Ch 7: COST AUDIT DOCUMENTATION, AUDIT PROCESS AND EXECUTION — Previous Year Exam Questions (PYQ)

1(a): Cost Audit Documentation

5 Marks

(ii) Adequacy of Internal Controls: The auditor should obtain an understanding of the accounting system sufficient to identify and understand major classes of transactions, manner of initiation of transactions, significant accounting records, supporting documents and specific accounts in the financial statements and the accounting and financial reporting process. Accounting control comprises of the plan of an organisation and the SUGGESTED_ANSWERS TO QUESTIONS_SYL2016_DEC2019_PAPER-19 DoS, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 12 procedures and records that are concerned with the safeguarding of assets and the reliability of financial controls. Internal control, as far as financial and accounting aspects are concerned, aims at the following: (i) Flow of work through various stages. (ii) Segregation of personnel duties (iii) Adequate documentation. (iv) The transactions are recorded with appropriate amounts and time (v) The assets should be properly safeguarded (vi) Properauthorisation. (vii) Existence of organisational chart (viii) System to locate the deviations and departures from the prescribed procedures (ix) Standardized records and formats. It would ensure availability of right information at right time. (x) Efficient Management Information System. Etc.

Unlock with Pro

1(b): Audit Process

5 Marks

Process Waste Multiplier Total Consumption 1.3161 Blow Room 1.1994 Carding 1.1158 Draw Frames 1.1027 Roving(Simplex) 1.0906 Ring Frames 1.0153 Reeling and Winding 1.0000

Unlock with Pro

2(a): Cost Audit Documentation

5 Marks

Factors In Planning Cost Audit Assignment: In planning the audit assignment, certain important factors are taken into consideration, viz. (a) Requirement of audit personnel for the assignment (b) Documentation of the audit procedures and of evidences (c) Quality control exercised over performance of the assignment, etc. Audit personnel for the assignment Experience and training of audit personnel engaged for the assignment should be considered particularly keeping in view the relevant industry. Prior practical experience of the industry helps in carrying out the study of the system and procedures in vogue. For this purpose, two pronged approaches may be adopted by the cost auditors. First, a study of the industry and the second, study of the Annual Reports of the auditee company for the past at least 5 years. The cost audit team to whom the assignment is to be delegated need appropriate direction and supervision. It is therefore, essential that they accomplish the following tasks:

Unlock with Pro

2(b): Cost Audit Documentation

5 Marks

(i) Quick Ratio = Quick Assets/Current Liabilities Quick Assets = Current Assets - Stock-Prepaid Expenses 31.03.2017 = (30,92,000-21,72,000-15,000)/10,50,000 = 9,05,000/10,50,000 = 0.86:1 31.03.2018 =(33,02,000-22,80,000-22,000)/12,72,000 SUGGESTED_ANSWERS TO QUESTIONS_SYL2016_JUNE2018_PAPER-19 Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 11 = 10,00,000/12,72,000 = 0.79:1 (ii) Current Ratio: = Current Assets/Current Liabilities 31.03.2017 = 30,92,000/10,50,000 = 2.94:1 31.03.2018 = 33,02,000/12,72,000 = 2.60:1 (iii) Debt-Equity Ratio: = Long Term Debt/Shareholder's Fund 31.03.2017 = 18,00,000/34,00,000 = 0.53:1 31.03.2018 = 18,00,000/35,00,000 = 0.51:1 (iv) Return on Capital Employed = (Profit after tax +Interest)/Capital Employed) x 10 31.03.2017: (882000+180000)/5200000) x 100 = 20.42% 31.03.2018: (957600+180000)/530000) x 100 = 21.46% Alternative Answer (iv) Return on Capital employed: (Profit after Tax+ Interest- Tax Advantage on Interest)/Capital employed × 100 31.03.2017: [(882000+180000-54000)/5200000/ x 100 = 19.38% (957600+180000-54000)/5300000] x 100 = 20.45% (v) Average Collection Period: =(Sundry Debtors/Credit Sales) × 360 31.03.2017 = (4,20,000/38,40,000) × 360 = 39 days 31.03.2018 = (4,50,000/41,28,000) × 360 = 39 days (b) Process % of Wastages in input Net output for 100 units of input Waste multiplier factor Total 1.3122 Blow room 9.13 100 - 9.13 = 90.87 1.1924 Carding 7.14 90.87 - 6.49 = 84.38 1.1072 Drawing 1.20 84.38 – 1.01 = 83.37 1.0940 Roving (Simplex) 0.25 83.37 - 0.21 = 83.16 1.0912 Ring frame (spinning) 7.11 83.16 - 5.91=77.25 1.0136 Reeling and winding 1.35 77.25 - 1.04 =76.21 1.0000

Unlock with Pro

3(a): Cost Audit Documentation

5 Marks

📌 **Statutory Amendment Note:** Under the erstwhile provisions, the small company threshold was Paid-up capital not exceeding ₹ 50 Lakhs / ₹ 2 Crore and Turnover not exceeding ₹ 2 Crore / ₹ 20 Crore. The Ministry of Corporate Affairs (MCA) amended the thresholds via the Companies (Specification of Definitions Details) Amendment Rules, 2022 to **₹ 4 Crore Paid-up Capital** and **₹ 40 Crore Turnover**. The question and answer have been updated to reflect the latest active thresholds.

Company having turnover above ₹ 100 crore undertakes works contracts for pipe line execution for Drinking, Sewerage and Irrigation purpose. The required pipes for the projects, falling under Chapter 68 of CETA, are manufactured by the Company itself. A part of the production is also sold outside. Whether Cost Audit is applicable for pipe manufacture. Answer: (Note: Assess the status in light of current Section 2(85) thresholds as amended by MCA).

Unlock with Pro

3(b): Cost Audit Documentation

5 Marks

With reference to the statutory framework governing 'Cost Audit Documentation' under Cost and Management Audit (CMA Final), critically examine the substantive legal provisions, scope, and applicability thresholds. Specifically elucidate: (i) the governing statutory sections/rules/standards; (ii) eligibility conditions, numerical limits, and compliance parameters; and (iii) consequences of non-compliance or procedural default.

Unlock with Pro