Cost Audit PDF

Cost and Management Audit (CMA)
Introduction
1. Define Cost Audit
2. Nature or Features of Cost Audit
3. Kinds of Audit
4. Types of Cost Audit:
5. Scope of Cost Audit
6. Purpose and objectives of cost audit.
7. Define Financial Audit
8. Technical Audit
9. Concept of efficiency audit. Parameters of measuring efficiency – Apr 14,
10. Value for Money Audit (VFM)
• Objectives of VFM
• Scope of VFM
• Phases of value-for-money audit
11. Performance Audit – Aug 12,
12. Propriety Audit:
13. Social Audit:
14. Commercial Audit:
15. Basic Concepts Auditing
16. Benefits of Cost Audit:
17. Management Audit
• Objectives of Management Audit:
• Management Audit Procedure:
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1. Define Cost Audit
Cost audit has been defined by the Chartered Institute of Management Accountants of England as “The
verification of cost accounts and a check on the adherence to the cost accounting plan”.
This definition implies –
➢ The objectives of cost accounting must be coordinated with the objectives of the company and
be kept in mind while conducting cost audit.
➢ It has to be examined the methods laid down for ascertaining costs and other relevant decisions
are implemented. The treatment and determination of abnormal losses or gain or treatment of
certain expenses direct or indirect are to be considered.
➢ The correctness of the cost figures was to be vouched according to the cost accounting plan.
Cost audit aims to systematic enquiry and analysis of the detail result obtained against predetermined
target. It is the audit on –
✓ Performance
✓ Efficiency and
✓ Economy of an organization.
2. Nature or Features of Cost Audit

The nature of audit differ from activity to activity. Features of cost audit are as follows –
➢ Assessing compliance of the relevant cost accounting rules as applicable to the product.
➢ Study of the closing system to assess whether it is adequate for the ascertainment of the product.
➢ Evaluation of the operating and other efficiencies of the organization.
➢ Submission of cost audit report in the format prescribed.
➢ Verification and examination of cost account with related books.
3. Kinds of Audit
According to The Companies Act 1994 of Bangladesh, Audit are the following types –
1. Financial audit
2. Cost audit
Depend on the several basis audit may following types:
A. Depends on govt. requirement:
1. Statutory audit.
2. Non-statutory audit.
1. Statutory Audit may also the following types:

➢ Financial Audit
➢ Cost audit
➢ Tax audit
➢ Excise audit
➢ Provident fund audit.
2. Non-statutory audit may the following types:
➢ Special audit done by management for any special objectives.
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➢ Voluntary cost audit ordered by management.
➢ Internal Audit.
➢ Propriety audit
➢ Efficiency audit
➢ Social audit
➢ Management audit.
B. Depend on time, technique and procedure audit may following types –
➢ Interim audit
➢ Final audit
➢ Concurrent audit.
4. Types of Cost Audit:
• Cost Audit on behalf of the management:

• Cost audit on behalf of a customer
• Cost Audit on behalf of Government
• Cost Audit by trade association
• Statutory Cost Audit
5. Scope of Cost Audit
Scope of Cost Audit are –
• Verification of the cost accounting records such as the accuracy of the cost accounts, cost reports,
cost statements, cost data and costing technique and
• Examination of these records to ensure that they adhere to the cost accounting principles, plans,
procedures and objective.
• Cost accounting plans.
It includes -
1. Efficiency audit. 16. Export incentive audit.
2. Performance audit.
3. System audit.
4. Compliance audit.
5. Inventory audit.
6. Consumer Audit.
7. Internal audit.
8. Propriety audit.
9. Management audit.
10. Operational audit.
11. VAT audit.
12. Tax audit.
13. Expert audit.
14. Cash flow audit
15. Export subsidy audit.
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6. Purpose and objectives of cost audit.
The purposes and objectives of cost audit are manifold. The purposes may be enumerated as to make
people cost conscious and to help improve all-round industrial efficiency and maximize production. The
cost audit may bring forth benefit to the shareholders, the creditors, the bankers, the government the
taxation department and to the society at large. The objectives may then be described as below -
Serving public interest:
➢ Ensure the quality of goods.
➢ Ensure the standard price of goods and services.
➢ Protect customer right.
➢ Protect the interest of the shareholders and other related parties.
Management Objectives:
❖ Maximizing the profitability.
❖ Operating within the countries legal framework.
❖ Ensuring continuity and growth of the business and
❖ To meet the shareholders expectations.
Development and other objectives:
❖ Equitable economic development of all the regions.
❖ Saving foreign exchange.
❖ Greater employment.
❖ Ensure more effective use of resources.
❖ Transfer and development of new technology.
7. Define Financial Audit

Financial Audit refers to examination and verification of records of financial transactions with books of
accounts, vouchers, contracts, sanction and other related documents to find our whether or not the P\L
account and the balance sheet have been drawn up properly to exhibit true and fair view of the affairs of
a company at a given date.
8. Technical Audit
The term technical audit is also used to mean examination and verification of technical proposal relating
to design, construction, creation and building of project with records and technical data in order to
ascertain whether or not the proposal meets the prescribed statement and is technically sound. Such audit
is generally undertaken by engineers and technical staff with the assistance of specialized persons.
9. Concept of efficiency audit – Ap 14,
Efficiency Audit:
Efficiency audit is directed towards the measurement of whether corporate plans have been effectively
executed. It is concerned with the utilization of resources in economic and most remunerative manner to
achieve the objectives of the concern. It comprises of studying the plans of organization, comparing actual
performance with plans and investigating the reasons for variances to take remedial action. For example,
the effective utilization of capital in an organization can be gauged by determining return on capital
employed.
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Parameters of measuring efficiency includes –

➢ Overall rate of return.
➢ Capacity utilization.
➢ Utilization of national, financial, physical human resources
➢ Cash flow performance.
➢ The pay-back period of the entire organization.
Thus, efficiency audit seeks to evaluate the overall organizational efficiency.
10. Value for Money Audit (VFM)
Value for money audit deals with the substance of transactions, and financial prudence, public interest and
avoidance of wasteful expenditure. It means every taka invested should have some purpose and should
generate some income or benefit to the society or to the company.
A Value for Money (VFM) audit is a systematic, purposeful, organized and objective examination of
government activities.
It will examine the value or the additional value created by the money invested in any project or work.
❖ Objectives of VFM
➢ Provide the assembly with independent information and advice about how economically,
efficiently and effectively resources have been used.
➢ Encourage audited bodies to improve their performance in achieving value form money and
implementing policy.
➢ Identify good practice and suggest ways to improve.
❖ Scope of VFM:
Its scope includes the examination of economy, efficiency, cost- effectiveness and environmental effects
of government activities; procedures to measure effectiveness; accountability relationships; protection of
public assets; and compliance with authorities.
❖ Phases of value-for-money audit
➢ Proposal phase: aims at justifying the study of a particular area, authorize initial resources
and determine further considered initial analysis of financial statistics, audit costs and other
performance indicators.
➢ The Scooping phase: aims at gathering sufficient details. It embraces gathering working
information, studying related legislations and testing controls act. At this stage there will be
comprehensive management systems and objective review.
➢ Planning phase: Aims at planning to fully develop identified potentials. The planning and
control processes are properly analyzed and methods of reviewing operating results are
examined through analysis of control and reporting systems.
➢ Implementation phase: Aims at reporting the audit results to those responsible for receiving
or acting on them.
➢ Evaluation phase: is to evaluate the audit result, methodology and performance of the audit
staff. The focus here will be assessment of efficiency and effectiveness review. Value-for-
money audit aims to identify ineffectiveness in the system and under-utilization of resources
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11. Performance Audit – aug 12,
Performance Audit:
Performance audit refers to an independent examination of a program, function, operation or the
management systems and procedures of a governmental or non-profit entity to assess whether the entity
is achieving economy, efficiency and effectiveness in the employment of available resources. The
examination is objective and systematic, generally using structured and professionally adopted
methodologies.
The scope of performance audits may include the detection of fraud, waste and abuse, although often these
are not included in the scope. Prior to engaging in a performance audit, the auditor must have a scope and
plan defined which will be used to guide the audit process.
12. Propriety Audit:

Propriety audit means examination an investigation of the actions of the executives in expending the
shareholders fund truthfully and faithfully.
This audit provides the answer of Wisdom and Financial morality of the executives in using shareholders
fund.
The cost auditor while conducting propriety audit may advise on the following matters:
1. Possibility or otherwise of achieving optimum result from the planned expenditure.
2. Possibility or otherwise of obtaining best result from the method of using fund.
3. Possibility or otherwise of better and improved return by making alternative use of fund.
Propriety audit may unearth (to discover) weaknesses of the top executives and therefore e in many
cases it is sensitive issue.
The auditor should not hurriedly attempt to say or do anything that will injure the feeling of others.
However a cost auditor should report cases where funds are used negligently or with motive
particularly in purchase and sales transactions, where the relatives of executives are directly involved.
The cost auditor should be watchful and follow-up suspicious transactions which in the end turn out
to be fraud.
13. Social Audit:

Social audit responsibility accounting is a systematic accounting and reporting of those parts of a company
activities that have a social impact. In the companies Act and Labor Act there are some guidelines about
making provisions or incurring some expenditures on the activities related to the society or to the own
employees of a company.
Therefore, social audit examine those phenomenon which are related to the above social responsibility
accounting. Cost audit also discharge (execute) this responsibility for overall benefit of the society and
hence there remains hardly difference between social audit and cost audit.
14. Commercial Audit:

Commercial audits confirm that a company has the right to use the brands and products that it advertises.
“Audit by the Comptroller and Auditor General of Bangladesh” may be done in the affairs of a company.
This is normally done in state owned enterprises and nationalized comp0anies and this is called as
“commercial audit”.
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15. Basic Concepts Auditing
Five primary concepts of auditing are –
1. Evidence: All the information used by the auditor in arriving at conclusion on which the audit
opinion is base.
2. Due audit care: Due audit care in a audit situation refers to the extent of care taken by a
reasonable man having adequate technical training and proficiency as an auditor.
3. Fair Presentation: his covers three concepts such as –
▪ Property – maintained accounting principles.
▪ Adequate disclosure – investor and other auditor can understand.
▪ Audit obligation – auditors has obligations towards the reader of the report.
4. Independence: This indicates that the auditor has audited the accounts without having any
direct or indirect influence of management or anyone else.
The auditor should be free from bias and prejudice and should possesses and independent
opinion.
5. Ethical conduct: the auditor should remain within the ambit of a professional code of conduct.
16. Benefits of Cost Audit:

Benefits of cost audits are –
1) Cost audit deals with proper ascertainment and control of costs by –
➢ Detecting errors, wastage, losses, misuse, corruption and unwarranted expenditure.
➢ Verifying that cost accounts are corrects maintained.
➢ Examining whether or not the existing procedures are adequate and effective to the
management for taking appropriate decisions.
2) Cost audit examine that whether management prepare and present accounts truthfully and
faithfully.
3) Ensure the maximum utilization of limited resources.
4) Examine whether business execute to profit maximization.
5) Cost audit examine that investment decision was right and return on capital employed and
adequate.
6) Examine whether the plan are effective enough to achieve business goal.
7) Cost audit can identify the reason for price hike and can suggest remedies to control.
8) Cost audit examine the cause of idle time, labor unrest, high maintenance of inventory, high repair,
and maintenance cost etc.
17. Management Audit

Management audit is in examination and investigation of managerial activities including top level of an
organization.
Management audit start when statutory audit ends. . Management audit involves the review of managerial
aspects like organizational objective, policies, procedures, structure, control and system in order to check
the efficiency or performance of the management over the activities of the Company.
Management Audit is an assessment of methods and policies of an organization's management in the

administration and the use of resources, tactical and strategic planning, and employee and organizational
improvement. Management Audit is generally conducted by the employee of the company or by the
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independent consultant and focused on the critical evaluation of management as a team rather than
appraisal of individual.
❖ Objectives of Management Audit:
• Establish the current level of effectiveness

• Suggest Improvement
• Lay down standards for future performance
• Increased levels of service quality and performance
• Guidelines for organizational restructuring
• Introduction of management information systems to assist in meeting productivity and
effectiveness goals
• Better use of resources due to program improvements
❖ Management Audit Procedure:
Generally auditor deploy following audit procedures to conduct the management audit.
• Questionnaire
• Interview with employee and managers
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nd
2 Chapter
1. Qualification and Disqualification of a cost auditor:
2. Relationship between Cost Audit and Statutory Audit (Financial Audit).
3. Right and Power of Cost Auditor
4. Responsibilities, Duties and liabilities of Cost Auditor
5. Qualities of Cost auditor
6. Resignation and Removal of cost auditor
7. Order of govt. for implementing cost audit
8. Companies Act, 1994
9. Cost Audit (Report) Rules, 1997:
10. Code of Ethics and Professional Misconduct
11. Professional ethics of a cost auditor
12. Professional Code of Ethics:
13. Engagement on other occupation:
CMA Ordinance, 1977 and CMA Regulations, 1980

❖ Rule – 3: Maintenance of Books of accounts on certain matters:
❖ Rule – 4: Audit of accounts by cost auditor:
❖ Rule – 5: Appointment of cost auditor:
❖ Rule -7: Supplying cost accounting records:
❖ Rule – 8: Submission of Report:
❖ Rule – 9: Presentation of copy cost audit report:
❖ Rule – 11: Authentication of cost accounting statements:
❖ Rule – 12: Penalties for contravention of rules:
❖ Section 220: Audit of certain matters by cost and management accountants:
❖ Regulation – 122: Cost and management accountant in practice not to engage in any other
Business or occupation
❖ Sec – 23: Companies not to engage in cost and management accounting in Bangladesh
❖ Section 24: Unqualified person not to sign documents:
❖ Section 25: offences by companies:
❖ Regulation 121: Cost and Management Accountant to practice in their individual names
❖ Regulation 123: Other function of Cost and Management Accountants:
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1. Qualification and Disqualification of a cost auditor:
Qualification of Cost auditor:
➢ A person cannot be appointed as a cost auditor unless he is a cost and management accountant as
defined in said ordinance.
➢ Provided that a cost and management accountant cannot be appointed as a cost auditor unless he
deserves a certificate of practice issued by ICMAB under the said ordinance.
Disqualification of Cost Auditor
➢ An employee of company under audit.
➢ A person who is a partner or served under an employee of the company under audit.
➢ A person who is indebted to the company for an amount exceeding one thousand taka.
➢ A person who is a director or member of a private company, or partner of a firm, which is managing
agent of the company.
➢ A person who is a director, or the holder of share and exceeding 5% in nominal value of the
subscribed capital.
➢ Appointed as an auditor of the company according to section 210.
2. Relationship between Cost Audit and Statutory Audit (Financial Audit).

➢ According to sub-section (2) of sec-220 an audit conducted by Cost Auditor under the sec, shall
be in addition to the statutory audit conducted by an auditor appointed under sec – 210.
➢ Both the auditor have the same power and duties.
➢ Cost audit should be continuous and not be done intermittently as done by the statutory auditor.
3. Right and Power of Cost Auditor

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:

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 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 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.
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 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 of the company or elsewhere and shall be
entitled to require from the officers of the company 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, etc. as well as any other information and explanation as may be required.
The duty of the cost auditor is to prepare and submit the cost audit report to the Board of Directors of the
company. The Rule 8 of the Cost Audit (Report) Rules, 1997 reads as follows that every cost auditor shall
prepare cost audit report (in duplicate) of the company under audit and in accordance with the procedures
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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 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 support of his audit
observation, opinion and reports.
4. Responsibilities, Duties and liabilities of Cost Auditor

