ASST PROF. JONLEN DESAASST PROF. JONLEN DESA

THE COST AUDITORTHE COST AUDITOR

COST AUDITORCOST AUDITORCost auditor means an auditor, who has been

appointed:i. to conduct audit under section 233 B of

Companies Act 1956 orii. To conduct voluntary cost audit by management

on such conditions as may be specified for this purpose by management.

In simple terms, a cost auditor is a person appointed to audit the cost books of a company.

STATUS & POSITION OF A COST STATUS & POSITION OF A COST AUDITORAUDITOR

DUTIES OF A COST AUDITORDUTIES OF A COST AUDITORHe should send report to Co. Law Board & Co. within 180

days from the end of co’s financial year.He should comply with Cost Audit (Report) Rule, 1968 and

Cost Audit (Report)Amendment Rules, 1986 & 1988.He should qualify the report, if necessary.He should help the Government examine the affairs of the

company.He should give his advice to the co. regarding irregularities.He should give his opinion on adequacy of co’s policies and

procedures.He should keep all information confidential.He should keep his professional knowledge updated.

RIGHTS OF A COST AUDITORRight to access books of accounts- Both Cost & Financial.

Right to call for information and explanations

Right to visit branches

Right to take technical advice

Right to remuneration

Right to sign the Cost Audit Report

Right to receive notice & attend AGM

QUALITIES OF A COST AUDITORQUALITIES OF A COST AUDITORHe must be honest.He should conduct audit with care & skilled.He must have complete knowledge of subjects like Cost

Accountancy, Financial Accountancy, Management Accountancy, Industrial Law, Commercial Law, Company Laws, Engineering & Mathematics.

He should be fully conversant with use of EDP & computer applications.

He must have basic technical knowledge to understand production process.

QUALITIES OF A COST AUDITORQUALITIES OF A COST AUDITORHe should be a man of prudence with complete common

sense.He should not approach work with doubt and suspicion.

He should have an unbiased mind.He should possess an outstanding personality to

command respect from all concerned.He should maintain complete secrecy of business affairs

of his client.

QUALIFICATION OF A COST QUALIFICATION OF A COST AUDITORAUDITOR

A cost auditor has to be a Cost Accountant Cost Accountant in practice.

He has to be holding a valid certificate of practice issued by the Institute of Cost & Works Accountant India, under the ICWA Act, 1959.

He should not be disqualified from being appointed as a cost auditor.

DISQUALIFICATION OF A COST AUDITORDISQUALIFICATION OF A COST AUDITOR

Following persons are not eligible for appointment as an auditor.

This means that in the following cases; the cost auditor will be disqualified to get appointed as a cost auditor.

1. A body corporate, however a limited liability partnership registered under the Limited Liability Partnership Act, 2008 can be appointed.

2. An officer or employee of the company.3. A person or his relative holding any security in the

company.

DISQUALIFICATION OF A COST AUDITORDISQUALIFICATION OF A COST AUDITOR

4. Relative of any partner in the firm holding security in the company of face value exceeding Rs 1 lakh.

5. A person who has given guarantee or provided any security for indebtedness of third party.

6. A person who has direct or indirect business relationship with the company or its subsidiary.

A cost auditor ceases to be an auditor on the following grounds:

On the expiry of the term of appointment.On his deathOn his desire to retire ( to be given in writing)On his becoming subject to disqualification.

A cost auditor can also be removed before the expiry of his term if he is found guilty of professional misconduct.

Due notice should be given to him, Special resolution is required to be passed at AGM appointing a new cost auditor.

CEILING ON NUMBER OF COST CEILING ON NUMBER OF COST AUDITS (LIMITS)AUDITS (LIMITS)The Company’s Act imposes a ceiling on the number of

audits that a cost auditor can undertake. It is as follows:

20 companies per Cost Auditor (other than private), and not more than 10 of the 20 companies should have a paid up share capital of Rs 25 lakhs or more.

