, is there some form of periodic review Part C: Performance Analysis
of employees? [Chapter 10]
25. Are employee made aware of the management’s view of their performance, and given the
opportunity to discuss the ways in which improvement can be made?
26. Is there a formal management by objective scheme?
27. What controls are there on the hours of work completed, and the starting and finishing time
of employees?
252
28. Is the maximum use being made of “local” labour, e.g. by flexible shifts times to suit
married women?
29. Is absenteeism a serious factor in the organisation?
30. How is absenteeism identified?
31. Have any serious attempts been made to reduce absenteeism?
32. What is the employee turnover ratio?
33. If high, what attempts have been made to reduce it? Click to jump on:
34. How the absenteeism and employee turnover ratio compare with other organizations in the
same class of business? Home
35. What security systems are there to safeguard the personnel records?
36. Are the security systems effective? Part A: Cost Audit
37. What controls are exercised over individual remuneration and its relationship to employees
carrying out similar work in other departments? Chapter A1 [1]:
38. If agreed sales are used which allowed some latitude to individual managers, what efforts Cost Audit Concept & Legal issues
are made to ensure a uniform approach to such matters?
39. Is there insufficient staff involvement due to inadequate means of disseminating Chapter A2 [2]:
information? Cost Accounting Standards
40. Is the organisation able to obtain and hold competent personnel?
Chapter A3 [3]:
Management Service Function and Data Processing Security Checks
1. What services are covered by the department? Chapter A4 [4]:
2. Are the roles of the various specialists, their responsibilities, authorities and relationship Legal Position of Cost Auditor
adequately defined?
3. To whom does the head of the management services report? Chapter A5 [5]:
4. To whom does the head of the computer department report? Reporting under Cost Audit
5. Are the computer data preparation, operation, control programming and systems sections
of the computer department independent of each other, reporting separately to the head of Chapter A6 [6]:
the computer department? Cost Audit in Information Technology (IT)
6. Are the duties of each section clearly defined?
7. Are there any opportunities for staff to carry out duties in a section other than their own? Part B: Management Audit
8. Does the operational head being serviced by a computer system have the opportunity to
approve the sample output as part of the testing facilities? Chapter B1 [7]:
9. Is an operational log kept on the computer console typewriter or otherwise of all work
processed on the computer and of the incidents that arise during the processing?
Chapter B2 [8]:
10. Who receives copies of such logs and are they carefully filled for future reference?
Operational Audit
11. Are operation research techniques practiced?
12. Who controls operational research projects? Chapter B3 [9]:
13. Are the regular process reviews of the operation research projects? Management Audit in Different function
14. Are managers generally aware of the type of problem amenable to an operations research
approach? Part C: Performance Analysis
15. Who controls the work study department? [Chapter 10]
16. Under what circumstances are work studies carried out?
17. Is there a definite link between work study times and system of standard costs?
18. Are work study made as soon as possible to replace temporary times?
19. Are work study techniques used to assess job timings in the offices and administrative
services as well as the production floor?
253
20. What other forms of work measurement or control are employed in the clerical and
administrative section of the business?
21. Are systems, particularly computer system, audited in the design stage?
22. Are systems and procedures continuously checked to ensure that unauthorized
modifications are now made?
23. How are projects controlled?
24. Are projects selected as a result of cost-benefit studies? Click to jump on:
25. Is a project team leader always appointed?
26. Are the objectives of a project always specifically stated? Home
27. What measurement of project progress are used?
28. What arrangements are there for the periodical review of the progress of project? Part A: Cost Audit
29. Who decides that projects have been completed to requirements?
30. Are appropriate terms of reference established for all organisation projects? Chapter A1 [1]:
31. In the case of new organisation projects, is a “before” and “after” appraisal made to verify Cost Audit Concept & Legal issues
to what extent anticipated benefits or improvements have been achieved in practice? And
by whom? Chapter A2 [2]:
32. How is data collection and analysis carried out? Cost Accounting Standards
33. What methods of investigations are used?
34. Are tentative solutions to organizational problems tested against the experience of the Chapter A3 [3]:
managers directly concerned? Cost Auditing Standards and Quality control
35. How are new systems “sold” to operating management?
Chapter A4 [4]:
36. How are operating staff trained in new methods and parallel run operation controlled?
37. How effective in office management?
38. Is there evidence of the planning of office activities, as distinct from dealing with crises as Chapter A5 [5]:
they arise? Reporting under Cost Audit
39. Is there evidence of coordination of the efforts of various elements of the office staff?
40. How good is the document flow between offices, for the various sections of a large office? Chapter A6 [6]:
41. Has general documentation between examined for readability, distribution and frequency? Cost Audit in Information Technology (IT)
42. Are office services centralized where this is appropriate and economic?
43. How efficient are the company’s communication facilities? Part B: Management Audit
44. Are there written standard procedures?
45. How extensive are they, and to what distribution are they issued? Chapter B1 [7]:
46. Is there an index? Internal Control & Internal Audit
47. What arrangements are there for keeping such procedures up-to-date?
48. Who issued standard procedures? Chapter B2 [8]:
49. What positive arrangements are there for the prosecution of work simplification Operational Audit
programmes?
Chapter B3 [9]:
50. In such programmes, are such aids as work distribution and process charts employed?
Equipment Checks Part C: Performance Analysis

1. Who authorizes the purchase or rental capital equipment. [Chapter 10]
2. What are the procedures for specifying equipment required in potential suppliers and for
obtaining competitive quotations?
3. Is recently obtained equipment in accordance with the specification, and what are the
reasons for differences if there are any? Is inability to rectify difference due to failure to
state the standards of performance required to fulfill the contract?
254
4. How does capital equipment generally relate to the needs of the business? For example, in
the case of a computer installation, is the equipment of the right capacity and balance? Is
the input and output equipment of the right kind and speed to suit the organization’s
requirements? Are the backup store facilities too large or too small?
5. In the case of equipment which have been replaced recently, or is about to be replaced
relatively soon after acquisition, is there evidence that the original specification bore in
mind reasonable development? Click to jump on:
6. In related equipment in different parts of or locations of the organisation compatible either
for mutual standby purposes or to facilitate the interchange of matter processed? Home
7. Is the existing equipment compatible with likely or possible development of the concern?
8. In large organisation, have special purpose or minicomputers been considered as viable as Part A: Cost Audit
alternatives to the further use of a central computer?
9. In particular, where large data inputs are considered, has a separate small computer been Chapter A1 [1]:
considered as a part of the data entry, editing and validating procedures, prior to data entry Cost Audit Concept & Legal issues
to a large processor?
10. Is equipment being utilised adequately, e.g. by shifts covering 24 hours a day, or by Chapter A2 [2]:
multiprogramming, spooling and/or virtual storage techniques? Cost Accounting Standards
11. Are data collection systems too sophisticated for the needs of the business?
12. Is the most efficient copying equipment for the particular needs and volumes of the business Chapter A3 [3]:
being used? Cost Auditing Standards and Quality control
13. What several types reprographic equipment are available, is each being correctly used in
Chapter A4 [4]:
relation to such things as the number of copies required of the original, the intended
recipients and the possibility of alternations and reruns etc.?
14. Is there the proper balance of office equipment and facilities, e.g. between manual, electric Chapter A5 [5]:
and automatic typewriters, and between secretarial services, copy typing and individual and Reporting under Cost Audit
central typing facilities, also, between the various types of calculators – adding machines,
add listing machines and calculating machines with memories? Chapter A6 [6]:
15. Is there the correct balance between computer programmes written in-house, obtained as Cost Audit in Information Technology (IT)
packages, the use of standard modules in programmes written in-house, the utilization of
the organization’s own programming staff in relation to, say, obtaining a contract Part B: Management Audit
programme for a peak programming requirement not likely or recur, etc.?
16. Where a large number of copies of computer output are required, have the merits of Chapter B1 [7]:
producing an offset master and/or the use of micro film considered? Internal Control & Internal Audit
17. Have the alternative of rent, lease, or purchase various equipments been considered in
relation to such factors as cash flow, capital employed in the business, rate of technological Chapter B2 [8]:
development and the break-even point of the replacement of old equipment by new, or in Operational Audit
place of manual systems?
Chapter B3 [9]:
18. In relation to the foregoing, has the other major alternative of buying time on other
organization’s equipment or at service bureaux been considered?
19. In the case of lease equipment, are the precise terms specified under which upgrades,
downgrades and termination of the use of the equipment are to be allowed?
[Chapter 10]
20. Have advantages of using a relatively large computer by means of terminals and time
sharing been considered, particularly by a relatively small organisation, or by a large
organisation with special requirements?
21. Finally, in relation to points q, r and t, has the facilities management concept been
considered, particularly in the case of a fairly young organisation that wishes to concentrate
its own effort to pursing its basic functions?
22. What methods are used for the efficient scheduling of the use of machinery?
255
23. What evidence is there of smoothing and accelerating the work flow through the business
and the rationalization of the location of machinery, departments and personnel in relation
to the work flow?
24. What transport methods are used – own, common carriers, couriers, the post office? Is this
the most effective mix of such facilities?
25. What consideration has been given to alternative methods of data transmission, if datapost,
fascsimile transmission, digital transmission by use of the switched network and/private Click to jump on:
line? The company’s own transport, etc., and is their the most effective and optimum mix
of such facilities. Home
26. Have agreed maximum response times been embodies in any maintenance service
agreement for critical equipment? Part A: Cost Audit
Methods and Systems Audit Checks Chapter A1 [1]:

1. What general control is there on methods and systems? Cost Audit Concept & Legal issues
2. How efficiently is this exercised?
3. How are methods and systems knitted into the organizations?
Chapter A2 [2]:
4. What detailed control is there on the implementation of a system?
5. If the stages of implementation of a system are sufficiently critical and/or important, is
Chapter A3 [3]:
advantage taken of such techniques as network analysis as one of the means of control? Cost Auditing Standards and Quality control
6. How are methods and systems maintained and documented?
7. How are systems evaluated? In particular, if a new system has been introduced, is there a Chapter A4 [4]:
post-evaluation and is this compared with expectations which were put forward at the time Legal Position of Cost Auditor
permission to introduce the new system was sought?
8. Assuming that a system service is supplied to operating managers, in what form do the Chapter A5 [5]:
operating managers present their requirements to the departments supplying the system Reporting under Cost Audit
service?
9. Do such specifications clearly bring out the objects of the procedures required? Chapter A6 [6]:
10. What is the method of development of a system from the point of the specification of his Cost Audit in Information Technology (IT)
requirements by the operating managers?
11. Is it part of the introduction of methods and systems procedures to evaluate the degree of Part B: Management Audit
efficiency with which the objects of the present procedure are achieved, before drawing a
comparison with proposed system? Chapter B1 [7]:
12. When new systems and procedures are being contemplated, is specific provision made for
the manner in which the changeover from the old system to the new is to be carried out,
Chapter B2 [8]:
and in particular, how are phasing out stages of the old system dealt with?
Operational Audit
13. How are systems depicted in discussion and subsequently communicated to the staff who
will be required to operate them? Chapter B3 [9]:
14. Are flow charts used as part of (m) above? Management Audit in Different function
15. Are written standard procedures used as part of (m) above?
16. How is the documentation used in a new procedure explained to the users? Part C: Performance Analysis
17. How effective are any written standard procedures issued as a means of communication of [Chapter 10]
systems requirements?
18. Are they written in such a manner that rapid reference can be made to the parts that affect
any particular employee in detail? At the same time, do they give an overall picture of the
system of general management and facilitate initial reading of the procedures?
256
19. Where procedures require that authorization should be obtained at certain point before
continuing with the system flow, are such authorizing signatories and the limits of their
authority clearly set out or referenced in the procedure?
20. Most systems, require the initial setting up or taking over of files or records. What evidence
is there that there has been adequate provision of the setting-up of such files and there is
sufficient check on their accuracy before the new system commences?
21. What standard arrangements are there for the testing and parallel running of systems before Click to jump on:
passing them for operational use?
22. What evidence is there that new systems are generally implemented on schedule, and with Home
the minimum of dislocation?
23. Are systems as a whole well integrated in relation to the business? Part A: Cost Audit
24. Do they use common data wherever this is practicable?
25. Do they supplement rather than oppose each other? Chapter A1 [1]:
26. Is there an overall plan into which developing systems are fitted? Cost Audit Concept & Legal issues
27. Is there evidence that systems are being kept administratively up-to-date? Have they been
modified to reflect changes which have taken place in the organisation or personnel? Chapter A2 [2]:
28. Is there evidence that systems are amended only in accordance with some authorized Cost Accounting Standards
procedure?
29. What arrangements are there for monitoring the work flow from the systems point of view Chapter A3 [3]:
of dayto-day control and also from the stand point of required reviews of appropriateness Cost Auditing Standards and Quality control
of method or managing in the light of new volumes, work peaks, or other aspects of work
Chapter A4 [4]:
flow?
30. What evidence is there that the social aspects of new systems have due attention?
Chapter A5 [5]:
Security Audit Checks Reporting under Cost Audit
1. What security precautions are taken against leakage of those aspects of the organization’s
policy and planning, which are desired to be kept secret? Chapter A6 [6]:
2. In particular, what security precautions are taken at boardroom level and in respect of Cost Audit in Information Technology (IT)
secretarial facilities used by the board? Do this extend to carbon paper, plastic type writers
ribbons and the magnetic media of automatic typewriters? Part B: Management Audit
3. Is assess to research and development areas controlled?
4. Are the controls efficient and likely to be effective? Chapter B1 [7]:
5. In particular, is special attention given to the security risks involved in the entry of service
personnel to research and development areas?
Chapter B2 [8]:
6. What are the documentary and drawings security controls?
Operational Audit
7. Who is responsible for the security of the company assets?
8. What measures are taken for the security of cash? Chapter B3 [9]:
9. How is cash transferred to the bank and how are collections of cash/bank handled? Management Audit in Different function
10. Who decides the actual route from the organization’s premises to the bank?
11. What systems are there for identifying and controlling movable tools and other assets? Part C: Performance Analysis
12. Is there a fixed asset register and who is responsible for maintaining it? [Chapter 10]
13. How effective is the control of receipts and issues of stock-in-trade and raw materials and
the custody of such assets?
14. How often are stock-in-trade and raw materials items physically counted?
15. What action is taken when physically counted stock varies significantly from the book
stock?
16. Who is able to authorize correction to the recorded book stock of an item?
257
17. What are the procedures for writing off damaged stock and revaluing obsolescent stock?
18. Is there an organized method of computer file preservation so that operator errors or
equipment malfunctions causing loss of current file information can be rectified by
reconstruction from preserved files?
19. Additionally, are important files copied at intervals suitable to their rate of change and
stored remotely, so as to provide a backup in the event of major catastrophe such as fire,
flood or explosion destroying current records? Click to jump on:
20. Are magnetic file media stored away from the computer room in fire-resistant conditions
when not in actual use? Home
21. Is the “no smoking” rule strictly observed in the computer room and the computer strong
areas? Part A: Cost Audit
22. Are automatic fire detectors located in the computer room?
23. Are doctors also installed in such danger areas as underfloor cavities, ceiling, voids and Chapter A1 [1]:
airconditioning ducts associated with the computer room and computer files strong areas? Cost Audit Concept & Legal issues
24. Do such detection systems automatically trigger a fire brigade alarm?
25. Do they trigger an immediate discharge of extinguishing gas? Chapter A2 [2]:
26. Does the fire detection system automatically switch off the air-conditioning installation in Cost Accounting Standards
the event of fire, to avoid oxygen being unnecessarily fed into the flames?
27. Is the computer installation located close to the hazardous areas such as those with a high Chapter A3 [3]:
fire risk of from which the public could throw missiles or bombs? Cost Auditing Standards and Quality control
28. Are there written instructions covering the action of computer operator staff in the event of
Chapter A4 [4]:
major catastrophes such as fire, flood or explosion?
29. Are the computer operator staff aware of the action they have to take in the event of a major
catastrophe? Chapter A5 [5]:
30. Are the computer room walls and ceiling fire-resistant and water proof? Reporting under Cost Audit
31. Is suitable drainage provided in such locations as underflow cavities to disperse water
which would otherwise flood the building? Chapter A6 [6]:
32. Are hand fire-extinguishers readily available to computer room staff and do they know how Cost Audit in Information Technology (IT)
to operate them?
33. Do waste bins in the computer installation areas has self closing lids? Part B: Management Audit
34. Are adequate operating instructions available for all computer applications?
35. Are computer legs maintained and carefully preserved? Chapter B1 [7]:
36. Are definite checks built into the application programmes to prevent miss operation and/or Internal Control & Internal Audit
to assist the operator at appropriate stages of the processing?
37. Are computer operators encouraged to report any unusual occurrences or unusual Chapter B2 [8]:
equipment operating characteristic? Operational Audit
38. Is access to the computer room and storage areas restricted?
Chapter B3 [9]:
39. Are the restrictions effective.
40. Are there a minimum of two computer operators on duty at any one time?
41. Is there a preventive maintenance schedule in operation and is it being adhered to?
42. How important is the uninterrupted provisions of computer services?
[Chapter 10]
43. If is important that there should be no interruption, say, in the case of on-line facilities for
a bank network, are duplicate facilities provided?
44. In circumstances where an interruption is not critical, but continued provision of the service
as soon as possible is essential, have reciprocal standby arrangements been made with a
similar local installation?
45. Are standby arrangements reviewed frequently to ensure that alterations in any of the
installations have not invalidated the arrangements?
258
46. Is any necessary standby software that will be required if standby facilities are to be used,
prepared and available for immediate use and transit?
47. Do catastrophe contingency plans exist?
48. What arrangements have been made to cover an interruption in the supply of electricity?
49. Do these include protection against minute interruptions of the period of time required, say,
to stand by generator?
50. If the computer protected against uneven power supply? Click to jump on:
51. Are there large window areas unprotected from shattering?
52. Are all computer files, programs, etc. under the control of a librarian even if the size of the Home
installation does not justify a full-time officer?
53. Are issues and receipts into such library carefully recorded and the library otherwise kept Part A: Cost Audit
locked?
54. On a surprise basis, has a request for a computer printout of certain records been made and Chapter A1 [1]:
checked off by reference to recent transactions? Cost Audit Concept & Legal issues
55. Has selected specimen input data been processed by the computer against current
programmes and records and the output checked for validity and accuracy? Chapter A2 [2]:
56. Are remote enquiry stations and local terminals kept securely locked when not in use? Cost Accounting Standards
57. Are the keys to such facilities strictly controlled?
58. Are code words needed to gain access to the central computer, and are these changed from Chapter A3 [3]:
time to time? Cost Auditing Standards and Quality control
59. Has the efficiency of the security arrangements in connection with remote terminals been
Chapter A4 [4]:
checked by an auditor trying to access the computer in an unpermitted manner?
60. Are there standard instructions specifying the individuals who are authorized to amend or
otherwise have access to computer information? Chapter A5 [5]:
61. Apart from the instructions given to staff covering immediate action in the event of a Reporting under Cost Audit
catastrophe, are plans laid for continuing operations after such a catastrophe?
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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9.8 Corporate Divisions/Departments/Functions

