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Cost Assignment

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ASSIGNMENT ON:

COST AUDIT

COURSE TITLE: COST ACCOUNTING

COURSE CODE: ACC-403

SUBMITTED TO:
MOURI DEY
ASSOCIATE PROFESSOR

DEPARTMENT OF ACCOUNTING,

UNIVERSITY OF CHITTAGONG

SUBMITTED BY:
MD. ALAUDDIN ALI
ID: 19301100

BBA 7TH SEMESTER, DEPARTMENT OF ACCOUNTING,

UNIVERSITY OF CHITTAGONG

SUBMISSION DATE: 04.10.2023


Definition:
A cost audit is a systematic examination of the cost accounts and records of a company or
organization.

Features:
The basic features of cost audit include the following:
1. Independent Evaluation: Cost audit is conducted by an independent and qualified
professional, often a cost auditor or a team of cost auditors, who are not directly
employed by the company.
2. Examination of Cost Accounting Systems: Cost audit involves a comprehensive review
of the cost accounting systems and procedures followed by the organization. This
includes an assessment of the methods used for cost allocation, inventory valuation, cost
control, and other cost-related processes.
3. Compliance with Cost Accounting Standards: Cost audit ensures compliance with
relevant cost accounting standards and regulations. The auditor examines whether the
cost accounting practices are in line with the prescribed standards and guidelines
established by the regulatory authorities.
4. Verification of Cost Statements: The cost auditor verifies the accuracy and reliability of
the cost statements prepared by the company. This includes verifying the integrity of cost
data, calculations, and financial information reported in the cost statements.
5. Identification of Deviations and Inefficiencies: Cost audit aims to identify deviations
from standard cost accounting practices, ineffective cost control measures, and areas of
cost inefficiencies within the organization.
6. Reporting and Recommendations: After conducting the audit, the cost auditor prepares
a detailed report highlighting the findings, observations, and recommendations. This
report serves as a valuable resource for management, providing insights into cost
management practices, potential risks, and opportunities for improvement.
7. Statutory Requirement: In some jurisdictions, cost audit is mandated by law for
specific industries or companies meeting certain criteria. In such cases, organizations are
legally obligated to undergo periodic cost audits and report the findings to relevant
regulatory authorities.
Scope:
The scope of cost audit encompasses various aspects related to an organization's cost
accounting practices and systems:

1. Examination of Cost Accounting Records: Cost audit involves a detailed review and
examination of the cost accounting records maintained by the organization. This includes
analyzing cost ledgers, cost sheets, work orders, inventory records, and other relevant
documents.
2. Cost Accounting System Evaluation: The cost auditor assesses the organization's cost
accounting system to determine its effectiveness, compliance with standards, and
accuracy in capturing and allocating costs. This evaluation includes analyzing cost
allocation methods, cost apportionment techniques, and overhead allocation practices.
3. Compliance with Cost Accounting Standards: Cost audit ensures compliance with
relevant cost accounting standards and regulations. The auditor verifies whether the
organization is following the prescribed cost accounting principles and guidelines
established by regulatory authorities or professional bodies.
4. Cost Control and Efficiency Analysis: The cost auditor examines the organization's
cost control measures and assesses their effectiveness. This includes analyzing cost
reduction initiatives, efficiency improvement programs, cost variance analysis, and cost-
performance trends.
5. Pricing and Product Profitability: Cost audit may include an evaluation of the pricing
strategies and methodologies used by the organization. The auditor analyzes the
relationship between costs and selling prices to assess product profitability and pricing
accuracy.
6. Inventory Valuation and Management: The cost auditor reviews the organization's
inventory valuation methods to ensure compliance with accounting standards. This
includes assessing the methods of determining costs of inventory (FIFO, LIFO, etc.) and
evaluating the adequacy of inventory management practices to minimize carrying costs or
obsolescence.
7. Financial Reporting and Disclosures: Cost audit may involve a review of the financial
statements and disclosures related to cost accounting information. The auditor verifies the
accuracy and adequacy of cost-related disclosures provided in financial reports, ensuring
transparency and compliance with reporting standards.
8. Compliance with Legal Requirements: In jurisdictions where cost audit is mandated by
law, the cost auditor examines the organization's compliance with legal requirements,
reporting obligations, and disclosure provisions specific to cost audit.