RESPONSIBILITIES OF A COST AUDITORRESPONSIBILITIES OF A COST AUDITOR

He is responsible to answer any query required by the Central Government on the scrutiny of the cost audit report submitted by him.

He has a legal responsibility to third parties who might have been misled by his audit certificate.

He should maintain working papers as an evidence of the audit work carried out by him.

He should not disclose any confidential information to others .

RESPONSIBILITIES OF A COST AUDITORRESPONSIBILITIES OF A COST AUDITORResponsibility to clients and confidentiality.

Responsibility to colleagues.

He is liable if he does not perform his duties properly or if he is guilty of misconduct.

LIABILITIES OF A COST AUDITORLIABILITIES OF A COST AUDITOR

LIABILITIES OF A COST AUDITORLIABILITIES OF A COST AUDITOR

A cost auditor is liable to clients, third parties & Govt.He should meet the expectations of society.The cost auditor plays an important role, in verifying the

cost books of accounts.Based upon the cost audit report prepared by him,

various decisions are taken by the stakeholders.Hence, he should not perform his duties negligently and

he should conduct audit in a professional and ethical manner.

1. CONTRACTUAL LIABILITY1. CONTRACTUAL LIABILITYThe cost auditor is liable for non- fulfillment of the terms

and conditions of an agreement between him and the company who appoints him.

He may be held responsible under the Contract Act in failing to perform the duties as laid down in the agreement.

In the absence of any written agreement or contract, he is expected to conduct a complete cost audit.

2. PROFESSIONAL2. PROFESSIONAL LIABILITYLIABILITYA Cost Auditor incurs the following liabilities due to act

of omission which constitutes professional misconduct:a. Paying or agreeing to pay shares or commission in the

fees of professional work to any person, who is not a member of the institute.

b. Accepting or agreeing to accept any part of the profits of the professional work of a lawyer, broker, agent who is not part of the institute.

c. Advertising professional attainments.d. Charging fees based on percentage of profit.e. Being grossly negligent in professional duties.

PROFESSIONALPROFESSIONAL LIABILITYLIABILITYf. Accepting the position of a Cost Accountant previously held

by another cost accountant without communicating to him in writing.

g. Disclosing information acquired during the course of audit to any unauthorized person.

h. Certifying cost audit report without conducting proper audit.i. Failure to report a known material misstatement appearing in

cost statement.j. Soliciting clients for professional work directly, indirectly by

circular, advertisement or personal communication.

3. LEGAL LIABILITYThe legal liabilities of a cost auditor include the following:

Civil Liabilities for negligenceSpecific statutory liabilitiesCriminal liabilities.

Criminal liabilities Criminal liabilities are for:a. Falsification of booksb. Giving false statementsc. Giving false evidence

A. CIVIL LIABILITIES FOR NEGLIGENCEA. CIVIL LIABILITIES FOR NEGLIGENCEA Cost auditor is liable to pay compensatory damages to

certain parties, in case he does not discharge his duties with reasonable care & skill.

He is required to make good the loss or damage resulting from negligence on his part.

Negligence means acting carelessly or failing to perform the assigned duties.

He has to discharge his duties with due care & diligence.He cannot guarantee that his efforts will succeed nor does

he promise highest degree of skill & knowledge.But, he must exercise the same degree of professional

care & skill that his status demands.

B. CRIMINAL LIABILITIESB. CRIMINAL LIABILITIESIndian Penal Code imposes a criminal liability on the cost

auditor. The I.P.C. states that ‘whosoever issues or signs any

certificate required by law to be given or signed or relating to any fact which such certificate is by law admissible in evidence, knowing or believing that such certificate is false in any material point, shall be punishable in the same manner as if he gives a false evidence’.

If the auditor makes a statement which is false or omits any material fact in any report or certificate, he shall be punishable with imprisonment for a term which may extend to 2 years or shall be liable to a fine.

i. FALSIFICATION OF BOOKSi. FALSIFICATION OF BOOKSDestroys, mutilates, alters, falsifies or secrets of any

books, papers and Makes any false or fraudulent entry in any register,

books of account or document belonging to the company.