Evaluation of Purchase Management
The primary objective of purchase management is to procure raw materials, packing material
etc. of the requisite quantity of required quality at reasonable cost at the right time. A
management accountant may make a model questionnaire for evaluation of purchase
management :-
Click to jump on:
(a) What is the organisation for purchase function?
(b) Whether the purchase policy is realistic?
Home
(c) Whether the purchase requirements are related to production schedules and dependent upon
the level of invention? Part A: Cost Audit
(d) How are suppliers selected and eliminated?
Chapter A1 [1]:
(e) Whether regular and dependable suppliers are ensured?
(f) Is there any system of purchase authorization?
(g) Whether latest market information automatically collected regarding new spares, etc.? Chapter A2 [2]:
(h) Whether proper information is kept about price trends? Cost Accounting Standards
(i) Whether regular comparison is made between average price paid and the corresponding
average market price? Chapter A3 [3]:
(j) What are built-in-controls against misutilisation of purchasing powers? Cost Auditing Standards and Quality control
(k) How effective is the system of follow-up?
(l) What is the system of executing emergency purchase? Chapter A4 [4]:
(m) What is the procedure followed for impact of raw materials? Legal Position of Cost Auditor
(n) Is there any proper coordination between purchase, stores and production?
Chapter A5 [5]:
Evaluation of Personal Management
The main objective of personnel function is to create such conditions in the organisation that Chapter A6 [6]:
the employees can put to best performances. The personnel manager has to assess manpower Cost Audit in Information Technology (IT)
replacements, select, recruit, train and develop persons, ensure industrial peace, redress
grievances of the workers, maintain discipline, keep various personal records and negotiate Part B: Management Audit
wage settlements. The performance of the personnel function policies may broadly be reviewed
by asking the following questions :- Chapter B1 [7]:
(a) What is the organisation of the Personal Department? Internal Control & Internal Audit
(b) Is the personnel department adequately staffed?
(c) What is the status of personnel manager in the organizational hierarchy? Chapter B2 [8]:
(d) What is personnel policy? Is the organisation production-oriented or people-oriented? How Operational Audit
does the top management look at its employees?
(e) How are the manpower requirements assessed? Are manpower requirements defined Chapter B3 [9]:
clearly according to the degree of skills required? Management Audit in Different function
(f) What is the requirement policy? Are qualifications for each job specified clearly? Is the
(g) requirement procedure well designed? Part C: Performance Analysis
(h) What is the internal promotion policy? Are the employees given a chance to grow in the [Chapter 10]
organisation itself through the objective tests to their qualifications and performances?
(i) Are training programmes conducted regularly? Are they effective in updating the
knowledge and skills of the employees? Are the opportunities for training adequate?
(j) Are the training methods modern or scientific? Are they suited to the needs of the
organisation?
(k) Are proper records maintained for all workers? Is time keeping effective?
260
(l) What is the procedure for dealing with the grievances of the employees? Are they
encouraged to speak to the personnel manager?
(m) How is the discipline maintained? How are the erring workers dealt with? Is there a uniform
and stable policy of dealing with indiscipline and misconduct on the part of all the
employees?
(n) Are the various human cost properly analysed? Is the cost of labour turnover and
absenteeism worked out periodically? Are attempts made to reduce labour turnover to Click to jump on:
optimum levels?
(o) What effectively are labour welfare organized in the organisation? Home
(p) Is there a machinery for dealing with the demands of the workers? Is legitimate union
activities encouraged? Part A: Cost Audit
(q) What is the extent of man-hours lost due to strike or lockout?
(r) How these losses compare with the man-hours lost by similar organisation in the area? Chapter A1 [1]:
Evaluation of Production Management
The main objective of production management is to turn out finished goods of requisite quality
Chapter A2 [2]:
by making an optimum use of men, machine, and services. The productivity of such factors
must satisfy the standards or norms set for the industry. The following check list will help the
Chapter A3 [3]:
management auditor in evaluating production management:- Cost Auditing Standards and Quality control
(a) Is there an adequate system of production planning? Are production schedules drawn up to
optimize various factors like plant capacity, raw materials, skilled labour, availability of Chapter A4 [4]:
funds, machine hours, availability of power, etc.? Legal Position of Cost Auditor
(b) Is there close coordination with sales department to ensure acceptability of the finished
products by customers? How effective is the quality of finished products by customers? Chapter A5 [5]:
How effective is the quality control system? Reporting under Cost Audit
(c) How quickly are the customers’ complaints dealt with ?
(d) Is the production design properly worked out? Is there a constant review of the production Chapter A6 [6]:
design to improve the cost-benefit ratio? Cost Audit in Information Technology (IT)
(e) Are the inputs and outputs of each process, operation or department linked up periodically?
(f) Does the input-output ratio conform with the standard ratio? Part B: Management Audit
(g) What is the system of reviewing delays in production?
(h) What is the frequency of accidents? Are safety measures adequate? Chapter B1 [7]:
(i) Is there a system of incentive scheme linked with the output of various production
departments?
Chapter B2 [8]:
(j) Have the incentive systems been designed on the basis of scientific studies?
Operational Audit
(k) How effective is control over idle time?
(l) Is the production process review done periodically to explore the possibility of having more Chapter B3 [9]:
efficient production method? Management Audit in Different function
(m) Are the performances of service departments appraised periodically? Have standard
efficiency factor worked out? Are they compared with actual efficiency ratios? Part C: Performance Analysis
(n) How effective is the management information regarding production function as a whole? [Chapter 10]
Evaluation of Research and Development Activities

With the evaluation of management practice, it is realized that somewhat different techniques
and approaches are required for management audit to research and development activity as a
separate area as it involves dealing with creative people not falling into a predictable pattern of
accomplishment. Moreover, it requires operations and development efforts in a relatively
261
unknown era. A management auditor of a company can appraise and evaluate the activities of
research and development on the basis of the following checklist:-
(a) What are the major achievements of the R&D?
(b) What is the input-output ratio?
(c) Whether the R&D scientist have actual operating experience in industry in order to
visualize what they are developing?
(d) What are strategic issues formulated at the Board level relating to industrial research? Click to jump on:
(e) How does the company formulate its approach on the annual outlay on research and
development? Home
(f) Whether the outlay on R&D is a fixed sum, a percentage of turnover, of profits, or capital
investment, or on industry average? Part A: Cost Audit
(g) Whether the Board of Directors identify or endorse the broad “types of research” to be
undertaken to order to ensure that the efforts are concentrated in line with the defined goals? Chapter A1 [1]:
(h) Whether the R&D is considered as an independent department in the company? Cost Audit Concept & Legal issues
(i) Whether the R&D is viewed as a separate profit centre?
(j) What is the level and extent of contribution of the company’s profit through sale of Chapter A2 [2]:
technologies? Cost Accounting Standards
(k) Whether there is proper coordination between the R&D cell and corporate planning cell?
(l) Are the guidelines from the Board clear and workable? Chapter A3 [3]:
(m) How is the R&D budget formulated? Cost Auditing Standards and Quality control
(n) Whether the R&D results are properly recorded, classified and analysed?
Chapter A4 [4]:
(o) How are the following areas of activity accomplished –
(i) Monitoring the existing projects?
(ii) Review of viability of projects in order to assign priorities? Chapter A5 [5]:
(iii) Transfer of technology to project and operations sections? Reporting under Cost Audit
(iv) Liaison with other departments and with outside agencies?
(p) Whether the control scheme for a particular R&D programme realistic and effective in Chapter A6 [6]:
relation to– Cost Audit in Information Technology (IT)
(i) Long-term programme?
(ii) Short-term programme? Part B: Management Audit
(iii) Periodical assessment of results with the predetermined budgets and correlated ideas?
(iv) Authorization of expenditure? Chapter B1 [7]:
(v) Analysis of cost-effectiveness? Internal Control & Internal Audit
(q) What successes and failures occurred in the past?
(r) From commercial view point – Chapter B2 [8]:
(i) Where savings were brought in by improved process? Operational Audit
(ii) What were R&D costs on new products developed as compared with sales and profits
Chapter B3 [9]:
arising from these products?
(iii) What was the cost of R&D on improvement of existing products and resultant
increase in sales and profits?
[Chapter 10]
Marketing Audit and its Areas
Marketing audit is an independent examination of the entire marketing effort of a company, or
some specific marketing activities covering objectives, programme implementation, and
organisation for purposes of determining what is being done, appraising which is being done,
and recommending what should be done in future.
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The essential feature of marketing audit is that marketing audit is carried out periodically at
regular intervals and not only when the company is facing marketing problems and difficulties.
Such audit covers both marketing place and control and evaluate the basic framework for
marketing action as also the performance within the framework. It covers the appraisal of the
entire system and process of marketing taking into account all the elements of the marketing
operations.
Click to jump on:
Marketing audit may be horizontal or vertical. Horizontal audit (also known as system level
audit) covers a major part of marketing audit and evaluates a total appraisal of the marketing Home
efforts of a company. Vertical audit (also known as activity level of audit) concentrates on
single item of functions of marketing operation of a company identified by horizontal audit or Part A: Cost Audit
otherwise and which becomes the subject of through examination and evaluation. The
marketing audit covers the following areas – Chapter A1 [1]:
(a) Objectives: Marketing objectives should be clearly established. Majority of companies do Cost Audit Concept & Legal issues
not have clearly defined objectives except that achieving high sales volume or making high
profit on the sales is the target. The search in audit of a clear objective will make the Chapter A2 [2]:
management aware of the gap in its operational policy if a well defined goal has not been Cost Accounting Standards
already set up by the company.
(b) Programme: The auditor should carry out an appraisal for the programme which the Chapter A3 [3]:
company has laid down for achieving the objective. Cost Auditing Standards and Quality control
(c) Implementation: The auditor will take up the examination of the company’s
Chapter A4 [4]:
implementation of the marketing programme.
(d) Organisation: A suitable organisation assists in a success of a marketing plan. The audit
should appraise the marketing organisation by reviewing the formal lines of authority and Chapter A5 [5]:
responsibility, delegation of authority, status of marketing head and his staff, adequacy of Reporting under Cost Audit
the personnel, proper manning of key tasks and assignments thereof.
Chapter A6 [6]:
Evaluation of Sales Management Cost Audit in Information Technology (IT)
The main objective of function of sales management is to create and develop customers and
retain the position of the organisation in the market. Part B: Management Audit
The following questionnaire will help in evaluating sales management – Chapter B1 [7]:
1. How is the sales department organisation? Is it adequately staffed?
2. How specific responsibilities fixed for development of products in various areas?
Chapter B2 [8]:
3. What market forecasts are developed regularly? Are they reliable?
Operational Audit
4. How does the growth in sales during the last five years compare with that of the industry
as a whole? Chapter B3 [9]:
5. What steps have been taken to increase the market share of the company? Management Audit in Different function
6. Whether the system of appraising performance of sales division and salesmen objectives
fair? Part C: Performance Analysis
7. Whether the salesmen’s performance are linked with rewards? [Chapter 10]
8. Does the system motivate salesmen to give their best performances?
9. Are the sales budget realistic? Do they show detailed physical targets for each sales office?
10. What controls exist on the expenses incurred by salesmen?
11. What is the percentage of sales returns and allowances?
12. Whether the percentage of sales returns declined over the year?
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13. How does marketing manager keep in touch with the changing conditions in market? Are
consumer surveys conducted regularly?
14. Is there a constant review of the order book?
15. Does a proper control over stocks of finished goods exist?
16. Are the slow moving stocks reviewed periodically?
17. Is there a proper and realistic budget for advertising and sales promotion?
18. Does a proper control over stocks of finished goods exist? Click to jump on:
19. Is it reviewed periodically?
20. What are the overall controls on outstanding? Home
21. Are they analyzed periodically?
22. Are the ageing schedules prepared regularly? Part A: Cost Audit
23. What is the procedure of writing off bad debts?
24. Are the distribution channels properly selected? Chapter A1 [1]:
25. Whether operations research techniques have been applied in distributing products to Cost Audit Concept & Legal issues
minimize costs?
26. Is the system of after-sales services efficient? Chapter A2 [2]:
27. What is the frequency of customer complains? Cost Accounting Standards
28. How frequently customer complaints are dealt with?
Chapter A3 [3]:
Evaluation of Distribution Function
For evaluation of distribution function, a management auditor should consider the following Chapter A4 [4]:
points – Legal Position of Cost Auditor
(a) Customer service goals and objectives.
(b) Integrated material management. Chapter A5 [5]:
(c) Physical distribution network and operating plan. Reporting under Cost Audit
(d) Management information system.
(e) Allocation of work activities and effectiveness in discharging the function. Chapter A6 [6]:
The management auditor in order to carry out the review of “distribution policies” may design
the following questionnaire – Part B: Management Audit
A. Levels of customer service - Chapter B1 [7]:

(a) Are the levels of customer service realistic and competitive?
(b) Does the management review –
Chapter B2 [8]:
(i) Customers’ real service needs i.e. existing service levels?
Operational Audit
(ii) Competitors abilities v. own abilities.
(c) What is the step wise approach to survey and determine the customer service requirements? Chapter B3 [9]:
B. Capacity configuration -
(a) Whether the production, marketing and distribution capacities provide an economical Part C: Performance Analysis
means of meeting the necessary customer serviced criteria? [Chapter 10]
(b) How are the capacity costs considered with respect to –
(i) Physical distribution operating costs?
(ii) Inventory levels?
(iii) Investment in distribution activities?
C. Staging of inventory -
264
(a) What is the volume of each product at each stage?