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 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."
The cost auditor may make necessary comments on the following points as per Rule 19, namely-
1. Equitability of allocation of overhead and common costs;
2. Quantification of idle machines and materials;
3. Methods of identification of waste materials and their analysis, quantification and disposal
(including re-cycling or reuse);
4. Usefulness of accounts maintained to record waste, spoiled materials, wastage, etc.;
5. Matters apparently wrong in principle or unjustifiable;
6. Negligence or inefficiency in using of company's funds;
7. Matters that could have been controlled, but have not been done resulting increase of the
production cost;
8. Contracts or agreements, if any, between the company and others relating to sales, purchases, etc.
bringing out any peculiar features, under benefits;
9. Adequacy of the following systems:
(a) Budgetary Control;
(b) Credit Control;
(c) Internal Checking;
(d) Internal Audit;
(e) Production Development; and
10. Recommendations for improvements in performance, if any, by the following:
➢ Reshuffling of machineries, etc.
➢ Best utilization of installed capacity of the machineries;
➢ (c) Concentration on areas offering scope for cost reduction, increased
productivity, decrease of anti-production activities, etc.
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 circumstances of such
case. If an auditor does not take reasonable care and does not exercise 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 with the discussion of professional competence and
professional ethics. However, failure on 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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5. Qualities of Cost auditor
Cost Auditor must possess costing knowledge of an organization and he must possess some qualities
those are –
➢ Ability to understand business problem as well as company problems.
➢ General understanding of the nature, purpose and objectives of the organization.
➢ Ability to determine or assist the progress of the organization.
➢ Must have some technical knowledge.
➢ Must be knowledgeable regarding cost accounting and its elements –
✓ Budget
✓ Process
✓ Pricing
✓ Calculation of labor, Overhead etc.
➢ Ability to Analysis – real situation, upcoming situation, ratio analysis, variance analysis.
➢ Understanding the organizational internal control.
➢ Sufficient knowledge regarding various law, rules and act. – Tax, VAT, commercial and
industrial law, company act, financial act, security act etc.
6. Resignation and Removal of cost auditor
➢ A cost auditor may resign from his office when he so desires.
➢ End of the appointed time period.
❖ Auditor can remove from his office any time before expired when he disqualified according to
rule – 6 of cost audit rule 1997.
7. Order of govt. for implementing cost audit
In pursuant to sec 220 of company act 1994 and cost audit rules of 1997 the govt. promulgated a
general order for implementation of cost audit in Bangladesh.
The order was passed December 11, 2001 through the above order govt. ordered for doing cost audit
in all public ltd. companies and all nationalized sugar industries in case of public sector industries.
The govt. passed another order dated December 26, 2002 for doing cost audit in same particular
industries.
The govt. promulgated details of cost accounting records rules in Bengali on 17.01.2015 for seven
sector those are -
➢ Sugar mills
➢ Company engaged in production of chemical fertilizer.
➢ Company engage in textile industries.
➢ Company engaged in jute industries.
➢ Company engaged in manufacturing and production of pharmaceuticals items.
➢ Company engaged in production, marketing and distribution of fuel and power products.
➢ Company engaged in edible oil and vegetable ghee.
8. Companies Act, 1994

Section 181(l) (d) provides maintenance of cost accounting books by the companies engaged in
production, distribution, marketing, transportation, processing, manufacturing, milling, extraction and
mining activities, such particulars relating to utilization of materials, labor, and other items of overhead
cost. Section 220 of Companies Act, 1994 provides provisions for doing cost audit in the industries
narrated above.
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9. Cost Audit (Report) Rules, 1997:
In order to implementing the above provisions of section 220 the Government of Bangladesh promulgated
detail rules for doing such cost audit in industries as specified in section 181 (l)(d). The Rules are called
'The Cost Audit (Report) Rules, 1997 and were enacted on 18.11.1997 in Bengal and the English version
of the above Bengali Rules was promulgated on 29.3.2001.
In the above Rules the maintenance of cost books by certain companies, appointment of cost auditor,
qualification, disqualification of cost auditor, preparation of cost audit report, etc. have been outlined in
detail.
10. Code of Ethics and Professional Misconduct
Code of Conduct and Code of Ethics:

The word ethics has been defined in "Webster's Dictionary" as moral principles or the science of moral
values and duties. The word 'code' means any' system of principles or rules. Thus, a code of ethics refers
to the standard of conduct by which the members of any professional accounting body are guided in their
daily activities.
In fact, the code of ethics provides the detailed rules which are formulated by the concerned professional
accounting bodies of each country mainly for the guidance of their members so that they may be able to
act with responsibility, independently, professional integrity and fairness and loyalty within the frame
work of rules so designed.
The members of the professional accounting bodies have to observe these rules to ensure the highest
quality of performance and to satisfy the public interest. In order to achieve these objectives, they have to
establish creditability, professionalism, quality of services, confidence, confidentiality, independence, etc.
Professional misconduct:
In addition to his duties as a cost auditor under the Companies Act, a cost accountant also has to abide by
the provisions of the Cost and Management Accountants Ordinance, 1977, CMA Regulations 1980, which
seek to regulate the profession of Cost Accountancy in Bangladesh. The Ordinance and Regulations
provide enough law for regulating cost audit as well as cost accounting profession in Bangladesh. It creates
opportunities as well as liabilities for committing any misconduct.
A cost accountant should ensure that he does not become liable for misconduct under the Cost and
Management Accountants Ordinance, 1977. The expression 'professional misconduct' has been defined as
to that for the purpose of the Ordinance, the expression 'professional misconduct' shall be deemed to
include any act or omission specified in any of the schedules of the Ordinance.
A cost accountant shall be deemed to be qualifying of professional misconduct for the causes as describe
in schedule no. IV attached to Regulation No. 104 of the Cost and Management Accountants Regulations,
1980. Such professional misconduct may be narrated as below:
A member of the Institute shall be guilty of professional and other misconduct,
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1) places his professional service at the disposal of or enters into partnership with, an unqualified
person or persons in a position to obtain business of the nature in which cost and management
accountants, engage by means which are not open to be a member of the Institute;
2) allows any person to practice in his name as a cost and management accountant in practice unless
such person is also a cost and management accountant and is in partnership with or employed by
him;
3) pays or allows or agrees to pay or allow directly or indirectly a share commission or brokerage in
the fees or profits of his professional, business to any person other than a member of the Institute
or a partner or a retired partner or the legal representative or widow of a deceased partner;
4) accepts or agrees to accept any part of the profits of the professional work of a lawyer, income-tax
practitioner, auctioneer, broker or other agent or any other person other than a member of the
Institute;
5) accepts a position as a cost and management accountant in practice previously held by some other
members without first communicating with him in writing;
6) accepts an appointment as a cost and management accountant with a concern without first
ascertaining from it whether the legal requirements, if any, have been duly complied with;
7) accepts a position as a cost and management accountant in practice previously held by some other
member in such conditions as constitute under-cutting;
8) publishes or sanctions the publication of expressions of thanks or appreciation by clients or
promotes in any way laudatory notices with regard to professional matters;
9) solicits clients or professional work either directly or indirectly by circular advertisement personal
communication or interview or by any other means partaking of the nature of advertisement;
10) advertises his professional attainments or services or uses any designation or expressions other
than cost and management accountant on professional documents, visiting cards, letter
heads or sign boards unless it be a degree of a University established by law in Bangladesh or
recognized by the Government or a title indicating membership of the Institute of Cost
and Management Accountant or any other Institution that has been recognized by the Government
or may be recognized by the Council;
11) allows his name to be inserted in any directory either in the main section or in classified list,
whether, printed or not, so as to appear in leaded type or in any manner which could be regarded
as of an advertising character;
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12) certifies or submits in his name or in the name of his firm a report of an examination of cost
accounting and related statements, unless the examination of such statements has been made by
him or by a partner or any employee in his firm or by another cost and management accountant in
practice;
13) permits his name or the name of his firm to be used in connection with an estimate of cost or
earnings contingent upon future transactions in a manner which may lead to the belief that he
vouches for the accuracy of the forecast;
14) charges or offers to charge, accepts or offers to accept in respect of any professional
employment fees which are based on a percentage of profits or which are contingent upon the
findings or results of such employment;
15) engages in any activities including publication of leaflets, booklets, brochures, papers etc., either
signed or unsigned which may be considered as affecting the Institute or the profession of Cost
and Management Accountants;
16) allows a person not being a member of the Institute or a member not being his partner to sign on
his behalf or on behalf of his firm any report or cost or pricing statement or any other document
required by his client;
17) discloses information acquired in the course of his professional engagement to any person other
than his clients without the consent of his client or otherwise than as required by any law for the
time being in force;
18) express his opinion on cost or pricing statement of any business or any enterprise in the
which he, his firm or a partner in his firm has a substantial interest unless he discloses interest also
in this report;
19) fails to disclose a material fact known to him which is not disclosed in a cost or pricing statement
but disclosure of which is necessary to make such statement not misleading;
20) fails to report a material misstatement known to him to appear in a financial statement with which
he is concerned in professional capacity; or fails to invite attention to any material departure from
the generally accepted procedures of costing and pricing applicable to the circumstances;
21) is grossly negligent in the conduct of his professional duties;
22) fails to obtain sufficient information to warrant the expression of an opinion or his qualifications
are sufficiently material to negate the expression of an opinion;
23) fails to keep moneys of his client in a separate banking account or to use such moneys for purposes
for which they are intended;
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24) has been guilty of any act or default discreditable to a member of the Institute;
25) contravenes any of the provisions of the Ordinance of the regulations made there under;
26) is guilty of such other act or omission as may be specified by the Council in this behalf, by
notification in the official Gazette;
27) not being a fellow styles himself as a fellow;
28) does not supply the information called for by, or does not comply with the directions of, the
Council or any of, the Council or any of its Committees;
29) includes in any statement, return or form to be submitted to the Council any particulars knowing
them to be false.
11. Professional ethics of a cost auditor