Objective:
The objective of cost audit is to provide an independent and systematic evaluation of an
organization's cost accounting records, systems, and processes. It aims to ensure that
costs are accurately recorded, allocated, and reported in accordance with applicable laws,
regulations, and accounting standards. The primary objectives of cost audit are as
follows:

1. Compliance: The cost audit ensures compliance with relevant laws and regulations
related to cost accounting. It helps verify that the organization is following the prescribed
accounting principles and practices for cost determination, allocation, and reporting.
2. Accuracy: The cost audit aims to verify the accuracy and reliability of the
organization's cost accounting records. It ensures that costs are properly recorded,
classified, and allocated to various products, services, or cost centers. This helps in
determining the true cost of production, facilitating effective decision-making, and
providing accurate financial information to stakeholders.
3. Efficiency: Cost audit evaluates the efficiency and effectiveness of the organization's
cost accounting systems and processes. It identifies areas of inefficiency, wastage, or
excessive costs and provides recommendations for improvement. This helps in
optimizing costs, enhancing operational efficiency, and improving overall financial
performance.
4. Cost Control: The cost audit helps in assessing the organization's cost control measures
and identifying opportunities for cost reduction or cost-saving initiatives. It examines cost
variances, compares actual costs with budgeted costs, and identifies areas where costs can
be minimized without compromising quality or performance.
5. Pricing and Profitability: Cost audit assists in evaluating the pricing strategies of the
organization and determining the profitability of different products, services, or business
segments. It helps in setting appropriate prices, analyzing cost-profit relationships, and
identifying opportunities for enhancing profitability.
6. Management Decision-making: The cost audit provides valuable information and
insights to management for effective decision-making. It helps management in evaluating
the financial viability of new projects or investments, assessing the impact of cost
changes on profitability, and making informed decisions related to cost control, pricing,
resource allocation, and product mix.
7. Transparency and Accountability: Cost audit promotes transparency and accountability
in cost accounting practices. It verifies that costs are accurately reported to stakeholders,
including shareholders, regulators, and customers. This helps in building trust, ensuring
compliance, and maintaining the organization's reputation.

Qualification of cost auditor:

1. Professional Certification: Cost auditors are typically required to hold a professional


certification in cost accounting or a related field. This certification may be issued by a
recognized professional body or institute that sets standards for the profession.
2. Education and Experience: Cost auditors should have a relevant educational
background, such as a degree in accounting, finance, or a related field. They should also
have sufficient practical experience in cost accounting, auditing, or financial
management.
3. Knowledge and Skills: Cost auditors should possess a thorough understanding of cost
accounting principles, techniques, and methodologies. They should have strong analytical
skills, attention to detail, and the ability to interpret and analyze financial data.
4. Ethical Conduct: Cost auditors should adhere to high ethical standards and professional
integrity. They should demonstrate honesty, objectivity, and independence in their work
and comply with applicable professional codes of conduct.

Disqualifications of cost auditor:

1. Conflict of Interest: Cost auditors should not have any conflicts of interest that may
compromise their objectivity or independence. They should not have any financial or
personal relationships with the audited organization that could influence their judgment
or impair their ability to provide an unbiased assessment.
2. Legal Restrictions: Cost auditors may be disqualified if they have been convicted of
any criminal offense or have been found guilty of professional misconduct by a
regulatory authority. They should comply with all applicable laws and regulations related
to auditing and professional ethics.
3. Lack of Competence: Cost auditors should possess the necessary knowledge, skills,
and experience to perform their duties effectively. If they lack the required qualifications
or fail to meet the professional standards, they may be disqualified from conducting cost
audits.
4. Non-compliance with Professional Standards: Cost auditors should adhere to the
professional standards and guidelines set by relevant regulatory bodies or professional
institutes. If they fail to comply with these standards or engage in unethical behavior,
they may be disqualified from conducting cost audits.
5. Bias or Prejudice: Cost auditors should approach their work with objectivity and
impartiality. If they have any personal or professional biases that may affect their ability
to provide an unbiased assessment, they may be disqualified from conducting cost audits.