He shall be punishable with imprisonment for a term which may extend to seven years and shall also be liable to a fine if with the intent to defraud or deceive any person.

ii. GIVING FALSE STATEMENTii. GIVING FALSE STATEMENTIf in any return, report, certificate or other document, he

makes a statement:which is false in any material fact knowing it to be a

material, andwhich omits any material fact knowing it to be a material

He shall be punishable with imprisonment for a term which may extend to two years and shall also be liable to a fine.

iii. GIVING FALSE EVIDENCEiii. GIVING FALSE EVIDENCEThe auditor who intentionally gives false evidence: Upon any examination, upon oath or solemn

affirmation; or In any affidavit, deposition or solemn affirmation in or

about the winding up of any company

• He shall be punishable with imprisonment for a term which may extend to seven years and shall also be liable to a fine.

C. SPECIFIC STATUTORY C. SPECIFIC STATUTORY LIABILITIESLIABILITIES1. Since a cost a auditor has a status of an officer ,

he is liable as an officer of the company under the provisions of the Act.

2. In case of willful default in making the report or authenticating or signing a document, the auditor shall be punishable with a fine to an extent of Rs 1000.

SPECIFIC STATUTORY LIABILITIESSPECIFIC STATUTORY LIABILITIES

3. The court is empowered to summon and examine any officer of the company including an auditor, who is known or suspected to have in his possession any books, paper of the company or is known to be indebted to the company or is deemed to be capable of giving information concerning the promotion, formation, trade, property, dealings, books, papers of the company.

SPECIFIC STATUTORY LIABILITIESSPECIFIC STATUTORY LIABILITIES4. Liabilities under Cost Audit (Report) Rules 1968:

Under these rules, a cost auditor is punishable with a fine extending to Rs 500, if he fails:

i. To submit 3 copies of the cost audit report to the Company Law Board in the prescribed format with a copy to the company and

ii.To Submit the cost audit report within 180 days from the end of the company’s financial year.

OTHER LIABILITIESOTHER LIABILITIESLIABILITY TO THIRD PARTIESLIABILITY TO THIRD PARTIES Cost auditor is appointed by the company and submits his

report to the Central Government and the company. He may be held liable to the Government if default is made by him in complying with the provisions of rule 3 or rule 4 of Cost Audit (Report) Rules, 1996 and shall be punishable with fine which may extend to five hundred rupees.

LIABILITY TO THE PROFESSIONAL BODY:LIABILITY TO THE PROFESSIONAL BODY: The cost auditor may be held liable for his professional

misconduct if he violates the professional code of conduct as instituted by the Cost and Works Accountants Act, 1959. He is liable if he acts as a cost auditor without holding a valid certificate of practice from the Institute.

APPOINTMENT OF A COST AUDITORAPPOINTMENT OF A COST AUDITORCost auditor is not appointed on a regular basis as the

financial auditor. Cost audit is taken up only when ordered by the Central

Government. Government may order audit of cost accounts of a

company by an auditor, who shall be a cost accountant within the meaning of Cost and Works Accountant Act, 1959

He must hold a valid certificate of practice.

PROCESS FOR APPOINTMENT OF A PROCESS FOR APPOINTMENT OF A COST AUDITOR COST AUDITOR

1. Audit Committee2. E-filing of application3. Approval of the Government4. Re-submission5. Issue of formal letter of appointment6. Intimate the Central Government

SPECIAL PENAL PROVISION SPECIAL PENAL PROVISION FOR COST AUDITORSFOR COST AUDITORSIf the cost auditor does not comply with the provisions of

the ICWAI Act, 1959, he is punishable with a fine which may extend to Rs 5000.

If the cost auditor intentionally gives false evidence, upon an affidavit or solemn affirmation, he shall be punishable with imprisonment for a term which shall not be less than 3 years, but may extend to 7 years and a fine which may extend to Rs 10 lakhs.

An auditor will be punishable with a fine of Rs 5 lakhs for non compliance with any of the provisions contained in sections 138, 143, 144 & 145.