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:
a. Independence;
b. Integrity & Objectivity;
c. Professional competence and due care;
d. Confidentiality;
e. Professional behavior; and
f. Technical standards.
a) Independence of Cost Auditor:

The independence of the cost auditor is largely covered by the Companies act 1994, under which a person
who has or had specified relationships, which go to mar his independence, cannot be appointed as a cost
auditor.
b) Integrity and Objectivity:

Integrity implies not only honesty but fair dealings and truthfulness. The principle of objectivity imposes
the obligation on all professional accountants to be fair, intellectually honest and free of conflict of interest.
Financial 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 straightforward and honest in rendering
professional services as a cost auditor. He has neither any ulterior motives nor any personal ends to serve.
He should be fair and should not allow any prejudice or bias, conflict of interest or any other influence to
override objectivity. Cost audit is to meet the management’s and the Government’s need for credibility in
cost information and cost accounting systems.
c) Professional Competence and Due Care:

A professional accountant should not project himself as having expertise or experience which he does not
possess. Attainment of professional competence requires a high standard of general education followed
by specific education, training and examination in professionally relevant subjects and a period of work
experience, with which all ICMAB members are equipped. Professional competence requires to be
maintained by a continuing awareness of developments in the accountancy profession, including relevant
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national and international pronouncements on accounting, auditing and other relevant regulations and
statutory requirements. The cost and management accountant has to maintain professional knowledge and
skill at a level required to ensure that a client or employer receives the advantage of competent professional
service, based on up-to-date developments in practice, legislation and techniques.
d) Confidentiality:
A cost and management accountant should respect the confidentiality of information acquired during the
course of performing professional services and should not use or disclose any such information without
proper and 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 client
or the cost and management accountant and the employer.
e) Professional Behavior:
A professional Cost and Management Accountant, being a member of the Institute of Cost and
Management Accountants of Bangladesh, 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.
f) Technical Standards:
A professional Cost and Management Accountant should carry out professional services in accordance
with the relevant technical and professional standards. A Cost and Management Accountant has a duty to
render professional services with care and skill, in accordance with the instructions of the clients or
employers, insofar as they are compatible with the requirements of integrity, objectivity, and in the case
of Cost and Management Accountants in public practice, independence. Moreover, they have to conform
to the technical and professional standards laid down by the Institute of Cost and Management
Accountants of Bangladesh, IFAC, IASC and the relevant laws, orders, rules and regulations.
12. Professional Code of Ethics:

A distinguishing mark of a profession is its acceptance of responsibilities to the society. The Cost
Auditor’s independence is to be judged by his clients, Government, employers, employees, investors in
the business, the financial community and the consumers at large, who all rely on the objectivity and
integrity of the Cost and Management Accountant. This reliance imposes a public interest responsibility
on the professional cost and management accountant.
13. Engagement on other occupation:

A professional accountant in public practice should not concurrently be engaged in any business
occupation and activity which might impair his integrity, objectivity or independence or the good
reputation of the profession. The code of professional ethics of the Institute of Cost and Management
Accountants of Bangladesh must be carefully observed.
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CMA Ordinance, 1977 and CMA Regulations, 1980
The followings are the extract from CMA Ordinance and Regulations enacted for cost audit and cost
auditors and for the profession of cost and management accountancy.
❖ Rule - 1: Short title – these rules may be called the “cost Audit Rules, 1997”.
❖ Rule – 2: Definitions –
a) Act means companies Act, 1994.
b) “Employee” means all the employees including the officers.
c) “Cost auditor” means “Cost and Management Accountant” as herein after called the “said
ordinance” and any cost audit firm also included in it.
d) Company means a company engaged in production, distribution, marketing, transportation,
processing, manufacturing, milling or extraction and mining activities.
e) “Section” means any section of the company act 1994.
❖ Rule – 3: Maintenance of Books of accounts on certain matters:

Company shall maintain cost accounting books with such particulars relating to utilization of material,
labor and other items of overhead costs.
❖ Rule – 4: Audit of accounts by cost auditor:

Books of cost accounts audited every year by cost auditor and such audit shall be in addition to audit
of a/c under section 210.
❖ Rule – 5: Appointment of cost auditor:

• The board of directors appoint cost auditor for auditing cost accounting records according to 220
(1).
• Remuneration of auditor must be fixed within 30 days from the end of its financial year.
• A person cannot be appointed or re-appointed as cost auditor without his or her written consent.
• The person appointed as a cost auditor of a company under sub-rule (I) shall intimate the matter to
the govt. within a period of 15 days.
❖ Rule -7: Supplying cost accounting records:

Books of accounts shall be supply to auditor within 75 days from the end of the financial year.
And cost auditor has right to get the same in relation to audit that explain in sec- 213 company act.
❖ Rule – 8: Submission of Report:

i. Every cost auditor shall prepare the cost audit report of the company under audit and in
accordance with the procedures as laid down in the schedule of this rules and submit within a
maximum period of 150 days from the end of the financial year.
ii. 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 govt.
iii. Cost auditor shall give clarification, if any, required by govt., on the cost audit report submitted
by him within the time, if the govt. thinks fit.
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❖ Rule – 9: Presentation of copy cost audit report:
i. The chief executive of the company shall present the cost audit report to the board of directors
within the 30 days from the date of submission of the same by the auditor.
ii. Cost audit report shall not ordinarily be opened for inspection by the members or shall not be
submitted to the annual general meeting of the company.
❖ Rule – 11: Authentication of cost accounting statements:

The cost accounting statements if any, shall be signed jointly by the chief executive of the company
and chief of accounts department and if any one or both of them for the time being are outside the
Bangladesh, the person or persons holding charge of tem shall sign the documents.
❖ Rule – 12: Penalties for contravention of rules:

If any cost auditor or any officer of a concerned company contravenes the provisions of these rules
he/she or they, as the case may be, shall be punished with fine which may extend to One thousand
taka.
❖ Section 220: Audit of certain matters by cost and management accountants:

Here certain matters of a company means those companies which have been mentioned in 181, 1(d).
“Cost and Management Accountant” are about whom mention in cost and management ordinance,
1977.
In company act 1994 under section 181, 1(d) mention the name of the company’s which should have
to perform audit on the books of cost accounting –
➢ Production
➢ Distribution
➢ Marketing
➢ Transportation
➢ Processing
➢ Manufacturing
➢ Milling
➢ Extraction and Mining activities.
With such particulars relating to utilization of material, labor and other items of overhead costs.
❖ Cost auditor appointed according to company act 1994 Section 210.
❖ If any indicated company in sec 181, 1(d), establish or incorporate in Bangladesh and not appointed
cost auditor, shall punishable may extend taka 1000 to 5000.
❖ Some rules:
7 days –
15 days –
30 days -
75 days –
150 days -
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❖ Regulation – 122: Cost and management accountant in practice not to engage in any other
business or occupation:
A Cost and Management Accountant in practice shall not engage in any other business or occupation
unless he permitted by special resolution of the council.
❖ Sec – 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.
2) If any company contravenes the provisions of sub-section (1), then every director, manager,
secretary and other officer of such contravention, shall be punishable on first contravention
with fine which may extend to 1000 taka and on any subsequent conviction to 5000 taka.
Section 24: Unqualified person not to sign documents:
1) No person other than a member of Institute, shall sign any document on behalf of a Cost and
Management accountant, Industrial Accountant, Management accountant or works accountant or
a firm of industrial, cost or management accountants in his or its professional capacity.
2) Any person contravening the provisions of sub-section (1) shall be punishable, on first conviction,
with fine which may extend to 1000 taka and on any subsequent conviction, to 5000 taka.
Section 25: offences by companies:
If any company as well as person in charge of or responsible

on offence under this ordinance of company they should be
deemed as a guilty of the offence.
If they would be able to prove that offence Of offence occurred with their consent or
occurred without his knowledge and negligence coursed of negligence.
negligence
They would be punishable according to –