(b) Whether the flow of finished goods inventory through the distribution process reasonable
within the acceptable service limits?
D. Transportation mode mix -

(a) How is each transportation route in the distribution network identified?
(b) How are the characteristics of traffic movement in the key routes determined? Click to jump on:
(c) Whether the present mode has been selected considering cost and service capabilities?
(d) Does the distribution policy indicate integrated character in respect of :- Home
(i) the needs of the key group customers?
(ii) the requirements of key product market segments? Part A: Cost Audit
(iii) the market policy?
Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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9.9 Corporate Governance and Audit Committee

Introduction to Corporate Governance
Summary
• Corporate governance is a system of rules, policies, and practices that dictate how a
company’s board of directors manages and oversees the operations of a company;
• Corporate governance includes principles of transparency, accountability, and security.
Click to jump on:
• Poor corporate governance, at best, leads to a company failing to achieve its stated
goals, and, at worst, can lead to the collapse of the company and significant financial
Home
losses for shareholders.
Part A: Cost Audit
What is Corporate Governance?
Chapter A1 [1]:
Corporate governance is the system of rules, practices, and processes by which a firm is
directed and controlled. Corporate governance essentially involves balancing the interests of a
company's many stakeholders, such as shareholders, senior management executives, Chapter A2 [2]:
customers, suppliers, financiers, the government, and the community. Cost Accounting Standards
Since corporate governance also provides the framework for attaining a company's objectives, Chapter A3 [3]:
it encompasses practically every sphere of management, from action plans and internal Cost Auditing Standards and Quality control
controls to performance measurement and corporate disclosure.
Chapter A4 [4]:
Understanding Corporate Governance Legal Position of Cost Auditor
Governance refers specifically to the set of rules, controls, policies, and resolutions put in place
to dictate corporate behavior. Proxy advisors and shareholders are important stakeholders who Chapter A5 [5]:
indirectly affect governance, but these are not examples of governance itself. The board of Reporting under Cost Audit
directors is pivotal in governance, and it can have major ramifications for equity valuation.
Chapter A6 [6]:
A company’s corporate governance is important to investors since it shows a company's
direction and business integrity. Good corporate governance helps companies build trust with
investors and the community. As a result, corporate governance helps promote financial
viability by creating a long-term investment opportunity for market participants.
Chapter B1 [7]:
Communicating a firm's corporate governance is a key component of community and investor Internal Control & Internal Audit
relations. On Apple Inc.'s investor relations site, for example, the firm outlines its corporate
leadership—its executive team, its board of directors—and its corporate governance, including Chapter B2 [8]:
its committee charters and governance documents, such as bylaws, stock ownership guidelines, Operational Audit
and articles of incorporation.
Chapter B3 [9]:
Most companies strive to have a high level of corporate governance. For many shareholders, it Management Audit in Different function
is not enough for a company to merely be profitable; it also needs to demonstrate
good corporate citizenship through environmental awareness, ethical behavior, and sound Part C: Performance Analysis
corporate governance practices. Good corporate governance creates a transparent set of rules [Chapter 10]
and controls in which shareholders, directors, and officers have aligned incentives.
Corporate Governance and the Board of Directors

The board of directors is the primary direct stakeholder influencing corporate governance.
Directors are elected by shareholders or appointed by other board members, and they represent
shareholders of the company.
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The board is tasked with making important decisions, such as corporate officer appointments,
executive compensation, and dividend policy. In some instances, board obligations stretch
beyond financial optimization, as when shareholder resolutions call for certain social or
environmental concerns to be prioritized.
Boards are often made up of inside and independent members. Insiders are major shareholders, Click to jump on:
founders, and executives. Independent directors do not share the ties of the insiders, but they
are chosen because of their experience managing or directing other large companies. Home
Independents are considered helpful for governance because they dilute the concentration of
power and help align shareholder interests with those of the insiders. Part A: Cost Audit
The board of directors must ensure that the company's corporate governance policies Chapter A1 [1]:
incorporate the corporate strategy, risk management, accountability, transparency, and ethical Cost Audit Concept & Legal issues
business practices.
Chapter A2 [2]:
EXAMPLES OF CORPORATE GOVERNANCE Cost Accounting Standards
Chapter A3 [3]:
Volkswagen AG
Bad corporate governance can cast doubt on a company's reliability, integrity, or obligation to
shareholders; all of which can have implications on the firm's financial health. Tolerance or
Chapter A4 [4]:
support of illegal activities can create scandals like the one that rocked Volkswagen AG starting Legal Position of Cost Auditor
in September 2015.
Chapter A5 [5]:
The development of the details of "Dieselgate" (as the affair came to be known) revealed that Reporting under Cost Audit
for years the automaker had deliberately and systematically rigged engine emission equipment
in its cars in order to manipulate pollution test results in America and Europe. Volkswagen saw Chapter A6 [6]:
its stock shed nearly half its value in the days following the start of the scandal, and its global Cost Audit in Information Technology (IT)
sales in the first full month following the news fell 4.5%.
VW's board structure was a reason for how the emissions rigging took place and was not caught
earlier. In contrast to a one-tier board system that is common in most companies, VW has a Chapter B1 [7]:
two-tier board system, which consists of a management board and a supervisory board. The Internal Control & Internal Audit
supervisory board was meant to monitor management and approve corporate decisions;
however, it lacked the independence and authority to be able to carry out these roles.3 Chapter B2 [8]:
Operational Audit
The supervisory board comprised a large portion of shareholders. Ninety percent of shareholder
Chapter B3 [9]:
voting rights were controlled by members of the supervisory board. There was no real
independent supervisor; shareholders were in control of the supervisory board, which canceled
out the purpose of the supervisory board, which was to oversee management and employees
and how they operate within the company, which of course, included rigging emissions.
[Chapter 10]
Enron and Worldcom
Public and government concern about corporate governance tends to wax and wane. Often,
however, highly publicized revelations of corporate malfeasance revive interest in the subject.
For example, corporate governance became a pressing issue in the United States at the turn of
267
the 21st century, after fraudulent practices bankrupted high-profile companies such
as Enron and WorldCom.
The problem with Enron was that its board of directors waived many rules related to conflicts
of interest by allowing the chief financial officer (CFO), Andrew Fastow, to create independent,
private partnerships to do business with Enron. What actually happened was that these private
partnerships were used to hide Enron's debts and liabilities, which would have reduced the Click to jump on:
company's profits significantly.
Home
What happened at Enron was clearly a lack of corporate governance that should have prevented
the creation of these entities that hid the losses. The company also had a corporate atmosphere Part A: Cost Audit
that had dishonest people at the top (Fastow) down to its traders who made illegal moves in the
markets. Chapter A1 [1]:
Both the Enron and Worldcom scandals resulted in the 2002 passage of the Sarbanes-Oxley
Act, which imposed more stringent recordkeeping requirements on companies, along with stiff Chapter A2 [2]:
criminal penalties for violating them and other securities laws. The aim was to restore public Cost Accounting Standards
confidence in public companies and how they operate.
Chapter A3 [3]:
PepsiCo Cost Auditing Standards and Quality control
It's common to hear of bad corporate governance examples, mainly because it is the reason
Chapter A4 [4]:
some companies blow up and end up in the news. It's rare to hear of companies with good
corporate governance because it is the good corporate governance that keeps them out of the
news as no scandal has occurred. Chapter A5 [5]:
One company that has consistently practiced good corporate governance and seeks to update it
often is PepsiCo. In drafting its 2020 proxy statement, PepsiCo took input from investors to Chapter A6 [6]:
focus on six areas: Cost Audit in Information Technology (IT)
• Board composition, diversity, and refreshment, and leadership structure
• Long-term strategy, corporate purpose, and sustainability issues Part B: Management Audit
• Good governance practices and ethical corporate culture
• Human capital management Chapter B1 [7]:
• Compensation discussion and analysis Internal Control & Internal Audit
• Shareholder and stakeholder engagement
Chapter B2 [8]:
Operational Audit
The company included in its proxy statement a side-by-side graphic that depicted the current
leadership structure, which shows a combined chair and CEO along with an independent Chapter B3 [9]:
presiding director, and a link between the compensation of the company's "Winning With Management Audit in Different function
Purpose" vision and changes to the executive compensation program.
Special Considerations [Chapter 10]
As an investor, you want to ensure that the company you are looking to buy shares of practices
good corporate governance, in the hope of avoiding losses in cases such as Enron and
Worldcom. There are certain areas that an investor can focus on to determine whether a
company is practicing good corporate governance or not.
268
These areas include disclosure practices, executive compensation structure (is it tied only to
performance or other metrics?), risk management (what are the checks and balances of making
decisions in the company?), policies and procedures on reconciling conflicts of interest (how
does a company approach business decisions that might conflict with its mission statement?),
the members of the board of the directors (do they have a stake in profits?), contractual and
social obligations (how do they approach areas such as climate change?), relationships
with vendors, complaints received from shareholders and how they were addressed, and audits Click to jump on:
(how often are internal and external audits conducted and how have issues been handled?).
Home
Types of bad governance practices include:
• Companies that do not cooperate sufficiently with auditors or do not select auditors with Part A: Cost Audit
the appropriate scale, resulting in the publication of spurious or noncompliant financial
documents Chapter A1 [1]:
• Bad executive compensation packages that fail to create an optimal incentive for corporate Cost Audit Concept & Legal issues
officers
• Poorly structured boards that make it too difficult for shareholders to oust ineffective Chapter A2 [2]:
incumbents Cost Accounting Standards
These are all areas an investor can research before making an investment decision.
Chapter A3 [3]:
CORPORATE GOVERNANCE CODE Chapter A4 [4]:

Bangladesh Securities and Exchange Commission
Chapter A5 [5]:
NOTIFICATION
Dated: 3 June 2018
Corporate Governance Code Chapter A6 [6]:
No. BSEC/CMRRCD/2006-158/207/Admin/80: Whereas, the Bangladesh Securities and Exchange
Commission (hereinafter referred to as the “Commission”) deems it fit that the consent already accorded Part B: Management Audit
by theCommission, or deemed to have been accorded by it, or to be accorded by it in future, to the issue
of capital by the companies listed with any stock exchange in Bangladesh, shall be subject to certain Chapter B1 [7]:
further conditions, i.e., Corporate Governance Code in order to enhance corporate governance in the Internal Control & Internal Audit
interest of investors and the capital market;
Chapter B2 [8]:
Now, therefore, in exercise of the power conferred by section 2CC of the Securities and Exchange Operational Audit
Ordinance, 1969 (XVII of 1969), the Commission hereby repeals its earlier Notification No.
SEC/CMRRCD/2006-158/134/Admin/44, dated 07 August 2012, published in the official gazette on Chapter B3 [9]:
30 August 2012 and the relevantNotification(s) on the same matter and, imposes the following further Management Audit in Different function
conditions, i.e., Corporate Governance Code to the consent already accorded by it, or deemed to have
been accorded by it, or to be accorded by it in future, to the issue of capital by the companies listed Part C: Performance Analysis
with anystock exchange in Bangladesh: [Chapter 10]
Provided, however, that these conditions or Code are imposed on ‘comply’ basis; the companies listed
with any stock exchange in Bangladesh shall comply with these conditions or Code in accordance
with the condition No. 9.
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The Conditions, i.e., Corporate Governance Code:
1. Board of Directors.
Size of the Board of Directors

The total number of members of a company’s Board of Directors (hereinafter referred to as
“Board”) shall not be less than 5 (five) and more than 20 (twenty). Click to jump on:
Independent Directors Home
All companies shall have effective representation of independent directors on their Boards, so
that the Board, as a group, includes core competencies considered relevant in the context of Part A: Cost Audit
each company; for this purpose, the companies shall comply with the following:
(a) At least one-fifth (1/5) of the total number of directors in the company’s Board shall be Chapter A1 [1]:
independent directors; any fraction shall be considered to the next integer or whole Cost Audit Concept & Legal issues
number for calculating number of independent director(s);
(b) For the purpose of this clause “independent director” means adirector Chapter A2 [2]:
(i) who either does not hold any share in the company or holds less than one percent Cost Accounting Standards
(1%) shares of the total paid-up shares of the company;
Chapter A3 [3]:
(ii) who is not a sponsor of the company or is not connected with the company’s Cost Auditing Standards and Quality control
any sponsor ordirector or nominated director or shareholder of the company or
any of its associates, sister concerns,subsidiaries and parents or holding entities Chapter A4 [4]:
who holdsone percent (1%) or more shares of the total paid-up shares of the Legal Position of Cost Auditor
company on the basis of family relationship and his or her family members also
shall not hold above mentioned shares in the company: Chapter A5 [5]:
Provided that spouse, son, daughter, father, mother, brother, sister, son-in-law Reporting under Cost Audit
and daughter-in-law shall be considered as family members;
(iii) who has not been an executive of the company in immediately preceding 2 (two) Chapter A6 [6]:
financial years; Cost Audit in Information Technology (IT)
(iv) who does not have any other relationship, whether pecuniary or otherwise, with
the company or its subsidiary or associated companies; Part B: Management Audit
(v) who is not a member or TREC (Trading Right Entitlement Certificate) holder,
Chapter B1 [7]:
director or officer of any stock exchange;
(vi) who is not a shareholder, director excepting independent director or officer of
any member orTREC holder of stock exchange or an intermediary of the capital Chapter B2 [8]:
market; Operational Audit
(vii) who is not a partner or an executive or was not a partner or an executive during
the preceding 3 (three)years of the concerned company’s statutory audit firm or Chapter B3 [9]:
audit firm engaged in internal audit services or audit firm conducting special Management Audit in Different function
audit or professional certifying compliance of this Code;
(viii) who is not independent director in more than 5 (five) listed companies; Part C: Performance Analysis
(ix) who has not been convicted by a court of competent jurisdiction as a defaulter [Chapter 10]
in payment of any loan or any advance to a bank or a Non-Bank Financial
Institution (NBFI); and
(x) who has not been convicted for a criminal offence involving moral turpitude;
(c) The independent director(s) shall be appointed by the Board and approved by the
shareholders in the Annual GeneralMeeting (AGM);
(d) The post of independent director(s) cannot remain vacant for more than 90 (ninety) days;
270
and
(e) The tenure of office of an independent director shall be for a period of 3 (three) years,
which may be extended for 1 (one) tenure only:
Provided that a former independent director may be considered for reappointment for
another tenure after a time gap of one tenure, i.e., three years from his or her completion
of consecutive two tenures [i.e. six years]:
Provided further that the independent director shall not be subject to retirement by Click to jump on:
rotation as per the (Companies Act, 1994).
Explanation: For the purpose of counting tenure or term of independent director, any Home
partial term of tenure shall be deemed to be a full tenure.
Part A: Cost Audit
Qualification of Independent Director
(f) Independent director shall be a knowledgeable individual with integrity who is able to Chapter A1 [1]:
ensure compliance with financial laws, regulatory requirements and corporate laws and Cost Audit Concept & Legal issues
can make meaningful contribution to the business;
(g) Independent director shall have following qualifications: Chapter A2 [2]:
(i) Business Leader who is or was a promoter or director of an unlisted company
having minimum paid-up capital of Tk.
Chapter A3 [3]:
100.00 million or any listed company or a member of any national or Cost Auditing Standards and Quality control
international chamber of commerce or business association; or
(ii) Corporate Leader who is or was a top level executive not lower than Chief Chapter A4 [4]:
Executive Officer or Managing Directoror Deputy Managing Director or Chief Legal Position of Cost Auditor
Financial Officer or Head of Finance or Accounts or Company Secretary or Head
of Internal Audit and Compliance or Head of Legal Service or a candidate with Chapter A5 [5]:
equivalent position of an unlisted company having minimum paid-up capital of Reporting under Cost Audit
Tk.
100.00 million or of a listed company; or Chapter A6 [6]:
Explanation: Top level executive includes Managing Director (MD) or Chief Cost Audit in Information Technology (IT)
Executive Officer (CEO), Additional or Deputy Managing Director (AMD or
DMD), Chief Operating Officer (COO), Chief Financial Officer (CFO), Part B: Management Audit
Company Secretary (CS), Head of Internal Audit and Compliance (HIAC), Head
of Administration and Human Resources or equivalent positions and same level Chapter B1 [7]:
orranked or salaried officials of the company.
(iii) Former official of government or statutory or autonomous or regulatory body in Chapter B2 [8]:
the position not below 5th Grade of the national pay scale, who has at least Operational Audit
educational background of bachelor degree in economics or commerce or
business or Law; or Chapter B3 [9]:
(iv) University Teacher who has educational background in Economics or Commerce Management Audit in Different function
or Business Studies or Law; or
(v) Professional who is or was an advocate practicing at leastin the High Court Part C: Performance Analysis
Division of Bangladesh Supreme Courtor a Chartered Accountant or Cost and [Chapter 10]
Management Accountant or Chartered Financial Analyst or CharteredCertified
Accountant or Certified Public Accountant or Chartered Management
Accountant or Chartered Secretary or equivalent qualification;
(h) The independent director shall have at least 10 (ten) years ofexperiences in any field
mentioned in clause (b);
(i) In special cases, the above qualifications or experiences may berelaxed subject to
271
prior approval of the Commission.
Duality of Chairperson of the Board of Directors and Managing Director or Chief

Executive Officer
(j) The positions of the Chairperson of the Board and the Managing Director (MD) and/or
Chief Executive Officer (CEO) of the company shall be filled by different individuals;
(k) The Managing Director (MD) and/or Chief Executive Officer (CEO) of a listed company Click to jump on:
shall not hold the same position in another listed company;
(l) The Chairperson of the Board shall be elected from among the non-executive directors Home
of the company;
(m) The Board shall clearly define respective roles andresponsibilities of the Chairperson and Part A: Cost Audit
the Managing Director and/or Chief Executive Officer;
(n) In the absence of the Chairperson of the Board, the remaining members may elect one of Chapter A1 [1]:
themselves from non- executive directors as Chairperson for that particular Board’s Cost Audit Concept & Legal issues
meeting; the reason of absence of the regular Chairperson shall be duly recorded in the
Chapter A2 [2]:
minutes.
The Directors’ Report to Shareholders Chapter A3 [3]:
The Board of the company shall include the following additional statements or disclosures in Cost Auditing Standards and Quality control
the Directors’ Report prepared under section 184 of the Companies Act, 1994 (Act No. XVIII of
1994): Chapter A4 [4]:
(i) An industry outlook and possible future developments inthe industry; Legal Position of Cost Auditor
(ii) The segment-wise or product-wise performance;
(iii) Risks and concerns including internal and external risk factors, threat to sustainability Chapter A5 [5]:
and negative impact on environment, if any; Reporting under Cost Audit
(iv) A discussion on Cost of Goods sold, Gross Profit Margin and Net Profit Margin, where
Chapter A6 [6]:
applicable;
(v) A discussion on continuity of any extraordinary activities and their implications (gain
or loss);
(vi) A detailed discussion on related party transactions along with a statement showing
amount, nature of related party, nature of transactions and basis of transactions of all Chapter B1 [7]:
relatedparty transactions; Internal Control & Internal Audit
(vii) A statement of utilization of proceeds raised through publicissues, rights issues and/or
any other instruments; Chapter B2 [8]:
(viii) An explanation if the financial results deteriorate after the company goes for Initial Operational Audit
Public Offering (IPO), Repeat Public Offering (RPO), Rights Share Offer, Direct
Listing, etc.; Chapter B3 [9]:
(ix) An explanation on any significant variance that occurs between Quarterly Financial
performances and Annual Financial Statements;
(x) A statement of remuneration paid to the directors including independent directors;
[Chapter 10]
(xi) A statement that the financial statements prepared by the management of the issuer
company present fairly its stateof affairs, the result of its operations, cash flows and
changes in equity;
(xii) A statement that proper books of account of the issuercompany have been maintained;
(xiii) A statement that appropriate accounting policies have been consistently applied in
preparation of the financial statements and that the accounting estimates are based on
272
reasonable and prudent judgment;