SPECIAL PENAL PROVISION FOR SPECIAL PENAL PROVISION FOR COST AUDITORSCOST AUDITORSPenalty for failure to disclose fraud will attract a fine of

minimum Rs 1 lakh, which may extend to Rs 25 lakhs.Penalty for misconduct includes a fine of not less than Rs

1 lakh, but which may extend to 5 times of the fees received in case of individual.

Also the cost auditor will be debarred from engaging himself from practicing as a member of the institute.

(Include penalties for Criminal Liabilities).

PROFESSIONAL ETHICS & PROFESSIONAL ETHICS & CODE OF CONDUCTCODE OF CONDUCTICWAI Professional Ethics for Members in practice.Approved by the Council of the Institute in July, 1980.It should be strictly followed by all practicing cost

accountants.It guides the action & behavior of the cost accountants.All members are expected to do the work assigned in the

most professional and ethical manner.

1. Independence, Integrity, Objectivity1. Independence, Integrity, ObjectivityA member should be straight forward, honest and sincere

in his approach to professional work.He should be fair, unbiased and impartial.He should be free of any interest.He should be objective.To ensure independence, a member should not have

financial involvement in the client’s business.If the member has any family/ personal relationship with

the client, it should be disclosed.

2. Responsibility to clients & confidentiality2. Responsibility to clients & confidentiality

A member should respect confidentiality of information acquired during the course of work.

He should not disclose the same to third parties without the client’s consent, unless there is right to legal disclosure.

Confidential information should not be used for personal gains or gains of third parties.

It is obligatory that the assistants of the member also maintain strict confidentiality of the client’s information.

3. Responsibility to Colleagues3. Responsibility to ColleaguesNo member shall directly or indirectly solicit business.If a member is approached by a client of another member to

give services or advice of special character, communication must be made to the other member.

If one member is approached to replace another member, appointment should not be accepted before communicating to the other member.

The same applies in case of member referrals.

In all cases, communication must be made before appointment.

4. Responsibilities to practice and profession 4. Responsibilities to practice and profession including Firm Name, Service Holding, Designationincluding Firm Name, Service Holding, Designation

A practicing member is guilty of professional misconduct if:

He allows any person to practice in the former’s name or allows such person to sign any financial/cost statement or certificate on his behalf, unless the latter is a member in practice.

The practicing member pays or agrees to pay commission or brokerage out his professional fees to any person other than a member.

Members to restrict the use of firm name.The firm name should not be fictitious.

5. Competence & Technical Standards5. Competence & Technical StandardsMembers are bound to carry out professional work with

care and skill.They should confirm with technical and professional

standards prescribed by the professional body or legislation of the country.

Members to accept professional work only within their professional competence.

6. Publicity, Fees & Allied Issues6. Publicity, Fees & Allied IssuesSoliciting of Clients & Professional Work:Following are prohibited:Soliciting of clients/professional work, personal

communication by any means.Responding to tenders, ads, circulars, inviting quotations

for professional work ( not applicable on enquiry of Govt)Making an offer for employment against advertisement.Advertising for employmentAny advertisement or note to press that amounts to

soliciting or canvassing.

6. Publicity, Fees & Allied Issues6. Publicity, Fees & Allied IssuesFeesFollowing are prohibited:To charge/ accept fees for professional work as a percentage

of profit.Paying or accepting to/from a non-member.

Publicity to Professional Attainment & FirmFollowing are prohibited:Advertisement of own professional attainment/services.Use of designation other than degrees of universities

established by law or accepted by Central Govt & ICWA.

6. Publicity, Fees & Allied Issues6. Publicity, Fees & Allied IssuesPress publicity to appointment as an auditorFollowing are permitted:Advertising changes in address/partnership/dissolutionEntry into telephone directoryPersonal discussion with prospective clientsNotice to press- examination success of candidates belonging

to firm.

AdvertisementAdvertisement for staff/trainees in own officeAdvertisement for sale of business/ property with the

practicing member as trusteeAdvertisement on behalf of client requiring staff.