They would be consider to punishment.
Sec – 21
Sec - 24
Regulation 121: Cost and Management Accountant to practice in their individual names
No cost and Management Accountant who is not a member of a firm of CMA shall practice under any
name or style other than his own name.
Regulation 123: Other function of Cost and Management Accountants:
A cost and management accountant in practice may act as liquidator, trustee, executor, administrator,
receiver, adviser or as representative for costing financial matters, company law and taxation matters or
may take up an appointment that may be made by the govt. or a court of law or any other authority
established under any law or may act as the secretary of a company in his professional capacity not being
a whole time employees.
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Chapter 3
1. Analyzing client’s industry, organization, the production process systems and procedures, list of
records and reposts:
2. The production process systems and procedures and list of records and reports/ In order to
understand the production process of a company, what type of records and reports a cost auditor
may call?
3. Preparation of Audit Program
4. Planning for checking and vouching of basic records:
5. Audit working papers:
6. Cost audit programme
7. Verification of records and reports:
8. Utilization of statistical sampling method:
9. Verification of performance and statements maintained under the Cost Accounting Record Rules:
10. Materials Checking/verification
11. Payroll checking
12. Checking for Other Direct Expenses:
13. Checking of Overheads:
14. Checking depreciation
15. Checking Production Records:
16. Checking Annexures and Proforma:
17. Checking sales data
18. Checking inventory valuation
19. Assessment of the adequacy of the internal audit function
20. The reliance on the work of the internal auditor and the extent of such reliance can be determined
on the basis of the following criteria:
21. Evaluation of Internal Control System:
22. Budgetary control, capacity utilization and inventory control:
23. Purchases and payables:
24. Sales and Receivables:
25. Management Information System:
26. Risk Assessment:
27. Preparation of Cost Audit Report:
28. Cost Audit Report
29. Placement of the Report before the Board of Directors and finalization:
30. Rule-8: Submission of report:
31. Rule-9: Presentation of cost audit report:
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1. Analyzing client’s industry, organization, the production process systems and procedures, list of
records and reposts:
The cost auditor should have plan for his audit work and first of all he should be familiar with the business
of the company.
A cost auditor should, on his own, do some leg work soon after the cost accounting record rules for an
industry are introduced. He should collect the data about the industry in general as well as the details of
manufacturing process, product varieties, specialties of the products, special feature of cost structure, etc.
The source of information for this purpose is the associations of such industry or chambers of commerce.
A comprehensive handbook on the specific industry may also be available from such associations.
It is necessary for the cost auditor to do his own homework before taking up an assignment in an industry.
He should visit the factory floor as many times as may be necessary to familiarize himself with the
manufacturing process involved. He should also discuss with the technical personnel and clarify his doubts
so that he can take up an audit or any other assignment very effectively.
Before taking up an audit, the 'cost auditor should familiarize himself with the organizational structure of
the company that he is auditing. He should know as to who is answerable for what and to whom so that
he can directly address his request for information, explanation, etc., to the officer concerned. A study of
the organizational structure will also be helpful in making any useful suggestions.
2. The production process systems and procedures and list of records and reports/ In order to
understand the production process of a company, what type of records and reports a cost auditor
may call?
First of all the cost auditor should know the system of production process of the company and he also
should know the cost structuring of products produced in the company. The cost auditor should also
familiarize himself with the existing systems and procedures. Practices vary from industry and from
company to company. For example, in public sector undertakings, no purchases are made without
preparing a comparative quotation chart and without a specific or general sanction for the purchase. In
certain factories, receipt of any item of material or store is documented through a stores receipt report or
note. In certain factories, a register is maintained where all entries are recorded in serial number. Similarly,
the bill passing procedures also differ. A leading company does not take cognizance of bills when received
and does not pass a due entry crediting the suppliers on receipt of the bills. The bill is passed through the
records only when payment is made.
Similarly, different procedures exit for issue of materials and for personnel records, etc. An auditor should,
therefore, familiarize himself with the systems and procedures adopted. While studying the system, he
should also take note of any lapses or weak areas so that such instances can be discussed with the
management or brought out in his report.
The cost auditor should also study the method of cost accounting vis-a-vis financial accounting.
The cost auditor has the right to call for any information and explanation from the company for the purpose
of his audit. The Cost Auditor may call for the following records and reports while he is doing an audit
work to understand the production process of a company.
1. Copy of Balance Sheet and profit and loss account;
2. Cost sheets for the year;
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3. Cost sheets for the previous year (cost audit reports, if any);
4. Trial Balance for the year;
5. Control chart of the expenses;
6. Reconciliation statement between cost and financial statements;
7. Statement of daily production for the year;
8. Student of production report;
9. Statement of raw materials receipt or issued;
10. Statement of investments;
11. Depreciation statement;
12. Machine utilization statement;
13. Machinery efficiency report;
14. List of imported items;
15. Schedule of material and finished goods in transit;
16. Details of scraps, by-products' and wastages;
17. Internal audit report for the year, etc.
3. Preparation of Audit Program

Audit Planning:
The main objective of an auditor in audit planning is to ensure an effective and efficient audit and to make
best use of available resources. The audit approach should be such as enables the auditor in accumulating
sufficient audit evidence in respect of each assignment. The auditor should approach his working plan in
a manner that will enable him to conduct the audit work effectively and efficiently. Audit planning
approach will facilitate -
➢ appropriate attention to important areas
➢ promote identification of potential problems
➢ expeditious completion of work
➢ proper utilization of staff
➢ Effective co-ordination of audit work.
The factors to be considered in audit planning approach include: -
1. Complexity of audit
2. Environment in which the client operates
3. Past experience with client
4. Knowledge of client's business
Audit planning will involve development of (a) audit planning memorandum, and (b) audit program.
(a) Audit planning memorandum sets out the approach to be followed in respect of each major of audit
and the rationale having such approach. This memorandum forms the basis for the detailed audit programs,
time table of work and cost budget.
(b) Audit programs is the auditor's plan of action indicating the audit tests and procedures to be followed
to collect adequate and reliable evidence in support of his opinion as to the truth and fairness of the
representations made in the financial statements of the client. The auditor should document the matters
which are important in providing evidence that the audit was carried out in accordance with the basic
principles. The form of audit program will be influenced by various factors like:
1. Nature of engagement.
2. Form of audit report.
3. Nature and complexity of client's records and internal control.
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4. Planning for checking and vouching of basic records:
Before preparing detail audit program audit planning has to be made. Planning for cost audit involves
working out a program for carrying out the audit. The program should cover audit of various elements of
cost and sales which are normally prescribed in the cost accounting record rules. They are:
1. Raw materials, bought out components and process materials.

2. Consumable stores, small tools, etc.
3. Salaries and wages.
4. Other direct expenses.
5. Depreciation.
6. Factory overhead.
7. Administration overhead.
8. Selling and distribution overhead.
9. Quantitative data regarding production, etc. (including excise records).
10. Sales details (quantity and value).
11. Physical inventory of finished goods and work in progress.
The plan for checking of basic records regarding elements of cost and quantities, should cover all the
above elements of cost with the details of time to be devoted, extent of checking to be carried out and the
responsibility.
The auditor has to use his own discretion depending upon the strength of internal control system and
availability of his staff. The timeframe should be so programmed that the work could be completed within
statutory time limits.
5. Audit working papers:

It is essential not only to carry out the audit efficiently but also to have evidence that it has been carried
out that way. For this purpose, the working papers constitute the evidence. The file containing working
papers is valuable and needs to be preserved. Particularly so because queries do come up from the
Government after a considerably long time interval.
The working papers files should consist of:

1. Comments in respect of each record checked by the assistants with specific references to the page
and entry;
2. List of comments which were finally taken up by the cost auditor after going through the comments
and the replies received by him;
3. Comments on the internal control system by the assistants;
4. Working papers to arrive at the final figures as reflected in the cost audit report, for example,
calculation of capital employed, net worth, profit before interest and taxation, non-moving items,
etc.;
5. Evidence and information collected from management on which reliance has been made during
the audit for example, technical estimates for distribution of utilities, number of shifts worked
to determine depreciation, overtime, etc.;
6. Matters which were taken as certified by management;
7. The draft observation as discussed with the management;
8. Minutes of discussion with the management;
9. Copies of extracts of excise records, returns, etc., where necessary.
10. Manuscript form of report.
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11. The Cost Auditor should develop a cost audit program setting forth the procedures that are required
to implement the cost audit plan. The program is basically based on the objectives for each area
and must have an appropriate detail to serve as an instrument of instruction to the audit staff. It
also serves as a means to control the adequate execution of cost audit work. It helps the audit staff
to perform their jobs in a systematic way and also enables them not to overlook and important
point while conducting audit. Furthermore, it facilitates the Cost Auditor to make a final review of
the work already done, before signing cost audit report.
6. Cost audit programme