(xiv) A statement that International Accounting Standards (IAS) or International Financial
Reporting Standards (IFRS), as applicable in Bangladesh, have been followed in
preparation of the financial statements and any departure there from has been
adequately disclosed;
(xv) A statement that the system of internal control is sound in design and has been
effectively implemented and monitored; Click to jump on:
(xvi) A statement that minority shareholders have been protectedfrom abusive actions by, or
in the interest of, controlling shareholders acting either directly or indirectly and have Home
effective means of redress;
(xvii) A statement that there is no significant doubt upon the issuer company’s ability to Part A: Cost Audit
continue as a going concern, if the issuer company is not considered to be a going
concern,the fact along with reasons there of shall be disclosed; Chapter A1 [1]:
(xviii) An explanation that significant deviations from the last year’s operating results of the Cost Audit Concept & Legal issues
issuer company shall be highlighted and the reasons thereof shall be explained;
Chapter A2 [2]:
(xix) A statement where key operating and financial data of at least preceding 5 (five) years
shall be summarized;
(xx) An explanation on the reasons if the issuer company hasnot declared dividend (cash Chapter A3 [3]:
or stock) for the year; Cost Auditing Standards and Quality control
(xxi) Board’s statement to the effect that no bonus share or stock dividend has been or shall
be declared as interim dividend; Chapter A4 [4]:
(xxii) The total number of Board meetings held during the year and attendance by each Legal Position of Cost Auditor
director;
(xxiii) A report on the pattern of shareholding disclosing the aggregate number of shares Chapter A5 [5]:
(along with name-wise details where stated below) held by:
(a) Parent or Subsidiary or Associated Companies and other related parties (name- Chapter A6 [6]:
wise details); Cost Audit in Information Technology (IT)
(b) Directors, Chief Executive Officer, CompanySecretary, Chief Financial Officer,
Head of Internal Audit and Compliance and their spouses and minor children Part B: Management Audit
(name-wise details);
(c) Executives; and Chapter B1 [7]:
(d) Shareholders holding ten percent (10%) or more votinginterest in the company Internal Control & Internal Audit
(name-wise details);
Explanation: For the purpose of this clause, the expression“executive” means top 5 Chapter B2 [8]:
(five) salaried employees of the company, other than the Directors, Chief Executive Operational Audit
Officer,Company Secretary, Chief Financial Officer and Head of Internal Audit and
Compliance. Chapter B3 [9]:
(xxiv) In case of the appointment or reappointment of a director, a disclosure on the following
information to the shareholders:
(a) a brief resume of the director;
[Chapter 10]
(b) nature of his or her expertise in specific functional areas;and
(c) names of companies in which the person also holds the directorship and the
membership of committees of the Board;
(xxv) A Management’s Discussion and Analysis signed by CEOor MD presenting detailed
analysis of the company’s position and operations along with a brief discussion of
changes in the financial statements, among others, focusing on:
273
(a) accounting policies and estimation for preparation of financialstatements;

(b) changes in accounting policies and estimation, if any, clearly describing the effect
on financial performance or results and financial position as well as cash flows in
absolute figure for such changes;
(c) comparative analysis (including effects of inflation) offinancial performance or
results and financial position as well as cash flows for current financial year with
immediate preceding five years explaining reasons thereof; Click to jump on:
(d) compare such financial performance or results and financial position as well as
cash flows with the peer industry scenario; Home
(e) briefly explain the financial and economic scenario of the country and the globe;
(f) risks and concerns issues related to the financial statements, explaining such risk Part A: Cost Audit
and concerns mitigation plan of the company; and
(g) future plan or projection or forecast for company’s operation, performance and Chapter A1 [1]:
financial position, with justification thereof, i.e., actual position shall be explained
to the shareholders in the next AGM;
Chapter A2 [2]:
(xxvi) Declaration or certification by the CEO and the CFO to the Board as required under Cost Accounting Standards
condition No. 3(3) shall be disclosed as per Annexure-A; and
(xxvii) The report as well as certificate regarding compliance of conditions of this Code as Chapter A3 [3]:
required under condition No. 9 shall be disclosed as per Annexure-B and Annexure- Cost Auditing Standards and Quality control
C.
Chapter A4 [4]:
Meetings of the Board of Directors Legal Position of Cost Auditor
The company shall conduct its Board meetings and record the minutes of the meetings as well
as keep required books and records in line with the provisions of the relevant Bangladesh Chapter A5 [5]:
Secretarial Standards (BSS) as adopted by the Institute of Chartered Secretariesof Bangladesh Reporting under Cost Audit
(ICSB) in so far as those standards are not inconsistent with any condition of this Code.
Chapter A6 [6]:
Code of Conduct for the Chairperson, other Board membersand Chief Executive
Officer
(o) The Board shall lay down a code of conduct, based on the recommendation of the
Nomination and Remuneration Committee (NRC) at condition No. 6, for the Chapter B1 [7]:
Chairperson ofthe Board, other board members and Chief Executive Officer of the Internal Control & Internal Audit
company;
(p) The code of conduct as determined by the NRC shall be posted on the website of the Chapter B2 [8]:
company including, among others, prudent conduct and behavior; confidentiality; Operational Audit
conflict of interest; compliance with laws, rules and regulations; prohibition of insider
trading; relationship with environment, employees, customers and suppliers; and Chapter B3 [9]:
independency. Management Audit in Different function
Governance of Board of Directors of Subsidiary Company Part C: Performance Analysis

(a) Provisions relating to the composition of the Board of the holding company shall be made [Chapter 10]
applicable to the composition of the Board of the subsidiary company;
(b) At least 1 (one) independent director on the Board of the holding company shall be a
director on the Board of the subsidiary company;
(c) The minutes of the Board meeting of the subsidiary companyshall be placed for review
at the following Board meeting of the holding company;
(d) The minutes of the respective Board meeting of the holding company shall state that they
274
have reviewed the affairs of thesubsidiary company also;

(e) The Audit Committee of the holding company shall alsoreview the financial statements,
in particular the investments made by the subsidiary company.
Managing Director (MD) or Chief Executive Officer (CEO), Chief Financial Officer (CFO),
Head of Internal Audit and Compliance (HIAC) and Company Secretary (CS).
Click to jump on:
2. Appointment
Home
(a) The Board shall appoint a Managing Director (MD) or Chief Executive Officer (CEO), a
Company Secretary (CS), a Chief Financial Officer (CFO) and a Head of Internal Audit Part A: Cost Audit
andCompliance (HIAC);
(b) The positions of the Managing Director (MD) or Chief Executive Officer (CEO), Chapter A1 [1]:
Company Secretary (CS), Chief Financial Officer (CFO) and Head of Internal Audit and Cost Audit Concept & Legal issues
Compliance (HIAC) shall be filled by different individuals;
(c) The MD or CEO, CS, CFO and HIAC of a listed company Chapter A2 [2]:
shall not hold any executive position in any other company atthe same time;
(d) The Board shall clearly define respective roles, responsibilities and duties of the CFO, Chapter A3 [3]:
the HIAC and the CS; Cost Auditing Standards and Quality control
(e) The MD or CEO, CS, CFO and HIAC shall not be removed from their position without
approval of the Board as well as immediate dissemination to the Commission and stock Chapter A4 [4]:
exchange(s). Legal Position of Cost Auditor
Requirement to attend Board of Directors’ Meetings Chapter A5 [5]:

The MD or CEO, CS, CFO and HIAC of the company shall attendthe meetings of the Board: Reporting under Cost Audit
Provided that the CS, CFO and/or the HIAC shall not attend such part of a meeting of the Board Chapter A6 [6]:
which involves consideration of an agenda item relating to their personal matters. Cost Audit in Information Technology (IT)
Duties of Managing Director (MD) or Chief Executive Officer (CEO) and Chief Part B: Management Audit
Financial Officer (CFO)
Chapter B1 [7]:
(f) The MD or CEO and CFO shall certify to the Board that they have reviewed financial
statements for the year and that to the best of their knowledge and belief:
(i) these statements do not contain any materially untrue statement or omit any Chapter B2 [8]:
material fact or contain statements that might be misleading; and Operational Audit
(ii) these statements together present a true and fair view of the company’s affairs and
are in compliance with existing accounting standards and applicable laws; Chapter B3 [9]:
(g) The MD or CEO and CFO shall also certify that there are, to the best of knowledge and Management Audit in Different function
belief, no transactions entered into by the company during the year which are fraudulent,
illegal or in violation of the code of conduct for the company’s Board or its members; Part C: Performance Analysis
(h) The certification of the MD or CEO and CFO shall be disclosed in the Annual Report. [Chapter 10]
Board of Directors’ Committee

For ensuring good governance in the company, the Board shall have atleast following sub-
committees:
(i) Audit Committee; and
(ii) Nomination and Remuneration Committee.
275
Audit Committee
(2) Responsibility to the Board of Directors.
(a) The company shall have an Audit Committee as a sub- committee of the Board;
(b) The Audit Committee shall assist the Board in ensuring that the financial statements
reflect true and fair view of the state of affairs of the company and in ensuring a good
monitoringsystem within the business;
(c) The Audit Committee shall be responsible to the Board; the duties of the Audit Click to jump on:
Committee shall be clearly set forth in writing.
Home
Constitution of the Audit Committee
(d) The Audit Committee shall be composed of at least 3 (three) members; Part A: Cost Audit
(e) The Board shall appoint members of the Audit Committee who shall be non-executive
directors of the companyexcepting Chairperson of the Board and shall include at least 1 Chapter A1 [1]:
(one) independent director; Cost Audit Concept & Legal issues
(f) All members of the audit committee should be “financially literate” and at least 1 (one)
Chapter A2 [2]:
member shall have accounting orrelated financial management background and 10 (ten)
years of such experience;
Explanation: The term “financially literate” means the ability to read and understand the Chapter A3 [3]:
financial statements like statement of financial position, statement of comprehensive Cost Auditing Standards and Quality control
income, statement of changes in equity and cash flows statement and a person will be
considered to have accountingor related financial management expertise if he or she Chapter A4 [4]:
possesses professional qualification or Accounting or Finance graduate with at least 10 Legal Position of Cost Auditor
(ten) years of corporate management or professional experiences.
(g) When the term of service of any Committee member expires or there is any circumstance Chapter A5 [5]:
causing any Committee member to be unable to hold office before expiration of the term Reporting under Cost Audit
of service, thus making the number of the Committee members to be lower than the
prescribed number of 3 (three) persons, the Board shall appoint the new Committee Chapter A6 [6]:
member to fill upthe vacancy immediately or not later than 1 (one) month fromthe date
of vacancy in the Committee to ensure continuity of the performance of work of the Audit
Committee;
(h) The company secretary shall act as the secretary of the Committee;
Chapter B1 [7]:
(i) The quorum of the Audit Committee meeting shall not constitute without at least 1 (one) Internal Control & Internal Audit
independent director.
Chapter B2 [8]:
Chairperson of the Audit Committee Operational Audit
(j) The Board shall select 1 (one) member of the Audit Committee tobe Chairperson of the
Audit Committee, who shall be an independent director; Chapter B3 [9]:
(k) In the absence of the Chairperson of the Audit Committee, the remaining members may Management Audit in Different function
elect one of themselves as Chairperson for that particular meeting, in that case there shall
be no problem of constituting a quorum as required under condition No. 5(4)(b) and the Part C: Performance Analysis
reason of absence of the regular Chairperson shall be dulyrecorded in the minutes. [Chapter 10]
(l) Chairperson of the Audit Committee shall remain present in the Annual General Meeting
(AGM):
Provided that in absence of Chairperson of the Audit Committee,any other member from
the Audit Committee shall be selected to be present in the annual general meeting (AGM)
and reason for absence of the Chairperson of the Audit Committee shall berecorded in
the minutes of the AGM.
276
Meeting of the Audit Committee

(m) The Audit Committee shall conduct at least its four meetings in a financial year:
Provided that any emergency meeting in addition to regular meeting may be convened at
the request of any one of the members of the Committee;
(n) The quorum of the meeting of the Audit Committee shall be constituted in presence of
either two members or two-third of the members of the Audit Committee, whichever is Click to jump on:
higher, where presence of an independent director is a must.
Home
Role of Audit Committee
The Audit Committee shall: Part A: Cost Audit
(o) Oversee the financial reporting process;
(p) monitor choice of accounting policies and principles; Chapter A1 [1]:
(q) monitor Internal Audit and Compliance process to ensure that it is adequately resourced, Cost Audit Concept & Legal issues
including approval of the Internal Audit and Compliance Plan and review of the Internal
Chapter A2 [2]:
Audit and Compliance Report;
(r) oversee hiring and performance of external auditors;
(s) hold meeting with the external or statutory auditors for review of the annual financial Chapter A3 [3]:
statements before submission to the Board for approval or adoption; Cost Auditing Standards and Quality control
(t) review along with the management, the annual financial statements before submission to
the Board for approval; Chapter A4 [4]:
(u) review along with the management, the quarterly and half yearly financial statements Legal Position of Cost Auditor
before submission to the Board for approval;
(v) review the adequacy of internal audit function; Chapter A5 [5]:
(w) review the Management’s Discussion and Analysis before disclosing in the Annual
Report;
Chapter A6 [6]:
(x) review statement of all related party transactions submitted by the management; Cost Audit in Information Technology (IT)
(y) review Management Letters or Letter of Internal Control weakness issued by statutory
auditors; Part B: Management Audit
(z) oversee the determination of audit fees based on scope and magnitude, level of expertise
deployed and time required for effective audit and evaluate the performance of external Chapter B1 [7]:
auditors; and Internal Control & Internal Audit
(aa) oversee whether the proceeds raised through Initial Public Offering (IPO) or Repeat
Public Offering (RPO) or Rights Share Offer have been utilized as per the purposes stated Chapter B2 [8]:
in relevant offer document or prospectus approved by the Commission: Operational Audit
Provided that the management shall disclose to the Audit Committee about the uses or
applications of the proceedsby major category (capital expenditure, sales and marketing
Chapter B3 [9]:
expenses, working capital, etc.), on a quarterly basis, as a part of their quarterly
declaration of financial results:
Provided further that on an annual basis, the company shall prepare a statement of the
[Chapter 10]
proceeds utilized for the purposes other than those stated in the offer document or
prospectus for publication in the Annual Report along with the comments of the Audit
Committee.
277
Reporting of the Audit Committee

(bb) Reporting to the Board of Directors
(i) The Audit Committee shall report on its activities to theBoard.
(ii) The Audit Committee shall immediately report to theBoard on the
following findings, if any:
(a) report on conflicts of interests; Click to jump on:
(b) suspected or presumed fraud or irregularity or material defect
identified in the internal audit and compliance process or in the Home
financial statements;
(c) suspected infringement of laws, regulatory compliances including Part A: Cost Audit
securities related laws, rulesand regulations; and
(d) any other matter which the Audit Committee deems necessary shall Chapter A1 [1]:
be disclosed to the Board immediately;
Chapter A2 [2]:
Reporting to the Authorities Cost Accounting Standards
If the Audit Committee has reported to the Board about anything which has material impact on
the financial condition and results of operation and has discussed with the Board and the Chapter A3 [3]:
management that any rectification is necessary and if the Audit Committee finds that such Cost Auditing Standards and Quality control
rectification has been unreasonably ignored, the Audit Committee shall report such finding to
the Commission, upon reporting of such matters to the Board for three times or completion of Chapter A4 [4]:
a period of 6 (six) months from the date of first reporting to the Board, whichever is earlier. Legal Position of Cost Auditor
Reporting to the Shareholders and General Investors Chapter A5 [5]:

Report on activities carried out by the Audit Committee, including any report made to the Board Reporting under Cost Audit
under condition No. 5(6)(a)(ii) above during the year, shall be signed by the Chairperson of the
Audit Committee and disclosed in the annual report of the issuer company. Chapter A6 [6]:
Nomination and Remuneration Committee (NRC)
(3) Responsibility to the Board of Directors
(a) The company shall have a Nomination and Remuneration Committee (NRC) as a sub-
Chapter B1 [7]:
committee of the Board; Internal Control & Internal Audit
(b) The NRC shall assist the Board in formulation of the nominationcriteria or policy for
determining qualifications, positive attributes, experiences and independence of directors Chapter B2 [8]:
and top level executive as well as a policy for formal process of considering remuneration Operational Audit
of directors, top level executive;
(c) The Terms of Reference (ToR) of the NRC shall be clearly set forth in writing covering Chapter B3 [9]:
the areas stated at the condition No. 6(5)(b). Management Audit in Different function
Constitution of the NRC Part C: Performance Analysis

(a) The Committee shall comprise of at least three members including an independent [Chapter 10]
director;
(b) All members of the Committee shall be non-executivedirectors;
(c) Members of the Committee shall be nominated and appointed by the Board;
(d) The Board shall have authority to remove and appoint any member of the
Committee;
(e) In case of death, resignation, disqualification, or removal of any member of the
278
Committee or in any other cases of vacancies, the board shall fill the vacancy
within 180 (one hundred eighty) days of occurring such vacancy in the Committee;
(f) The Chairperson of the Committee may appoint or co-opt any external expert
and/or member(s) of staff to the Committee as advisor who shall be non-voting
member, if the Chairperson feels that advice or suggestion from such external
expert and/or member(s) of staff shall be required or valuable for the Committee;
(g) The company secretary shall act as the secretary of the Committee; Click to jump on:
(h) The quorum of the NRC meeting shall not constitute without attendance of at least
an independent director; Home
(i) No member of the NRC shall receive, either directly or indirectly, any
remuneration for any advisory or consultancy role or otherwise, other than Part A: Cost Audit
Director’s fees or honorarium from the company.
Chapter A1 [1]:
Chairperson of the NRC Cost Audit Concept & Legal issues
(d) The Board shall select 1 (one) member of the NRC to be Chairperson of the Committee,
Chapter A2 [2]:
who shall be an independent director;
(e) In the absence of the Chairperson of the NRC, the remaining members may elect one of
themselves as Chairperson for thatparticular meeting, the reason of absence of the regular Chapter A3 [3]:
Chairperson shall be duly recorded in the minutes; Cost Auditing Standards and Quality control
(f) The Chairperson of the NRC shall attend the annual general meeting (AGM) to answer
the queries of the shareholders: Chapter A4 [4]:
Provided that in absence of Chairperson of the NRC, any other member from the NRC Legal Position of Cost Auditor
shall be selected to be present in the annual general meeting (AGM) for answering the
shareholder’s queries and reason for absence of the Chairperson of the NRC shall be Chapter A5 [5]:
recorded in the minutes of the AGM. Reporting under Cost Audit
Meeting of the NRC Chapter A6 [6]:

(g) The NRC shall conduct at least one meeting in a financial year;
(h) The Chairperson of the NRC may convene any emergency meeting upon request by any
member of the NRC;
(i) The quorum of the meeting of the NRC shall be constituted in presence of either two Chapter B1 [7]:
members or two third of the members of the Committee, whichever is higher, where Internal Control & Internal Audit
presence of an independent director is must as required under condition No. 6(2)(h);
(j) The proceedings of each meeting of the NRC shall duly be recorded in the minutes and Chapter B2 [8]:
such minutes shall be confirmed in the next meeting of the NRC. Operational Audit
Role of the NRC Chapter B3 [9]:

(k) NRC shall be independent and responsible or accountable to the Board and to the Management Audit in Different function
shareholders;
(l) NRC shall oversee, among others, the following matters and make report with Part C: Performance Analysis
recommendation to the Board: [Chapter 10]
(i) formulating the criteria for determining qualifications, positive attributes
and independence of a director and recommend a policy to the Board,
relating to the remuneration of the directors, top level executive,
considering the following:
(a) the level and composition of remuneration is reasonable and
sufficient to attract, retain and motivate suitable directors to run the
279
company successfully;
(b) the relationship of remuneration to performance is clear and meets
appropriate performancebenchmarks; and
(c) remuneration to directors, top level executive involves a balance
between fixed and incentive pay reflecting short and long-term
performance objectives appropriate to the working of thecompany
and its goals; Click to jump on:
(ii) devising a policy on Board’s diversity taking into consideration age,
gender, experience, ethnicity, educational background and nationality; Home
(iii) identifying persons who are qualified to become directors and who may
be appointed in top level executive position in accordance with the Part A: Cost Audit
criteria laid down, and recommend their appointment and removal to the
Board; Chapter A1 [1]:
(iv) formulating the criteria for evaluation of performance of independent Cost Audit Concept & Legal issues
directors and the Board;
Chapter A2 [2]:
(v) identifying the company’s needs for employees at different levels and
determine their selection, transferor replacement and promotion criteria;
and Chapter A3 [3]:
(vi) developing, recommending and reviewing annually the company’s Cost Auditing Standards and Quality control
human resources and training policies;
(m) The company shall disclose the nomination and remuneration policy and the evaluation Chapter A4 [4]:
criteria and activities of NRC during the year at a glance in its annual report. Legal Position of Cost Auditor
External or Statutory Auditors Chapter A5 [5]:

(1) The issuer company shall not engage its external or statutory auditors to perform the Reporting under Cost Audit
following services of the company, namely:-
Chapter A6 [6]:
(i) appraisal or valuation services or fairness opinions; Cost Audit in Information Technology (IT)
(ii) financial information systems design and implementation;
(iii) book-keeping or other services related to the accounting records or financial Part B: Management Audit
statements;
(iv) broker-dealer services; Chapter B1 [7]:
(v) actuarial services; Internal Control & Internal Audit
(vi) internal audit services or special audit services;
(vii) any service that the Audit Committee determines; Chapter B2 [8]:
(viii) audit or certification services on compliance of corporategovernance as required Operational Audit
under condition No. 9(1); and
Chapter B3 [9]:
(ix) any other service that creates conflict of interest. Management Audit in Different function
(2) No partner or employees of the external audit firms shall possess any share of the
company they audit at least during the tenure of their audit assignment of that company; Part C: Performance Analysis
his or her family members also shall not hold any shares in the said company: [Chapter 10]
Provided that spouse, son, daughter, father, mother, brother, sister, son-in-law and
daughter-in-law shall be considered as family members.
(3) Representative of external or statutory auditors shall remain present in the Shareholders’
Meeting (Annual General Meeting or Extraordinary General Meeting) to answer the
queries of the shareholders.
280
Maintaining a website by the Company

(4) The company shall have an official website linked with the website of the stock exchange.
(5) The company shall keep the website functional from the date of listing.
(6) The company shall make available the detailed disclosures on its website as required
under the listing regulations of the concerned stock exchange(s).
Reporting and Compliance of Corporate Governance Click to jump on:

(7) The company shall obtain a certificate from a practicing Professional Accountant or
Secretary (Chartered Accountant or Cost and Management Accountant or Chartered Home
Secretary) other than its statutory auditors or audit firm on yearly basis regarding
compliance of conditions of Corporate Governance Code of the Commission and shall Part A: Cost Audit
such certificate shall be disclosed in the Annual Report.
Chapter A1 [1]:
Explanation: “Chartered Accountant” means Chartered Accountant as defined in the Cost Audit Concept & Legal issues
Bangladesh Chartered Accountants Order, 1973 (President’s Order No. 2 of 1973); “Cost
and Management Accountant” means Cost and Management Accountant as defined in Chapter A2 [2]:
the Cost and Management Accountants Ordinance, 1977 (Ordinance No. LIII of 1977);
“Chartered Secretary” means Chartered Secretary as defined in the LtL ´ <e7ưtL W flDN,
Chapter A3 [3]:
o³o ( o³o e7NвN© flDN) (Chartered Secretaries Act, 2010). Cost Auditing Standards and Quality control
(8) The professional who will provide the certificate on compliance of this Corporate Chapter A4 [4]:
Governance Code shall be appointed by the shareholders in the annual general meeting. Legal Position of Cost Auditor
(9) The directors of the company shall state, in accordance with the Annexure-C attached, in
the directors’ report whether the company has complied with these conditions or not. Chapter A5 [5]:
Chapter A6 [6]:
Interactive Question B3.9: Corporate Governance for small organizations
Is corporate governance relevant only to large businesses? Chapter B1 [7]:
Ans: No, corporate governance applies to all organizations, large or small, not just those with a high
market share. Small enterprises are considered to require corporate governance in order to establish Chapter B2 [8]:
clear expectations, responsibilities, and to establish sound decision-making procedures for the company Operational Audit
while the team is still small. Small organizations can establish and delegate appropriate authority
through corporate governance; this helps your personnel understand which decisions they can and Chapter B3 [9]:
cannot make independently. As was already noted, corporate governance structures frequently integrate Management Audit in Different function
policies, rules, and codes; these documents strike a balance between the demands of the company and
the involvement of stakeholders. Part C: Performance Analysis
[Chapter 10]
281
Annexure-A
[As per condition No. 1(5)(xxvi)]
Name of the company ( .................... Ltd.)
Declaration by CEO and CFO
Date: ……………………….
Click to jump on:
The Board of Directors
………………….. Limited Home
…………………………
………………… Part A: Cost Audit
………..
Chapter A1 [1]:
Subject: Declaration on Financial Statements for the year ended on…. Cost Audit Concept & Legal issues
Chapter A2 [2]:
Dear Sirs,
Pursuant to the condition No. 1(5)(xxvi) imposed vide the Commission’s
Notification No. ………………………. Dated ....................... under section 2CC Chapter A3 [3]:
of the Securities and Exchange Ordinance, 1969, we do hereby declarethat: Cost Auditing Standards and Quality control
(1) The Financial Statements of ................................................. Limited for the
year ended on …………………… have been prepared in compliance with Chapter A4 [4]:
International Accounting Standards (IAS) or International Financial Reporting Legal Position of Cost Auditor
Standards (IFRS), as applicablein the Bangladesh and any departure there from
has been adequately disclosed; Chapter A5 [5]:
(2) The estimates and judgments related to the financial statements were made on Reporting under Cost Audit
a prudent and reasonable basis, in order for the financial statements to reveal a
true and fair view;
Chapter A6 [6]:
(3) The form and substance of transactions and the Company’s state of affairs have
been reasonably and fairly presented in its financial statements;
(4) To ensure above, the Company has taken proper and adequate care in installing
a system of internal control and maintenance of accounting records; Chapter B1 [7]:
(5) Our internal auditors have conducted periodic audits to provide reasonable Internal Control & Internal Audit
assurance that the established policies and procedures of the Company were
consistently followed; and Chapter B2 [8]:
(6) The management’s use of the going concern basis of accounting in preparing Operational Audit
the financial statements is appropriate and there exists no material uncertainty
relatedto events or conditions that may cast significant doubt on theCompany’s Chapter B3 [9]:
ability to continue as a going concern. Management Audit in Different function
In this regard, we also certify that: Part C: Performance Analysis

(i) We have reviewed the financial statements for the year ended on [Chapter 10]
…………….and that to the best of our knowledge and belief:
(a) these statements do not contain any materially untrue statement or omit
any material fact or contain statements that might be misleading;
(b) these statements collectively present true and fair view of the
Company’s affairs and are in compliance with existing accounting
standards and applicable laws.
282
(ii) There are, to the best of knowledge and belief, no transactions entered into by
the Company during the year which are fraudulent, illegal or in violation of the
code of conduct for the company’sBoard of Directors or its members.
Sincerely yours,
(Name and Signature with date) (Name and Signature with date) Click to jump on:
Chief Executive Officer (CEO) Chief Financial Officer (CFO)
Home
Annexure-B
[Certificate as per condition No. 1(5)(xxvii)]
Part A: Cost Audit
Chapter A1 [1]:
Report to the Shareholders of...........................................................Limited on Cost Audit Concept & Legal issues
compliance on the Corporate Governance Code
Chapter A2 [2]:
We have examined the compliance status to the Corporate Governance Code by Cost Accounting Standards
…………………. Limited for the year ended on
……………………… This Code relates to the Notification No. Chapter A3 [3]:
………………………… dated ……………….. of the Bangladesh Securities and Cost Auditing Standards and Quality control
Exchange Commission.
Chapter A4 [4]:
Such compliance with the Corporate Governance Code is the responsibility of the Legal Position of Cost Auditor
Company. Our examination was limited to the procedures and implementation
Chapter A5 [5]:
thereof as adopted by the Management in ensuring compliance to the conditions of
the Corporate Governance Code.
Chapter A6 [6]:
This is a scrutiny and verification and an independent audit on compliance of the Cost Audit in Information Technology (IT)
conditions of the Corporate Governance Code as well as the provisions of relevant
Bangladesh Secretarial Standards (BSS) as adopted by Institute of Chartered Part B: Management Audit
Secretaries of Bangladesh (ICSB) in so far as those standards are not inconsistent
with any condition of this Corporate Governance Code. Chapter B1 [7]:
We state that we have obtained all the information and explanations,which we have
required, and after due scrutiny and verification thereof, we report that, in our Chapter B2 [8]:
opinion: Operational Audit
(a) The Company has complied with the conditions of the Corporate Governance
Code as stipulated in the above mentioned Corporate Governance Code issued Chapter B3 [9]:
by the Commission or not complied (if not complied, specify non-compliances); Management Audit in Different function
(b) The Company has complied with the provisions of the relevant Bangladesh
Secretarial Standards (BSS) as adopted by the Instituteof Chartered Secretaries Part C: Performance Analysis
of Bangladesh (ICSB) as required by this Code or not complied (if not complied, [Chapter 10]
specify non-compliances);
(c) Proper books and records have been kept by the company as required under the
Companies Act, 1994, the securities laws and other relevant laws or not
complied (if not complied, specify non- compliances); and
(d) The Governance of the company is highly satisfactory or satisfactory or not
satisfactory.
283
Place: For ......................... (Name of the firm)

Dated: ---------------------------------------- (Signature with name and designation)
Annexure-C
[As per condition No. 1(5)(xxvii)]
Click to jump on:
Status of compliance with the conditions imposed by the Commission’s Notification
No.SEC/CMRRCD/2006-158/207/Admin/80, dated 3 June 2018 issued under section Home
2CC of the Securities and Exchange Ordinance, 1969:
Part A: Cost Audit
(Report under Condition No. 9)
Chapter A1 [1]:
Condition No. Title Compliance Status (Put Remarks
√ in the appropriate (if any)
Chapter A2 [2]:
column)
Complied Not
complied Chapter A3 [3]:
1(1) Cost Auditing Standards and Quality control
1(2) (a)
1(2)(b)(i) Chapter A4 [4]:
1(2)(b)(ii) Legal Position of Cost Auditor
1(2)(b)(iii)
Chapter A5 [5]:
1(2)(b)(iv)
1(2)(b)(v)
1(2)(b)(vi) Chapter A6 [6]:
1(2)(b)(vii) Cost Audit in Information Technology (IT)
1(2)(b)(viii)
1(2)(b)(ix) Part B: Management Audit
1(2)(b)(x)
1(2)(c) Chapter B1 [7]:
1(2)(d)
1(2)(e)
Chapter B2 [8]:
1(3)(a) Operational Audit
1(3)(b)(i)
1(3)(b)(ii) Chapter B3 [9]:
1(3)(b)(iii) Management Audit in Different function
1(3)(b)(iv)
1(3)(b)(v) Part C: Performance Analysis
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column)
Complied Not
complied
1(3)(c)
1(3)(d) Click to jump on:
1(4)(a)
1(4)(b) Home
1(4)(c)
1(4)(d) Part A: Cost Audit
1(4)(e)
Chapter A1 [1]:
1(5)(i)
1(5)(ii)
1(5)(iii) Chapter A2 [2]:
1(5)(iv) Cost Accounting Standards
1(5)(v)
1(5)(vi) Chapter A3 [3]:
1(5)(vii) Cost Auditing Standards and Quality control
1(5)(viii)
Chapter A4 [4]:
1(5)(ix) Legal Position of Cost Auditor
1(5)(x)
1(5)(xi) Chapter A5 [5]:
1(5)(xii) Reporting under Cost Audit
1(5)(xiii)
1(5)(xiv) Chapter A6 [6]:
1(5)(xv)
1(5)(xvi)
1(5)(xvii)
1(5)(xviii) Chapter B1 [7]:
1(5)(xix) Internal Control & Internal Audit
1(5)(xx)
1(5)(xxi) Chapter B2 [8]:
1(5)(xxii) Operational Audit
1(5)(xxiii)(a)
Chapter B3 [9]:
1(5)(xxiii)(b)

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column)
Complied Not
complied
1(5)(xxiii)(c)
1(5)(xxiii)(d) Click to jump on:
1(5)(xxiv)(a)
1(5)(xxiv)(b) Home
1(5)(xxiv)(c)
1(5)(xxv)(a) Part A: Cost Audit
1(5)(xxv)(b)
Chapter A1 [1]:
1(5)(xxv)(c)
1(5)(xxv)(d)
1(5)(xxv)(e) Chapter A2 [2]:
1(5)(xxv)(f) Cost Accounting Standards
1(5)(xxv)(g)
1(5)(xxvi) Chapter A3 [3]:
1(5)(xxvii) Cost Auditing Standards and Quality control
1(6)
Chapter A4 [4]:
1(7)(a) Legal Position of Cost Auditor
1(7)(b)
2(a) Chapter A5 [5]:
2(b) Reporting under Cost Audit
2(c)
2(d) Chapter A6 [6]:
2(e)
3(1)(a)
3(1)(b)
3(1)(c) Chapter B1 [7]:
3(1)(d) Internal Control & Internal Audit
3(1)(e)
3(2) Chapter B2 [8]:
3(3)(a)(i) Operational Audit
3(3)(a)(ii)
Chapter B3 [9]:
3(3)(b)

[Chapter 10]
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column)
Complied Not
complied
3(3)(c)
4(i) Click to jump on:
4(ii)
5(1)(a) Home
5(1)(b)
5(1)(c) Part A: Cost Audit
5(2)(a)
Chapter A1 [1]:
5(2)(b)
5(2)(c)
5(2)(d) Chapter A2 [2]:
5(2)(e) Cost Accounting Standards
5(2)(f)
5(3)(a) Chapter A3 [3]:
5(3)(b) Cost Auditing Standards and Quality control
5(3)(c)
Chapter A4 [4]:
5(4)(a) Legal Position of Cost Auditor
5(4)(b)
5(5)(a) Chapter A5 [5]:
5(5)(b) Reporting under Cost Audit
5(5)(c)
5(5)(d) Chapter A6 [6]:
5(5)(e)
5(5)(f)
5(5)(g)
5(5)(h) Chapter B1 [7]:
5(5)(i) Internal Control & Internal Audit
5(5)(j)
5(5)(k) Chapter B2 [8]:
5(5)(l) Operational Audit
5(5)(m)
Chapter B3 [9]:
5(6)(a)(i)

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column)
Complied Not
complied
5(6)(a)(ii)(a)
5(6)(a)(ii)(b) Click to jump on:
5(6)(a)(ii)(c)
5(6)(a)(ii)(d) Home
5(6)(b)
5(7) Part A: Cost Audit
6(1)(a)
Chapter A1 [1]:
6(1)(b)
6(1)(c)
6(2)(a) Chapter A2 [2]:
6(2)(b) Cost Accounting Standards
6(2)(c)
6(2)(d) Chapter A3 [3]:
6(2)(e) Cost Auditing Standards and Quality control
6(2)(f)
Chapter A4 [4]:
6(2)(g) Legal Position of Cost Auditor
6(2)(h)
6(2)(i) Chapter A5 [5]:
6(3)(a) Reporting under Cost Audit
6(3)(b)
6(3)(c) Chapter A6 [6]:
6(4)(a)
6(4)(b)
6(4)(c)
6(4)(d) Chapter B1 [7]:
6(5)(a) Internal Control & Internal Audit
6(5)(b)(i)(a)
6(5)(b)(i)(b) Chapter B2 [8]:
6(5)(b)(i)(c) Operational Audit
6(5)(b)(ii)
Chapter B3 [9]:
6(5)(b)(iii)

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column)
Complied Not
complied
6(5)(b)(iv)
6(5)(b)(v) Click to jump on:
6(5)(b)(vi)
6(5)(c) Home
7(1)(i)
7(1)(ii) Part A: Cost Audit
7(1)(iii)
Chapter A1 [1]:
7(1)(iv)
7(1)(v)
7(1)(vi) Chapter A2 [2]:
7(1)(vii) Cost Accounting Standards
7(1)(viii)
7(1)(ix) Chapter A3 [3]:
7(2) Cost Auditing Standards and Quality control
7(3)
Chapter A4 [4]:
8(1) Legal Position of Cost Auditor
8(2)
8(3) Chapter A5 [5]:
9(1) Reporting under Cost Audit
9(2)
9(3) Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
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9.10 Business Investigations

What is a corporate investigation?
A corporate investigation is the thorough investigation of a corporation or business in order to
uncover wrongdoing committed by management, employees, or third parties.
There are many aspects of corporate investigations and they can vary significantly based on
your needs. For example, corporate investigations can uncover if a business partner is
Click to jump on:
legitimate, whether an employee is stealing from the company, or reveal fraud and
embezzlement, just to name a few. A corporate investigator’s main job, though, is ensuring a
Home
company is running smoothly and within the law.
Part A: Cost Audit
Types of Corporate Investigation: Chapter A1 [1]:
Depending on what you’re looking to investigate within your business, an investigator will Cost Audit Concept & Legal issues
conduct one or multiple of these investigations:
1. Undercover Investigation: By blending in with the company, an investigator can look into Chapter A2 [2]:
employee misconduct like theft, substance abuse, or harassment. Investigators will often Cost Accounting Standards
use covert surveillance as a part of their inspection.
2. Research Investigation: Investigators can conduct research in order to find information Chapter A3 [3]:
about companies that you do business with for acquisitions, mergers, joint ventures, venture Cost Auditing Standards and Quality control
capital, private equity, and investments. They can also perform in-depth
employee background checks. Chapter A4 [4]:
3. Financial Investigation: An investigator conducting a financial investigation can discover
embezzlement, money laundering, fraud, and other white-collar crime.
Chapter A5 [5]:
4. E-Discovery / Electronic Investigation: With e-discovery, investigators can gather
electronically stored information in order to collect necessary evidence. They can also
potentially restore lost data. Chapter A6 [6]:
5. Corruption Investigation: An investigator looking for corruption can uncover bribery, Cost Audit in Information Technology (IT)
illegal foreign exchange, corporate fraud, and industrial espionage.
How does a corporate investigation work?
The methods of investigation with vary depending on what kind of investigation you are Chapter B1 [7]:
looking for and the individual investigator. Be specific about your needs and the information Internal Control & Internal Audit
you are seeking so your investigator can use the right tools to resolve your situation. Some
techniques an investigator might use include: Chapter B2 [8]:
Operational Audit
1. Financial investigation:
Chapter B3 [9]:
A financial investigation is an analysis of where money comes from, how it moves, and
how it is used. Also known as forensic accounting, this type of investigation is used in
corporate investigations, theft, embezzlement, money laundering, tax evasion, asset
searches, criminal, and many other types of investigations.
[Chapter 10]
What do financial investigations reveal?
• Tax evasion
• Public corruption
• Health care fraud
• Telemarketing fraud
290
• Terrorist financing
• Illegal activity
What happens during a financial investigation?

In most cases, financial investigations revolve around collection and analysis. The
collection aspect involves searching through a variety of financial documents. This could
include bank account records, bank account information, real estate files, motor vehicle Click to jump on:
records, and computer files. With your permission, investigators may use computer
forensics to find relevant information. They will then analyze the data they’ve found, Home
looking into where money is and how it got there. Because financial investigators are a
legal, unbiased source, evidence they find can be used in court if necessary. Part A: Cost Audit
2. Due diligence Chapter A1 [1]:
Due diligence is the comprehensive analysis of either a person or a business to establish Cost Audit Concept & Legal issues
their credibility during a legal transaction.
Chapter A2 [2]:
What is a due diligence investigation? Cost Accounting Standards
A due diligence investigation is the examination of a company’s management, finances,
Chapter A3 [3]:
performance, mission, history, aims, clients, and anything else that details how a business
functions. It is vital to conduct a due diligence investigation before a merger, company
purchase, or acquisition because it reveals hidden liabilities.
Chapter A4 [4]:
How do I know if I need a due diligence investigation?
If you run a business or plan on taking a high-ranking position, due diligence investigations Chapter A5 [5]:
give you a complete picture of a company. Depending on what they find, investigators can Reporting under Cost Audit
justify negotiating a lower price and ensure all claims by a company are substantiated. If
you are investing your money in a business transaction, a due diligence investigation can Chapter A6 [6]:
help you make an informed decision. Cost Audit in Information Technology (IT)
What is the due diligence process? Part B: Management Audit

An investigator will often use forensic accounting investigations, background checks,
surveillance, mystery shopping, asset searches, financial investigations, and other corporate Chapter B1 [7]:
investigation methods to find out how a company functions. In some cases, investigators Internal Control & Internal Audit
will need to review public records, speak with company clients and customers, and contact
overseas offices to uncover the legitimacy and potential of a company. A good private Chapter B2 [8]:
Operational Audit
investigator will work with you to determine which methods your particular investigation
needs.
Chapter B3 [9]:
Information an investigator looks at:
• Company overview (history) Part C: Performance Analysis
• Employees (benefits, personalities, unions) [Chapter 10]
• Financial costs/results (revenue, cost structure, selling activities)
• Intellectual property, assets and facilities
• Liabilities and equity
• Marketing audits
• Information systems audits
• Compatibility audits
291
• Materials management (inventory)

• Production and reconciliation audits
Types of Due Diligence:

• Legal: This aspect deals with the intellectual property of the company in question. It
involves contract, loans, property, employment, and pending litigations.
• Financial: Financial due diligence verifies a company’s finances. It looks at things like Click to jump on:
earnings, assets, liabilities, cash flow, debt, and management.
• Commercial: Commercial due diligence brings into consideration the current market. Home
This includes conversations with customers, competitor assessment, and any business
plans in place. Part A: Cost Audit
• Other: External types of due diligence include taxation, pensions, human resources,
and IT systems. Chapter A1 [1]:
3. Computer forensics
Chapter A2 [2]:
Cellular and computer forensics investigations are the collection and analysis of digital data
by trained forensic investigators in order to solve a crime or resolve an issue.
Chapter A3 [3]:
Computer Forensics vs. Cell Phone Forensics Cost Auditing Standards and Quality control
Though often considered similar investigations, the two types of devices are different in
how they function, the techniques and technologies used to examine them, and the laws Chapter A4 [4]:
surrounding each investigation. While a computer is essentially a storage container for data, Legal Position of Cost Auditor
cell phones differ drastically by make and model. The type of phone determines what type
of data the phone contains, how that data is stored, what happens to deleted data, and how Chapter A5 [5]:
the GPS is monitored. Reporting under Cost Audit
What is cyber crime and how can an investigator help? Chapter A6 [6]:
Cyber crime is any unlawful act committed through the internet. Criminals can use hacks Cost Audit in Information Technology (IT)
and codes to break into laptops, personal computers, corporate servers, and wireless
devices. They can steal anything from intellectual property from corporations to personal Part B: Management Audit
information from individuals.
Chapter B1 [7]:
An investigator will assess your computer’s risk, develop a strong security policy, train you
on security measures, implement technology, and reconfigure information technology
Chapter B2 [8]:
infrastructure. If you believe your computer has already been compromised, investigators Operational Audit
can perform vulnerability assessments and penetration testing to determine the root of the
problem. This allows them to detect and fix any weaknesses in your computer system. They Chapter B3 [9]:
can also suggest countermeasures you can take to protect your system in the future. Management Audit in Different function
Do you need a cell phone or computer forensics investigator? Part C: Performance Analysis
Sometimes cybercrime and hacking can be obvious, but often times a criminal’s methods [Chapter 10]
are more subtle. You need the help of a trained investigator if:
Computer
• Unexpected software installs on your computer
• Your mouse moves by itself and actually shows purpose
• Your antimalware software, task manager, or registry editor is disabled
292
• Standard programs or files won’t open or function properly

• Files you haven’t touched have been deleted or moved
• Your passwords have been changed without your consent
• Money is missing from your bank account or you get bill or calls about purchases you
haven’t made
Cell Phone Click to jump on:

• Your battery is dying faster than usual and takes longer to charge
• Your phone is constantly warm when not charging or playing games Home
• Strange noises or echoing occurs during phone calls
• Your data usage skyrockets Part A: Cost Audit
Types of Cyber Crime Investigators Chapter A1 [1]:

Depending on your particular investigation needs, you may look for help from one of a
variety of investigators:
Chapter A2 [2]:
• Computer forensics investigator: If you require evidence of activity on your Cost Accounting Standards
computer, a computer forensics investigator can legally and accurately recover digital
data. They also have the ability to resurface hidden or deleted data and emails. Chapter A3 [3]:
• Cell Phones forensics investigator: A cellular forensic investigator will understand Cost Auditing Standards and Quality control
the different types of phones and will use this information to recover data, text
messages, photographs, GPS, and other information. Chapter A4 [4]:
• Computer security investigator: If your computer has been attacked by a criminal Legal Position of Cost Auditor
or compromised by an employee or family member, a computer security investigator
can uncover the source of the attack and exactly what has been done to your Chapter A5 [5]:
computer. Through this investigation, you can discover whether your computer was Reporting under Cost Audit
used to perpetuate a crime and find out how to prevent future attacks.
Chapter A6 [6]:
• Computer crime investigator: A computer crime investigator can make sure that, if
your system is used in a crime, the blame doesn’t fall on you. They can find out
exactly what kind of crime was committed and can gather evidence to be used in
court.
Chapter B1 [7]:
How to Protect Yourself from Cyber Crime Internal Control & Internal Audit
• Don’t click on unfamiliar links (antiviral messages, strange emails, etc.)
• Don’t download unfamiliar software Chapter B2 [8]:
• Never give out personal information unless it’s a trusted source Operational Audit
• Install a firewall
• Perform software updates Chapter B3 [9]:
• Change and vary your passwords
• Avoid public, open wi-fi
• Keep important information off the cloud
[Chapter 10]
• Backup your data
4. Security penetration checks

5. Countermeasure sweeps
6. Integrity testing
7. Surveillance
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Click to jump on:
Home
Part A: Cost Audit

Part C
Chapter A1 [1]:
Performance Analysis Cost Audit Concept & Legal issues
Chapter C1 [10]
Chapter A2 [2]:
Click to jump on a specific topic of this part Cost Accounting Standards
Chapter A3 [3]:
10.1 Performance Analysis Cost Auditing Standards and Quality control
10.2 Suggested Mechanism for Performance Analysis
10.3 Steps Approach Suggested for Report on Performance Appraisal Chapter A4 [4]:
10.4 Indicative Contents of the Report on Performance Appraisal Legal Position of Cost Auditor
10.5 Capacity Utilization Analysis
Chapter A5 [5]:
10.6 Productivity and Efficiency Analysis Reporting under Cost Audit
10.7 Utilities and Energy Efficiency Analysis
10.8 Key Costs and Contribution Analysis Chapter A6 [6]:
10.9 Product/Service Profitability Analysis Cost Audit in Information Technology (IT)
10.10 Market / Customer Profitability
10.11 Working Capital and Inventory Management Analysis
10.12 Manpower Analysis Chapter B1 [7]:
10.13 Impact of IFRS on the Cost Structure, Cash Flows and Profitability Internal Control & Internal Audit
10.14 Management Accounting tools
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
294
10.1 Performance Analysis

10.1.1 The basic objective to prepare a Report on Performance Appraisal is to provide an
actionable insight into costs and profitability for the management in the strategic and
operational context. It aims at discovering various drivers of costs and profitability and
their impact on the selected performance variables. It would help the organisations:
• To improve profits and profitability Click to jump on:
• To optimize resource allocation
• To optimize the product and services portfolio Home
10.1.2 The objective is to provide assessment of the performance of the organisation across Part A: Cost Audit
various spectrums. It inter-alia aims at satisfying the goals of management audit. It is
concerned with providing the Board with information that it “should know” to take Chapter A1 [1]:
suitable actions to improve business performance.
Chapter A2 [2]:
10.1.3 The following criteria may help the auditor to select and include the various
performance measurement criteria in the Report on Performance Appraisal:
• Effect on profitability Chapter A3 [3]:
• Effect on resource utilisation Cost Auditing Standards and Quality control
• Effect on liquidity
• Effect on risks Chapter A4 [4]:
• Effect on quality Legal Position of Cost Auditor
• Effect on competitiveness
Chapter A5 [5]:
• Effect on responsiveness to the market etc.
10.1.4 An ideal Report on Performance Appraisal should possess the following Chapter A6 [6]:
characteristics: Cost Audit in Information Technology (IT)
• Objectivity
• Capability of being predictive value Part B: Management Audit
• Comprehensiveness
• No information over load Chapter B1 [7]:
• Coverage of strategic thrust Internal Control & Internal Audit
• Trend measures and current status
Chapter B2 [8]:
• Timeliness
Operational Audit
• Segmented and enterprise-wide coverage
Chapter B3 [9]:

[Chapter 10]
295
10.2 Suggested Mechanism for Performance Analysis

After analyzing the activities within each process, we given below the suggested mechanism
for performance analysis as follows:
In the above paragraphs, we discussed how the strategies are formulated, how they are
implemented through the processes and now we come to assess the actual performance. Click to jump on:
Performance measures tell managers something important about the company’s products,
services, and the processes. Effective performance measures can let us: Home
• Monitor performance to judge how well the company is doing,
• Know if company is meeting its own set goals and if the customers are satisfied, Part A: Cost Audit
• Take action to affect performance or improve efficiency if improvements are necessary.
Chapter A1 [1]:
So, we need to identify appropriate Performance measures so that the analyst is provided data
and information necessary to make informed decisions. Performance measures provide a
Chapter A2 [2]:
snapshot of current performance capabilities and track whether actual performance is getting
better, staying the same, or getting worse over time. Machine hour rate is a performance
measure which provides us inputs for various decisions. Capital expenditures talk about the Chapter A3 [3]:
investment of funds; we communicate the return on that investment through performance Cost Auditing Standards and Quality control
measures.
Chapter A4 [4]:
Keep the focus of the chosen performance measure on things that matter most, such as: Legal Position of Cost Auditor
• Are we accomplishing our mission to analyze the performance?
• Are the processes achieving strategic goals and objectives? Chapter A5 [5]:
• Are the customers satisfied? Reporting under Cost Audit
• Are various processes being managed by the company properly?
Chapter A6 [6]:
• Are the output and outcomes observed result in the company being cost-efficient as the Cost Audit in Information Technology (IT)
industry leader?
The auditor could summarize the plan in order to have clarity. A suggestive format of the plan
is given in the List- A. Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
296
10.3 Steps Approach Suggested for Report on Performance

Appraisal
Suggested below steps involved in the preparation of the Performance Analysis:
Preliminary discussion with the Management of the company to apprise them of the scope with
specific reference to the company.
Click to jump on:
10.3.1 Identify and understand the key strategies of the company, both prescriptive and
Home
emergent strategies included.
Part A: Cost Audit
10.3.2 Choose strategies that have more visible expressions in costs data maintained by the
Chapter A1 [1]:
company.
10.3.3 Identify the activities that were impacted by the strategies selected and also Chapter A2 [2]:
implemented during the year of cost audit. Cost Accounting Standards
10.3.4 Analyze the cost implications of those activities and link it with the expected results of Chapter A3 [3]:
the strategies. Cost Auditing Standards and Quality control
10.3.5 Present the evaluation, in a table or any other easily comprehensible format like Chapter A4 [4]:
histogram, chart, graph etc. Legal Position of Cost Auditor
10.3.6 Give explanatory notes for the terms used, calculations made, and assumption behind Chapter A5 [5]:
the evaluations. Reporting under Cost Audit
Chapter A6 [6]:
10.3.7 Finalize the finding after a discussion with the concerned operating executives and then
with the management of the company.

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
297
10.4 Indicative Contents of The Report on Performance Appraisal

10.4.1 The Report on Performance Appraisal may cover the following indicative areas:
• Capacity Utilization Analysis
• Productivity/Efficiency Analysis
• Utilities/Energy Efficiency Analysis
• Key-Costs & Contribution Analysis
Click to jump on:
• Product/Service Profitability Analysis
• Market/Customer Profitability Analysis
Home
• Working Capital & Inventory Management Analysis
Part A: Cost Audit
• Manpower Analysis
• Impact of IFRS on the Cost Structure, Cash-Flows and Profitability Chapter A1 [1]:
• Application of Management Accounting Tools Cost Audit Concept & Legal issues
10.4.2 For these and any other performance measures elected for inclusion in the Report on Chapter A2 [2]:
Performance Appraisal, the auditor should also include wherever appropriate the Cost Accounting Standards
following:
• Horizontal and vertical analysis of quantitative figures Chapter A3 [3]:
• Trend analysis of performance parameters reflecting 3-10 years’ figures Cost Auditing Standards and Quality control
• Qualitative comments with interpretations of the cost auditor
Chapter A4 [4]:
• Comparison with external benchmarks such as industry average
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
298
10.5 Capacity Utilization Analysis

10.5.1 The basic quantitative information on capacity is covered in the Annexure 1 of Part B
and C of CRA3 – Quantitative Information. However, this information is only
indicative and does not provide analytical review. Capacity is usually expressed in
terms of the final cost unit and where not so possible in terms of machine hours, people
hours etc. Click to jump on:
10.5.2 The concept of capacity is highly subjective. While on one hand it denotes the Home
availability of resources, it would also mean the maximum rate at which the company
can produce goods or services. Capacity does have considerable impact on the Part A: Cost Audit
profitability. The auditor should assess this impact by analyzing and relating the impact
of capacity costs on profitability. Chapter A1 [1]:
10.5.3 The auditor should collect information of theoretical capacity, practical capacity,
normal capacity and budgeted capacity for the period under review. Although the Chapter A2 [2]:
information may be available for all machinery & equipment, the auditor should
identify the “constraint” that would limit the capacity of the entire organisation or
Chapter A3 [3]:
product or a certain geographical area. Cost Auditing Standards and Quality control
10.5.4 The auditor should assess various capacity limits for better analysis and reporting. All Chapter A4 [4]:
these have costs and could affect profitability. These are: Legal Position of Cost Auditor
• Internal physical capacity – machinery & equipment
• External physical capacity – subcontracting and leasing Chapter A5 [5]:
• The capacity of manpower bandwidth at all levels Reporting under Cost Audit
• The financial capacity
Chapter A6 [6]:
10.5.5 When comparing the actual production with the capacity, the auditor should identify
and analyze the reasons for variation due to controllable and uncontrollable causes. It
would help to concentrate on material impact caused due to idle time, break-downs,
lack of power, lack of material, lack of demand. It would be advisable to compute the
Chapter B1 [7]:
cost impact of these.
10.5.6 Most of the capacity related information is available with the production and industrial Chapter B2 [8]:
engineering departments. The auditor should also refer to the CENVAT records for Operational Audit
actual production data.
Chapter B3 [9]:
10.5.7 The auditor should comment on how the company responds to the variations in product Management Audit in Different function
demand by adjusting its capacity. This should be done with respect the cost impact.
10.5.8 The capacity performance measures could be: [Chapter 10]
• Capacity ratios to measure utilisation
• Identify bottlenecks & their impact on costs
• Ability to serve markets by creating short term capacity
• Analysis of throughput per hour of constraint capacity resource and return per hour
at this resource (could be done decomposing the Throughput Accounting ratios)
• Committed capacity costs by process and managed capacity costs by process
299
• Impact of wastages on capacity utilization
10.5.9 The auditor’s checklist would include processing of information gathered from sources
like:
• Technical documents pertaining to the equipment
• Production planning reports
• Interviews with managers responsible Click to jump on:
• Wastage and down-time reports
• Benchmarking exercises done, if any Home
• External sources providing suggestive capacity reporting formats like CAM-I
publications Part A: Cost Audit
(Consortium for Advanced Manufacturing – International) Chapter A1 [1]:

Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
300
10.6 Productivity And Efficiency Analysis

10.6.1 Productivity involves variables of input resources and the output. Measuring,
identifying and isolating the different input resources and analyzing their contribution
to produce goods and services and their effect on costs and profitability is imperative
for improving business performance. It should be noted carefully that productivity is a
measure of efficiency per unit of output, whereas efficiency is generally measured in Click to jump on:
totality.
Home
10.6.2 The auditor could understand and analyse the whole chain of input-processing-output.
This analysis, while traditional and very basic, would help auditor to comment upon Part A: Cost Audit
the performance of the organisation across products or product groups. It is necessary
for the auditor to understand the input ingredients for each product, product group, Chapter A1 [1]:
customer etc. Cost Audit Concept & Legal issues
10.6.3 Annexure 3 & 4 of Part of CRA-3 to the cost audit report provide some basic information Chapter A2 [2]:
about the input costs and their relation with the output. The auditor should further
analyse these areas to identify causes of good performance and areas that need
Chapter A3 [3]:
improvements. Cost Auditing Standards and Quality control
10.6.4 The considerations in measuring productivity and efficiency performance could be: Chapter A4 [4]:
• Performance of input factors such as material, people, tools, equipment, processes, Legal Position of Cost Auditor
management, capital funds etc.
• The output factors could be units produced and sold, number of customers served, Chapter A5 [5]:
reduced costs, improved responsiveness etc. Reporting under Cost Audit
• It’s not just the productivity, but the improvement (or lack of it) in it that must be
measured. This could be done by identifying whether the company is able to Chapter A6 [6]:
− Achieve more output with same input
− Achieve same output with less input
− Achieve much more output with relatively less increased input
− Achieve slightly less output with much less input Chapter B1 [7]:
• For each selected area, the auditor should identify whether the improvement is Internal Control & Internal Audit
permanent or temporary and report on the same. The recommended approach for
the organisation should be focusing on the sustainable improvements. Care should Chapter B2 [8]:
be taken to identify and report potential manipulations. Operational Audit
• Alongside the productivity or efficiency ratios, the cost auditor should also analyse
and report on the effect of the same on quality. The auditor should isolate quality Chapter B3 [9]:
of various inputs and their effect of the output. Management Audit in Different function
• The performance measures in respect of this area could be:
− Inputs ustilised (material, man, machine, capital etc) per unit of output or Part C: Performance Analysis
output obtained per unit of an input variable [Chapter 10]
− Wastages as percentage of input
− Indices could be developed for Single Factor Productivity (SFP), Multi-Factor
Productivity (MFP), Total Factor Productivity (TFT)
− Inter-relationships in various productivity measures e.g. output per man-hour
may have increase, but if it is accompanied by higher wastage per man hour,
then there is no real benefit.
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10.6.5 The cost auditor’s checklist would include, inter alia, the following: • The Bill of
Material (BOM) for each product • The standard cost card, if any • Internal reports on
consumption, wastages per unit of input to capture actual data • Production scheduling
and plans to measure labour & machine time productivity • External benchmarking
such as industry norms, best practices data etc. used by the company or generated by
auditor for analysis Click to jump on:
Home
Part A: Cost Audit

Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
302
10.7 Utilities and Energy Efficiency Analysis

10.7.1 This is an extended analysis of single factor productivity in respect of the utilities and
energy inputs acquired and consumed by the company. The importance of conservation
of non-renewable energy needs no emphasis.
10.7.2 The utilities are resources that are used in the process of conversion of material and Click to jump on:
other components into a finished product, but these resources do not form part of the
physical unit of the product. In manufacturing industries, utilities and energy form a Home
substantial part of the conversion cost.
Part A: Cost Audit
10.7.3 The broad headings under which the utilities and energy performance could be
categorized are Power, steam, electricity, compressed air, water, etc. These utilities are Chapter A1 [1]:
consumed in the production process or in environment protection initiatives. The use Cost Audit Concept & Legal issues
of utilities for administrative functions may be found in terms of lighting, cooling,
ventilation, heating refrigeration etc. The auditor should evaluate the impact from cost Chapter A2 [2]:
angle as well as from the viewpoint of conservation of energy. It is essential to check
if there are any statutory norms prescribed for the company.
Chapter A3 [3]:
10.7.4 The auditor should gather information on whether the company falls under the energy
intensive industries as per the schedule attached to the Energy Conservation Act 2001. Chapter A4 [4]:
These industries include Aluminum, fertilizers, steel, cement, paper and pulp, sugar, Legal Position of Cost Auditor
textile, chemicals, petrochemicals, gas crackers, etc.
Chapter A5 [5]:
10.7.5 For external benchmarking, it may be useful to refer to the practices followed by Reporting under Cost Audit
companies which are accredited by the Bureau of Energy Efficiency formed under the
Energy Conservation Act 2001. Chapter A6 [6]:
10.7.6 The performance appraisal parameters for energy and utilities would include the
consumption of fuel for generating energy and then the use of the energy thus produced Part B: Management Audit
per unit of final product.
Chapter B1 [7]:
The performance parameters could include the following: Internal Control & Internal Audit
• Energy generated per unit of fuel consumed or fuel consumed per unit of energy
Chapter B2 [8]:
generated. This could be applied for power, steam, electricity, water etc. Operational Audit
• Measurement of improvement in power factor (denoting reduction in the KVA
demand charges) Chapter B3 [9]:
• The cost of generating energy per unit and the cost of consuming the energy per Management Audit in Different function
unit of the finished product would be the critical part of the analysis.
• Trend analysis of energy costs as percentage of total production costs is a good Part C: Performance Analysis
indicator of Performance [Chapter 10]
303
10.8 Key Costs and Contribution Analysis

10.8.1 The thrust here should not be only on computation of numbers or percentages for
various product groups under consideration. The auditor should check the
reasonableness of the contribution by benchmarking with the industry average
wherever applicable.
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10.8.2 Financial performance is the major element of the performance management. This
analysis involves assessment of major items of cost, their relationship with the volume Home
of production and impact on the profitability. Annexure 4 of Part D of CRA-3 of the
cost audit report provides information (for each product group) on operating ratios for Part A: Cost Audit
the current and previous years. These ratios are computed as proportion of individual
cost elements to the cost of sales. Chapter A1 [1]:
10.8.3 The auditor could provide analysis of the cost information by highlighting any
significant variation therein during the reporting period. These variations are caused by Chapter A2 [2]:
non-recurring, onetime costs that may vitiate the ratios. Suggestions to avoid such
variations may be provided in the report. This could be having long term rate contracts,
Chapter A3 [3]:
supplier agreements, consumption controls etc. Cost Auditing Standards and Quality control
10.8.4 The cost information should include comparison of actual cost performance with the Chapter A4 [4]:
standards or budgets as the case may be. If the company is using target costs, the auditor Legal Position of Cost Auditor
could identify the cost gap and recommend the ways to reduce the same. The report
should provide a commentary on variance analysis. The process followed by the Chapter A5 [5]:
organisation for investigation and correction of variances should be commented upon. Reporting under Cost Audit
10.8.5 In addition to these, it would be necessary to enlighten the company management with Chapter A6 [6]:
an in-depth analysis of contribution earned by each product group. The contribution Cost Audit in Information Technology (IT)
analysis may be given an absolute amount per unit of the finished product or in terms
of percentage of sales i.e. the PV ratio. The auditor can add value by pointing out Part B: Management Audit
contribution earned per unit of the key constraint resource.
Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
304
10.9 Product/Service Profitability Analysis

10.9.1 The unit product or service profits are driven by two major components viz. cost per
unit and selling price per unit. The auditor should analyse if the business belongs to the
sellers’ market or buyers’ market. This would facilitate the assessment of impact of
changes in selling prices and changes in costs on the profitability or otherwise of the
products or services. While the selling price is a single number, the cost is the sum total Click to jump on:
of different elements. The auditor must ensure that the basis use to allocate indirect
costs is consistently adopted by the company. Home
10.9.2 In case of services, the unit of measurement is very important and hence carefully Part A: Cost Audit
selected. Further, due to the diverse nature of services, it is essential to exercise care in
analyzing the profitability thereof especially when the services provided are not Chapter A1 [1]:
standard. Many times, there is a combined contract for sale of product along with the Cost Audit Concept & Legal issues
service & maintenance contract. In such cases, the auditor should bifurcate the sales
and costs for each portion and then compute and comment on their respective Chapter A2 [2]:
profitability.
Chapter A3 [3]:
10.9.3 Care should be taken in splitting the joint costs in case of joint products and by Cost Auditing Standards and Quality control
products. The method adopted for separation of costs should be checked to ensure
correctness and consistency. Chapter A4 [4]:
10.9.4 It would help to separately identify the costs of production, selling & marketing and
handling customer services. Chapter A5 [5]:
10.9.5 The auditor is expected to provide a thorough evaluation to bring out the products
and/or services that are contributing more or less to the overall company performance. Chapter A6 [6]:
For convenience purpose, the products and/or services could be classified in groups Cost Audit in Information Technology (IT)
with similar risk-return profiles. This classification may be different from the ‘product
groups’ in the cost audit report annexures. Part B: Management Audit
10.9.6 The analysis should separately appraise profitability of newly introduced products or Chapter B1 [7]:
services and also their proportion to the total profits of the organisation. The auditor Internal Control & Internal Audit
should incorporate the profitability analysis of products discontinued during the period.
Chapter B2 [8]:
Operational Audit
10.9.7 The term “profitability” should be taken with an extended meaning to include, apart
from the concept of accounting profit, the ROI analysis as well. It would be useful to Chapter B3 [9]:
analyse profitability of products/services in domestic and export market. Care should Management Audit in Different function
be taken to isolate reasons for the changes in the profitability percentages. Similarly, if
significant, profitability on sales to the related parties may be separately highlighted. Part C: Performance Analysis
[Chapter 10]
10.9.8 The report should specifically highlight the top five and the bottom five products. This
will help the company to understand which products or services are contributing to the
performance and which are ones that are non-performing. Based on this the suitable
corrective actions may be suggested.
10.9.9 The checklist for the auditor could include reference to

305
• Sales and production records

• Reconciliation with CENVAT records
• Price lists and discount structure policy
• Product cost statements
• Operational budgets
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Home
Part A: Cost Audit

Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
306
10.10 Market/Customer Profitability

10.10.1 Certain industries focus on limited markets and customer types, while the others are
broad based. The management may choose to understand its position in the different
markets and different customers it serves.
10.10.2 The auditor should observe the segmentation method adopted by the company for Click to jump on:
analysing its profitability. The objective is to take suitable action for the segments that
are not performing as per desired targets by introducing campaigns or to pull out of Home
those segments that are no longer attractive.
Part A: Cost Audit
10.10.3 The markets could be segmented on the basis of geographical locations such as
domestic & international, zones or regions. They can also be segmented based on Chapter A1 [1]:
customers, e.g. OEMs, institutional, dealers, aftermarket, retail etc. These are normally Cost Audit Concept & Legal issues
termed as channels of distribution. Sales and supplies to Government, related parties
could also be used for analysis. Chapter A2 [2]:
10.10.4 The challenge in all the above named method of segmentation lies in the computation
Chapter A3 [3]:
of costs for each of them. The auditor should carefully evaluate the allocation of costs Cost Auditing Standards and Quality control
to the different channels, especially marketing & campaigning costs.
Chapter A4 [4]:
10.10.5 While analysing the profitability, the amount of turnover should not be ignored. There Legal Position of Cost Auditor
could cases of improved profitability and dropping turnover levels for the different
segments. The auditor should perform trend analysis to judge the performance in such Chapter A5 [5]:
cases and recommend suitable measures. Reporting under Cost Audit
10.10.6 A life cycle approach would provide better insight into the market or customer Chapter A6 [6]:
profitability analysis. Hence, the auditor could analyse the costs of acquiring the market Cost Audit in Information Technology (IT)
or customer, costs involved in servicing and maintaining them and also costs involved
in evaluating the potential thereof through market research. Example of how to look at Part B: Management Audit
“Cost per unit” when there are multiple customers and orders vary from quantities to
deliveries. A Customer places the PO for X quantity to be delivered in four batches. Chapter B1 [7]:
Another customer places PO for Y quantity which is higher than Customer X, but Internal Control & Internal Audit
delivery in equal number every month, which incidentally falls short of the minimum
Chapter B2 [8]:
batch size. Here customer X, eventhough the quantity is lesser than customer Y, is
Operational Audit
economical to produce the required quantity as it costs less per item compared to Y.
Chapter B3 [9]:
10.10.7 This aspect of the report should specifically highlight the top five and the bottom five Management Audit in Different function
markets and/ or customer/customer categories. This will help the company to
understand the most profitable markets and customers/customer categories and also the Part C: Performance Analysis
ones that are consuming resources but not yielding profits. [Chapter 10]
10.10.8 In addition to the study of profitability, the auditor could comment on the risks
associated with the markets and customers. This risk could be “concentration risk”, e.g.
overdependence on a few customers or selling in one market only. The other risk may
be related to defaults by customers. The analysis of bad debt history would help the
analysis.
307
10.10.9 The checklist for evaluation of performance in this area could be based on the study of
• Market and customer-wise sales and cost reports
• The marketing campaigns undertaken by the company
• Date on new markets or new customers added during the year
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Home
Part A: Cost Audit

Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
308
10.11 Working Capital and Inventory Management Analysis

10.11.1 This part of the report should point out the efficiencies in operations through
management of different components of working capital. The auditor should identify
all the elements of working capital for each product group and evaluate the adequacy
or otherwise thereof.
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10.11.2 In case of multi-unit operations, the working capital and inventory management is
centralized, with sub limits fixed for each manufacturing locations. While the Home
working capital assessment is done for the Company as a whole, the key factor which
influences the working capital requirement of each unit have to be kept in mind and Part A: Cost Audit
evaluated.
Chapter A1 [1]:
10.11.3 On the whole, the auditor should critically examine the working capital policy of the Cost Audit Concept & Legal issues
company. The total working capital could be analysed into permanent and fluctuating
components. It is necessary to check whether the funding of these components is Chapter A2 [2]:
consistent with the period of requirement.
Chapter A3 [3]:
10.11.4 Working capital decision is handling of the conflict between liquidity and Cost Auditing Standards and Quality control
profitability. The auditor could provide an independent assessment of how it is being
currently handled and how it can be improved. Chapter A4 [4]:
10.11.5 The analysis of working capital can be done using the traditional measures of ratios
like current ratio, quick ratio, turnover ratios, number of days in operating cycle etc. Chapter A5 [5]:
These ratios could be computed for each product group separately. Analysis of the Reporting under Cost Audit
operating cycle of the company would be immensely useful.
Chapter A6 [6]:
10.11.6 For manufacturing industries, inventory is the major portion of the current assets. Cost Audit in Information Technology (IT)
The auditor should evaluate the inventory management policy which would include,
inter alia, procurement policy, stocking policy, inventory valuation method, Part B: Management Audit
inventory records and physical verification procedures. Benchmarking of the policy
pursued by the company with the industry averages will enhance the value of Chapter B1 [7]:
performance report. Internal Control & Internal Audit
Chapter B2 [8]:
10.11.7 It will be appropriate to analyse the inventory into its components such as raw
Operational Audit
material and stores, work in progress and finished goods. For each of these
categories, system of inventory control should be evaluated using tools like ABC or Chapter B3 [9]:
VAT or FSND analysis, EOQ technique, JIT system etc. The auditor should comment Management Audit in Different function
upon the quality of inventory asset using the inventory aging reports.
10.11.8 Another important component of working capital is receivables. Analysis of [Chapter 10]
receivables is important for internal perspective (working capital management) and
external perspective (customer management) as well. The auditor should peruse
through the policy of the company regarding credit evaluation of customers, setting
up of credit terms and credit limits, discount policy, collection & delinquency
procedures etc.
309
10.11.9 Trade credit from suppliers is the most crucial spontaneous source of working capital
funding. The performance in respect of this could be critical for operational
efficiencies and liquidity of the company. The auditor could analyse the supplier-
wise performance in respect of on time supply, quality issues, pricing, etc.
10.11.10 Observations about other components of working capital and trends therein could be
noteworthy. These components may be loans and advances, other receivables and Click to jump on:
payables etc. the criteria for analysis here should be to find whether excessive amount
is blocked in these areas. Cash management can be included in the analysis. Home
10.11.11 It will be helpful to include the observations on cost of working capital funding. Part A: Cost Audit
These costs may include the interest paid on cash credit and loans, cost of using
factoring services, cost of collection efforts, costs involved in cash management, cost Chapter A1 [1]:
of inventory carrying etc. These costs may be explicit or implicit. Reasonable Cost Audit Concept & Legal issues
assumptions could be made for computing the implicit costs. The total cost of
managing working capital as a percentage of total working capital invested may be a Chapter A2 [2]:
very useful performance indicator. Cost Accounting Standards
10.11.12 The auditor’s checklist could include the reference to the following: Chapter A3 [3]:
• Records related to inventory of RM, WIP and FG, stock discrepancy reports
• Inventory aging reports, reports on treatment of non-moving items Chapter A4 [4]:
• Reports on receivables – aging, timely collection, bad debt etc. Legal Position of Cost Auditor
• Terms and conditions of working capital funds such as bank credit, loans etc.
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
310
10.12 Manpower Analysis

10.12.1 The depth of analysis of manpower could depend upon the proportion of manpower
cost to the total cost of product or service. The performance criteria for this area will
mainly be related to the costs and efficiency or productivity. Again, benchmarking
with the similar organisations would be helpful.
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10.12.2 The costs may be categorized into the cost of recruitment, cost of maintaining the
manpower and the cost of separations. Recruitments costs may include position Home
advertisements, commission paid to recruitment agencies, participation in job fairs
or campus recruitment etc. The maintenance costs may be the training & Part A: Cost Audit
development costs, facilities provided over & above the monetary benefits etc. The
separation costs would mostly be implicit costs. These costs as a percentage of the Chapter A1 [1]:
total salaries and wages would provide an insight into the quality of manpower Cost Audit Concept & Legal issues
management. These costs could be further broken up as per the hierarchies of people.
The time taken to recruit important positions may affect the performance adversely. Chapter A2 [2]:
10.12.3 The factor returns from the manpower is in terms of growth in production and
Chapter A3 [3]:
productivity, enhancement of skills and knowledge of the organisation. The auditor Cost Auditing Standards and Quality control
should analyse the figures of manpower productivity, idle time, overtime worked,
absenteeism etc. These factors could be compared with the respective outputs such Chapter A4 [4]:
as increased production, increased sales etc. The criteria such as sales per person Legal Position of Cost Auditor
achieved, production per man hour etc. will add value to the Report on Performance
Appraisal. Chapter A5 [5]:
10.12.4 The Report on Performance Appraisal may include comments and observations about
the employee learning and growth opportunities and their linkage with the Chapter A6 [6]:
improvement in overall performance of the organisation. Cost Audit in Information Technology (IT)
10.12.5 The auditor’s checklist for this content area may be: Part B: Management Audit
• Details of number of recruitments done, number of people left, the labour
Chapter B1 [7]:
turnover ratios
• The data on idle time, absenteeism
• Manpower productivity reports Chapter B2 [8]:
• Use of temporary or casual labour Operational Audit
• Turnover at the higher level of management
Chapter B3 [9]:
• Training and developmental programmes and the feedback thereon

[Chapter 10]
311
10.13 Impact of IFRS on the Cost Structure, Cash Flows and

Profitability
10.13.1 The new era of accounting standards has started in Bangladesh after Introduction
of Bangladesh/International Accounting Standard (BAS/IAS)/Bangladesh
Financial Reporting Standard (BFRS/IFRS). The Financial Reporting Council had
Click to jump on:
notified all new IAS/IFRS in 2022.
Home
10.13.2 However, it will be useful for the auditor to run through the effects that the new
standards may have on the organisations in the new era. The auditor should get Part A: Cost Audit
acquainted with the requirements of the new standards and the differences as
Chapter A1 [1]:
compared to the existing standards.
10.13.3 In the Report on Performance Appraisal, the auditor may point out the impact of Chapter A2 [2]:
IFRS on the existing cost structure, cash flows, and profitability. It may be noted Cost Accounting Standards
that the new standards provide a principle based framework in place of rule based
standards, and as such the companies may need to assess the effect of their actions Chapter A3 [3]:
and choices made for accounting. Cost Auditing Standards and Quality control
10.13.4 The five main elements of financial statements are assets, liabilities, equity, income Chapter A4 [4]:
and expenses. The IFRS provide for recognition, measurement and disclosure Legal Position of Cost Auditor
criteria for these elements. In cases, where the measurement criteria change, there
will be an impact on the costs. The changed recognition criteria may impact the Chapter A5 [5]:
profitability and cash flows of the company. Reporting under Cost Audit
Chapter A6 [6]:
10.13.5 The most important effect on valuation will happen through the adoption of “fair
value” concept in measuring various assets and liabilities. The auditor must
enumerate the cases where use of fair value is mandatory or permitted as
management’s choice. It should be noted that any change in the fair value as on the
reporting date has to be taken to the profit and loss a/c.
Chapter B1 [7]:
10.13.6 It may not be possible to split the effect of new standards on individual product or
product group costs and profitability. It could be assessed for the organisation as a Chapter B2 [8]:
whole. Operational Audit
10.13.7 These effects arise due to the balance sheet orientation of IFRS rather than the P & Chapter B3 [9]:
L smoothing practices followed by companies. Given below is an illustrative list Management Audit in Different function
of areas where major impact would be arising out of the IFRS provisions related
to: Part C: Performance Analysis
• Revenue recognition – companies may have to defer part or whole of their [Chapter 10]
revenues
• Inventory valuation – explicit rejection of LIFO method could change the
inventory costs and thus profitability
• Property, plant and equipment – recognition of assets and depreciation may
change, provisions on revaluation of assets are noteworthy
312
• Financial instruments – accounting for hedges and FOREX may result in

profits or losses to be recognised or derecognized
• Construction contracts – there could be changes in contract revenues and profit
measurement thereon
• Impairment of assets – recognition of provisions may impact profitability
• Intangible assets – certain existing assets may have to be derecognized
• Business combinations – some costs of M & A cannot be capitalized Click to jump on:
10.13.8 The impact of changeover has been explained in IAS 1 – First Time Adoption. It Home
may be noted that the impact based on this standard would be in the first year in
which the new standards are applied. In the first financial statements, the Part A: Cost Audit
adjustments will have to be made in the retained earnings, subject to some
exceptions and exemptions. This standard may require an entity to: Chapter A1 [1]:
(a) Recognise all assets and liabilities whose recognition is required by IAS Cost Audit Concept & Legal issues
(b) Not to recognise items as assets or liabilities if IAS do not permit such
recognition;
Chapter A2 [2]:
(c) Reclassify items that it recognised under previous GAAP as one type of asset,
liability or component of equity, but are a different type of asset, liability or
Chapter A3 [3]:
component of equity under Ind AS and Cost Auditing Standards and Quality control
(d) Apply Ind ASs in measuring all recognised assets and liabilities
Chapter A4 [4]:
10.13.9 The Report on Performance Appraisal should include comments of the potential Legal Position of Cost Auditor
changes for the understanding of the Board and Audit Committee members. The
auditor could provide them an insight to the likely changes in the cost structure. Chapter A5 [5]:
This content area is an important aspect to be covered till the new standards are not Reporting under Cost Audit
adopted. In subsequent years, it may lose its relevance.
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
313
10.14 Management Accounting Tools

10.14.1 The performance measurement involves collection of information, analysing the
same by establishing the inter-relations between them, interpreting the results and
then arriving at meaningful conclusion. The collection of information depends
upon various sources of data and other reports for various systems used by the
organisation. Click to jump on:
10.14.2 The data input is generally made in the accounting system used by the company Home
e.g. the ERP systems. Most of the ERP systems facilitate input and capturing of
even the non-financial data which can be then processed to produce desired reports. Part A: Cost Audit
There is a lot of information to be accessed from outside of the ERP system. The
auditor should identify such sources within and outside of the organisation and use Chapter A1 [1]:
information drawn from the same. Cost Audit Concept & Legal issues
10.14.3 The management accounting tools could be used to analyse the performance with Chapter A2 [2]:
different purposes. The auditor should verify the tools and techniques used by the
company and comment on appropriateness and adequacy thereof. The auditor
Chapter A3 [3]:
could recommend more appropriate management accounting tool. Cost Auditing Standards and Quality control
10.14.4 The following table shows various management accounting tools that are used to Chapter A4 [4]:
serve different objectives: Legal Position of Cost Auditor
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
10.14.5 The auditor should be acquainted with the intricacies of these and such other tools Internal Control & Internal Audit
and what it takes to successfully implement and use them. The success of Report
Chapter B2 [8]:
on Performance Appraisal would depend upon not how many performances
Operational Audit
measure are considered, but upon how they are evaluated and assessed with the
help of various management accounting tools. Chapter B3 [9]:

[Chapter 10]
314
List - A
Planning for the Report on Performance Appraisal
Key Performance Indicators (KPIs) are simply the variables, independent or interdependent,
in respect of which the goals can be set and performance measured to assess whether it is in
furtherance of the enterprise objectives. Hence, for evaluation of performance the selection of
Click to jump on:
KPIs must be chosen correctly in tune with the objectives. The KPI measurement should not
be a static computation, but always needs to be compared with a benchmark set. The KPIs
Home
could be:
(a) Quantitative – these can be financial or non-financial
(b) Qualitative – these are often lead indicators i.e. they influence future performance
Part A: Cost Audit
(c) Actionable – those which can be influenced by enterprise actions or controllable
Chapter A1 [1]:
(d) Trending – those which need to be assessed over a period of time to observe whether they Cost Audit Concept & Legal issues
are improving or not At the outset, based on the initial discussion with the management, a
proper checklist may be drawn in the following format for planning the Report on Chapter A2 [2]:
Performance Appraisal: Cost Accounting Standards
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:
Depending upon merit of each case, the auditor could factor in other things such as source of
the information, measurement frequency, time periods to be covered, etc. This will facilitate
clarity of understanding and once the auditor gets the management’s nod on these basic
elements, the Report on Performance Appraisal can certainly be a value adding proposition for Chapter B1 [7]:
the company. Internal Control & Internal Audit
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
315
List – B
Suggestive List of KPIs
Click to jump on:
Home
Part A: Cost Audit

Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
316
Click to jump on:
Home
Part A: Cost Audit

Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
317
List – C
Additional references for cost auditor
1. Annual reports of the companies for current year and past years
2. Guidance given by companies to stock markets
3. Written Policy documents of the company
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4. Company web-sites
5. Web-sites of industry associations
Home
6. Macro-economic data from RBI, Ministry of finance and commerce & industry etc.
7. Management accounting tools and techniques – reference books and hand books
8. Cost accounting standards issued by the ICAI
Part A: Cost Audit
9. Accounting standards and Ind AS issued by the Institute of Chartered Accountants of India
Chapter A1 [1]:
10. Generally accepted cost accounting principles (CAGAP) published by ICAI Cost Audit Concept & Legal issues
11. Stock market information on prices, market capitalisation, market returns
12. Minutes of board meeting to the extent relevant Chapter A2 [2]:
13. Personal meetings with the CEO/MD of the organisation and members of the audit Cost Accounting Standards
committee and the Board
14. The cost accounting policy of the company Chapter A3 [3]:
15. The cost accounting system of the company – costing methods Cost Auditing Standards and Quality control
16. The CENVAT and VAT records maintained by the company
17. The monthly MIS reports – concentrate only on exceptional reports Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]
318
Click to jump on:
Home
Part A: Cost Audit

Chapter A1 [1]:
Chapter A2 [2]:
Chapter A3 [3]:
Chapter A4 [4]:
Chapter A5 [5]:
Chapter A6 [6]:

Chapter B1 [7]:
Chapter B2 [8]:
Operational Audit
Chapter B3 [9]:

[Chapter 10]

AA252 Cost and Management Audit Manual

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AA252 Cost and Management Audit Manual

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1

Part A AND Part

Click to jump on:

Part A: Cost Audit

Part B: Management Audit

Part C: Performance Analysis

Click to jump on:

Part A: Cost Audit

Cost Audit Chapter A3 [3]:

Part C: Performance Analysis

Click to jump on a specific topic of this chapter.

Part B: Management Audit

Part C: Performance Analysis

1.1 Meaning, Nature and Scope of Cost Audit

From the aspect of statute:

conducted by an auditor appointed under section 210.

1.2 Objectives and Purpose of Cost Audit

Objectives of Cost Audit

overall improvement of socio-economic structure by higher productivity and higher national

Interactive Question 1.2: Anti-dumping duty Chapter B1 [7]:

1.3 Advantages and Limitations Of Cost Audit

Advantages to the Society

Advantages to the Government

Interactive Question 1.3: Low emphasis of cost audit Chapter B1 [7]:

1.4 Distinction Between Financial Audit and Cost Audit in

Interactive Question 1.4: Appointment and Conduction of Cost Audit

Part B: Management Audit

Part C: Performance Analysis

1.5 Genesis of Cost Audit in Bangladesh

Part C: Performance Analysis

1.6 Companies Act, 1994

AS PER SECTION 220 OF COMPANIES ACT 1994: Click to jump on:

Part C: Performance Analysis

1.7 Cost Audit (Report) Rules, 1997

Interactive Question 1.7: Disqualification of Cost Auditor Chapter A6 [6]:

1.8 Government Gazette Notification Relating to Cost Audit

1) All public Limited Companies and nationalized Sugar Mills.

Part A: Cost Audit

Part B: Management Audit

Part C: Performance Analysis

1.9 CMA Ordinance, 1977 (Ordinance No. LIII of 1977)

(b) four persons to be nominated by the Government. Part C: Performance Analysis

(b) from whom a request has been received to that effect; or

(l) the carrying out of research in cost and management accounting;

Part B: Management Audit

Part B: Management Audit

Part C: Performance Analysis

1.10 CMA Probidhanmala (Rules), 2019

Part B: Management Audit

Part C: Performance Analysis

1.11 Financial Reporting Council (FRC)

• Statutory audit to be conducted by an appointed auditor being a "Chartered Accountant"

responsibilities (§37), Conflict of interest (§38), and Public interest-related observation in

Opportunity of Professional Accountants to be a Member of FRC: Click to jump on:

Conclusion: Chapter B3 [9]:

with the FRC;

Click to jump on:

Part A: Cost Audit

Part B: Management Audit

Part C: Performance Analysis

Click to jump on a specific topic of this chapter.

Part B: Management Audit

Part C: Performance Analysis