It is important for organizations to carefully select cost auditors who meet the necessary
qualifications and do not have any disqualifications that could compromise the integrity
and credibility of the audit process.

Cost audit report:


A cost audit report is a comprehensive document prepared by a cost auditor after
conducting a cost audit of an organization. It provides detailed insights, findings,
observations, and recommendations related to the organization's cost accounting
practices and systems. The report serves as a formal communication of the cost
auditor's evaluation and analysis of the organization's cost-related activities.

Cost auditing status in Bangladesh:

As of September 2021, cost auditing is mandatory for certain companies in Bangladesh.


In Bangladesh, the Companies Act, 1994, mandates cost auditing for specific industries,
including manufacturing, production, processing, mining, or service-oriented
organizations meeting certain thresholds. These thresholds may be based on factors such
as turnover, paid-up capital, or other prescribed criteria.
The Bangladesh Cost and Management Accountants Act, 2018, governs the profession of
cost and management accounting in Bangladesh. The Institute of Cost and Management
Accountants of Bangladesh (ICMAB) is the professional body responsible for regulating
and overseeing the cost and management accounting profession in the country. They
provide guidelines and standards for cost auditing practices in Bangladesh. Companies
meeting the specified criteria are required to conduct cost audits and submit cost audit
reports to the relevant authorities, such as the Registrar of Joint Stock Companies and
Firms (RJSC) and the Securities and Exchange Commission (SEC).

Prospects of Cost audit in Bangladesh:


1. Anti Dumping and Counter Veiling duties:
The provisions relating to anti-dumping laws are of remarkable current issue in the
context of cost accounting. The determination of normal value, domestic price, quantum
of injury etc. all requires cost information. In Anti-Dumping cases, the International
Dispute Resolution Authority accepts the authenticated cost data from the Cost Audit
records, maintained by the domestic as well as international companies.
2. Free Trade Agreement:
The domestic product cost is the base for incorporating any item during the process of
negotiations under Free Trade Agreement (FTA) signed by Bangladesh with other
countries. The cost of items covered under that cases cost audit can be used by
government for taking informed decision.
3. Transfer Pricing:
The Multinational companies have their prominent presence in Bangladesh and they
frequently transfer resources among associate concerns / inter units operating in different
parts of the world. This transaction has a great impact on their profitability as well as tax
liability. The Cost Auditors can play significant role in providing a system of check on
such transfer pricing mechanisms.
4. Predatory Pricing:
For increasing market share, the dominant players may opt for a price lesser than the cost,
to reduce the competitors. In long run, this is not beneficial for the common consumers.
The Cost auditor can aid the Competition Commission in cases filed against predatory
pricing.
5. Licensed VAT Adviser:
As per provision of rule 4(1)(c) of the Value Added Tax Adviser (License) Rules 1998
[VAT SRO No. 117-Ain/98/178-Musak, dated 11 June 1998], a Cost Accountant is
eligible for getting license for practicing as a licensed VAT Adviser subject to fulfillment
of some other conditions (written and oral examinations).

There are a number of problems involved in Cost audit in Bangladesh. These challenges
are related to the Lack of Capacity Building and Institutional Development, Application
or Adoption of Cost Accounting Standard, existing Law sometimes contrary to Cost
accounting Standard, Speedy adoption of cost accounting standard suffers from lack of
technical and financial resources, Lack of awareness, understanding and application skill
by prepares and auditors.
These challenges may be overcome by Capacity Building and Institutional Development,
Adoption of cost accounting standard and enhancing technical and financial resources,
increase resources, knowledge, technical skill and competency of regulatory agencies that
means working together with Financial Reporting Council (FRC) to monitor/compliance
with standard.

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