An overall cost audit program is drawn up as under for guidance of the Audit Staff:
Planning Phases Action to be taken
1. Familiarization with the company: Acquire the previous years' Annual
Reports and Accounts
(a) Nature of business and industry
Keep notes
(b) Objectives of the company, e.g. Maximization of Profits
Market expansion
Market diversification Product diversification, etc.
Comment: The specific business objectives shall also be
checked and notes kept in respect thereof, as contained in the
Memorandum of Association. Identify
(c) Ownership, e.g. public or private Major Shareholders

Management Position of Shareholders Identify
(d) Corporate structure, e.g. Subsidiaries and Affiliates Keep Notes
Ownership percentage
Dates of acquisition
Company records: Obtain copies Keep Notes.
Memorandum and Articles of Association Foreign technical
collaboration & agreement Other agreement deeds or contracts
Including that of inter - company transactions Secretarial
records and registers.
Comment: Only material information need to be
obtained /notes kept in respect of that contained in the
secretariat records and registers since these contain much
detailed information relating to different statutory matters.
Familiarization with the Organogram of the Company: Keep Notes.
(a) Director of Finance and Accounting
(b) Other Directors & Key personnel
(c) Delegation of Financial and Administrative Authorities
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Familiarity with organization profile: Obtain detailed organization chart
showing functional relationships.
Main or Central or Head Office Administration Offices
Other functional managements, e. g.
Purchase. Sales Production, Finance, etc. Background of Key
personnel.
Familiarity with the company policies: Keep Notes
(a) Capitalization:
Debt./Credit lines-short-term Seasonal capital requirements Identify
Short-term obligations Long-term obligations
(b) Products or Services:
Obtain a Chart. Keep notes
Main Product lines By-product lines Production sites
(c) Inter - company transactions' policies
Identify
(d) Other important policies
Sales policy and sales management: Keep Notes
Pricing Policies Identify
Home and export sales Keep Notes
Export Policy
Exporting countries
Export/Import Control Order-effect
Product image - place in national
National economy
Own country sales policy
Distribution policy
Credit and collection policy
Production planning and control: Obtain the process
Types of manufacturing process layout, Product layout flowcharts, planning
Production plans, scheduling etc. Plant capacities and other
facilities schedules, and charts for
Detailed manufacturing process Licensed and installed

capacities.
Management information systems: Obtain an outline of the
schemes adopted, if any.
Budget Controls Standard costing
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Internal audit system and Internal control: Obtain Internal Auditor's reports
on areas covered.
Systems / Internal Audit Programs Internal Audit Manual
Cost records, statements and reports: Obtain them from the cost
(a) Cost accounting records and other records. department.
(b) Cost Statements and related subsidiary Statements
(c) Cost Accounts Manual
(d) Previous cost auditors reports (if any)
Cost audit programs on each significant Audit area: (a) Prepare audit
(a) General, e.g. production and service departments. Cost Programs and allot a time-schedule
centers, costing methods internal checks and controls, system for completion of audit.
of classification, codification of cost items, etc.
(b) Allot and assign the audit
(b) Specific, e.g. systems of purchase, storage, issues of personnel.
materials, stock-taking and accounting practices, systems of (c) Collect audit evidences as
labor attendance, wages and transfer records, systems of to accuracy, relevance,
overheads classification, allocation and apportionment records, objectivity and fairness during
systems of inventory, Adjustment of cost variances from execution of programs.
standard costing, Trial Balance, Profit and Loss Account,
control account. (d) Identify them for
clarification and obtain
(c) System of reconciliation between cos: and financial documentary evidences.
records. Matters or contentions requiring special attention
e.g., material error, accounting problems, changes in (e) Identify and document for
technology, labor incentive schemes, etc. audit considerations.
Coordination & Review of sectional audit (a) Identify specific audit areas.
Program:
(b) Document the audit
Rotation of emphasis on specific audit areas. Further audit evidences duly referenced
scrutiny. Scanning of audit evidences, Scrutiny and finalization to the basic records, etc.
of audit evidences.
Audit evidence: (a) Collect the information based
on verification curing the course
For reporting information on company's (or product's) financial of audit.
position, production statistics, raw materials, power and fuel,
wages and salaries, stores and spare parts, overheads, royalty (b) Keep working papers duly
and technical payments, sales statistics, abnormal non- referenced.
recurring costs, utilization.
Finalization of Cost Audit Report: (a) Obtain comments from the
company management.
(a) Draft matters to be qualified in the report
(b) Final check.
(b) Draft Cost Audit Report
Prepared By:
Name & Date
Cost Auditor
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Cost audit programme Summary
An overall cost audit programme is drawn up as under for the guidance of the audit staff –
1. Familiarization with the company:
➢ Nature of the business.
➢ Objectives of the company –
• Maximization of profit.
• Market expansion.
• Market diversification.
• Product diversification.
2. Company records:
➢ Memorandum of association and Article of association.
➢ Foreign technical collaboration and agreement.
➢ Inter-company transaction.
➢ Secretarial records of registers.
3. Familiarization with the organogram of the company:
➢ Director of Finance and Accounting.
➢ Other director and key personnel.
➢ Delegation of Financial and Administrative authorities.
4. Familiarity with the company policies:
➢ Capitalization policy – seasonal capital requirements - short and long term obligation.
➢ Product or services – main product, by product, production sites.
➢ Inter-company transactions policies.
➢ Other important policies.
5. Familiarity with the organization profile: Head office, other functional management,
Background of key personnel.
6. Sales policy and sales management:
➢ Pricing policy
➢ Export policy
➢ Own country sales policy
➢ Distribution policy
➢ Credit and collection policy
7. Production planning and control:
➢ Types of manufacturing process
➢ Process layout
➢ Product layout
➢ Production plan
➢ Plant capacity and other facilities.
8. Accounting system – financial accounting, cost accounting, store accounting, trial balance.
9. MIS – budget control, standard costing.
10. Internal audit system and internal control: Internal audit programme, internal audit manual.
11. Cost records, statements and reports:
➢ Cost accounting records and other related records.
➢ Cost statement and related subsidiary statements.
➢ Cost accounts manual.
➢ Previous cost auditor reports (if any).
12. Coordination and review of sectional audit programme.
13. Audit evidence
14. Finalization of cost audit report.
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7. Verification of records and reports:

It is for the auditor to decide the extent of verifying or vouching as far as various elements of costs are
concerned. The decision is mainly based on the extent of internal check in the system. He must, however,
vouch both the final adjusting entries and closing month's entries completely. As regards the other months
he may select a few months depending upon how perfect the internal control system is.
It is advisable to adopt a 100% check for raw materials, components and process materials. Before
vouching, the color and the manner of ticking should be indicated to the staff so that they follow the same
consistently. This is part of the standard instructions to audit staff as already referred to.
It is better to proceed from the entry on record to the basic documents and reports so that the entry is
totally traced.
8. Utilization of statistical sampling method:

While verifying the entries, vouchers, invoices, ledger accounts, reports and statements and documents
the cost auditor can select the entries, invoices or vouchers on statistical sampling basis which includes
random sampling. While using such system the cost auditor should bear in mind that no important
documents or vouchers containing large amount of expenditure escape the attention of the cost auditor or
his audit assistant.
9. Verification of performance and statements maintained under the Cost Accounting Record Rules:
While carrying out the routine verification and checking in respect of various elements of cost, a number
of matters have to be kept in view. These matters are discussed below with reference to each element of
cost.
10. Materials Checking/verification

Raw materials account normally for a major part of the cost. Raw materials accounting for quantity and
value in respect of receipts issues and balances will have to be thoroughly (100%) checked. However, in
respect of consumable stores, tools, etc., 100% checking may be applied for major items which may cover
about 75% of the stores. For the balance 25%, individual priced store ledgers may not be maintained.
However, quantitative bin cards have to be maintained. Hence, the extent of checking can be reduced to a
certain extent.
It is necessary to ensure that the bin card and priced stores ledger balances go hand in hand. The system
for checking this reconciliation periodically has to be examined. The priced stores ledger for individual
items of materials and stores should be linked to the control accounts in the general ledger. It should be
ensured that the balances in the individual priced store ledger should be tallied with the control accounts
in the general ledger.
The following is the suggested procedure for checking material accounts:

1. Collect proforma of all documents used for receipts, issues and stock-taking of materials;
2. Check whether priced store ledger and bin cards are being maintained;
3. Call for all the stores receipt notes or inward goods register as well as the bills from the suppliers.
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4. Check up the entries in the priced stores ledger on the receipt side with reference to the store receipt
note on the inward store register. While doing this, also check up the valuations from the relevant
bills;
5. Ensure that freight and other incidental expenses are added to the cost of materials received;
6. Ensure that the serial control over the stores receipt is maintained and all the receipt notes as per
serial are accounted for;
7. Ensure at the yearend that stores received have been taken either as receipts or at least as materials
in transit;
8. Examine the procedure for issue of materials.
11. Payroll checking

Checking of pay rolls should involve the following matters:
1. The pay roll should be kept department wise or cost center wise so that salaries and wages of each
center can be identified;
2. Salaries of supervisory staff who are not specifically for a particular center will have to be included
in factory overheads and apportioned accordingly;
3. Pay roll for time-rated labor and piece-rated labor should be kept separately or at least in separate
columns;
4. Pay roll for daily wages, or badly workers should be kept separately and should be analyzed cost
center wise;
5. Payment on account of overtime or production incentive should be shown in a separate column.
Checking of the above items may be limited to two to four months depending upon the effectiveness of
the internal control system.
❖ The checking should involve verifying –

➢ Whether the wages are actually relevant to the cost centre.
➢ Whether proper rates have been picked up.
➢ Whether idle time/ overtime wages are shown separately.
➢ Whether payment for bonus/ gratuity is included or not.
Salaries/wages may include perquisites like house rent allowance, D.A., P.F. contribution, etc. The
practice of including perquisites like P.F. contribution, not being easily identifiable cost center wise and
hence apportioned to the cost centers in the ratio of salaries and wages is common.
Payment for bonus or gratuity: the provisions for those items should not be included under the head salary
and wages.
12. Checking for Other Direct Expenses:
Routine checking for other direct expenses can vary in volume and in nature depending upon the type of
industry.
In an engineering unit, particularly in the assembly of components, many components may be got
processed from outside. Certain specific assembly may itself be got done from outside. In such cases, the
cost of components or the cost of the assembly may contain a specific head "other direct expenses". It is
necessary for the cost auditor to find out in the first instance the operations which are got done from
outside so that he can proceed to check such costs.
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In process industry, the outside jobbing element may be rarely present, as processing is a continuous
affair. However, after or before a process, specific jobs on the product or raw material may be got done
from outside. The head Bother expenses' does not mean only outside processing.
It also includes any expenses, other than materials, consumables or salaries and wages, which are directly
incurred in a cost center or on the product. For example, material handling expenses in a coal mill.
13. Checking of Overheads:

As regards routine checking for overheads, viz. factory overheads, administration overheads and selling
and distribution overheads, the ideal procedure would be to get hold of the trial balance and after
eliminating all other items of cost as already taken up, to prepare a list and sort out the same into these
three heads. The list of expenses as per the trial balance, however, has to be vouched with the vouchers to
ensure authenticity. This vouching could be very much restricted in case the financial auditor has already
vouched the expenses or if there is a full-fledged internal audit system.
It is advisable to do a voucher-wise analysis of expenses on a continuous basis. But this system is

invariably insufficient. Generally, the expenses listed out in trial balance are sorted out. Hence, the need
for preparing an analytical statement. In a system of computerized accounts, by using suitable codes and
adopting the same codes while passing vouchers, it is possible to analyze the expenses on a continuous
basis.
14. Checking depreciation

Depreciation is an important elements of cost which may or may not appear in the financial accounts.
It cost accounts depreciation should be provided in accordance with accounting principle and practices.
However cost accounting record rule prescribe that irrespective of the value of the asset, if the assets are
expected to last for more than a year, the cost of such assets should be spread over the expected life of the
asset.
15. Checking Production Records:
The cost auditor should also program to check the quantitative production records on the basis of which
the cost statements will have to be prepared. While checking the quantitative records, the following points
may be kept in view:
1. Most of the items of manufacture are covered by Excise regulations. As a result, excise records
may be maintained by the company;
2. The quantitative records showing the production from time to tune should be tallied with the Excise
records;
3. For costing purposes, production should mean the final product which goes to the warehouse and
not production which is subject to testing, quality control, etc. For example, in the case of dry cell
batteries, the production before ageing and testing is not the final production. It is the quantity
which is finally tested which shall be counted for the purposes of production;
4. The cost auditor should also check up the quantitative records at intermediary stages of production.
This is particularly followed in textile and jute industry where the production is to be determined
at different stages for arriving at the cost per unit at these stages. For this purpose, the process flow
chart is relevant.
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16. Checking Annexures and Proforma:
After completely checking the control chart as well as the distribution of service center costs to production
centers, the cost auditor can call for the prescribed proforma which ultimately will have to be attached as
part of his cost audit report. While checking the various proforma prescribed, the following points may be
kept in view.
1. Proforma are prescribed by various Cost Accounting Record Rules of the relevant Record Rules.
The formats are prescribed as 'Annexures'.
2. It is not necessary for the cost auditor to submit the annexure along with his cost audit report
because "Cost Audit' Report Rules, 1997 prescribe that only the cost statements, as given in the
Schedule of the relevant Record Rules, should be appended to the report. However, the cost auditor
should check up the annexures also thoroughly as they will also have to be submitted if called for
by the Government.
17. Checking sales data
The Cost Accounting Record Rules envisage the disclosure of sales figures in quantity and in value both
for the internal and export markets. It is advisable to check up –
➢ The figure of sales in quantity and in value with the corresponding figure in this regard in the B/S.
➢ The trade discount allowed are properly adjusted in arriving at the sales value.
➢ The treatment of export incentives.
➢ The treatment of sales return and sales discount.
18. Checking inventory valuation
The cost auditor must verify the method of valuation of the work in progress in the production center as
well as the inventory of finished goods. Normally, the valuation of the work in progress should include a
share of works overheads also. Practice exists to value work in progress at material cost only or material
cost plus labor cost only. The work in progress figures as reflected in the cost statements, should be
supported by a detailed calculation sheet. While valuing the finished stocks, a share of administration
overheads should be included, preferably to the extent such overheads can be attributed to bringing the
goods to such state. This is in line with the Accounting Standards.
The program of inventory audit may cosset of the following –
➢ Ascertain the composition of stock. Such as RM, WIP, FG and stores by calling for the latest stock
statement.
➢ Note the margin on stock and other condition as stipulated only stock in trade is offered as a
security.
➢ Ascertain from the detailed stock statement-
• Items have greater value.
• Items having greater quantity.
• Items having higher rate.
➢ Verify physical –
• 100% of high value items.
• More than 50% of medium value items.
• 25% of low value items.
Note: if the value of each item less than tk. 500, this may be ignored. The overall coverage should
be more than 75%.
➢ Examine and call for the details regarding the age and quality of RM, WIP, FG etc.
➢ Call for the latest B/S and see the schedule particulars.
➢ Ascertain the method adopted by the company for valuing the stock. i.e. FIFO, LIFO, Average etc.
➢ Obtain cost records for the valuation adopted for WIP/FG.
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19. Assessment of the adequacy of the internal audit function
Internal audit is a continuous audit done by the management itself. After commencement of the cost audit
the cost auditor should collect one copy of the report of the internal audit. The cost auditor examines –
➢ The area covered by the internal auditor.
➢ The findings made by internal auditor.
➢ Any adverse comments made by internal auditor.
➢ Audit queries made by internal auditor.
➢ Audit replies provided by various departments.
Then the cost auditor will form his own comments and observations on those points. The cost auditor will
suggest any improvement needed in the internal audit department and internal audit principles.
20. The reliance on the work of the internal auditor and the extent of such reliance can be
determined on the basis of the following criteria:
➢ The scope and objectives of the internal audit functions.
➢ The degree of independence of the internal auditor which depends upon the ability of the
internal auditor to carry out his work.
➢ The extent of professional care taken by internal auditor.
➢ Technical competence of the internal auditor based on training, experience and proficiency.
➢ The quality of the internal audit report.
21. Evaluation of Internal Control System:
The cost auditor should study the organizational structure as well as internal control system of the
company before commencement of the work of cost audit. He must understand the internal control system
that is followed in the company. Internal control system will help the Cost Auditor understand control
chart of expenses expended by the company.
22. Budgetary control, capacity utilization and inventory control:

The auditor must examine the budgetary control system followed in an organization. Budgetary control is
a tool to the management for having overall control in the management of the organization and it ensures
the implementation of budgetary functions within the stipulated time and cost. The cost auditor will
examine the budget register and he will see whether or not the budget balances are drawn up on every day
basis or a transaction basis. Over and under application of budgetary allocation should also be identified
by the cost auditor. He will make his comments when or in which account budgetary allocation has been
exceeded and who has approved the excess expenditure and whether the approving officer has the
authority of according any approval to the excess expenditure.
Similarly the cost auditor will examine capacity utilization position of an industry because utilization of
planned capacity is important in running an industry. He will examine the plant log book and daily records
of utilization made in the book. If the budgeted capacity is not utilized the cost auditor will make a note
of this point in the audit report so that the management will be able to find out the reasons for not utilization
the budgetary plant capacity.
The inventory, at any point of time in any organization, may consist of (i) raw materials and components,
(ii) packing materials, (iii) consumables including loose tools, (iv) stores and spares, (v) stock in trade
(finished goods), (vi) work in progress (work in process), (vii) scrap-usable/saleable and (viii)process
materials, colors and chemicals.
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Determination of the fair value of inventory as on a particular date is significant in (a) reflecting the
working result of operations for a period ending on that date and (b) in determining the value of the
business as on that date with regard to inventories. A correct picture of the working result for a period
ending on the particular date is the direct concern of the investors and the tax authorities. The investors
would like to safeguard against window dressing and artificial boosting of working results by
management. Tax authorities are interested in collecting the due taxes on the profits of a business
enterprise and would like to safeguard from being hoodwinked with deflated profits and reduced tax
liabilities. Banks and financial institutions are interested in the security of their advance and would like to
take adequate precautions in case of erosion of security values. In Bangladesh, the entire working capital
need of industry is generally provided by banks and they have a first charge on inventories. Normally,
financial institutions and other long term lenders have a second charge on inventories. Thus taking the
investors, banks and financial institutions together the total stakes are enormous.
In the above context, it is unfortunate that the inventory valuation remains a nebulous and imprecisely
defined area. In the determination of profits, all income and expenditure are precisely defined, but the
system of value of inventory varies. In the valuation of the assets of the enterprise, no other items has a
inaccurate system of valuation excepting the inventories. Inventories generally constitute the second
biggest item, after fixed assets, in the financial statement particularly of manufacturing organizations. The
value attached to inventory can materially affect the operating results and the financial position. However,
different basis of valuing inventory are used by different business and even by different undertakings,
within the same trade or industry".
Therefore, considering the above importance of inventory the cost auditor must examine the inventory
control system followed in the organization undertaken by him for cost audit. He must examine the
methods of inventory receipts and issuance and the methods of maintaining the bin card or inventory card
or the computer programs followed for inventory control.
23. Purchases and payables:

The cost auditor should examine the terms and conditioned in the purchase order, work order or the supply
order and should verify the goods supplied with the above terms and condition of work order. The price
paid and the quantity received should be examined by the cost auditor. Side by side the Accounts Payable
or creditor’s ledger should be verified by the cost auditor. He should check the invoices provided by the
vendors and the terms of price reduction, trade or cash discount allowed by the suppliers. Purchase return
vouchers should also be verified by the Cost Auditor.
24. Sales and Receivables:

Sales invoices and vouchers and terms and conditions should be systematically verified by the cost auditor.
Sales return and other supply terms should be checked. Cash collection and bank collection against
accounts receivables or sundry debtors should be vigorously examined by the Cost Auditor. It should be
borne in mind that sale and receivables are the prime functions of the management and hence these items
should be verified in detail.
25. Management Information System:

Management Information System (MIS) is the vital part of management function. It tells simultaneously
the control function followed by the management and the organization structure of the company. From
the MIS the methods and techniques of cost data follow, production data follow and other statistical data
follow could be understood. MIS plays an important role in management decision process and taking up
a right decision mostly depends upon the MIS and hence the cost auditor must give his attention to examine
the structure of MIS and will verify the pros and cons of the system. If there remains any defect or fault
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in the MIS and if any improvement needed in the format of MIS should be suggested in the cost audit
report.
26. Risk Assessment:

"As required by International Standard for Auditing, to obtain an understanding of the entity and its
environment, including its internal control, the auditor performs risk assessment procedures. As part of
this work the auditor performs the following procedures to obtain information that is used to identify the
risks of material misstatement due to fraud:
1. Makes inquiries of management, of those charged with governance, and of others within the entity
as appropriate and obtains an understanding of how those charged with governance exercise
oversight of management's processes for identifying and responding to the risks of fraud and
the internal control that management has established to mitigate these risks.
2. Considers whether one or more fraud risk factors are present.
3. Considers any unusual or unexpected relationships that have been identified in performing
analytical procedures.
4. Considers other information that may be helpful in identifying the risks of material misstatement
due to fraud."
27. Preparation of Cost Audit Report:
The cost audit report should be prepared in the prescribed format as per Cost Audit (Report) Rules, 1997.
The report will contain the following:
➢ The main certificate; and
➢ The annexure to the main certificate
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 signing on behalf
of a firm, of cost accountants. The main certificate contains five major points namely:
1. Whether the auditor has or has not obtained all the information and explanations necessary for the
purposes of the cost audit;
2. Whether proper cost accounting records as required by law have or have not been maintained by the
company;
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;
4. Whether the books and records give or do not give the information required by law in the manner so
required; and
5. Whether in the opinion of the auditor the cost accounting records have or have not been kept so as to
give a true and fair view of the cost of production and marketing of the product.
The format prescribed in the Cost Audit (Report) Rules, 1997 are given below:
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28. Cost Audit Report
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....................................................... 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
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;
c) adequate information on returns, statement, etc. for the purpose of my/our cost audit have/have not
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
maintained by the "company and exhibit/do not exhibit a -true and fair view of the cost of
production/distribution/marketing/ transportation/processing/manufacturing/milling/mining or
extraction of minerals of the Company; and
e) the enclosed statement of production and statement of inventories are/are agreement with the books
of accounts of the company.
Name and signature of the person or firm
Cost Auditor
Place :.................................................
Dated : ................................................
N.B. Annexures those are to be enclosed with the report should be treated as integral part of the report:
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29. 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:
30. Rule-8: Submission of report:

(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 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,
(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 Governments.
(3) Cost auditor shall give clarification, if any, required by Government, on the cost audit report
submitted by him within the time, the Government thinks fit.
31. Rule-9: Presentation of cost audit report:

(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.
Such cost audit report may contain some annexures on general observations, cost accounting system,
financial position, production, process of manufacture and other elements of cost and risk factors of the
company.
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Cost and Management Audit (CMA)

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2. Nature or Features of Cost Audit

1. Statutory Audit may also the following types:

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4. Types of Cost Audit:

• Cost Audit on behalf of the management:

5. Scope of Cost Audit

Scope of Cost Audit are –

7. Define Financial Audit

Parameters of measuring efficiency includes –

❖ Phases of value-for-money audit

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12. Propriety Audit:

13. Social Audit:

14. Commercial Audit:

16. Benefits of Cost Audit:

17. Management Audit

Management Audit is an assessment of methods and policies of an organization's management in the

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❖ Objectives of Management Audit:

• Establish the current level of effectiveness

❖ Management Audit Procedure:

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CMA Ordinance, 1977 and CMA Regulations, 1980

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2. Relationship between Cost Audit and Statutory Audit (Financial Audit).

3. Right and Power of Cost Auditor

Rule 7 of the "Cost Audit (Report) Rules, 1997 is as follows:

4. Responsibilities, Duties and liabilities of Cost Auditor

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8. Companies Act, 1994

10. Code of Ethics and Professional Misconduct

Code of Conduct and Code of Ethics:

A member of the Institute shall be guilty of professional and other misconduct,

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11. Professional ethics of a cost auditor

a) Independence of Cost Auditor:

b) Integrity and Objectivity:

c) Professional Competence and Due Care:

12. Professional Code of Ethics:

13. Engagement on other occupation:

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❖ Rule – 3: Maintenance of Books of accounts on certain matters:

❖ Rule – 4: Audit of accounts by cost auditor:

❖ Rule – 5: Appointment of cost auditor:

❖ Rule -7: Supplying cost accounting records:

❖ Rule – 8: Submission of Report:

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❖ Rule – 11: Authentication of cost accounting statements:

❖ Rule – 12: Penalties for contravention of rules:

❖ Section 220: Audit of certain matters by cost and management accountants:

Section 25: offences by companies:

If any company as well as person in charge of or responsible

They would be punishable according to –

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3. Preparation of Audit Program

1. Raw materials, bought out components and process materials.

5. Audit working papers: