Basics of Cost Audit

Queston 1 June 2024 (7M)

What is the Scope of Cost Audit? Explain.

Answer

1. Cost Audit is an independent examination of cost statements, cost records and other related
information of an entity, with a view to express an opinion thereon.
2. It refers to the detailed verification of the correctness of costing techniques, costing systems,
and cost accounts. It is necessary to ensure that records maintained for the purpose are
accurate and correct to drive entity’s decision making process.
3. The primary objective of „Cost Audit‟ is ensuring accuracy of cost data, accumulation and exact
computation of the cost of a product. However, the vast scope of Cost Audit works as a mirror
of entity’s performance.
4. The wider scope of Cost Audit can help
a) Control over element-wise cost
b) Help in determining Sales Price and margin
c) Assist Management in decision-making
d) Necessity and results from each of the activity performed
e) Setting of Standards and budgetary controls
f) Minimizing wastages, if any
g) Accuracy of inventory valuation
h) Overall efficiency improvement of the entity
5. Hence, Cost Audit not only to be considered as a Compliance tool (where the same is mandatory),
the outcome is far reaching to go ‘beyond compliance’

Queston 2 Dec 2023(7M)

What are the benefits of Cost Audit?

Answer

The Expert committee formed by the Government of India to study the Cost Audit scenario in the
country, highlighted the following benefits of cost information:

a) Cost Information Use: Enables organizations to structure, understand, and communicate costs
with stakeholders.
b) Assessing Performance: Costing is vital for evaluating organizational performance, shareholder
and stakeholder value, and operational efficiency. It provides insights into resource efficiency,
waste management, and allocation policies.
c) Scope of Costing: Covers product, process, and resource-related information across the
organization's functions and value chain. It helps appraise actual performance against strategies.
d) Decision Support: Effective costing supports both regular and non-routine decisions by: •
• Meeting customer expectations and profitability targets.
• Assisting in continuous improvement of resource utilization.

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 • Guiding product mix and investment decisions.
e) Data Consistency: Working from a common data source ensures reconcilable output reports for
different audiences.
f) System Integration: Integrating databases and information systems enhances the efficiency
of costing information and reduces data manipulation.

Question 3 June 2023(6M)

What are the social objectives of cost audit ?

Answer

a) Verifying whether the pricing of the products is justified as per the product and quality are
concerned.
b) Removing the disparities, if any, in the pricing of products and/or services.
c) Looking into that no cost based economic imbalance may occur in product and /or services.
Facilitating in the global market cost competitiveness of the products.
d) Ensuring the efficient utilization of resources

Question 4 Dec 2021 (4M)

Describe about general objectives of cost audit ?

Answer

a) Verification of cost accounts with a view to ascertaining that these have been properly
maintained and compiled according to the cost accounting system followed by the enterprise.
b) Ensuring that prescribed procedures of the cost accounting records rules are duly adhered to.
Detection of errors and fraud.
c) Verification of the cost of each “cost unit” and “cost centre” to ensure that these have been
properly ascertained.
d) Determination of inventory valuation.
e) Facilitating the fixation of prices of goods and services.
f) Periodical reconciliation between cost accounts and financial accounts.
g) Ensuring optimum utilization of human, physical and financial resources of the enterprise.
h) Detection and correction of abnormal loss of material and time
i) Advising management, on the basis of inter-unit/inter-firm comparison of cost records, as
regards the areas where performance calls for improvement.
j) Promoting corporate governance through various operational disclosures to the directors.
k) Helping the entity in matters of Anti-Dumping Duty, valuation of cost of production of goods and
services, anti-profiteering (e.g. GST), price controls (e.g. Pharma industry in the past), etc.

Question 5 ICMAI Material Question

What is Genesis of Cost Audit ?

Answer

Refer concept 3

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Cost Records and Audit Rules _ 2014
Main Questions

Question 1 June 23(22)(10M),Dec 2018(16)(10m)

The following figures are obtained from the Cost Accounting Records of Vennela Ltd. :

Amount in ₹lakhs

Year ended 31st March 2023 2022

Net Sales 7,120 5,700
Other Income 450 300
Export Incentives 80 60
Increase in Value of Stock of Finished Goods 30 15
Raw materials consumed 2,640 2,160
Direct wages, salaries, bonus, gratuity etc 660 528
Power & Fuel 360 288
Stores and spares 240 210
Other manufacturing overheads 645 555
Administrative Overheads :
Audit fees 54 45
Salaries & commission to directors 72 60
Other overheads 390 330
Selling and distribution overheads :
Salaries & Wages 54 45
Packing and forwarding Other overheads 30 24
375 300
Total depreciation 180 180
Interest Charges :
On working capital loans from Bank 90 75
On fixed loans from IDBI 135 105
On Debentures 45 45
Tax paid including provisions 474 300
Dividend paid 630 345
Dividend Distribution Tax 110 60
You are required to calculate the following parameters as stipulated PART-D, PARA-3 of the
Annexure to Cost Audit Report under the Companies (Cost Records and Audit) Rules, 2014 for
the year ended March 31, 2023 and March 31, 2022:

i. Value addition
ii. Earnings available for Distribution
iii. Distribution of Earning to the different claimants

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Solution

Vennela Ltd

Calculation of value addition Amount in ₹lakhs

Particulars Current yr Previous yr

2022-23 2021-22
Value Addition:
Net Sales 7,120 5,700
Add: Export incentives 80 60
Add:/ (Less) Adjustment In Finished Stocks 30 15
7,230 5,775
Less: Cost of bought out input:
(a) Cost of Raw materials consumed 2,640 2,160
(b) Consumption of stores and spares 240 210
(c) Power & Fuel 360 288
(d) Other overheads 1,584 1,329
(645+54+390+30+375+90) = 1584
(555+45+330+24+300+75) = 1329
Total cost bought out inputs 4,824 3,987
Value Added: 2,406 1,788
Earnings Available for Distribution

Particulars Current yr Previous yr

2022-23 2021-22
Value Added: 2,406 1,788
Add: Other income 450 300
Add: Extra ordinary income - -
Earnings available for distribution 2,856 2,088
Distribution of Earnings

Distribution of earnings to:

a) Employees as salaries and wages, bonus, gratuity etc 714 573
Directors- Salaries and commission 72 60
b) Shareholders as dividend 630 345
c) Company as retained funds (including depreciation) 676 600
d) Government as taxes
Dividend Distribution Taxes 110 60
Income taxes paid (including provisions) 474 300
584 360
e) Providers of Capital/Fund as Interest on Debentures:
Interest on Debentures: 45 45
Interest on Fixed Loans from IDBI 135 105
Total distribution of earnings 2,856 2,088

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Working of Retained Earnings:

Earnings Available for Distribution 2856

Employee Cost – 714

Directors Salaries & Commission – 72

Dividend – 630

Taxes – 584

Interest – 180 = 676

Question 2 Dec 2019(16)(8M)

The following parameters are extracted from the Cost Accounting Records of ALCOBOX Ltd.
multi products manufacturing company for two years: (Amount in ₹ lakh)

Year ended 31st March 2019 2018

Gross Sales including GST 28,560 27,790

GST 4,130 3,920

Other Income — —

Raw materials consumed 15,960 14,840

Direct wages and salaries 490 450

Power and fuel 350 320

Stores and spares consumed 80 70

Repairs and maintenance 70 60

Depreciation charged to production cost centers 220 210

Factory overheads:

Salaries and wages 70 60

Depreciation 30 30

Rates and taxes 15 14

Other overheads 75 66

Administrative overheads:

Salaries and wages 140 130

Rates and taxes 90 90

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Other overheads 2,250 2,100

Selling and distribution overheads:

Salaries and wages 100 80

Packing and forwarding 85 85

Depreciation 15 15

Other overheads 1,730 1,640

Interest 1,160 1,030

Bonus and gratuity 200 150

You are required to compute the following RATIOS as stipulated in PART -D, PARA-4 to the
Annexure of Cost Audit Report under the Companies (Cost Records and Audit) Rules, 2014 for
the year ended March 31, 2019 and March 31, 2018.

(i) Profit before Tax (PBT) to Value Added

(ii) Value Added to Net Sales

(iii) Profit before Tax (PBT) to Net Revenue from Operations

Solution

Calculation of Profit Before Tax (PBT) (Amount in ₹ lakh)

Year Ended 31st March 2019 2018

Gross Sales inclusive of GST 28560 27790

Less: GST 4130 3920

Net Sales 24430 23870

Net Revenue from Operations 24430 23870

Cost of Sales

Raw material consumed 15960 14840

Direct wages and salaries 490 450

Power and fuel 350 320

Stores and spares consumed Repairs and maintenance 80 70

70 60

Depreciation charged to production centers 220 210

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Factory over heads (including depreciation) 190 170

Administration overheads 2480 2320

Selling and distribution overheads (inclusive depreciation) 1930 1820

Interest 1160 1030

Bonus and gratuity 200 150

Total B 23130 21440

Profit before Tax (PBT) (A -B) 1300 2430

Calculation of Value Added (Amount in ₹ lakh)

2019 2018

Net Sales (A) 24430 23870

Less: Cost of bought out of inputs:

Direct materials consumed 15960 14840

Stores 8i spares consumed 80 70

Power and fuel 350 320

Repairs and maintenance 70 60

Overheads (exclusive salaries, wages,

rates & taxes and depreciation) 4140 3891

Total cost of bought out of inputs (B) 20600 19181

Value Added (A-B) 3830 4689

2019 2018

(i) Profit before tax (PBT) to Value Added 1300/3830 2430/4689

33.94% 51.82%

(ii) Value Added to Net Sales 3830/24430 4689/23870

15.68% 19.64%

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Profit before tax (P BT) to net revenue from operations 1300/24430 2430/23870

5.32% 10.18%

Question 3 June 24(22)(7M)

The Cost Accountant of TRINCUS TEXTILES MILLS LTD. has arrived at a Profit of ₹
20,10,500 based on Cost. Accounting Records for the year ended March 31, 2023. Profit as
per Financial Accounts is ₹ 22,14,100.

As a Cost Auditor, you find the following differences between the Financial Accounts and Cost
Accounts:

NO PARTICULARS AMOUNT ₹
1 Profit on Sale of Fixed Assets 2,05,000
2 Loss on Sale of Investments 33,600
3 Voluntary Retirement Compensation included in Salary & Wages in F/A 50,25,000
4 Donation Paid 75,000
5 Insurance Claim relating to previous year received during the year 5,08,700
6 Profit from Retail trading activity 32,02,430
7 Interest Income from Inter-Corporate Deposits 6,15,000
8 Decrease in value of Closing WIP and Finished goods inventory
as per Financial Accounts 3,82,06,430
as per Cost Accounts 3,90,12,500
You are required to prepare a Reconciliation Statement between the two Accounts for the year
ended March 31,2023.

Solution

Reconciliation of Profit between Cost and Financial Accounts

for the year ended March 31, 2023

₹ ₹
Profit as per Financial Accounts: 22,14,100
Add: Loss on sale of investments 33,600
Add: Voluntary Retirement compensation included in salary 50,25,000
and wages in F/A - Not included in cost A/c 75,000 51,33,600
Add: Donation paid 73,47,700
Less: Profit on Sale of Fixed Assets-Not considered in cost A/c 2,05,000
Less: Receipts of insurance claim related to previous year 5,08,700
Less: Profit from Retail trading activity 32,02,430
Less: Interest income from inter-corporate deposit-not considered in 6,15,000
cost accounts
Less: Difference in valuation of stock:
Decrease in inventories as per cost accounts 3,90,12,500

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 Decrease in inventories as per financial accounts (–) 3,82,06,430 8,06,070 53,37,200
Profit as per Cost Accounts 20,10,500

Question 4 DEC2023(22)(7M),June 2017(16)(8m)

Auto Parts Manufacturing Company Ltd. showed a profit for the year 2022-23 as ₹ 35,46,700.
During the course of Cost Audit, the followings transactions were noticed:

(i) an old machine with net value of ₹ 6,54,000 was sold off for₹ 9,30,000,

(ii) dividend income was received amounting to ₹84,500 from investments,

(iii) a sum of ₹ 58,000 was spent towards CSR commitment,

(iv) the company was engaged in trading activity where purchase of goods was ₹13,50,000 and
sales was ₹13,42,300, after incurring ₹ 40,800 as expenditure,

(v) some renovation work was carried out at a cost of ₹ 7,75,000 and its useful life was only
for five years, and

(vi) the closing inventory of raw material was undervalued ₹29,600 and that of finished goods
was overvalued ₹65,400 in the financial records.

Work out the Profit as per the Cost Accounts.

Solution

Reconciliation of Profit between Cost Accounts and the Financial Accounts of Auto Parts
Manufacturing Company Ltd. for the year 2022-23.

Particulars ₹ ₹
Profit as per the Financial Accounts 35,46,700
Add: Trading Loss 48,500
4/5th of Renovation Expenses Amortized 6,20,000
CSR Contribution 58,000 7,26,500
Less: Profit on Sale of Assets 2,76,000
Income from Investments 84,500
Net overvaluation of closing inventory in the Financial records
(65,400 - 29,600) 35,800 (-) 3,96,300
Profit as per the Cost Accounts 38,76,900

Question 5 Dec 2023(16)(10M)

The profit as per financial accounts of M/s Kaling pong Himalaya Private Company for the year
2022-23 was ₹ 1,54,28,642. The profit as per Cost Accounting Records for the same period
was less. You are required to prepare a reconciliation statement and arrive at the profit as

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per Cost Records. The following details are collected from the financial schedules and cost
accounting records:

Financial Cost Accounts

Accounts
Valuation of Stock
Opening: WIP 25,62,315 22,65,710
Finished Goods 2,65,47,520 2,92,18,950
Closing : WIP 42,75,640 37,36,346
Finished Goods 3,72,59,430 4,35,25,149
Interest income from inter-corporate deposits 6,15,340 —
Donations given 4,85,560 —
Loss on Sale of Fixed Assets 1,22,546 —
Value of cement taken for own consumption 3,82,960 3,65,426
Cost of Power drawn from own Wind Mill
— At EB tariff — 49,56,325
— At cost 36,20,370 —
Non-operating income 45,36,770. —
Voluntary retirement compensation 16,76,540 —
Insurance claim relating to previous year received during the 14,35,620 —
year

Solution

Computation in difference in Valuation of Stock

Financial Cost
Accounts Accounts
Opening (WIP & FG) 2,91,09,835 3,14,84,660
Closing (WIP & FG) 4,15,35,070 4,72,61,495
1,24,25,235 1,57,76,835
Reconciliation of Financial Profit and Costing Profit

₹ ₹
Profit as per Financial Accounts 1,54,28,642
Add: Difference in Stock Valuation 33,51,600
Loss on Sale of Fixed Assets 1,22,546
Donation not considered in Cost Records 4,85,560
Voluntary retirement compensation not included in cost 16,76,540 56,36,246
2,10,64,888
Less: Non-operating income 45,36,770
Less: Interest income from intercorporate deposit 6,15,340
Difference in value of cement taken for own consumption 17,534
Difference in valuation of windmill power 13,35,955
(₹49,56,325 -36,20,370)

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 Insurance claim relating to previous year 14,35,620 79,41,219
Profit as per Cost Accounts 1,31,23,669

Question 6 Dec 2019(16)(8M)

The financial Profit and Loss Account of PANWOOD LTD, a manufacturing company for the
year ended 31st March, 2019, was ₹1,15,71,480. During the course of Cost Audit, it was
noticed the following :

(i) Some discarded assets sold off which fetched a profit of ₹ 95,000.

(ii) Interest was received amounting to ₹1,05,000 from outside the business investment.

(iii) Voluntary Retirement payment of ₹3,80,000 was not included in the Cost Accounts.

(iv) Some renovation work was carried out at a cost of ₹6,20,000 and its useful life was only
for five years.

(v) Donation of ₹1,28,000 towards CSR commitment was not considered in the Cost Accounts.

(vi) Insurance claim of ₹ 18,05,000 relating to previous year received during the year.

(vii) Loss on sale of investments amounts to ₹ 32,800.

(viii) The closing inventory of raw materials was undervalued ₹30,600 and that of finished
goods was overvalued ₹2,30,700 in the financial records.

(ix) Post retirement medical grant to the extent of ₹ 2,80,000 was not considered in Cost
Accounts.

(x) Profit from Retail trading activity amounting to ₹ 1,90,000.

You are required to prepare a Reconciliation Statement between two Accounts and work out the
Profit as per Cost Accounts.

Solution

Statement showing the Reconciliation of Profit and Loss between Cost and financial account
for the year ended 31st March, 2019.

Particulars ₹ ₹

Profit as per Financial Accounts. 11571480

Add: Expenses/Loss not considered in Cost Accounts

(a) Loss on Sale of Investments 32800

(b) Donation towards CSR Commitment 128000

(c) Post-retirement Medical grant 280000

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(d) Voluntary Retirement payment 380000

(e) 4/5 of Renovation Expenses Amortized 496000 1316800

Less: Incomes not considered in Cost Accounts

(a) Profit on Sale of old assets 95000

(b) Interest received from outside investment 105000

(c) Insurance claim for previous year received 1805000

(d) Profit from Retail Trading Activity 190000

(e) Effect of Undervaluation/overvaluation of closing inventory 200100 (2395100)

Profit as per Cost Accounts 10493180

Question 7 Dec-2017 (16)(8m)

i. What are ‘Books of Accounts’ as per the Companies Act, 2013? Do ‘Cost Records’ become
part of Books of Accounts?

ii. Is maintenance of Cost Accounting Records mandatory for a multi-product company where
all the products are not covered under the Rules, even if the turnover of the individual
products, which are covered under the Rules, is less than rupees thirty five crore?

Solution

(i) Section 2(13) of Companies Act, 2013 states that: “Books of Accounts” includes records
maintained in respect of-

(i) All sums of money received and expended by a company and matters in relation to which
receipts and expenditure take place;

(ii) All sales and purchases of goods and services by the company

(iii) The assets and liabilities of the company and

(iv) The items of cost as may be prescribed under section 148 in the case of company which
belongs to any class of companies specified under that section.

Section 148 of Companies Act 2013 empowers the “central government to specify audit of items of
costs in respect of certain companies”.

As per Rule 2 (e) of the Companies (Cost Records and Audit ) Rules 2014, “cost records” means books
of accounts relating to utilization of materials, labour and other items of cost as applicable to the
production of goods or provision of services as provided in Section 148 of the Act and such rules.

(ii) The Rules provide threshold limits for the company as a whole irrespective of whether all it‟s
products are as per the prescribed industry /sector provided under Table A or Table

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 B. The Rules do not provide any minimum product specific threshold limits for maintenance of Cost
Accounting Records and consequently the company would be required to maintain Cost Accounting
Records for the products covered under table A or Table B or both , even if the turnover of such
products is below rupees thirty five crore.

Question 8 Dec-2018 (16)(8m)

i. While accepting the offer of appointment as Cost Auditor of a company, what certificate
should be submitted by the Cost Auditor to the company ? Is the Cost Auditor required
to give any certificate with respect to his/her/its independence and ‘arm’s length
relationship’ with the appointing company ?

ii. A company has units in SEZ and in non-SEZ areas. What would be the applicability of
the Companies (Cost Records and Audit) Rules, 2014 on such a company with respect to
maintenance of cost accounting records and Cost Audit ?

Solution

i. The Cost Auditor appointed shall submit a certificate that –

(a) The individual or the firm, as the case may be, is eligible for appointment and is not
disqualified for appointment under the Act (the Cost and Works Accountants Act, 1959)
and the rules or regulations made thereunder ;

(b) The individual or the firm, as the case may be satisfies the criteria provided in Section
141 of the Companies Act, 2013 so far as may be applicable ;

(c) The proposed appointment is within the limits laid down by or under the authority of
the Act ; and

(d) The list of proceedings against The Cost Auditor or audit firm or any partner of the
audit firm pending with respect to professional matters of conduct, as disclosed in the
certificate, is true and correct.

Yes, the Cost Auditor of a company is required to give a certificate to the Audit Committee in
respect of his/her/its independence and arm’s length relationship with the company. Moreover,
according to the Second Schedule, Part I, Clause 4 of the Cost and Works Accountants Act, 1959,
it amounts to professional misconduct when a cost Auditor expenses his/her/its opinion on cost and
pricing statement of any business or enterprise in which he/she, his/her firm or a partner of his/her
firm has substantial interest.

ii. Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 is specific and it has mandated
maintenance of cost accounting records for all products/activities listed under Table- A and
Table- B subject to threshold limits. No exemption is available to any company from maintenance
of cost accounting records one it meets the threshold limits. Hence, the above company would
be required to maintain cost accounting records for all its units including the ones located in the
special economic zone.

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However, in view of the provisions of Rule 4(3) (ii) of the Companies (Cost Records and Audit) Rules,
2017, the units located in the special economic zone would be outside the purview of Cost Audit and
the company would not be required to include particulars of such units in its Cost Audit Report. The
other units of the company located outside the special economic zone would be covered under Cost
Audit subject to the prescribed threshold limits.

Question 9 Dec-2018(16),June 2024(22)(7M),June2017(16)(8m)

What is the basis adopted to determine normal price with respect to related party transactions

Solution

As per item 24 of CRA 1, normal price means price charged for comparable and similar products in
the ordinary course of trade and commerce where the price charged in the sole consideration of
sale and such sale is not made to a related party. Normal price can be construed to be a price at
which two unrelated and non-desperate parties would agree to a transaction and where such
transaction is not clouded due to the proximity of the parties to the transaction and free from
influence though the parties may have shared interest. The basis adopted to determine normal price
shall be classified as under :

(i) Comparable uncontrolled price method

(ii) Resale price method

(iii) Cost plus method

(iv) Profit split method

(v) Transactional net margin method

(vi) Any other method, to be specified.

Question 10 Dec-2019 (16)(4m)

Healthcare Equipment Limited is engaged mainly in the production of Cardiac stents, Catheters,
Pacemakers and Intraocular lenses.

State below whether maintenance of Cost Records is applicable if the company fulfils turnover
criteria and is

(I) a foreign company having registered office at Mumbai.

(II) a company classified as a micro enterprise.

(III) a foreign company having only liaison offices at Delhi and Mumbai.

(IV) a domestic company whose average turnover of ₹ 40 crore for last two years has dropped
to ₹ 24 crore in FY 2018 -19.

Solution

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 (1) Healthcare Services is in non -Regulated sector (item 33 of B: non -Regulated sector) and any
company, domestic or foreign, having annual turnover of ₹ 35 crore or more from all its
products or services in the previous year shall maintain cost records. Therefore, the Rule is
applicable to a foreign company.

(2) Nothing contained in Companies (Cost Records and Audit) Rules shall apply to a company, which
is classified as a micro enterprise or a small enterprise as per the turnover criteria under
Micro, Small and Medium Enterprises Development Act.

(3) Nothing contained in serial number 33 shall apply to foreign companies having only liaison
offices in India.

(4) Once maintenance of cost records becomes applicable, it would be maintained on a continuous
basis in the subsequent years also even if the turnover of the company in the previous year
falls below threshold limit.

Question 11 Dec-2022 (16)

While accepting the offer of appointment as Cost Auditor of a company, what certificate should
be submitted by the Cost Auditor to the company?

Solution

The Cost Auditor appointed shall submit a certificate that –

(a) The individual or the firm, as the case may be, is eligible for appointment and is not disqualified
for appointment under the Act (the Cost and Works Accountants Act, 1959) and the rules or
regulations made there under;

(b) The individual or the firm, as the case may be, satisfies the criteria provided in Section 141
of the Companies Act, 2013 so far as may be applicable;

(c) The proposed appointment is within the limits laid down by or under the authority of the Act;
and

(d) The list of proceedings against The Cost Auditor or audit firm or any partner of the audit
firm pending with respect to professional matters of conduct, as disclosed in the certificate,
is true and correct.

The Cost Auditor is also required to give a certificate to the Audit Committee in respect of his
independence and arm’s length relationship with the company

Question 12 June 2018(16)(8m)

i. A Company meets the threshold limits for both maintenance of Cost Records and Cost
Audit in 2015-16 and, consequently, comes under the purview of the Rules in the year
2016-17. If the turnover of the company gets reduced to lower than the prescribed
threshold limit in 2016-17, state whether the Rules relating to Cost Records and Cost
Audit will be applicable for the year 2017-18?

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 ii. What would be the treatment of cost of consumption of electricity from a captive
generating plant and the applicability of Cost Audit to such captive generating plants?

Solution

i. Rule 3 of the Companies (Cost Records and Audit) Rules, 2014, states that a company engaged
in the production of the goods and/or rendering of the services as prescribed, having an
overall turnover from all its products and/or services of Rupees thirty five crore or more
during the immediately preceding financial year, shall include cost records for such products
and/or services in their books of account. Since the threshold limit for applicability of
maintenance of Cost Accounting Records is met in 2015-16 (Previous Year), the Cost Records
are required to be maintained from 2016-17. Once the maintenance of Cost Records becomes
applicable, it would be maintained on a continuous basis in the subsequent years also. Following
the same line, Cost Audit will be applicable from 2016-17 and for every year thereafter. So
Cost Audit is applicable in 2017-2018 also.
ii. As per Rule 3(A)(2), of the Companies (Cost Records and Audit) Rules, 2014 amendment dated
14th July, 2016 dealing with generation, transmission, distribution and supply of electricity,
all companies having captive generation of electricity, whether covered under Audit or not
shall be required to maintain Cost Records. It may be noted that, in case of a company whose
product(s)/service(s) are covered under the Rules and it consumes electricity from the
captive generating plant, determination of cost of generation, transmission, distribution and
supply of electricity as per CRA-I would be mandatory since the cost of consumption of
electricity has to be at Cost. Hence, maintenance Cost Records for generation, transmission,
distribution and supply of electricity would be applicable. However, Cost Audit will not be
applicable to such captive plants, provided the entire generation is consumed captively and no
portion is sold outside.

Question 13 June 2019 (16)

During the course of audit as Cost Auditor, you have come across (I) some material deficiency
and (II) significant variation in material consumption over the previous year. State the provisions
of the Companies (Cost Records and Audit) Rules, 2014 in this regard.

Solution

Pursuant to rule 6(4) of the Companies (Cost Records and Audit) Rules, 2014 read with the Cost
Audit Report in form CRA-3, if as a result of the examination of the books of account, the Cost
Auditor desires to point out any material deficiency or give a qualified report, he/she shall indicate
the same against the relevant para (i) to (vii) in the prescribed form of the Cost Audit Report giving
details of discrepancies he/she has come across. The report, suggestions, observations and
conclusions given by the cost auditor under this paragraph shall be based on verified data, reference
to which shall be made here and shall, wherever practicable, be included after the company has been
afforded an opportunity to comment on them.

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 The prescribed format for Cost Audit Report states that „Wherever, there is any significant
variation in the current year’s figure over the previous year’s figure for any item shown under each
para of the annexure to the cost audit Report, reasons thereof shall be given by the cost auditor.
Accordingly, any variation in material consumption during current year over the previous year shall
be clarified in Part B of Annexure to Cost Audit Report.

Question 14 Dec 2023(22)(7M)

Explain the term "Normal capacity vis a vis installed capacity" as defined in the Form CRA I

Solution

Para 18 of Form CRA 1 of CCRA Rules, 2014 states that Installed capacity is determined based on:

i. Manufacturers‘ Technical specifications

ii. Capacities of individual or inter-related production centers
iii. Operational constraints or capacity of critical machines or
iv. Number of shifts

Normal capacity shall be determined vis-a-vis installed capacity after carrying out following
adjustments:

i. Holidays, normal shut down days and normal idle time,

ii. Normal time lost in batch change over,
iii. Time lost due to preventive maintenance and normal break downs of equipment‘s,
iv. Loss in efficiency due to ageing of the equipment, or
v. Number of shifts.

Question 15 Dec 2023(22)(7M)

The cost Audit Report in CRA3 as submitted by the Cost Auditor contains more of Management
Audit Basics than mere data of Production and services Comment on same Justifying the reasons

Solution

i. The Cost Auditor has to report in CRA 3, whether the Cost Accounting System followed in a
manufacturing unit is adequate for determination of the fair cost of production.
ii. He has to report on the financial performance of the company as well as of the product under
cost audit, along with various ratios and offer comments on the ratios.
iii. He has to indicate the percentage of production in relation to the installed capacity expressed
in appropriate units of measurement.

Management by exception

a) He has also to state reasons for the shortfall in production bringing out clearly the extent to
which they are controllable both in short term as well as long term.
b) He has to give observations as regards variations, if any, in the rate of major raw materials,
power and fuel, etc. in terms of rate per unit as compared to previous year, if any.

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 c) He has to give details of wages and salaries including direct labor cost per unit of output and
as compared to the previous year.
d) He has to indicate the amount of overheads along with reasons for any significant variations in
expenditure incurred against the items of factory, administration, selling and distribution
overheads as compared with previous two years.

Remedial Actions: In this case the following position emerges: the Cost Auditor may offer
suggestions as regard the following matters for improvements in performance of the company
under audit with reference to:-

a) Rectification of general imbalance in production facilities

b) Fuller utilization of installed capacity
c) Concentration on areas offering scope for cost reduction, increased productivity and key
limiting factors causing production bottlenecks; and
d) Suggesting improved inventory policies.

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Additional Questions

Question 1

The following figures are obtained from the Cost Accounting Records of Sinjini Ltd. a single
product manufacturing company:
Year ended 31st March 2023 2022
Net Sales 4,800 3,840
Other Income 300 200
Increase in Value of Stock of Finished Goods 20 10
Raw materials Consumed 1,760 1,440
Direct wages, Salaries, Bonus, Gratuity etc 440 352
Power & Fuel 240 192
Stores and Spares 160 140
Cess and local Taxes 120 100
Other manufacturing Overheads 430 370
Administrative Overheads:
Audit fees 36 30
Salaries & Commission to Directors 48 40
Other Overheads 260 220
Selling and Distribution Overheads:
Salaries & Wages 36 30
Packing and Forwarding 20 16
Other Overheads 250 200
Total Depreciation 120 120
Interest Charges:
On Working Capital Loans from Bank 60 25
On Fixed Loans from IDBI 90 75
On Debentures 30 30
Provision for Taxes 316 200
Proposed Dividends 420 230
You are required to calculate the following parameters as stipulated PART-D, PARA-3 of the
Annexure to Cost Audit Report under the Companies (Cost Records and Audit) Rules, 2014 for
the year ended March 31, 2023 and March 31, 2022:

i. Value Addition
ii. Earnings available for Distribution
iii. Distribution of Earnings to the different claimants.

Solution

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 Sinjini Ltd.

Calculation of Value Addition Amount in ₹lakhs

Year ended March 31 2023 2022

VALUE ADDITION:
Net Sales 4,800 3,840
Add: Export Incentives - -
Add/Less: Adjustment in Finished stocks 20 10
4,820 3,850
Less: Cost of bought out input:
i. Cost of Raw materials consumed 1,760 1,440
ii. Consumption of stores and spares 160 140
iii. Power & Fuel 240 192
iv. Other overheads 1,056 861
(430+36+260+20+250+60) = 1,056
(370+30+220+16+200+25) = 861
Total cost bought out input 3,216 2,633
Value added 1,604 1,217
Earnings Available for Distribution

2023 2022
Value Added 1,604 1,217
Add: Other Income 300 200
Earnings Available for distribution 1,904 1,417
Distribution of Earnings

2023 2022
a) Employees as salaries and wages, bonus, gratuity etc. 476 382
Directors- Salaries and Commission 48 40
b) Shareholders as dividend 420 230
c) Company as retained funds (including depreciation) 404 365
d) Government as taxes (120+316) ( 100+200) 436 300
e) Providers of Capital/Fund as Interest on Debentures
Interest on debentures 30 30
Interest on Fixed loans from IDBI 90 70
120 100
Total distribution of earnings 1,904 1,417
Working of retained earnings :

Earnings Available for Distribution 1904

Employee Cost – 476

Directors Salaries & Commission – 48

Dividend – 420

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 Taxes – 436

Interest – 120 =404

Question 2

The following figures are extracted from the statement prepared by the Cost Accountant and
the Trial Balance of ABC Ltd., which is a single product company

Amount in ₹lakhs

2023 2022 2021

Net Sales 1,745 1,705 1,610
Raw Materials consumed 1,140 1,060 975
Direct Wages 35 32 27
Power and Fuel 30 27 24
Stores and Spares 6 5 4
Depreciation charged to production cost centres 16 15 13
Factory overheads:
Salaries and wages 5 4 3
Depreciation 2 2 2
Rates and Taxes 1 1 1
Other overheads 6 5 4
Administrative overheads:
Salaries and Wages 10 9 8
Rates and Taxes 2 2 2
Other overheads 162 154 148
Selling and distribution overheads:
Salaries and Wages 7 6 5
Packing and Forwarding 6 6 5
Depreciation 1 1 1
Other overheads 124 118 108
Interest 85 74 68
Bonus and Gratuity 12 10 9
Gross Current Assets 840 724 640
Current Liabilities and Provisions 324 305 246
You are required to compute the following ratios as per requirement of Part D, Para 3 & 4
of the Annexure to Cost Audit Report under the Companies (Cost Records and Audit) Rules,
2014 for 3 years:

(i) Operating Profit as percentage of Value Addition.

(ii) Value Addition as percentage of Net Sales.

(iii) Note: The computation should be based on EBDIT as Operating Profit.

Solution

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 Calculation of operating profit

2023 2022 2021

Net sales (A) 1,745 1,705 1,610
Cost of Sales excluding depreciation & Interest
Raw Material consumed 1,140 1,060 975
Direct Wages 35 32 27
Power and Fuel 30 27 24
Stores and Spares 6 5 4
Factory overheads (excluding depreciation) 12 10 8
Administrative overheads (excluding depreciation) 174 165 158
Selling and distribution overheads (excluding depreciation) 137 130 118
Bonus and Gratuity 12 10 9
Total (B) 1,546 1,439 1,323
Operating Profit (A) - (B) = 199 266 287
Value addition is defined as “the difference between the net output value (Net Sales) and cost of
bought out materials and services for the product under reference”

Calculation of value addition

2023 2022 2021

Net sales 1,745 1,705 1,610
Less : (i) Cost of Bought Out Materials & Service (Raw 1,146 1,065 979
Materials and Stores & Spares)
Power & Fuel, other bought out services 30 27 24
Over heads (excluding Salaries & Wages, Rates & Taxes 298 283 265
and depreciation)
Value Addition : 271 330 342

2023 2022 2021

Operating profit as % of Value Added 199/271 266/330 287/342
73.43% 80.6% 83.92%
Value Addition as % of Net Sales 271/1745 330/1705 342/1610
15.53% 19.35% 21.24%

Question 3

In the Financial Accounts of Chemicals & Fertilizers Ltd. for the year ended March 31, 2023
the profit was ₹8,98,07,500. The profit as per Cost Accounting records for the same period
was less. The following details are extracted from the accounting schedules and Cost Accounting
records of the company.

Financial Accounts ₹000 Cost Accounts ₹000

Opening : Semi Finished Goods 31700 35210
: Finished Goods 83220 78590

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 Closing : Semi Finished Goods 35260 39420
: Finished Goods 89320 80450
Urea & Transport subsidy 348
Expenses on CSR 56
Profit on sale of Fixed Assets 150
Chemical used internally 382 365
Favourable Exch. Rate variation 294
Post-retirement Medical grant 584
Purchase Tax Refund 453
Litigation Recovery-Prior year 125
You are required to prepare a Reconciliation Statement and arrive at the Profit as per Cost
Records for the year ended March 31, 2023.

Solution

Chemicals & Fertilizers Ltd. Amount in ₹thousand

Reconciliation of financial profit and costing profit for the year ended March 31, 2023

Profit or loss as per Financial Accounts 89807.50

A. Less: Incomes not considered in Cost Accounts:
i. Profit on sale of Fixed Assets 150
ii. Urea & Transport Subsidy 348
iii. Litigation Recovery-Prior year 125
iv. Favourable Exch. Rate Variation 294
v. Purchase tax Refund 453
vi. Own consumption (chemicals) valuation difference (382-365) 17 (1387.00)
B. Add: Expenses not considered in Cost Accounts
i. Expenses on CSR 56
ii. Post-retirement medical grant 584 640
C. Less: Difference in Valuation of stock between Financial Accounts
and Cost Accounts
(9660-6070) (workings) (3590.00)
Profit as per Cost Accounts 85470.50
Workings :

Financial Account Cost Accounts

Opening : Semi Finished Goods 31700 35210
: Finished Goods 83220 78590
Total 114920 113800
Closing : Semi Finished Goods 35260 39420
: Finished Goods 89320 80450
Total 124580 119870
Variation in inventory 9660 6070
Increase in Difference of stock valuation towards financial accounts = ₹3590

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 Question 4

The Financial Profit and Loss of M/s. VGM Manufacturing company Ltd. for the year is
₹28,75,000. During the course of cost audit, it is noticed the followings:

(i) Some Old assets sold off which fetched a profit of ₹ 1,25,000
(ii) Interest was received amounting to ₹45,000 from outside the business investment.
(iii) Work-in-progress valuation for financial accounts does not as a practice take into
account factory overhead. Factory overhead is ₹2,15,000 in opening W-I-P and
₹2,45,000 in closing
W-I-P.
(iv) The Company was engaged in Trading activity by purchasing goods of ₹11,15,845 and
selling at ` ₹13,12,850 after incurring ₹35,000 as expenditure.
(v) A major overhaul of machinery was carried out at a cost of ₹ 5,50,000 and next such
overhaul will be done only after five years.
(vi) Opening stock of raw material and finished goods was overvalued for ₹ 2,00,000 and
closing stock was overvalued ₹1,85,000 in financial records.

Work out the profit as per Cost Accounts.

Solution

Reconciliation of Profit between Cost Accounts and Financial Accounts of M/s. VGM Manufacturing
Company Ltd.

Particulars ₹ ₹
Profit as per Financial Account 28,75,000
Add: Difference in valuation of W-I-P 30,000
Proportionate charge i.e. four-fifth for overhaul of machinery 4,40,000
Overvaluation of Opening Stock in the financial records 2,00,000 6,70,000

Less: Profit on sale of old assets not included in Cost A/cs 1,25,000
Interest received from outside investment 45,000
Trading profit not included in cost accounts 1,62,005
Overvaluation of closing stock in the financial records 1,85,000 (-) 5,17,005
Profit as per Cost Accounts 30,27,995

Question 5

a) Ambica Textile Mills produced cloth and fabrics. In addition, they undertook customer’s
job order for processing of cloth towards optimum utilization of its spare capacity and
earned from loan license . From the following Income figures.

Find out the turnover of the company as per the Companies (Cost Records and Audit) Rules:

Income ₹ in Lakhs

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 Sales 19,300
Trading Sales from Depots 1,250
Export Income 2,100
Export Duty 450
Income from Job Processing 1,100
Scrap Sale 235
Income from Loan Licence operations 560

b) The financial profit and loss account for the year 2022-23 of a company shows a net profit
of ₹29,60,000. During the course of Cost Audit, it was noticed that:
(i) The company was engaged in trading activity by purchasing goods at ₹6,00,000 and
selling it for ₹7,50,000 after incurring repacking cost of ₹ 25,000,
(ii) Some discarded assets sold off with no scrap value for ₹ 90,000,
(iii) Some renovation of machinery was carried out at a cost of ₹6,00,000, having a
productive life of five years, but entire amount was charged to financial accounts
(iv) Interest was received amounting to ₹ 1,40,000 from outside investments
(v) Voluntary Retirement payment of ₹3,50,000 was not included in the Cost Accounts,
(vi) Insurance claim of previous year was received to the extent of ₹ 2,50,000 but was
not considered in the Cost Accounts.
(vii) Opening stock or raw materials and finished goods was overvalued by₹ 2,40,000 and
closing stock of finished goods was overvalued by ₹1,10,000 in the financial accounts,
and
(viii) Donation of ₹80,000 towards CSR commitment was not considered in the Cost
Accounts.

Work out the profit as per the Cost Accounts and briefly explain the adjustment, if any,
carried out.

Solution

a) As per the Companies Act, 2013, Turnover means gross turnover made by the company from the
sale or supply of all products and services during a financial year but excluding duties and taxes

Income ₹ in Lakhs
Sales 19,300
Trading Sales from Depots 1,250
Export Income 2,100
Export Duty 450
Income from Job Processing 1,100
Scrap Sale 235
Income from Loan Licence operations 560
Total Turnover 24,545

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b) Profit Reconciliation as per Cost and Financial Records for the year 2022-23

Particulars ₹ in ’000 ₹ in ’000

1 Profit as per Financial Accounts for Audited Products 29,60,000
2 Less : Incomes not considered in the Cost Accounts
a) Trading Profit (7,50,000-6,00,000-25,000) 1,25,000
b) Profit on Sale of Old Assets 90,000
c) Interest received from Outside Investments 1,40,000
d) Insurance claim for previous year received 2,50,000
Total (–) 6,05,000
3 Add : Expenses not considered in the Cost Accounts
a) Donation towards CSR Commitment 80,000
b) VRS Expenses 3,50,000
c) Renovation (4/5th Outlay of 600000) 4,80,000
Total 9,10,000
4 Valuation of stocks (240000-110000)(Overvaluation of 1,30,000
opening stock and closing stock in financial accounts)
5 Other adjustments -
Profit as per the Cost Accounts 33,95,000

Question 6

The following figures are taken from the accounts of Best Ltd. for the year ended
on31.03.2018

Particulars ₹(in lakhs )

Gross Fixed Assets 5,600
Cumulative Depreciation 1,300
Investment in Shares and Debentures 650
Inventories 545
Sundry Debtors 347
Advances for Purchase of Capital Equipment 38
Other Loans and Advances 72
Other Current Assets 37
Sundry Creditors 229
Provision for Expenses 34
Net Sales 4,152
Depreciation 54
Interest 704
Profits before Tax 318
Compute the following under the Companies (Cost Records and Audit) Rules:

(i) Profit as a percentage of capital Employed

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(ii) Profit as a percentage of Net Sales

Solution

Particulars ₹(in lakhs )

Gross Fixed Assets
5,600
-Cumulative Depreciation (1,300)
Net Fixed Assets 4,300
Gross Current Assets:
Inventories 545
Sundry Debtors 347
Other Loans and Advances 72
Other Current Assets 37
Total Current Assets 1,001
Current Liabilities:
Sundry Creditors 229
Provision for Expenses 34
Total Current Liabilities 263
Net Current Assets 738
Total Capital Employed (A+B) 5038
Profit before tax (PBT) 318
Net Sales 4152
Working notes: Capital works in progress, investment outside business and Advance for purchase
of Capital equipment do not enter into the calculation of capital employed.

(i) Profit as percentage of Capita Employed: = (318/5038)×100 = 6.31%

(ii) Profit as percentage of Net Sales: = (318/4152)×100 = 7.66%

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Cost Auditor

Question 1 DEC 2017(16)(8M)

(i) Mr. X, the Cost Auditor of a company, contributes articles in various papers or journals,
discussing matters of professional interest. In the course of such discussion, he mentions
various data which include some vital, but unpublished, data relating to his client company
without its tacit approval. State whether there is punishment, if any, of the Cost Auditor
for such contravention.
(ii) A member of the Institute, whether in practice or not, is liable for disciplinary action if
he/she is found guilty of professional and other misconduct. Explain the term ‘other
misconduct.”

Solution

(i) Clause (1) of Part I of the Second Schedule to the Cost and Works Accountant’s Act 1959 deals
with the professional misconduct relating to the disclosure of information by a CMA in practice
relating to the business of his /her clients to any person other than his/her without the consent
of the client or otherwise than as required by any law for the time being in force would amount
to breach of confidence .The code of ethic further clarifies that such duty continues even after
completion of the assignment. The CMA may, however, disclose the information in case it is
required as a part of performance of his/her professional duties. In the given case

Mr .X has disclosed vital information of his client’s business without the consent of the client
under the impression that it will help the profession and the industry at large it is a professional
misconduct covered by Clause (1) of Part (I) of the Second Schedule of the Cost and Work
Accountant’s Act 1959.

(ii) As per Part IV first schedule to the Institute of Cost and Work Accountant’s Act 1959 a member
of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct
if-

1. He /She is held guilty by any civil or criminal court for an offence which is punishable with
imprisonment for a term not exceeding 6 months and

2. In the opinion of the Council he/she brings disrepute to the profession or the Institute as
a result of the action whether or not related to his /her professional work.

Question 2 Dec 2022 (16)(8m),June 2018(16)(8m)

Explain whether the following activities amount to Professional Misconduct on the part of a
Cost Accountant;

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(i) Mr. Arun, a CMA, is working as Manager-Cost Accounts of PQR Ltd. He accepts 10% of
profits from his friend, Mr. Raju, a lawyer and a legal consultant for PQR Ltd. He is doing
the job on retainership basis.
(ii) Mr. S, a CMA in Practice, certifies a cost and pricing statement of manufacturing of pipes
for the supply relating to a contract. The statement is prepared by Mr. T, who is not a
CMA or an employee of Mr. S.

Solution

(i) As per provisions of Clause 2 of Part II of The First Schedule of The Cost and Works
Accountants Act, 1959, stipulates the Professional Misconduct in relation to Cost Accountants
in Service. As per the provisions of Part II of the First Schedule of the Act, a Cost Accountant
in Service shall be deemed to be guilty of Professional Misconduct, if he/she "accepts or agrees
to accept any part of fees, profits or gains from a lawyer, a cost accountant or a broker engaged
by such a company, firm or person or agent or customer of such company, firm or person by way
of commission or gratification". In the given case, Mr. Arun, who is working as a Manager—Cost
Accounts of PQR Ltd., accepts 10% of profits from Mr. Raju, who is a legal consultant of the
same company. This amounts to Professional Misconduct.
(ii) As per provisions of Clause 2 of Part I of The Second Schedule of The Cost and Works
Accountants Act, 1959, stipulates, the Professional Misconduct in relation to Cost Accountants
in Practice. As per the provisions of the Part I of the Second Schedule of the Act, a Cost
Accountant in practice shall be deemed to be guilty of professional misconduct, if he/she
"certifies or submits in his/her name, or in the name of his/her firm, a report of an examination
of cost accounting and related statements unless the examination of such statements has been
made by him/her or by a partner or an employee in his/her firm or by another Cost Accountant
in Practice". In the given case, Mr. S. certifies the cost and pricing statement of a company,
which is manufacturing pipes. The statement is to be submitted for a Contract and is not
prepared by him. It is prepared by Mr. T. who is neither a CMA nor an employee of Mr. S. Hence,
this amounts to Professional Misconduct.

Question 3 Dec 2018(16)(4m)

Mr. Arun maya, a practicing Cost Accountant engaged two trainees, under Going training under
his guidance for audit job. Since the job was voluminous, he agreed to pay them, in addition
to stipend, an amount of 10% of the audit fees. Does the action of Mr. Arun maya amount to
professional misconduct ?

Solution

As per Part I of the First Schedule of the Cost and Works Accountants Act, 1959, a Cost Accountant
in practice shall be deemed to be guilty of professional misconduct, if he/she pays or allows or agrees
to pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits of

29 | P a g e
his/her professional work, to any person other than a member of the Institute or a partner or a
retired partner or the legal representative of a deceased partner. Under such circumstances, any
payment to trainees as a percentage of audit fees is a professional misconduct. He may, if necessary,
pay a lump sum stipend to the trainees.

Question 4 Dec 2023(16)(8m),June 2019(16)(8m)

(i) ABC Ltd. changed its Stock Valuation Policy from FIFO method to Average Cost method in
the FY 2018-19, as a result of which the profit of the Company was inflated by ` 25 lakhs.
The change in policy and the fact of additional gain were not disclosed by the Company nor
the Cost Auditor in the Audit Report. State whether the Cost Auditor is deemed to be
guilty of professional misconduct.
(ii) In the course of performance of his duties, some fraud against the Auditee Company gets
disclosed to the Cost Auditor. What is the punishment to Cost Auditor for failing to report
to the Authority within prescribed time?

Solution

(i) The Part I of the Second Schedule to the Cost and Works Accountants Act,1959 stipulates that
a cost accountant in practice shall be deemed to be guilty of professional misconduct, if he:
a. Fails to disclose a material fact known to him in a cost or pricing statement, which is not
disclosed in a cost or pricing statement, but disclosure of which is necessary in making
such statement, where he is concerned with such statement in a professional capacity;
b. Does not exercise due diligence, or is grossly negligent in the conduct of his professional
duties;
c. Fails to invite attention to any material departure from the generally accepted procedure
of costing and pricing applicable to the circumstances;
In the given case, the Cost Auditor has not disclosed the fact of changing the accounting policy
in the valuation of inventory and the resultant loss in the books of account for the year 2022-
23. Hence, the Cost Auditor is deemed to be guilty of Professional Misconduct.

(ii) According to Section 143(12) of the Companies Act 2013, if an auditor (Cost Auditor is included)
of a company, in the course of the performance of his duties as Auditor, has reason to believe
that an offence involving fraud is being or has been committed against the company by officers
or employees of the company, he shall immediately report the matter to the Central Government
within such time and in such manner as may be prescribed. Sub Section 13 specifies that no duty
to which an auditor of a company may be subject to shall be regarded as having been contravened
by reason of his reporting the matter referred to in subsection (12) if it is done in good faith.
According to Sub-Section 15 if any auditor does not comply with the provisions of sub-section
(12), he shall be punishable with fine which shall not be less than one lakh rupees but which may
extend to twenty-five lakh rupees.

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Question 5 Dec 2019(16)(8m)

(i) A firm of Cost Accountants was appointed by a company to evaluate the costs of the various
products manufactured by it for its information system. One of the partners of the firm was
a Non-Executive Director of the company. Is it permissible?

(ii) A Cost Auditor has reported fraud to the company as required under sec. 143 of the
Companies Act, 2013. What disclosures are to be made by the company in its Board’s Report?

Solution

(i) Clause 4 of Part-I of the Second Schedule to the Cost and Works Accountants Act, 1959 states
that expressing an opinion on cost and pricing of any business or any enterprise in which the
auditor or his firm or a partner in his firm has a substantial interest would constitute misconduct,
unless he discloses the interest also in his report. As per the facts of the case, the firm has
been retained to evaluate the cost of products manufactured by it for its information system.
Therefore, this amounts to Professional misconduct.
(ii) According to Section 143(12) of the Companies Act 2013, if an auditor of a company, in the course
of the performance of his duties as auditor, has reason to believe that an offence involving fraud
is being or has been committed against the company by officers or employees of the company,
he shall immediately report the matter to the Board/ Audit Committee/ Central Government
within such time and in such manner as may be prescribed.
As per Rule 13 of the Companies (Audit and Auditors) Rules, 2014, following detailed disclosures
of fraud reported to Audit Committee are to be made in Board’s Report:
a) Nature of Fraud with description;
b) Approximate Amount involved;
c) Parties involved, if remedial action not taken; and
d) Remedial actions taken.

Question 6 June 2023(16)(8m)

Enumerate the various omissions that might arise in rendering audit services to it's Clients by
a Cost Accountant in practice which can make him guilty of Professional Misconduct as laid down
in Second schedule of CWA Act, 1959

Solution

Part I of the Second Schedule of the CWA Act, 1959 relevant to sec. 21 and 22 lists out the acts
of professional misconduct in relation to Cost Accountants in Practice. Some of such acts are
negligence on the part of the Cost Accountant in Practice to adhere to the fundamental duty to the
client. The specific omissions are mentioned below:

(1) fails to report a material mis-statement known to him to appear in a cost or pricing statement
with which he is concerned in a professional capacity;

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 (2) does not exercise due diligence, or is grossly negligent in the conduct of his professional
duties;

(3) fails to obtain sufficient information which is necessary for expression of an opinion or its
exceptions are sufficiently material to negate the expression of an opinion;

(4) fails to invite attention to any material departure from the generally accepted procedure of
costing and pricing applicable to the circumstances;

(5) fails to keep moneys of his client other than fees or remuneration or money meant to be
expended in a separate banking account or to use such moneys for purposes for which they
are intended within a reasonable time.

Question 7 Dec 2023(16)(8m)

ABC was appointed as Cost Auditor of PQR Ltd for FY 2023-24. After three months of
appointment, for some reasons, the Cost Auditor becomes disqualified to be appointed as Cost
Auditor. State the steps to be taken by the Company as a consequence of such event.

Solution

In the present case, the Auditor has deemed to have vacated his office. For any casual vacancy of
Cost Auditor shall be filled by the Board of Directors within 30 days of occurrence of such vacancy.

The fresh appointment has to follow the same procedure as for appointment of original Auditor,

(a) in the case of companies which are required to constitute an audit committee- the Board shall
appoint an individual, who is a cost accountant in practice, or a firm of cost accountants in practice,
as cost auditor on the recommendations of the Audit committee, which shall also recommend
remuneration for such cost auditor;(ii) the remuneration recommended by the Audit Committee
under shall be considered and approved by the Board of Directors and ratified subsequently by the
shareholders;

(b) in the case of other companies which are not required to constitute an audit committee, the
Board shall appoint cost auditor fixing the remuneration and the remuneration so fixed shall be
ratified by shareholders.

The new Cost Auditor shall submit acceptance letter along with eligibility certificate after receiving
the offer of appointment. Within 30 days of Board meeting in which appointment is made, the
Company shall file a Revised Notice to Central Government through electronic mode, in Form CRA -
2 along with fees as per Rules

Question 8 Dec 2023(22)(7m)

State the procedure of appointment and fixing the remuneration of Cost Auditor

Solution

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Rule 14 of the Companies (Audit and Auditors) Rules, 2014 has laid down the procedure of
appointment and fixing the remuneration of a cost auditor.

For the purpose of section 148(3)—

(a) in the case of companies which are required to constitute an audit committee—

(i) the Board shall appoint an individual, who is a cost accountant in practice, or a firm of cost
accountants in practice, as cost auditor on the recommendations of the Audit committee,
which shall also recommend remuneration for such cost auditor;
(ii) the remuneration recommended by the Audit Committee under (i) shall be considered and
approved by the Board of Directors and ratified subsequently by the shareholders;

(b) in the case of other companies which are not required to constitute an audit committee, the
Board shall appoint an individual, who is a cost accountant in practice or a firm of cost accountants
in practice as cost auditor and the remuneration of such cost auditor shall be ratified by
shareholders subsequently.

Question 9 June 2024(22)(7m)

Can a Cost Accountant be appointed

(i) as a Key Managerial Person; or

(ii) as an Independent Director, as per the provisions of the Companies Act, 2013.Explain

Solution

Cost Accountant as a Key Managerial Person:

Section 203 provides for the appointment of Key Managerial Person

• Managing Director or Chief Executive Officer or manager and in their absence, a whole time
director;
• Company Secretary; and
• Chief Financial Officer

By virtue of qualification and experience, a Cost Accountant can become Key Managerial Person in
the Company.

Cost Accountant as an Independent Director:

Section 149(4) provides that every listed public company shall have at least one third of the total
number of directors as independent directors.

Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014 prescribes the
qualification of an independent director who shall possess appropriate skills, experience and
knowledge in one or more field of finance, law, management, sales, marketing, administration,

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research, Corporate Governance, technical operations or other disciplines related to the company
business.

The Cost Accountant having expertise in most of the above fields can become independent director
as stipulated in the Companies Act, 2013.

Question 10 June 2023(22)(6m)

Write a short note on Code of Professional Ethics which need to be followed in the field of
Cost and Management Accounting.

Cost Accountants are bound by certain Professional ethics and requested to observe some
fundamental principles that will have to be followed by a Cost Accountant

Solution

The Code of Professional Ethics for Cost and Management Accountants highlights the ethical
responsibilities and standards that professionals in this field must uphold. These ethical standards
are critical to maintaining trust, credibility, and professional reputation. Below is a breakdown of
the key components:

Objectives of the Accountancy Profession

The profession strives to achieve:

1. Credibility: Ensuring trust in information and information systems.

2. Professionalism: Gaining recognition from employers, clients, and others as trusted

professionals.

3. Quality of Service: Providing high standards of performance.

4. Confidence in Ethics: Establishing trust through a framework of ethical standards governing

the provision of services.

Fundamental Principles

To meet these objectives, cost accountants must adhere to the following principles:

1. Integrity:
Be straightforward, honest, and truthful in all professional services.

2. Objectivity:
Ensure fairness and impartiality, avoiding prejudice, bias, or undue influence from others.

3. Competence:
Provide services only when competent to do so. If needed, seek advice and assistance to
ensure quality and satisfaction.

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 4. Confidentiality:
Respect confidentiality and not disclose any information obtained in the course of
professional work, unless legally or professionally required.

5. Professional Behaviour: Act in a manner that maintains and enhances the reputation of the
profession.

Question 11 June 2017(16)(8m)

Mr. P. Swamy, the Cost Auditor of PQR Ltd. for the FY 2016-17, was offered an assignment
of Investment Consultant of RST Ltd., a subsidiary of PQR Ltd., for the same year.

i. Whether the acceptance of the assignment amounts to violation of law and professional
misconduct?
ii. What are the penal provisions, if any? (Mention the relevant provisions.)

Solution

i. Any person who is engaged in consulting and providing specialized services to a company and
its subsidiary companies is not eligible to act as Cost Auditor [Section 141 of the Companies
Act, 2013, read with Companies (Audit and Auditors) Rules, 2014]. The Cost Auditor cannot
accept the assignment as long as he/she remains appointed as the Cost Auditor of the
company. A member of the institute, whether in practice or not, shall be deemed to be guilty
of other misconduct, if— (1) he is held guilty by any civil or criminal court for an offence
which is punishable with imprisonment for a term not exceeding six months; (2) in the opinion
of the Council he brings disrepute to the profession or the institute as a result of his action
whether or not related to his professional work.[Part IV, The First Schedule] A member of
the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct,
if he is held guilty by any civil or criminal court for an offence which is punishable with
imprisonment for a term exceeding six months.[Part III, The Second Schedule]
ii. If an auditor has contravened the provisions of the Companies Act, 2013, he/she shall be
punishable with fine which shall not be less than twenty five thousand rupees but which may
extend up to five lakh rupees. When the auditor has contravened knowingly or will fully with
the intention to deceive the company or its shareholders or creditors or tax authorities,
he/she shall be punishable with imprisonment for a term which may extend to one year and
with fine, which shall not be less than one lakh rupees but which may extend up to twenty-
five lakh rupees. When the auditor has been convicted as above, he/she shall be liable to
refund the remuneration received and pay for the damages to the company, statutory body
or to any other person for the loss arising out of incorrect statement made in his/her report
[Section 147 of the Act]. A member of the Institute, whether in practice or not, shall be
deemed to by guilty of other misconduct, if he/she is held guilty by any civil or criminal court
for an offence which is punishable with imprisonment for a term exceeding six months [The
Second Schedule, Part III of the Cost and Works Accountants Act, 1959].

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 OVERVIEW OF COST ACCOUNTING STANDARDS AND GACAP

CAS 2 – Capacity Determination

Question 1

A plant operates 3 shifts of 8 hours each for all days except Sundays and 8 holidays.

Preventive maintenance is taken care in Sundays and annual maintenance in 8 holidays.

Normal idle time for food, shift change and other work for the workers is 1 hour per shift.

Installed Capacity of the machine = 1200 units per hour.

Production during last 5 years & Current year are 69.4, 72.6, 71.4, 70.5, 70.8, 69.9 lakh
units

Determine according to CAS 2, Installed capacity, Actual capacity, Idle capacity, Abnormal
idle capacity

Solution

i. Installed capacity = days in year × working hours per day × unit per hour

= 365 × 8 × 3 × 1200 unit = 105.12 lakh units

ii. Available capacity = days available × available hour per shift × shifts × units per hour

= (365 – 52 – 8) × (8 – 1) × 3 × 1200 = 76.86 lakh units

iii. Normal capacity = 69.4 + 72.6 + 71.4 + 70.5 + 70.8 /5 = 70.94 Lakhs units
iv. Actual capacity = Current production / Installed capacity = 69.9 / 105.12 = 66.50 %
v. Idle capacity = Installed capacity – Actual capacity = 105.12 – 69.90 = (35.22/105.12) × 100 =
33.50%
vi. Abnormal Idle capacity = Normal capacity – Actual capacity

= 76.86 – 69.9 = 6.96 lakh units

Question 2

Burnet Ltd., a manufacturing unit, provides the following extracts from its records for the
year ended March 31,

2023

The Company’s specifications capacity for a machine per hour 1,500 units
No. of shifts (each shift of 8 hours) per day 3 shifts
Paid Holidays in a year (365 days):

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 Sunday 52 days
Other holidays 12 days
Annual maintenance is done within these holidays
Preventive weekly maintenance for the machine is carried on during Sundays
Normal idle capacity due to lunchtime, shift changes etc. per shift 1 hour
Production based on sales expectancy in past 5 years (units in lakh): 75.70 ,87.42
,65.38 77.97
,76.08 ,
Actual Production for the year (units in lakh) 81.50

You are required to calculate:

(i) Installed Capacity

(ii) Practical Capacity

(iii) Actual Capacity (%)

(iv) Normal Capacity

(v) Idle Capacity (%)

(vi) Abnormal Capacity . Keeping in view of the relevant Cost Accounting Standard (CAS-2)

Solution

Calculation of different capacities

Burnett Ltd.

i. Installed Capacity: days in year × working hours per day × unit per hour

365 × 8 × 3 × 1500 = 131.40 lakh units

ii. Practical capacity: days available × available hour per shift × shifts × units per hour

(365-52-12) × ( 8-1) × 3 × 1500 = 94.815 lakh units

iii. Actual capacity Utilization: Current production / Installed capacity

(81.50 / 131.40) × 100 = 62.02%

iv. Normal capacity: (75.70+87.42+65.38+77.97+76.08) / 5 = 76.51 lakh units

v. Idle Capacity: Installed capacity – Actual capacity

(131.40-81.50) = 49.90 / 131.40 = 0.3798 = 37.98%

vi. Abnormal Idle capacity: (94.815 – 81.50) = 13.315 lakh units

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Question 3

GLORY LTD., a manufacturing company provides the following extracts from its Cost Accounting
Records for the year ended March 31, 2023:

The total capacity for 5 Machines per hour as per the company’s 2500 Units
specification
No. of shifts (each shift of 8 hours) per day 3
Paid holidays in a year (365 days):
Weekly holidays 52
Other holidays 10
Annual maintenance is done within these holidays (i.e. 10)
Preventive maintenance for the machines is carried on during weekly off
day
Normal idle capacity due to lunchtime, shift changes etc. per shift 0.5 hour
Production based on sales expectancy in past 3 years (units in lakh): 154.50
159.54
166.66
Actual production for the year ended March 31, 2023: 158.80
You are required to calculate: (1) Installed Capacity (2) Practical Capacity (3) Actual Capacity
(%) (4) Normal Capacity (5) Idle Capacity (%) (6) Abnormal Capacity — Keeping in view of the
relevant Cost Accounting Standard (CAS-2).

Solution

GLORY LTD.

CALCULATION OF DIFFERENT CAPACITIES FOR THE COMPANY

(1) Installed Capacity : 365 × 8 × 3 × 2500 = 21900000 i.e. 219 lakh units

(2) Practical capacity: (365 – 52 – 10) × (8 – 0.5) × 3 × 2500 = 17043750 i.e. 170.4375 lakh units

(3) Actual capacity (given) = 158.80 lakhs units

Actual capacity utilization: (158.80/219) × 100 = 72.51%

(4) Normal Capacity: (154.50 + 159.54 + 166.66)/3 = 160.23 lakh units

(5) Idle capacity: (219 – 158.80) = 60.20 lakh unit i.e. (60.20/219) = 27.49%

(6) Abnormal Idle capacity: (170.4375 – 158.80) = 11.6375 lakh units i.e. (11.6375/170.4375) = 6.83%.

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Question 4 June 2018(16)(6m)

The following data have been available of Sun flag Dolon Limited:

2020 - 21 2021 - 22 2022 – 23

Installed Capacity—Ton 250 250 250
Production—Ton 240 230 125
Cost Per Ton ₹ 1,000 1,077 1,660
The poor capacity utilization in 2022-23 was due to abnormal power-cut. The escalation in
costs were 5% in

2021-22 and 7% in 2022-23 based on 2020-21

(i) Calculate the abnormal cost due to power cut.

(ii) How would you treat these abnormal cost?

Solution

2020-21 2021-22 2022-23

Installed Capacity – Ton 250 250 250
Production—Ton 240 230 125
% of Capacity Utilisation 96 92 50
Cost Per Ton ₹ 1,000 1,077 1,660
Escalation factor 100 105 107
Cost at base year price 1,000 1077*100/105 1660*100/107
1,026 1,551
Total cost of production ₹ 2,40,000 2,35,980 1,93,875
Variable Cost/Ton ₹ 402 402 401
Fixed Cost/Ton 598 624 1,150
Fixed Cost @ 100% utilisation ₹ 574
Hence, increase in Fixed Cost/Ton due to poor capacity utilization in 2022-23

= (1,150 –574) = ₹ 576

i. Total abnormal cost due to power cut = 576 × 125 = ₹ 72,000

ii. The abnormal cost must be excluded from computation of cost and has to be shown under
Para 7 of the Cost Audit Report as “Abnormal Non-Recurring Cost”.
iii. The 50% Under Utilization of capacity being due to power-cut only, the Company should
consider possibility of captive generation, if the power-cut is likely to persist. Accordingly,
the investment needed, potential savings, etc. must be computed to determine the viability
of such a decision.

Working Notes:

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 2021-22 2022-23
Difference in Total Cost [2,40,000 – [2,35,980 – 1,93,875]
2,35,980] = 4,020 = 42,105
Difference in production 10 105
Variable Cost 402 401

Question 5

The following information pertains to REACON CEMENT LTD., a manufacturing cement company
for the year

that ended as follows:

The year ended March 31 2022-23 2021-22

Rated Capacity per Hr (in MT) 80 80
Break down (Hrs) 2,177 1,015
Planned Maintenance (Hrs) 247 422
Power restrictions (Hrs) 1,237 1,481
Shortfall (there are no orders) (Hrs) 792 677
Want of wagons (Hrs) 495 635
Total stoppage (Hrs) 4,948 4,230
Total running (Hrs) 3,888 4,582
Total available Hours 8,836 8,812
Production during the year (in MT) 2,48,844 3,29,928
Hourly Rate of Production (in MT) 64 72
Capacity Utilization (%) 62.21 82.48
Annual Installed Capacity (in MT) 4,00,000 4,00,000
Based on information stated above, you as a Cost Auditor are required to offer your comments
on:

(i) The performance of the company

(ii) Your suggestion for improvement.

Solution

Recon Cement Ltd.

Performance analysis

i.
a) Rated capacity = 80 MT/Hr. : Rated capacity achieved in 2021-22 = (72/80)×100 = 90%

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 Rated capacity achieved in 2022-23 = (64 /80) × 100 = 80%. The capacity achievement as %
of rated capacity has declined from 90% to 80% in 2021-22.
Further the Capacity Utilization has gone down to 62.21% in 2022-23 from 82.48% of
previous year; a reduction of 20.27%.
b) From the data available the following observations are noted:-
1. Breakdown hours have gone up from 1,015 hours to 2,177 hrs.’, an increase by 114.48%
2. Planned Maintenance hrs has reduced from 422 hrs.’ to 247 hrs.’ i.e. by 41.47%
3. Shortfall hrs due to lack of orders has increased from 677 hrs.’ to 792 hrs.’ i.e. by 16.99%
4. The total stoppage hrs. has increased from 4,230 hrs to 4,948 hrs i.e. by 16.97%
5. The total running hrs has come down from 4,582 hrs to 3,888 hrs i.e. by 15.15%
6. The production has come down from 3,29,928 MT to 2,48,844 MT i.e. by 24.58% From the
above findings, it can be pointed out that the under utilization of capacity to the extent of
little over 20% can be attributed mainly to:-
• Increased total stoppage hours of 4,948 of 2022-23 as against that of 4,230 hrs in
2021-22 and
• The net increase of 718 hrs (4,948-4,230) is again due to increase of break down by
1,162 hrs
(2,177-1,015) in the year 2022-23
ii. Suggestion:
Therefore, the Company should look into the aspect of proper maintenance, securing sufficient
orders to avoid lost time. Better utilization of capacity can be also be achieved by improving
availability of wagons. The company may also carry out a cost-benefit analysis to have captive
source of power.

CAS 4 Cost of Production / Acquisition / Supply of Goods / Provision of Services

Question 6 Dec 2017(16),June 2024 (22)(7m)

The following particulars pertaining to production of yarn are extracted from the records of
Balarampur Textiles Ltd. for the year ended March 31, 2017:

Particulars ₹ ‘000

Direct Material Cost per unit inclusive of Excise Duty ₹ 280 thousand 2,560

Direct Wages & Salaries 1,540

Direct Expenses 450

Indirect Materials 533

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Factory Overheads 897

Administrative Overheads (40% relating to Production activities) 1,250

Quality Control Cost 565

Research and Development Cost 600

Interest on Working Capital 350

Sale of Scrap Realized 460

You are to determine the cost of production for the purpose of captive consumption in

terms of the Rule 8 of the Central Excise Valuation (DPE) Rules 2000 and as per the CAS-4
and the Assessable Value for the purpose of paying Excise Duty on captive consumption.

Solution

According to the Central Excise Valuation (Determination of price of Excisable Goods) Rules 2000,
the assessable Value of goods used for captive consumption is 110% (w.e.f 5-8-2003) of cost of
production of such goods. The manner of determination of cost of production for captive
consumption is laid down in CAS 4.

Particulars ₹ in ‘000

Direct Material 2560

Direct wages and salaries 1540

Direct expenses 450

Indirect Materials 533

Factory Overheads 897

Administrative Overheads(40% on ₹.1250) 500

Quality Control Cost 565

R& D Cost 600

Total cost 7645

Less: realization of scrap 460

Cost of production as per CAS 4 7185

Note : 1. The cost of Working Capital Interest is not chargeable to Cost of Production

2. Assessable value as per Excise Rules is ₹ 7903500 (110 % × 71,85,000)

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Question 7

ABUNA ELECTRONICS LTD. is engaged in the manufacture of LED TV sets having its factories
at Patna and Gujarat. The company manufactures picture tube at Patna which is consumed to
produce LED TV sets at Gujarat factory. The following information pertaining to captively
consumed picture tubes are extracted from the records of the company for the half year
ended March 31, 2023.

Direct material 950

Direct wages and salaries 357
Direct expenses 80
Indirect materials 70
Factory overheads 320
Administrative overheads (20% relating to production activities) 640
Quality control cost 100
Research and development cost 125
Selling and distribution expenses 225
Sale of scrap realized 130
Profit margin 15%
You are required to determine: The cost of production for purpose of captive consumption in
terms of Rule 30 of the Central Goods & Services Tax Rules 2017 and as per CAS-4 (Revised),
and Assessable Value for the purpose of paying GST on applicable transactions.

Solution

ABUNA ELECTRONIC LTD.

Computation of Cost of Production (As per CAS-4)

Direct material 950

Direct wages and salaries 357
Direct expenses 80
Factory overheads 320
Indirect materials 70
Quality control cost 100
Research and development cost 125
Administrative overheads 128
LESS : Sale of scrap realized (130)
Cost of production 2000
Add: 10% as per Rule 30 of CGST Rules, 2017 (10% of ` 2,000) 200
Assessable Value as per Rule 30 of CGST Rules, 2017 2200

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Question 8 Dec 2019(16)(4m)

How the cost of production of goods and provision of services as per CAS-4 read

with CGST Rules are determined:

i. where the supply of goods or services is for a consideration not wholly in money.
ii. where goods are intended for further supply as such by the recipient?

Solution

Cost Accounting Standard 4 (CAS 4) specifies the principles for determination of cost of production
for valuation of goods based on cost. Where the supplier and the recipient are not related and price
is the sole consideration, the value of supply or services shall be transaction value. CGST Act and
Rules 27, 28, 29 of CGST Rules provide methodologies for determination of value of supply under
certain exceptional situations. (1) Where the supply of goods or services is for a consideration not
wholly in money, the value shall be the (a) open market value or (b) the value of supply of goods or
services or both of like kind and quality for distinct or related person. (2) Where goods are intended
for further supply as such by the recipient, the value shall be an amount equivalent to 90% of the
price charged for the supply of goods of like kind and quality to his customer not being a related
person. If the value is not determinable, it will be 110% of cost.

Question 9 Dec 2022 (16)(4m)

To determine Cost Production for Captive Consumption what are different cost components
considered

Solution

Institute of Cost Accountants of India (ICAI) has issued Cost Accounting Standard CAS-4 titled
‘Cost of Production for Captive Consumption’. The standard has clarified that in case of captive
consumption, cost calculation should be as per CAS-4 standard only. Cost of production of a product
consists of materials consumed, Direct Wages and Salaries, direct expenses, works overheads,
quality control costs, research development costs, packing costs, administrative overheads relating
to production. To arrive at cost of production of goods dispatched for captive consumption,
adjustment for stock of Work-in-progress, finished goods, recoveries for sales of scrap, wastages
etc. shall be made.

Question 10 Dec2022(16)(4m)

How Capacity is determined according to cost Accounting standards

Solution

Determination of Capacity:

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1. Capacity shall be determined in terms of units of production or services or equivalent machine or
man hours.

2. Installed Capacity: Installed capacity is usually determined based on:

(i) Technical specifications of facility.

(ii) Technical evaluation

(iii) Capacities of individual or interrelated production or operation Centres.

(iv) Operational constraints or capacity of critical machines or equipment

(v) Number of shifts or machine hours or man hours.

In case, technical specifications of facility are not available, the estimates by technical experts on
capacity under ideal conditions shall be considered for determination of installed capacity. In case
the installed capacity is assessed as per direction of the Government or regulator it shall be in
accordance with the said directives.

3. Reassessment of Installed Capacity:

Installed capacity shall be reassessed in case of any change due to addition, deletion, modification
or for any other reason from the date of such change. In case the installed capacity is reassessed
as per direction of the Government or regulator it shall be in accordance with the said directives.

4. Normal Capacity:

Normal capacity is determined after suitable adjustments to the Installed Capacity The adjustments
may be of the following nature:

(i) Time lost due to scheduled preventive or planned maintenance

(ii) Number of shifts or machine hours or man hours

(iii) Holidays, normal shut down days, normal idle time

(iv) Normal time lost in batch change over

CAS -5 Determination of Average (Equalized) Cost of Transportation

Question 11 Dec 2017(16)(4m)

How to treat Inward Transportation Cost as per the Cost Accounting Standard 5? How
Transportation Cost is to be determined in case the manufacturer is having its own transport
fleet?

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Solution

As per the Cost Accounting Standard 5, Inward transportation cost is the transportation expenses
incurred in connection with the materials/goods received at factory or place of use. Inward
transportation costs shall form the part of the cost of procurement of materials which are to be
identified for proper allocation/apportionment to the materials/ products.

In case of a manufacturer having his own transport fleet, proper records shall be maintained to
determine the actual operating cost of vehicles, showing the details of various elements of cost,
such as salaries and wages of driver, cleaners and others, cost of fuel, lubricant, grease, amortized
cost of tyres and battery, repairs and maintenance, depreciation of vehicles, distance covered and
trips made, goods hauled transported to the depot.

Separate records should be maintained as per Appendix 1 to the standard separately for

(i) Inward transportation

(ii) Outward transportation

(iii) Movement for home consumption and export

(iv) Separate for production and trading activities

Separate for transportation other than by road, viz, by air, etc.

Question 12 Dec 2019(16)(8m) ,Dec 2023(16)(6m)

(i) What are the advantages of Cost Accounting Standards?

(ii) Answer the following with reference to Transportation Cost as per Cost Accounting
Standard-5 (CAS-5):

I. What items of cost shall not be included in Transportation Cost?

II. For apportionment of outward Transportation Cost, what basis should be adopted?

Solution

i. Cost Accounting Standards are set of standards that are designed to achieve ‘uniformity and
consistency in cost accounting practices.’ The Institute of Cost Accountants of India,
recognizing the need for structured approach to t he measurement of cost in manufacture or
service sector and to provide guidance to the user organizations , government bodies,
regulators, research agencies and academic institutions to achieve uniformity and consistency
in classification, measurement and assignment of cost to product and services, has
constituted Cost Accounting Standards Board (CAS B) with the objective of formulating the
Cost Accounting Standards. The advantages of Cost Accounting Standards are as follows:

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 a. Providing a structured approach to measurement of costs in manufacturing process or service
industry;

b. Integrating, harmonizing, and standardizing cost accounting principles and practices;

c. Providing guidance to users to achieve uniformity and consistency in classification,

measurement, assignment, and allocation of costs to products and services;

d. Arriving at the basis of computing the cost of product, activity, or service where required by
legal or regulatory bodies;

e. Enabling practicing members to make use of Cost Accounting Standards in the attestation of
General Purpose Cost statements; and

f. Assisting in clear and uniform understanding of all the related issues by various user
organizations, government bodies, regulators, research agencies, and academic institutions.

ii. Cost Accounting Standard 5 (CAS -5) on “Determination of Average (Equalized) Cost of
Transportation” deals with the determination of average transportation cost of a product.

(a) Cost of Transportation comprises of the cost of freight, cartage, transit insurance and cost
of operating fleet and other incidental charges whether incurred internally or paid

to an outside agency for transportation of goods. Penalty, detention charges, demurrage and cost
related to break down and expenses abnormal and non-recurring in nature will not be included in
transportation cost.

(b) The following basis may be used, in order of priority, for apportionment of outward
transportation cost depending upon the nature of products, unit of measurement followed and
type of transport used:

(i) Weight

(ii) Volume of goods

(iii) Tone -Km

(iv) Unit / Equivalent unit

(v) Value of goods

(vi) Percentage of usage of space

Once a basis of apportionment is adopted, the same should be followed consistently

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Question 13 Dec 2022(16)(8m)

As per Cost Accounting Standard on Determination of Average (Equalized) cost of

Transportation (CAS-5), what are the records to be maintained for ascertaining the
Transpiration Cost?

Solution

Maintenance of records for ascertaining Transportation Cost:

(i) Proper records shall be maintained for recording the actual cost of transportation showing each
element of cost such as freight, cartage, transit insurance and others after adjustment for
recovery of transportation cost. Abnormal costs relating to transportation, if any, are to be
identified and recorded for exclusion of computation of average transportation cost.

(ii) In case of a manufacturer having his own transport fleet, proper records shall be maintained to
determine the actual operating cost of vehicles showing details of various elements of cost, such
as salaries and wages of driver, cleaners and others, cost of fuel, lubricant grease, amortized
cost of tires and battery, repairs and maintenance, depreciation of the vehicles, distance covered
and trips made, goods hauled and transported to the dept.

(iii) In case of hired transport charges incurred for dispatch of goods, complete details shall be
recorded as to date of dispatch , type of transport used, description of the goods, destination
of buyer, name of consignee, challan number, quantity of goods in terms of weight or volume,
distance involved, amount paid etc.

(iv) Records shall be maintained separately for Inward and outward transportation cost specifying
the details particulars of goods dispatched , name of supplier/recipient, amount of freight etc.

(v) Separate records shall be maintained for identification of transportation cost towards inward
movement of material (procurement) and transportation cost of outward movement of goods
removed/sold for both home consumption and export.

(vi) Records for transportation cost from factory to depot and thereafter shall be maintained
separately.

(vii) Records for transportation cost for carrying any material/product to job-workers place and
back should be maintained separately so as to include the same in the transaction value of the
product.

(viii) Records for transportation cost for goods involved exclusively for trading activities shall be
maintained separately and the same will not be included for claiming any deduction for calculating
assessable value excisable goods cleared for home consumption.

(ix) Records of transportation cost directly allocable to a particular category of products should be
maintained separately.

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(x) For common transportation cost, both, for own fleet or hired ones, proper records for basis of
apportionment should be maintained.

(xi) Records for transportation cost for exempted goods, excisable goods cleared for export shall
be maintained separately.

Separate records of cost for mode of transportation other than road like ship, air etc., are to be
maintained, which will be included in total cost of transportation

CAS 6 Material cost

Question 14 :

Purchase of Materials $ 50,000 [Forward contract rate $ = `64.40 but $ = ₹64.60 on the
date of importation]; Import Duty paid ₹5,65,000; Freight inward ₹1,62,000; Insurance paid
for import by road ₹48,000; Cash discount ₹33,000; Payment made to the foreign vendor after
a month, on that date the rate of exchange was $ = `65.20. Compute the landed cost of
material.

Solution

Computation of Landed Cost of Material

Particulars Amount ₹
Purchase price of Material [50,000 × 64.60] 32,30,000
Add : Import duties of purchasing the material 5,65,000
Add : Freight Inward during the procurement of material 1,62,000
Add: Insurance paid 48,000
Value of Receipt of Material 40,05,000
(i) Excess payment made to the vendor due to exchange fluctuation is not an includible cost, hence
not considered.

(ii) Though the forward contract rate was $ = ₹64.40, but the exchange rate on the date of
importation is considered. Hence, included in the cost of materials. Accordingly, the purchase cost
is computed considering the $ = ₹64.60

Question 15 :

Purchase of Materials ₹3,00,000 (inclusive of GST of ₹15,715); Free on Board ₹12,000;

Import Duty paid ₹15,000; Freight inward ₹20,000; Insurance paid for import by sea ₹10,000;
Rebates allowed ₹4,000; Cash discount ₹3,000; Subsidy received from the Government for
importation of these materials ₹20,000. Compute the landed cost of material (i.e. value of
receipt of material).

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Solution

Computation of Material Cost Sheet

Particulars Amount ₹
Purchase price of Material 3,00,000
Add: Free on Board 12,000
Add: Import Duties of purchasing the material 15,000
Add: Freight Inward during the procurement of material 20,000
Add: Insurance paid 10,000
total 3,57,000
Less : Rebate 4,000
Less: GST Input Tax Credit 15,715
Less: Subsidy received from the Government for importation of materials 20,000
Value of Materials 3,17,285
Note: (i) Cash discount is not allowed, as it is a financial item.

(ii) Subsidy received, rebates and GST Input Tax Credit are to be deducted for the purpose of
computing the material cost.

Question 16 Dec 2017

From the following figures of Systematics Polytex Ltd., compute the landed cost of Egyptian
Cotton for the year 2016-2017:

Particulars Amount

Materials $35,000

Import Duty ₹ 3,35,000

Freight Inward ₹ 1,62,000

Insurance of Import by sea ₹ 48,000

Cash Discount ₹ 33,000

Bank Interest for Import Credit ₹ 15,000

CENVAT Credit refundable ₹ 37,000

Weight Reduction due to Moisture Loss 0.6%

Parity value of US $ :

On the date of Contract ₹ 64.40

On the date of Import ₹ 64.60

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On the date of Payment ₹ 65.20

Solution

Landed Cost of Material ₹

Materials Cost (35,000 × 64.40) 22,54,000

Import Duty 3,35,000

Freight Inwards 1,62,000

Insurance by Sea 48,000

Total 27,99,000

Less: Cen vat Credit 37,000

Landed cost of Materials 27,29,000

Unit cost increased by 100/99.4 times (due to weight loss)

Note : 1. Exchange Loss, finance costs are not allowable for inclusion in the Material Cost

2. Weight Loss does not affect the total cost, but the unit cost is enhanced by the percentage of
weight loss.

Cash discount is not allowed, as it is a financial item.

Question 17 June 24(22)(7m)

Opening stock of raw materials (5,000 units) ` 1,80,000; Purchase of Raw Materials (17,500
units) ` 7,00,000; Closing Stock of Raw Materials 3,500 units; Freight Inward ` 85,000; Self-
manufactured packing material for purchased raw materials only `60,000 (including share of
administrative overheads related to marketing sales `8,000); Demurrage charges levied by
transporter for delay in collection ` 11,000; Normal Loss of materials due to shrinkage in
transit 1% of materials purchased; Abnormal Loss due to absorption of moisture before receipt
of materials 100 units. Calculate the value of Closing Stock (Average Cost Method).

Solution

Computation of value of closing stock of raw materials [Average Cost Method]

Particulars Quantity (Units) Amount (₹)

Opening Stock of Raw Materials 5,000 1,80,000

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 Add: Purchase of raw materials 17,500 7,00,000
Freight inwards 85,000
Cost of self-manufactured packing materials 52,000
for purchased raw materials only
(60000- 8000)
Less: Abnormal Loss of raw materials ( due to (100) (4,486)
absorption of moisture before receipt of
materials) =
[(7,00,000 + 85,000) × 100]/17,500
Less: Normal loss of materials due to shrinkage in (175)
transit [1% of 17,500 units]
Cost of raw materials 22,225 10,12,514
Less: Value of Closing Stock (3,500) (1,58,737)
total cost
( total units−units of normal loss
)×Value of Closing Stock
1012514
( 5000+17500−175
)× 3500
Cost of Raw Materials Consumed 18,725 8,53,777
Note:

(i) Units of normal loss adjusted in quantity only and not in cost, as it is an includible item
(ii) Cost of self-manufactured packing materials does not include any share of administrative
overheads or finance cost or marketing overheads. Hence, marketing overheads excluded.
(iii) Abnormal loss of materials arose before the receipt of the raw materials, hence, valuation done
on the basis of costs related to purchases only. Value of opening stock is not considered for
arriving at the valuation of abnormal loss.

Question 18

How do you assign cost of Indirect Materials?

Solution

(i) The cost of indirect materials shall be assigned to the various Cost objects based on a
suitable basis such as actual usage or technical norms or a similar identifiable measure.

(ii) The cost of materials like catalysts, dies, tools, moulds, patterns etc., which are relatable to
production over a period of time shall be amortized over the production units benefited by
such cost.

The cost of indirect material with life exceeding one year shall be included in cost over the useful
life of the material

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CAS 7 Employee cost

Question 19 Dec-2017 (Syl-2016)

I. How would you treat the following as per the CAS 7 related to Employee Cost?

i. Separation Cost due to voluntary retirement, retrenchment termination, etc.

ii. Idle Time Cost

II. Find the Employee Cost of a company for the year 2016-17 as per the CAS 7 from the
following figures:

Particulars (₹ lakh)

Salaries, wages, allowances and bonus 950

Wage award arrears for the previous year 85

Contribution to provident and other funds 188

Employee welfare 56

Abnormal Idle Labor cost due to strike 95

Wages of contractual labor 125

VRS payment for the year 66

Solution

Separation costs related to voluntary retirement, retrenchment, termination etc., shall be amortized
over the period benefiting from such costs. The amortized separation costs for the period shall be
treated as indirect cost and assigned to the cost objects in an appropriate manner. However un
amortized amount related to discontinued operations, shall not be treated as Employee Cost but
should be charged to Profit and Loss account.

Idle Time Cost shall be assigned direct to the cost object or treated as overheads depending on the
economic feasibility and the specific circumstances causing such idle time. Cost of Idle time for
reasons anticipated like normal lunchtime, holidays etc. is normally loaded in the employee cost while
arriving at the cost per hour of an employee/a group of employees whose time is attributed direct
to the cost objects.

I. The employee cost for the company for the year 2016-17 is as follows:

(₹ Lakh)

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 Salaries, Wages, allowances and bonus 950

Wages of contractual labor 125

Contribution to provident fund and other funds 188

Employee Welfare 56

VRS payment for the year 66

Total 1385

Note : 1. As per CAS 7, arrear not related to the current year should not be included in

the Employee Cost.

2. Abnormal idle time cost is charged to Costing Profit & Loss Account

3. It is assumed that the VRS payment does not relate to closure of any section or activity
of the unit.

Question 20 Dec 2018

What items of expenses are to be included as Employee Cost as per the revised CAS 7 guidelines

Solution

The revised CAS 7 Guidelines lay down that the following items of expenses are to be included in
Employee Cost (for all employees whether temporary, part-time or contractual)

Employee Cost (payable in cash or kind excluding prior period costs)

• Salaries, wages, allowances, bonus/incentive ,Contribution to provident and other funds

Employee welfare & other benefits

Employee Cost (future benefits)

• Gratuity ,Leave encashment ,Other retirement/separation benefits ,VRS/other deferred

employee cost & other future benefits

Benefits generally include

• Paid holidays ,Leave with pay

• Statutory provisions for insurance against accident or health scheme ,Statutory provisions
for workman’s compensation

• Free or subsidized food ,housing ,education to children ,canteen, crèches and recreational
facilities , conveyance , Leave travel concession, Medical benefits to the employees and
dependents. , Interest-free or subsidized loans

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Question 21

A steel company which produces iron casting pipes and rod iron is covered under the cost audit
according to the companies (cost records and audit) rules 2014. From the expenditure data
relating to 2020-21, determine the employees cost according to CAS-7.

SI. No. Particulars Rs in lakh₹

(i) Salary, wages and other allowances 865

(ii) Bonus 95

(iii) Contribution to provident fund 90

(iv) Wages to contractual Labour 108

(v) Employees welfare 49

(vi) Abnormal cost due to strike 105

(vii) VRS payment for closure of rod iron section of the plant (to be 105
amortized for five years from the current period).

(viii) Arrear salary (2019 -20) 240

(ix) Compensation paid against the past periods against court order 85

Solution

The Employee Cost as per CAS 7 for the period FY 2020-21 = Rs. 1207 lakh₹

CAS 8 Cost of Utilities

Question 22 Dec 2018

A chemical unit generates in-house power to meet its shortfall from grid supply. It has 20%
surplus power which it can supply to the adjacent units. From the cost data given below, how
would you compute the cost of power as per CAS 8 is the following circumstances ?

(i) Power generated for the purpose of inter-unit transfers.

(ii) Power generated for the inter-company transfers

Power generated 29,76,500 Kwh

Particulars Total Amount (Rs.) (Rs.)/’00 kwh

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Coal Consumed less Ash Sale 15,80,000 53.08

Diesel Oil 1,85,000 6.22

Water 16,40,000 55.10

Stores 65,000 2.18

Salaries of Power House Staff 13,94,800 46.86

Repairs & Maintenance 2,96,000 9.94

Deprecation of Plant and Boiler 2,06,000 6.92

Share of Administration 2,05,000 6.89

Overheads

Interest on Asset Purchase 1,40,000 4.70

Distribution Cost 1,80,000 6.05

Total Power House Cost 58,91,800 197.94

Solution

(i) Cost of power generated for the purpose of inter-unit transfers shall comprise direct
material cost, direct employee cost, direct expenses, factory overheads and distribution
cost. Interest on asset purchase and share of administration over heads will not form
part of the cost. This is calculated as below :

Particulars Total Amount (Rs.)

Coal Consumed less Ash Sale 15,80,000

Diesel Oil 1,85,000

Water 16,40,000

Stores 65,000

Salaries of Power House Staff 13,94,800

Repairs & Maintenance 2,96,000

Depreciation of Plant, Boiler 2,06,000

Distribution Cost 1,80,000

Total 55,46,800

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Therefore, cost of power generated for the purpose of inter-unit transfers

= 55,46,800 / 29765 = Rs. 186.35 per 100 Kwh

(ii) Cost of power generated for the inter-company transfers shall comprise direct material
cost, direct employee cost, direct expenses, factory overheads, distribution cost and
share of administrative overheads. Interest on asset purchase will not form part of the
cost. This is calculated as below.

Particulars Total Amount (Rs.)

Coal Consumed less Ash Sale 15,80,000

Diesel Oil 1,85,000

Water 16,40,000

Stores 65,000

Salaries of Power House Staff 13,94,800

Repairs & Maintenance 2,96,000

Depreciation of Plant, Boiler 2,06,000

Share of Administration Overheads 2,05,000

Distribution Cost 1,80,000

Total 57,51,800

Therefore, cost of power generated for the purpose of inter-company transfers

= 57,51,800 / 29765 = Rs. 193.24 per 100 kwh

Question 23

A manufacturing firm has up its own power plant to cater its need in manufacturing process.

Its one month data is given below : Number of units produced = 100 lakh units of which 5% is
used by generating unit.Material and utility used :

(i) Coal 300 MT @ ₹ 30,000 per MT

(ii) Oil 5 MT @ ₹1,60,000 MT

(iii) Cost of Water extraction and treatment : 6 lakh litres @ ₹3 per litre

(iv) Steam boiler cost ₹ 55 lakh with residual value 5 lakhs after life of 10 years.

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(v) Cost of Generating Plant is ₹ 90 lakhs with no residual value. Depreciation is charged on
straight line method @ 10%

(vi) Generating Plant : 100 skilled workers@ ₹30,000 & 150 helpers @ ₹20,000 pm.

(vii) Boiler plant : 60 semi-skilled workers @ ₹25,000 & 100 helpers @ ₹20,000 pm

(viii) Repair & Maintenance of generating plant & Boiler is ₹5.0 lakhs

(ix) Share of Administrative charges ₹20 lakh

(x) Realization from Sale of ash disposed is ₹ 1.5 lakh

Prepare a cost sheet for Electricity Generating Cost and calculate cost per unit.

Solution

Particulars Amount ₹ in lakhs

Material Cost
Coal (300 × 30,000) 90
Oil (5 × 1,60,000) 8
Water (6 × 3) 18
Total material cost 116
Wages
Generator Plant (100 × 30,000) + (150 × 20,000) 60
Boiler Plant (60 × 25,000) + (100 × 20,000) 35
Total wages 95
Depreciation
Generating Plant (90 × 0.10) 9
Boiler Plant ((55 – 5) / 10) 5
Total Depreciation 14
Repair & Maintenance (Generating & Boiler) 5
Administrative Expenses 20
Total Cost 250
Realisation from Sale of Ash -1.50
Net Total Cost 248.50
Effective Units Produced (After 5% Self-use) 95lakh units
Cost per Unit ₹2.6158

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CAS 9 Packing Material cost

Question 24 Dec-2021 (Syl-2016)

How would you assign primary and secondary packing materials cost as per CAS9?

Solution

Cost of primary packing materials shall form part of the cost of production and cost of secondary
packing materials shall form part of distribution overheads

CAS 10 Direct Expenses

Question 25 Dec-2021 (Syl-2016)

Find the Direct Expenses as per CAS 10 from the following: Finance charge on lease of Design
Rs25,000, Special Design Charges Rs 28,000, Software Development Charges related to
Production Rs 27,000, and Travelling abroad for Training Rs25,000.
Solution

Rs 28000+Rs 27000+ Rs25000 =Rs 80000 (finance charges will not form part of direct expenses.

Question 26

TROMA LTD., a manufacturing unit, produces two products PB and PS. The following information
is extracted from the Books of the Company for the year ended March 31, 2023:

Particular Product PB Product PS

Units Produced (Qty.) 2,10,000 1,68,000
Units sold (Qty.) 1,68,000 1,36,500
Machine hours utilized 1,26,000 84,000
Design charges ( ₹) 1,57,500 1,89,000
Software development charges (`) 2,62,500 3,78,000
Royalty paid on sales ₹6,09,000 [ @ ₹2 per unit sold for both the products].

(i) Royalty paid on units produced ₹3,78,000 [ @ ₹1 per unit produced for both the products].

(ii) Hire charges of equipment used in the manufacturing process of product PB only ₹53,000.

Note: No adjustments are to be made related to units held i.e. Closing Stock.

You are required to compute the Direct Expenses—keeping in view of Cost Accounting Standard
(CAS-10).

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Solution

TROMA LTD.

Computation of Direct Expenses (As per CAS-10)

Amount in ₹

Particulars Product PB Product PS

Royalty paid on sale 3,36,000 2,73,000
Add: Royalty paid on units produced 2,10,000 1,68,000
Add: Hire charges of equipment used in the manufacturing 53,000
process of product-PB only
Add: Design charges 1,57,500 1,89,000
Add: Software development charges related to 2,62,500 3,78,000
production
Direct expenses (total) 10,19,000 10,08,000

Question 27

A company bought a new technology for its auto component unit for two products A and B. The
condition was to pay a lump of Rs.10,00,000 (equally distributable for both products having a
service life of 5 years) and Royalty of Rs.3 per unit produced. The vendor’s technicians were
to be paid travelling expenses for maintenance. The company incurs cost for software services
and interest for borrowing of Rs.1,20,000. The following information is extracted from the
Books of the Company for the year ended March 31, 2019:

Particulars Product A Product B

Unit produced (Qty.) 30000 25000
Royalty paid on production (Rs.) 3/unit 3/unit
Travelling charges (Rs.) 10000 10000
Software services charges (Rs.) 24000 20000
Hire charges for special equipment (Rs.) 8000
Interest on Bank borrowing (Rs.) 60000 60000
You are required to compute the Direct Expenses — keeping in view of CAS - 10.

Solution

Computation of Direct Expenses (as per CAS-10)

Particulars Product A Product B

Amortized cost for Technical knowhow 100000 100000
Royalty paid on Units Produced 90000 75000

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 Hire charges of equipment used in A 8000
Travelling Expenses 10000 10000
Software services 24000 20000
Direct Expenses 2,32,000 2,05,000
Interest on bank borrowing shall not form part of Direct Expenses

CAS 12 Repairs and Maintenance Cost

Question 28

As per the CAS-12, how should high value spare, when replaced by a new spare and
reconditioned, be treated?

Solution

As per CAS-12 on Repairs and Maintenance Cost, high value Spare, when replaced by a new spare and
reconditioned, should be recognised as property, plant and equipment when they meet the definition
of property, plant and equipment and depreciated accordingly. Otherwise, such items are to be
classified as inventory and recognised in cost as and when they are consumed.

Question 29

A Company purchased equipment for ₹10 crore and the insurance spare was ₹ 1 crore. If the
company is covered under Ind AS, such spare is capitalized as Property, Plant and equipment.
After use for five years, the equipment broke down and a part was replaced with the aforesaid
insurance spare. After 5 years, the depreciated value of equipment is `5 crore. As property,
plant and equipment are depreciated when they are available for use, accordingly the
depreciated value of new spare is ₹50 lakh. The old spare was reconditioned and the cost of
reconditioning is ₹10 lakh. As per the estimated life of the old spare for future economic
benefits, the current market value of the reconditioned old spare has been estimated at ₹25
lakh. The amount to be treated in repairs and maintenance is ₹ 35 lakh as follows:

Solution

Particulars Amount ₹ in crores

Equipment Cost 10
Cost of New Spare 1
Total Cost 11
Depreciation for 5 years 5.5
Depreciated value of equipment and spare [₹ 5 + 0.50] 5.5
Reconditioning cost of old spare 0.10

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 Depreciated value of old spare 0.50
Book value reconditioned spare 0.60
Less :Current market value of reconditioned spare to be restated in Books 0.25
of Account
Amount to be treated in Repairs and Maintenance 0.35

CAS 16 :Depreciation and Amortization

Question 30 June - 2023 (syl-2022)

What are the principles of measurement, to be followed for Depreciation and Amortisation, as
per Cost Accounting Standard-16?

Solution

Principles of Measurement

• Depreciation and amortisation must be calculated based on the depreciable amount and useful
life of the asset.

• The residual value of intangible assets & Property ,Plant & Equipment is generally assumed to be
zero unless certain conditions are met.

o There is a commitment by a third party to purchase the asset at the end of its useful
life. (Or )An active market exists where residual value can be determined and will likely
exist at the asset's end of life.

• Consider factors like physical wear, obsolescence, and legal limits when estimating useful life.

• Depreciation should not be less than the amount calculated as per any law or regulations
applicable to the entity. For industries with regulatory oversight, depreciation must match the
amount prescribed by the relevant regulator.

• Useful Life of Intangible Assets: Should not exceed the period of contractual or legal rights,
but may be shorter depending on usage. For renewals of legal rights, the useful life may include
the renewal period if there is evidence that the entity can renew without significant cost. The
useful life of intangible assets should not exceed 10 years from the date they are available for
use.

• Depreciation starts when the asset is available for use and ceases when the asset is classified
as held for sale or derecognised.

• The method of depreciation (e.g., straight-line, diminishing balance, units of production) should
align with how the asset's benefits are consumed.

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• Depreciation arising from the revaluation of assets should not be assigned to the cost object.

• Exclude Impairment loss

• Methods and rates of depreciation must be reviewed annually. If there is a change in the
expected pattern of consumption, the method should be adjusted.

• Spare parts, standby equipment, and servicing equipment are classified as property, plant, and
equipment (PPE) if they meet the PPE definition, otherwise, they are treated as inventory.

CAS 21 Quality Control Cost

Question 31

Standard Material requirement to produce 1000 units of product X is 1200 units of material
at a standard price

of ₹60 per unit. The Standard allows for reject of 25% of input. It is estimated that one
third of rejects can be

reworked at an additional cost of ₹20 per unit. Scrap units can be sold at ₹ 5 per unit.

During a particular period, units produced were 19500 with 24000 units of materials at standard
cost of ₹60 per

unit, 7000 units were rejected out of which 2500 units were reworked at a cost of ₹ 51,000.
The balance units were

sold as scrap for ₹ 5 per unit.

Calculate Material Quality Variance and Scrap Variance.

Solution

Quality control cost is the cost of resources used for quality control procedures

Standard Material Cost :

Units Particulars Amount ₹

Material 1200 units Standard Cost (₹) 72,000
Rejection 300 units
Reworked Unit =100 Rework cost (₹) 2,000
Scrap of 200 units Sale value of scrap (`) -1,000
73,000
Unit Produced 1000 (1200 - 200) Standard Cost per unit ₹73.00
Actual Material Cost :

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 Material 24000 units Actual Cost (`) 14,40,000
Rejection 7000 units
Reworked Unit = 2500 Rework cost (₹) 51,000
Scrap of 4500 units Sale value of scrap (₹) -22,500
₹ 14,68,500
Unit Produced 19500 (24,000 - 4,500) Actual Cost per unit ₹75.31

Material Quality Variance = Actual Material Cost – Actual Quantity × Std Rate

= ₹14,68,500 – (19500 × 73) = 14,68,500 – 14,23,500 = ₹ 45,000 (A)

Material Usage Variance = Actual Quantity × Standard Rate – Standard Quanity × Std Rate

Standard Quantity = 19500 * 1200 / 1000 = 23,400

= Standard Rate (Actual Quantity – Standard Quantity) =

= 60 × (24,000 – 23,400) = 60 × 600 = ₹ 36,000 (A)

For Scrap Variance

Actual scrap = ₹22,500

Scrap value as per standard = ₹ 19,500

Working : Rejects ( 23,400 *25% = 5850 )

Reworked 1/3rd so scrap are 2/3rd

5850 *2/3 = 3900 * 5₹ = ₹19,500

Scrap Variance = ₹ 3,000 (F)

Material cost/unit = 72,000/1200 = ₹60 /unit

Question 32

During the Energy Audit of Reliable Engineering Ltd., the following figures relating to usage of
power were placed before the Auditor:

2022-23 2021-22 2020-21

Total Power consumed (kWh) 2642720 2744360 2393250
Rate per kWh (`) 6.29 5.42 4.90
Total Production (in million kg.) 422.16 416.36 376.08
Compute the necessary productivity measures and (i) Price Variance and (ii) Volume Variance of
power usage during these years.

Solution

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The power usage of Reliable Engineering Ltd. is given below along with the productivity measures
and Price Variance and Volume Variance.

2022-23 2021-22 2020-21

Power consumed (kWh) 26,42,720 27,44,360 23,93,250
Production (in million kg.) 422.16 416.36 376.08
Rate per kWh (₹) 6.29 5.42 4.90
Power Cost (₹) [1 × 3] 1,66,22,709 1,48,74,431 1,17,26,925
Power Cost/‘000 kg. (₹) 39.375 35.725 31.182
(W.N.-2)
Price Variance (₹) (W.N.-1) 22,99,166 14,27,067
Volume Variance (₹) (W.N.- 2,28,375 14,39,003
1)

Working notes

2022-23 2021-22
Price Variance : 26,42,720 × (6.29 – 5.42) 22,99,166
: 27,44,360 × (5.42 – 4.90) 14,27,067
Volume Variance[`39.375 × (422.16 – 416.36) 2,28,375
×1,000 kg.]
[`35.725 × (416.36 – 376.08) × 1,000 kg.] 14,39,003
1 Million kg = 10,00,000 kg

422.16 Million kg. = 42,21,60,000 kg

Hence, for 1000 kg. = 4,22,160

For 2022-23, Power Cost/ ‘000 kg

= 1,66, 22,709 / 4, 22,160

` = ` 39.375 and so on

Question 33 Dec-2017 (Syl-2016)

The following is a summary of the Profit and Loss Account of M/s. Straw Berry Company
Limited for the year ended 31.03.2017 (₹ in lakh):

Sales 13,540

Cost of Sales: Raw Materials, Stores, Spares 5,600

Excise Duty 830

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Salaries, Wages 1,400

Power and Fuel 470

Repairs: Major Breakdown 35

Regular Maintenance 94

Selling and Distribution Cost 1,040

Insurance 56

Rent, Rates and Taxes 97

Printing, Stationery, etc. 437

Travelling 776

Other Administrative expenses 426

Depreciation 391

Interest 1,494

Total expenses 13,146

Profit 394

There was a major breakdown of machinery, resulting in loss of production for 42 days in June
and July, 2016 and there was a labour strike of 97 days from 14.02.2017 to 21.05.2017.
The company produced a single product (Steel-Billet) and the production during the year was
9,42,000 kgs. You are required to compute the amount of abnormal cost on account of the
breakdown and strike and the impact on cost per unit of output. Where, do these figures find
a place in the Cost Audit Report?

Solution

Loss of working days due to abnormal situation are :

Breakdown 42 days -Salary Paid

Strike 46 Days (up to 31stMarch , 2017) - No Salary Paid

Total 88 Days, ₹ in Lakh

Income 13,540

Variable Exp : Raw Materials stores 5,600

Excise Duty 830

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Power Fuel 470 6,900

Margin 6,640

Fixed Cost (13,146 -6900) 6,246

Salaries amounting to ₹ 1,400 Lakh is for (365-46) = 319

Days Abnormal cost comes to

Fixed Cost on PRODUCTION Total(₹ ) Abnormal (₹) Normal (₹)

Breakdown Repairs 35 35 00

Salaries Wages (in the ratio 1400 184 1216

42:319)

Interest 1494 00 00

Selling Distribution Cost 1040 00 00

Production Fixed Cost (Balance 2277 549 1728

figure in the ratio 88:365)

Total 6246 768 2944

Production Cost Per Kg : (942000 Variable = Fixed Cost Abnormal Cost

Kg) 6900/9.42 2944/9.42
= 768/9.42
= ₹ 732.48 = ₹ 312.52
= ₹ 81.52

Note :

1. Interest, Selling charges are not included in the Cost of Production.

2. Abnormal Cost is excluded from Cost of Sales and charged to Profit & Loss Account

3. In the Cost Accounting Policy declared in Annexure to Cost Audit Report „A‟, the treatment
of abnormal or non-recurring cost has to be declared

4. The analysis of value addition and distribution of Earnings show Extra ordinary expenses
as post Value Addition.

Question 34 Dec-2018 (Syl-2016)

A unit actually operated 291 days in a year and was stopped for abnormal circumstances –

(i) 6 days due to power disruption for cyclone and flood, and

(ii) 4 days due to heavy breakdown of core machinery.

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The rest of the days were weekly off or holidays. Half wages as lay-off compensation were
paid for the stoppage period. During the year, total expenses incurred were

(A) Salaries and wages (including lay-off compensation of Rs. 65 lakh) Rs.
3,360 lakh, and

(B) Other fixed costs Rs. 1,050 lakh.

Find Abnormal Costs (in Rs. lakh)

Solution

As per Cost Accounting Standard on Material Cost (CAS- 6), any abnormal cost shall be
excluded from material cost. So cost of abnormal events such as strike, lock out and other
factors are not included in cost. The abnormal cost is estimated as below.

Total Fixed Costs Abnormal Costs

Working days 291+6+4 = 301 6+4 = 10

Salaries and Wages (Rs. in lakh) 3,360 65

Other Fixed cost (Rs. in lakh) 1,050 = 1050 × (10/301)

= 34.88

Total 4,410 99.88

Out of total fixed costs of Rs. 4,410 lakhs, abnormal costs of Rs. 99.88 lakhs will not form
part of cost of production.

CAS 22 Manufacturing Cost

Question 35 Dec 2021

You are required to write Short Note on Materials Consumed as per CAS-22

Solution

Materials Consumed as per Cost Accounting Standard - 22:

Materials consumed includes materials directly identified for production of excisable good such as:

(i) indigenous materials ,Imported materials ,Bought out materials ,Self-manufactured items
,Process materials and other items ,Materials received free of cost or at concessional value from
the buyer ,Accessories, on which Cen vat credit is admissible, and which are cleared along with
the final product ,goods used for providing free warranty for excisable goods.

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GACAP

Question 36 Dec-2021 (Syl-2016)

What is Generally accepted cost accounting principles?

Solution

The purpose for a compilation of GACAP is to bring uniformity in cost accounting principles and
standard for Indian industry. [The Companies (Cost Records and Audit) Rules, 2014 require
maintenance of cost records according to GACAP and Cost Accounting Standards.]

Question 37

How do you define 'Packing Material' as per the Generally Accepted Cost Accounting Principle?
What is the treatment of such cost?

Solution

The Cost Accounting Standard on Packing Material Cost (CAS 9) defines Packing Materials as
materials used to hold, identify, describe, store, protect, display, transport, promote and make the
product marketable.

Packing Materials for the purpose of the standard are classified into primary and secondary packing
materials. Primary Packing Material is that packing material which is essential to hold and preserve
the product for its use by the customer. Secondary Packing Material is that packing material that
enables to store, transport, inform the customer, promote and otherwise make the product
marketable. For example, in

‗pharmaceutical industry‘, cartons used for holding strips of tablets and card board boxes used for
holding cartons.

Packing material costs shall be directly traced to a cost object to the extent it is economically
feasible. Where the packing material costs are not directly traceable to the cost object, these may
be assigned on the basis of quantity consumed or similar measures like technical estimates. The
packing material cost of reusable packing shall be assigned to the cost object taking into account
the number of times or the period over which it is expected to be reused. Cost of primary packing
materials shall form part of the cost of production. Cost of secondary packing materials shall form
part of distribution overheads

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Cost Auditing and Assurance Standards

Question 1 Dec-2019 (Syl-2016)

Explain “Risk Assessment” with reference to Cost Audit Standard 104 at ‘Cost Statement’
level.

Solution

(a) As per Cost Auditing Standard 104 on Knowledge of Business, its process and the Business
environment, it is necessary to assess the risks related to material misstatement, whether due to
fraud or error at the overall cost statement and at the assertion level including items of cost, cost
heads and disclosure thereof.

Risks at the cost statement level may derive in particular from a deficient control environment or
adverse economic conditions. The Management’s lack of competence may have a pervasive effect on
the cost statements and may require an overall response by the Auditor. According to 1SA3 15,
Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement,
“the auditor should perform risk assessment procedures to obtain an understanding of the entity
and its environment, including its internal control”. The Audit risk has three components: Inherent
Risk, Control Risk and Detection Risk. For identifying and assessing the risk, the Auditor shall

• Identify risks including relevant controls that relate to misstatement or fraud

• Assess whether the risk is related to recent significant economic, accounting, or other
developments and require specific attention

• Assess risks involving significant transactions with related parties.

• Assess the degree of subjectivity in the measurement of information related to risk.

• Assess the need for revising assessment of risk based on additional evidence

Question 2 Dec-2021 (Syl-2016)

According to Cost Auditing Standard-103, Explain: Audit and Ethics:

Solution

Audit and Ethics:

The Cost Auditor should comply with relevant ethical requirements as per Code of Ethics issued by
the Institute of Cost Accountants of India. This Code establishes fundamental principles of
professional ethics relevant to the auditor while conducting an audit and provides a conceptual
framework for applying these principles. The fundamental principles with which the auditor is
required to comply are Independence, Integrity, Objectivity Professional Competence and due
care, Confidentiality and Professional conduct. In case of an audit engagement, it is in the public
interest that the auditor should be independent of the entity subject to the audit. The cost

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auditor's independence from the entity safeguards the cost auditor's ability to form an opinion
without being affected by influences that might compromise that opinion. Independence enhances
the auditor's ability to act with integrity to be objective and to maintain an attitude of
professional skepticism.

Question 3 Dec-2021 (Syl-2016)

You are required to write Short Note on Internal Control of Cost Information
System/Management Information System as per Cost Auditing Standard – 104

Solution

Internal Control Of Cost Information/Management Information System As Per Cost Auditing

Standard - 104:

The cost auditor shall obtain an understanding of the Information System including Management
Information System, relevant to cost reporting, including the following areas:

(i) The classes of transactions and their analysis, that are significant to the cost statements;

(ii) The procedures, by which those transactions and their analysis are initiated, recorded,
processed, and reported in the management information systems and cost statements;

(iii) The related cost accounting records, supporting information that are used to initiate,
record, process and report transactions; and

(iv) The reporting process used to prepare the entity's cost statements, including significant
estimates and disclosures.

Question 4 June - 2023 (syl-2022)

Explain Audit Risk as per Cost Auditing Standard-103.

Solution

Audit Risk (CAS 103):

Audit Risk is the risk that the cost auditor expresses an in-appropriate audit opinion on the cost
statements that are materially misstated. Audit risk is a function of the risk of material
misstatement and detection risk.

The risk of material misstatement has two components. viz. Inherent Risk and Control risk.

(i) Inherent Risk: the susceptibility of an assertion about the measurement, assignment or
disclosure of cost to a misstatement that could be material, either individually or when
aggregated with other misstatements, before consideration of any related controls.

(ii) Control Risk: the risk that a misstatement that could occur in an assertion about the
measurement, assignment or disclosure of cost and that could be material, either
individually or when aggregated with other misstatements, will not be prevented, or

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 detected and corrected, on a timely basis by the entity’s internal, operational and
management control.

Detection Risk: The risk that the procedures followed by the cost auditor to reduce audit risk to
an acceptable low level will not detect a misstatement that exists and that could be material,
either individually or when aggregated with other misstatements

Question 5 June 17(16)(8m)

While commencing Cost Audit of a manufacturing company, how the Auditor would assess the
risk of material misstatement?

Solution

Cost Audit Standard 101 explains the situation when the Cost Auditor expresses an inappropriate
audit opinion on the cost statements that are materially misstated. Misstatements are the
differences between the actual figures and the desired amounts, classifications, presentations, or
disclosures that, in the Cost Auditor‘s judgment, are necessary for the cost statements to be
presented fairly in all material respects or to give a true and fair view.

For assessment of the risk, the audit strategy is formulated to obtain an understanding of the
entity and its environment, including the entity‘s internal control, to identify and assess the risks
of material misstatement, whether due to fraud or error, at the overall cost statement level and
at the assertion level including items of cost, cost heads and disclosures thereof.

In formulating the overall audit strategy, the Cost Auditor shall consider all the relevant
factors stated below.

(i) The cost reporting framework generally prescribed, under the Companies Act and the Rules
on the basis of which the cost information to be audited has been prepared, including need
for reconciliation with the financial reporting framework

(ii) Industry regulators‘ requirement as to how costs will be handled

(iii) Unique features of an industry that influence audit requirements, such as definition of
product in the newspaper industry

(iv) Reliance that can be placed on the work of financial auditors, other cost auditors appointed by
the entity and internal auditors

(v) State of IT (information technology) implementation

(vi) Statutory timelines for Cost Reporting

(vii) Timelines for Board/Audit Committee meetings, which can set the time limits for
completion of audit work

(viii) Resources required and available in terms of manpower, equipment and others and the
assignment of these to specified parts of the work,

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The Cost Auditor shall then

(ix) develop an audit plan which will include the nature, extent and timing of risk assessment, audit
procedures and other activities,

(ii) shall update the overall audit strategy and the audit plan as required during the course
of audit, and

(iii) shall document the overall audit strategy, the audit plan and any significant changes
made therein during the audit engagements and the reasons for the changes.

In case of deviations from the prescribed accounting and internal control system, if the Cost
Auditor concludes that the deviations are such that the preliminary assessment of risk persists,
he/she would amend the plan, the timing and the extent of his/her plan and the substantive
procedure. He/she would report the deficiencies to the management and if no remedial action is
taken, report the same in the Report.

Question 6

Explain ‘Professional Judgment’ and ‘Professional Skepticism’ as per Cost Audit Standard 103.

Solution

Cost Auditing Standard 103 defines „Professional Judgment‟ as the application of relevant
training, knowledge and experience, within the context provided by cost accounting standards and
ethical requirements in making informed decisions about the courses of action that are appropriate
in the circumstances of the audit engagement. The cost auditor shall have an understanding of the
entire text of the Cost Auditing Standard, including its application and other explanatory material,
to understand its objectives and to apply its requirements properly. In exceptional circumstances,
the cost auditor may apply for Professional Judgment, if necessary, to depart from a relevant
requirement in a Cost Auditing Standard.

As per Cost Auditing Standard 103, the term „Professional Skepticism‟ is an attitude that includes
a questioning mind, being alert to conditions which may indicate possible misstatements due to
error or fraud, and a critical assessment of audit evidence. An attitude of professional skepticism
is necessary throughout the cost audit process for the auditor to reduce the risk of overlooking
unusual circumstances, of over generalizing when drawing conclusions from cost audit observations,
and of using faulty assumptions in determining the nature, timing and extent of the cost audit
procedures and evaluating the results thereof. When making inquiries and performing other cost
audit procedures, the cost auditor should not be satisfied with less-than-persuasive audit evidence
based on a belief that management and those charged with governance are honest and have
integrity

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Question 7 June - 2023 (syl-2022)

"The audit engagement team should hold discussions to gain a better understanding of the
organization and its environment, including internal control, and also to assess the potential for
material misstatements of the financial statements. All these discussions should be
appropriately documented for future reference". Critically examine the statement.

Solution

Management is responsible for maintaining an adequate accounting/costing system incorporating

various internal Controls to the extent appropriate to the size and nature of the Business. Internal
controls consist of all the measures taken by the organization for the purpose of;
1) protecting its resources against waste, fraud, and inefficiency;
2) ensuring accuracy and reliability in accounting and operating data;
3) securing compliance with the policies of the organization.

Cost Audit Standard 101 to 104 states various methodologies for audit of the accounts and cost
statements. The Application Guidance to CAS 101 states primarily that:
• The audit team members in planning the audit draws on their experience and insights,
thereby enhancing the effectiveness and efficiency of the planning process.
• Industry regulators‟ requirement as to how costs will be handled.
• Unique features of an industry that influence audit requirements.
Planning for these audit procedures takes place over the course of the audit as the audit plan for
the engagement develops. For example, planning of the auditor‟s risk assessment procedures
occurs early in the audit process. Planning the nature, timing and extent of specific further audit
procedures depends on the outcome of those risk assessment procedures.
For the initial audit, additional matters the auditor may consider in formulating the overall audit
strategy and audit plan include consultations with the previous auditor, review of previous year‟s
audit working papers, if not prohibited by other Law or regulation, and previous year‟s transactions
having an impact on current year‟s cost, any major issues discussed with management and the
communication of these matters to those charged with governance and how these matters affect
the overall audit strategy and audit plan.
The Application Guidance to Cost Audit Standard 102 recommends, among others, evidence Audit
documentation to requirements of Cost Auditing Standards in respect of this Standard and other
standards. Typical of such evidence are:
a. an adequately documented audit plan
b. the signed appointment letter from the auditee
c. Minutes of discussion with client personnel, with names of members of audit team present,
particularly of the audit partner when he is present
d. Minutes of audit team discussions, with names of members of audit team present, particularly
of the audit partner when he is present.

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Cost Audit Documentation ,Audit Process and Execution

Question 1 June23 (22)(8m)

What are the three stages of Audit Analyze the three stages of audit ?

Planning the Audit (First Stage)

i. Objective: To lay the groundwork for an efficient and effective audit.

ii. Key Activities:
o Understanding the entity : Gain insights into the entity's operations, industry, and
environment.
o Identifying Risks: Assess factors that may increase the risk of material misstatement in the
cost statements.
o Risk and Materiality Assessment: Determine the significance of identified risks.
o Developing Audit Strategy: Outline the nature and timing of audit procedures.
iii. Importance: A well-planned audit optimizes the efficiency (time spent gathering evidence) and
effectiveness (minimizing audit risk). Ensures sufficient appropriate evidence is collected to
reduce the risk of material misstatement.

Performing the Audit (Second Stage)

i. Objective: Execute the audit plan through detailed testing.

ii. Key Activities:
o Testing Internal Controls: If relying on the client's internal control system, conduct tests to
evaluate their effectiveness.
o Substantive Testing: Perform detailed tests on: Material consumptions ,Cost accumulation
,Allocation, apportionment, and absorption of costs
o End-of-Period Testing: Conduct substantive tests of recorded consumptions and balances at
the period's end.
iii. Importance: Detailed testing provides the necessary evidence to evaluate the fair presentation
of the cost statements.

Concluding and Reporting on an Audit (Final Stage)

i. Objective: Draw conclusions and form an opinion on the cost statements.

ii. Key Activities:
o Evaluating Evidence: Analyze evidence gathered during the audit in light of the understanding
of the entity.
o Forming an Opinion: Arrive at a conclusion regarding the fair presentation of cost statements.
o Cost Audit Report: Express the auditor’s opinion in a formal report.
iii. Importance: The auditor’s opinion is based on the understanding of the client, the risks
identified, and the testing of controls and transactions.

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Cost Audit Program

Question 1 Dec23 (22)

What are the important factors to be considered in planning the Cost Audit Assignment?

Answer

1. Audit Personnel for the Assignment

i. Experience and Training: Consider the relevant industry experience and training of audit
personnel.
ii. Two-Pronged Approach: Study the industry & Analyse the auditee company's Annual
Reports for at least the past five years.
iii. Direction and Supervision: The audit team needs proper guidance to perform the following
tasks: Physical Inspection , Identify individuals responsible for activities and maintaining
cost records , Review cost accounting records and related documents. ,: Analyse statements
related to budgets, plans, and strategies. Understand the cost accounting system used and
its compliance with relevant Cost Accounting Standards (CAS).
iv. Documentary Evidence Collection: Audit personnel should gather and file relevant
documentary evidence for future reference.

2. Documentation of Audit Procedures and Evidence

i. Document all important matters that provide evidence to support the auditor's opinion.
ii. Prepare working papers that record evidence resulting from the audit. Include not only
accounting data but also production schedules, quantitative data, and statistical analyses.
iii. Keep records of queries raised, discussions held, and resolutions.
iv. Utilize checklists and standard forms to enhance efficiency in preparing and reviewing
working papers.
v. Organize the working paper file for easy retrieval and maintain confidentiality.
vi. Adhere to legal and professional requirements for record retention.

3. Quality Control over Performance of the Assignment

i. Ensure proper direction, review, and monitoring of the audit assignment.

ii. Track the preparation and maintenance of cost accounting records.
iii. Assess the skill and competence of audit assistants in understanding systems and
procedures.
iv. Stay informed about cost accounting and auditing questions that arise during the audit.
v. Adjust the audit plan and program based on significant issues identified.
vi. Address differences in professional judgment among personnel and determine appropriate
reference levels.

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Question 2 June23(22)(8m)

Formulate Audit Checklist for Auditing Repairs and Maintenance cost from the perspective of
cost Audit

Answer

1. The Cost Auditor should obtain information, for the expenses incurred on Repairs and
Maintenance for the previous five years – Cost center wise, either from CMA department/Finance
department or through ERP system in the company. It provides at a glance year wise, cost center
wise expenses on repairs and maintenance. If there is any substantial increase in expenditure with
respect to any particular cost center/cost centers, then reasons for the same should be discussed
with the head of that cost center(s), so that appropriate action can be taken to prevent such
recurrences.

Through these details, the cost auditor will come to know A category of cost centers which will
account for 70% to 75% of total expenses on repairs and maintenance incurred. It is always
advisable to focus on these A category cost centers to monitor, control and reduce expenses on
repairs and maintenance. A little step taken by the management with respect to these A category
of cost centers will result in far greater advantage to the management regarding cost control and
cost reduction with respect to repairs and maintenance.

2. Similarly, the cost auditor should obtain information on Cost of Repairs and Maintenance
(₹/Lakhs) for previous 5 years – product wise, either from CMA department/Finance department
of through ERP system in the company. It provides at a glance year wise, product wise expenses on
repairs and maintenance. If there is any substantial increase in expenditure with respect to any
particular product then reasons for the same should be discussed with the head of concerned cost
center(s) so that appropriate action can be taken to prevent such recurrences.

3. The cost auditor can pick up few major items of repairs and maintenance and ensure that they
have been booked against correct cost centers.

4. The cost auditor should ask for information – Cost of Repairs and Maintenance (₹/MT). Higher
per MT expenses can be due to lower capacity utilization, which he needs to highlight to the
management

5. The cost auditor should also go through expense control chart which gives plant wise expenses
duly tied up with Trial balance.

Question 3 Dec-2021 (Syl-2016)

For audit of cost of electricity generated by DG set, draw a check list. (at least 6 points)

Solution

Some suggested areas should be remembered to audit the cost of electricity generated by DG set:

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• Periodical report of Diesel Generating Set prepared by the head of DG set should be the
basis for finding the cost of electricity generated.
• Ensure that monthly report contains the following information on i) No of hours DG set is
operated, Quantity of high speed diesel used, ii) Total units generated.
• Ensure that employee cost is properly booked and it pertaining to only those employees
actually working for DG set.
• Ensure that cost of consumable stores and repairs is properly allocated, pertains to cost
actually incurred for DG set.
• Ensure the correctness of depreciation and insurance, etc.
• Ensure that proper cost center is allocated to DG set
• Generally, CMA Department prepares expense control chart which lists out all the expenses
incurred for DG set.

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Preparation and Filling of Cost Audit Report

Question 1 June 24(22)(7m)

What Process is to be followed to file the reports in XBRL Format

Solution

Process to be followed to file the reports in XBRL Format:

The following steps have to be followed in sequence:

• Mapping the individual cost elements of the company to the elements of the costing taxonomy.
• Populating the relevant data in the software/filing tool.
• Creating an XBRL instance document.
• Download XBRL validation tool
• Validating the Instance Document with the Validation Tool of MCA.
• Pre-scrutiny of the instance document.
• Use available tool to convert the Instance document to a human readable format and check
correctness of data.
• Attaching the Instance Document to the e-Form and filing on MCA Portal

Question 2 Dec-2021 (Syl-2016)

What are the benefits from using XBRL?

Solution

Benefits from using XBRL:

All types of organisations can make use of XBRL to automate their process of data collection and
distribution to various stakeholders. It helps in saving costs and improving the efficiency in managing
business information - financial or cost.
XBRL being extensible and flexible, can be adopted to a wide variety of requirements. All
Stakeholders whether they are preparers, transmitters or users of business data in the financial
information supply chain can benefit from the use of XBRL

Question 3 June 23(22)(8m)

Your Friend who has been appointed as a cost Auditor of a company has sought your adviceon

a) How to analyze the duty of cost auditor to highlight utilization of resources by the
company during the year end audit
b) Under what circumstances a qualified audit report will be issued ?

Solution

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The Cost Audit and requirement of details are informative for better and clear understanding of
the Users of Report. CRA –1, prescribes broad headings for detailed cost accumulation. The
prescribed Format (Ref. CRA -3) i.e. the Cost Audit Report includes Unit-wise, Product/Service-
wise Cost Statements and Schedules, deviation for the same need to be reported. Part – D of CRA-
3 is a measure towards performance orientation.

(a) The duty of the Cost Auditor is, therefore, not to perform a „fait accompli‟ audit but an audit
of efficiency of minute details of expenditure, while the work is in progress. Apart from search
for accuracy and detection of fraud, the Auditor needs to highlight propriety and quality aspect of
performance. Some of such areas are:

Report:

• Whether the machines and labour remained idle during the year because of the shortage of
raw materials.
• Whether a large quantity of raw materials were stocked which remained unutilized for a
long time, thereby locking up the working capital of the company.
• The cost auditor should state, if there has been a rise in the cost of production as
compared to that of the previous year. He should analyze the causes of such a rise. He
should clearly point out where the problem originates from.
• The report should concentrate more on the cost of production, comparative profitability,
and operating efficiency of different lines in which the company is engaged rather than the
routine statistical or financial information.
• The report should state, if there has been any wastage during the process of manufacture
and how it could be avoided.
• The cost auditor must state also the critical elements in the cost auditor‟s report covering
areas (Whether a large quantity of raw materials were stocked which remained unutilized
for a long time, thereby locking up the working capital of the company) in which it is
possible to reduce the cost of production.

(b) Qualification of Report:

The report in which Cost Auditors express a qualified view of cost statements is a qualified audit
report. It means that the company's cost records are not maintained in accordance with Generally
Accepted Accounting Principles (GAAP) but no misinterpretations are involved. When the cost
statements are materially misstated due to misstatement in one particular cost element, class of
transaction or disclosure that does not have pervasive effect on the cost statements and when the
cost auditor is unable to obtain audit evidence regarding particular cost element, its allocation and
apportionment, class of transaction or disclosure that does not have pervasive effect on the cost
statements.

A qualified audit report is issued when the cost auditor encounters any of these situations which
do not comply with the generally accepted cost accounting principles and is not in conformity with
the principles laid down in CRA-1.

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Management Audit
Question 1 June24(22)(7m)

What is the top objectives of having a Management Audit ?

Solution

Top Objectives of having a Management Audit are:

(i) Clearly defined prime objectives of the organisation

(ii) Ensuring a clear, lean and thin Organisational reporting structure. The setting of a well-
defined organisational structure with clear-cut lines of reporting.
(iii) Goal setting process aligned with business objectivity
(iv) Process benchmarking for improving effectiveness. Challenge existing rules and regulations
to work out on effectiveness level.
(v) Suggesting improvement measures for giving an impetus to business performance in the
forthcoming months/periods.
(vi) Suggesting ways to restructure the organisation and ensure high-quality service at all
quarters.
(vii) More effective resource utilization planning.
(viii) Incorporating management information systems to reach production and work efficiency
goals.
(ix) Identification of weak points or managerial inefficiencies with respect to core functional
areas of the business, namely finance, sales and production.

Question 2

Identify the essential qualities required of a Management Auditor.

Solution

The management auditor should have the following qualities:

• A management auditor should have good knowledge and experience of all Managerial Functions.
• An Auditor should have good knowledge of financial, cost statements analysis techniques.
• She/he should know about economics and business laws, etc.
• Understanding of Organization structure and decisions taken by management the, working of
the organization and its problems is also required.
• Thorough understanding of all processes and control aspects.
• She/he should know and understand the objectives of the organization very well.
• She/he should understand planning, budgets, rules, and procedures to be applied in management
reviews.
• She/he should be well-versed with the entire production process.
• She/he should have enough knowledge and experience to understand the reason behind the lack
of coordination between different departments.

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• She/he should have the quality of giving practical and achievable solutions to the problems in
the organization.

Question 2 June24(22)(7m)

Enumerate and explain the Information System Audit Approaches ?

Solution

Information Systems Audit Approaches:

There are three approaches for conducting Information Systems Audit viz. Auditing around the
computer, Auditing through the computer and Auditing with the computer.

Auditing around the computer:

Under this approach, the emphasis is on checking the correctness of the output data/documents
concerning the input of a process without going into the details of the processing involved. This
approach is preferred, where auditors themselves do not have the desired level of technical skills
to adopt the other approaches. This is also preferred, when high reliance is placed on the users
rather than the computer controls to safeguard the assets, maintain data integrity and attain
effectiveness and efficiency objectives. The focus is on procedural controls rather than computer
controls. This approach can be used in the following circumstances:

When an application system is simple, logic is straightforward, and a clear audit trail exists, this
approach can be adopted. The process generates the audit trails such as the generation of
exception reports along with the main reports. Such systems have very low inherent risk i.e. they
are unlikely to be susceptible to material errors or irregularities or to be associated with
significant ineffectiveness or inefficiencies in operations. Input transactions in such systems are
in batch mode and control is maintained using traditional methods like the separation of duties and
management supervision. Further, the task environment in such systems is relatively constant and
the system itself is rarely modified.

This approach may be used when an application system uses a generalized package that is well
tested and used by many users as its software platform. If the package has been provided by a
reputed vendor, has received widespread use, and appears error-free, the auditors may decide to
adopt this approach. Auditors should ensure that the organisation has not modified the package
and adequate controls exist over the source code and documentation to prevent unauthorized
modification of the package. When high reliance is placed on the users rather than the computer
controls to safeguard the assets maintain data integrity and attain effectiveness and efficiency
objectives, this approach can be adopted.

Auditing around the computer is a simple approach. It does not provide any information about the
system’s ability to cope with the changes. Systems can be designed and programs can be written in
certain ways to inhibit their degradation when user requirements change. Further, this method

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cannot be used for complex systems. Otherwise, the auditors might fail to understand some
aspects of a system that could have a significant effect on the audit approach.

Auditing through the Computer:

Auditing through the computer requires a fair knowledge of the operating system, hardware being
used, and certain technical expertise in systems development. Under this approach, the computer
programs and the data constitute the target of IS audit. Compliance and substantive tests are
performed on the computer system, its software (both operating system and application system)
and the data. The IS auditors can test the application system effectively using this approach. The
IS auditors can use a computer to test logic and controls existing within the system and also
records produced by the system. The approach increases the IS auditor’s confidence in the
reliability and applicability of the evidence/information collected and evaluated. This approach is
time consuming, as it needs an understanding of the internal working of an application system. It
also needs some technical expertise.

Auditing with the Computer:

Under this approach, the computer system and its programs are used as tools in the audit process.
The objective is to perform substantive tests using the computers and their programs. The data
from the auditee’s computer system are retrieved in an independent environment. Audit
interrogation and the query are carried out on such data, using special programs designed for the
purpose. This method is used where:

(a) Application system consists of a large volume of inputs, producing a large volume of outputs and
where the direct examination of the inputs/outputs is difficult.

(b) Logic of the system is complex

(c) There are substantial gaps in the visible trails.

Question 3

Describe the steps involved in conducting an IT Security Audit

Solution

The Steps in an IT Security Audit A cyber security audit consists of five steps:

• Define the objectives.

• Plan the audit.
• Perform the auditing work.
• Report the results.
• Take necessary action for the deficiencies

Define the Objectives:

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Layout the goals that the auditing team aims to achieve by conducting the IT security audit. Make
sure to clarify the business value of each objective so that specific goals of the audit align with
the larger goals of the company.

List of questions as a starting point for brainstorming and refining of objectives for the

audit.

i. Which systems and services do want to test and evaluate?

ii. Do audit digital IT infrastructure, physical equipment, and facilities, or both?
iii. Is disaster recovery on the list of concerns? What specific risks are involved?
iv. Does the audit need to be geared towards proving compliance with a particular regulation?

Plan the Audit:

A thoughtful and well-organized plan is crucial to success in an IT security audit. Define the roles
and responsibilities of the management team and the IT system administrators assigned to
perform the auditing tasks, as well as the schedule and methodology for the process.

Once decided on all the details, document and circulate the plan to ensure that all staff members
have a common understanding of the process before the audit begins.

Perform the Auditing Work:

The auditing team should conduct the audit according to the plan and methodologies agreed upon
during the planning phase. This will typically include running scans on IT resources like file-sharing
services, database servers, and SaaS applications like Office 365 to assess network security, data
access levels, user access rights, and other system configurations.

During this process, interview employees outside the IT team to assess their knowledge of
security concerns and adherence to company security policy, so any holes in the company’s security
procedures can be addressed moving forward

Report the Results:

Compile audit-related documentation into a formal report that can be given to management
stakeholders or the regulatory agency. The report should include a list of any security risks and
vulnerabilities detected in IT systems, as well as actions that IT staff recommend to mitigate
them.

Take Necessary Action:

Follow through with the recommendations outlined in the audit report. Examples of security
enhancement actions can include:

• Performing remediation procedures to fix a specific security flaw or weak spot/s.

• Training employees in data security compliance and security awareness.
• Adopting additional best practices for handling sensitive data and recognizing signs of
malware and phishing attacks.

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 • Acquiring new technologies to strengthen existing systems and regularly monitor
infrastructure for security risk.

Question 3 June24(22)(7m)

What is productive efficiency ? how does it work and how is it different from Allocative
efficiency ?

Solution

Productive Efficiency:

Productive Efficiency, also known as production efficiency, is the economic concept of producing
the largest possible output from the available resources. Productivity enhancement and/or
efficiency improvement are positives for growth and profitability.

How Productive Efficiency Works:

Productive efficiency often comes into play when a production process relies on scarce resources.
In microeconomics, this could involve two industries competing for the same raw materials and
ending up limited by similar externalities.

As an example, consider the production of most rechargeable batteries, which require a steady
supply of the mineral lithium and cobalt. When companies allocate these minerals toward the
maximum production efficiency of car batteries, they reduce the available resources for other
types of batteries that rely on the same core materials. If the car battery manufacturing process
has reached its maximum productive efficiency, there will be higher marginal costs for any
additional unit produced. In competitive companies may be able to evade and situations by
improving workflows, technical efficiency, and exploiting economies of scale. In the short run, they
bump up against the limits of production efficiency.

Productive vs Allocative Efficiency: What is the Difference?

Productive efficiency and allocative efficiency measure common characteristics, but the two terms
are not synonyms.

Productive efficiency represents the maximum output of a product given scarce resources. The
production of any additional units results in opportunity costs-one which is the reduced output of
another product. This metric focuses entirely on monetary costs and resources.

Allocative efficiency measures the distribution of goods and services. Allocative efficiency is
state of market equilibrium where both producer and consumer benefit. Specifically, it means the
marginal cost of production for each unit sold will equal the marginal benefit to the customer
buying that good. To have true allocative efficiency, both producers and buyers must benefit from
the overall condition of the market. On a macroeconomic level, this applies to entire societies such

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that producers benefit in an open market and consumers pay reasonable prices for an enhanced
quality of life.

Question 4 Dec23(22)(7m)

What is cyber security and Computer Forensics ? Explain the difference between the two ?

Solution

1. Cybersecurity: The practice of protecting systems, networks, and data from digital attacks,
unauthorized access, and damage. It involves implementing measures and protocols to prevent
cyber threats and ensure the confidentiality, integrity, and availability of information.

2. Computer Forensics: The process of recovering, analysing, and preserving data from computer
systems, networks, and digital devices, often for the purpose of investigating cybercrimes or data
breaches. It involves collecting evidence in a way that maintains its integrity for legal proceedings.

Aspect Cyber Security Computer Forensics

Focus Prevention of cyber attacks Recovery of lost or encrypted
and data breaches data, often related to a crime
Nature of Work Proactive; aims to prevent Reactive; responds after a
incidents from occurring cyber incident or data loss
Primary Goal To create secure systems and To uncover and preserve data,
networks to prevent breaches often for criminal
investigations
Typical Tasks Setting user permissions, Analyzing devices, recovering
configuring security protocols, lost data, and providing digital
ethical hacking, vulnerability evidence
testing
Industries Involved Broad application across IT Mostly law enforcement, legal
systems, businesses, investigations, and corporate
governments data recovery
Skill Set Programming, networking, Data recovery, programming,
system architecture, ethical hardware/software knowledge,
hacking digital forensics
Examples of Tasks Implementing secure Recovering data from a
passwords, setting up firewalls, suspect’s device, identifying
penetration testing digital evidence in criminal
cases
Specializations System architecture, software Criminal investigations, data
security, access management, recovery (e.g., stolen or lost
ethical hacking, vulnerability data)
assessment

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 End Goal Prevent security breaches and Recover data and provide
ensure data safety admissible digital evidence in
investigations
Approach Defensive, protective, and Investigative, reconstructive,
preventative and evidence-gathering
When Applied Before or during a potential After a cyber incident has
cyber threat occurred
Example Scenario Setting up secure file transfer Recovering deleted files from a
protocols (FTP) suspect’s hard drive

Question 5 Dec23(22)(7m)

How do u evaluate personnel development explain in detail ?

Solution

Employee Development Strategies

1. Role of Managers in Employee Development

• Delegation: Encourage employees by delegating responsibilities rather than solving problems

for them.
• Feedback: Provide honest and constructive feedback for employee growth.
• Development Opportunities: Suggest specific training and development opportunities.
• Motivation: Inspire employees to take risks and pursue rewards.
• Leadership Attributes: Exemplify qualities of true leadership (L.E.A.D.E.R.S.H.I.P.):
• Loyalty ,Empathy ,Accountability ,Determination & Dutifulness ,Encouragement ,Respect
,Selflessness ,Humility ,Integrity ,Innovation ,Passion

2. Formal Employee Development Strategies

• Training: Offer both general and specific training.

• Soft Skills: Interpersonal communication, public speaking, negotiation, leadership skills, etc.
• Hard Skills: Technical skills such as coding, accounting, systems administration, etc.
• Psychometric Studies: Assess mental capabilities for leadership roles.

3. Informal Employee Development Strategies

• On-the-Job Training: Learn from real work experiences.

• Shadowing and Mentorship: Allow newer employees to learn from experienced seniors.
• Coaching: Managers coach promising employees for future roles.

Performance Evaluation Methods

1. Annual Performance Evaluations

• Assess employees against their assigned Key Result Areas (KRAs).

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 • Utilize goal-setting exercises to define roles and assignments.
• Conduct periodic reviews to track progress and make adjustments as necessary.
• Annual Review: Aggregate feedback from previous evaluations.

2. Evaluation Techniques

• Rating Scales: Rate employee performance using a numerical scale; results placed in a bell
curve to identify top performers.
• 360-Degree Feedback: Collect feedback from various sources (managers, subordinates,
peers) for a well-rounded evaluation.
• Management by Objectives (MBO): Evaluate performance against agreed-upon objectives
set at the beginning of the period.

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Management Audit in Different Functions
Question 1 June 2017(16)(8m)

Discuss (i) the areas of 'Corporate Services' and (ii) the evaluation criteria used in
'Corporate Services Audit'.

Solution

Corporate Services

• Refers to the service-oriented obligations of corporate entities to various interest groups,

including consumers, employees, shareholders, the community, and the state.
• Contextual Nature: Responsibilities vary based on circumstances (e.g., natural disasters,
wars) and ethical considerations (e.g., selling goods to friendly countries vs. enemy nations).

Scope of Corporate Services Audit

• Purpose: Critical examination of services rendered by a corporate body and evaluation of its
awareness and responsiveness to stakeholders.
• Key Stakeholders:
1. Consumers: Focus on product quality, quantity, price, and safety.
2. Employees: Assess pay, safety, welfare, and industrial relations.
3. Shareholders: Ensure satisfactory returns on investment and capital appreciation.
4. Community: Evaluate business ethics, relationships, fair trade practices, and
compliance with laws.
5. Fellow Businessmen: Assess fair dealings and cooperation.
6. State: Evaluate compliance with state regulations and contributions during
emergencies.

Conceptual Approach of Corporate Services Audit

Evaluate contributions of businesses to societal quality of life over mere profit maximization.

• Key Considerations:
o Continued Customer Relationships: Maintain and enhance connections with customers.
o Intelligent Resource Use: Optimize resource utilization to prevent waste.
o Identifying Social Needs: View social needs as opportunities rather than artificial demands.
o Fair Pricing: Establish fair prices and equitable distribution.
o Product Development: Innovate or improve products/services.
o Stable Employment: Foster a healthy work environment.
o Proactive Engagement: Anticipate social legislation and shape the business environment.

Question 2 June2017(16)(8m)

What is Corporate Social Responsibility (CSR) Committee and its role as per the Companies
Act, 2013? Describe the coverage of a CSR Audit Programme.

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Solution

➢ CSR is defined as projects or programs related to activities in Schedule VII or undertaken by

the CSR Committee as per the company’s CSR Policy.
➢ CSR involves assessing and taking responsibility for a company’s impact on society and the
environment, integrating corporate self-regulation into the business model.
➢ Companies are expected to contribute to social welfare and environmental sustainability, going
beyond just profit generation.
➢ Applicability of CSR Provisions Thresholds for CSR Compliance: A company must constitute a
CSR Committee if it meets any of the following: 1. Net Worth: ₹500 crore or more. 2.
Turnover: ₹1,000 crore or more. 3. Net Profit: ₹5 crore or more.
➢ CSR Committee Constitution: • Minimum of 3 directors, including at least 1 independent
director. • For unlisted/private companies, the committee can be formed without an
independent director. • Foreign companies must have at least 2 members, one of whom must
meet specified criteria.
➢ Functions of the Board 1. Approve the CSR policy and disclose it in the Board’s Report. 2.
Ensure CSR activities are conducted. 3. Ensure a minimum of 2% of average net profits from
the last 3 financial years is spent on CSR.
➢ Schedule VII Activities CSR activities include: 1. Eradicating hunger, poverty, and malnutrition.
2. Promoting education and gender equality. 3. Ensuring environmental sustainability. 4.
Protecting natural heritage and culture. 5. Supporting armed forces and rural sports. 6.
Contributing to the PM CARES Fund. 7. Disaster management and rural development.
➢ Through there is no mandatory requirement for CSR Audit, yet a CSR Audit programme will
form part of the Management Audit and may cover all or any of the following:
• effectiveness of the operating framework for CSR implementation,
• effectiveness of implementation of specific, large CSR projects,
• adequacy of internal control and review mechanisms,
• reliability of measures of performance, and
• management of risks associated with external factors like regulatory compliance,
management of adverse or potentially adverse NGO attention, etc.
➢ CSR Audit and review will in nutshell look for the following:
• ensuring compliance with the Act,
• evaluating internal control and governance framework,
• assessing the CSR project life cycle, and
• conducting financial review of the project to confirm the utilization of budgets for
achieving desired outcomes.

Question 3

Explain the need for energy audit.

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Energy Audit is the key to a systematic approach for decision-making in the area of energy
management. It attempts to balance the total energy inputs with its use and serves to identify all
the energy streams in a facility. An industrial energy audit is an effective tool in defining and
pursuing a comprehensive energy management programme. As per the Energy Conservation Act,
2001, Energy Audit is defined as “the verification, monitoring, and analysis of the use of energy
including submission of technical report containing recommendations for improving energy
efficiency with cost-benefit analysis and an action plan to reduce energy consumption”.

Need for Energy Audit:

In any industry, the three top operating expenses are often found to be energy (both electrical
and thermal), labour, and materials. Hence, cost reduction in energy consumption is of paramount
importance. Energy Audit will help to understand more about the ways energy and fuel are used in
any industry and help in identifying the areas where waste can occur and where the scope for
improvement exists.

The Energy Audit would give a positive orientation to the energy cost reduction, preventive
maintenance, and quality control programmes which are vital for production and utility activities.
Such an audit programme will help to keep the focus on variations that occur in the energy costs,
availability and reliability of supply of energy, decide on appropriate energy mix, identify energy
conservation technologies, retrofit for energy conservation equipment, etc.

In general, Energy Audit is the translation of conservation ideas into realities, by lending
technically feasible solutions with economic and other organisational considerations within a
specified time frame.

The primary objective of Energy Audit is to determine ways to reduce energy consumption per unit
of product output or to lower operating costs. Energy Audit provides a “bench-mark” (Reference
point) for managing energy in the organisation and also provides the basis for planning more
effective use of energy throughout the organisation.

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Management Reporting Issues And Analysis

Question 1

Topple Co has the following forecast figures for its first year of trading: Sales ₹36,00,000
Purchases expense ₹30,00,000 Average receivables `3,06,000 Average inventory ₹4,95,000
Average payables ₹2,30,000 Average overdraft ₹5,00,000 Gross profit margin 25% Industry
average data: Inventory days 53 Receivables days 23 Payables days 47 Current ratio 1.43
Assume there are 365 days in the year. Required: Calculate and comment on Topple Co’s cash
operating cycle, current ratio, quick ratio, and sales to working capital ratio

Solution

(i) Inventory days = 4,95,000/27,00,000 * 365 = 67 days

Receivable days =3,06,000/36,00,000*365 = 31 days
Payable days = 2,30,000 / 30,00,000* 365 = (-28) days
Cash operating cycle 70 days
(ii) Current ration = Average receivable + average inventory / average payables +average overdraft
3,06,000+4,95,000 / 2,30,000+5,00,000
1.10times
(iii) Quick ratio = Average receivables / average payables + average overdraft
3,06,000 / 2,30,000 + 5,00,000
0.42 times
(iv) Sales to working capital = sales / average receivables + average inventory – average payables
36,00,000 / 3,06,000 + 4,95,000 – 2,30,000
6.3 times

Question 2

ABC Co. has planned for an investment of ₹800.00 lakh with a 50% Loan from Banks at 10%
interest. Direct Cost for the year ₹480.0 lakhs and 50% of which is Material cost. Other
expenses are at ₹80.0 lakh. The goods will be sold at 150% of the direct cost. The tax rate
is assumed at 50%.

Determine:

(i) Net profit margin

(ii) Return on Assets

(iii) Assets turnover

(iv) Return on owners’ equity

(v) Inventory Turnover

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Solution

Particulars ₹Lakhs / %
Sales: 480 × 1.5 720
Direct Cost 480
Gross Profit 240
Operating Exp + interest 120
Profit before Tax 120
Net profit after Tax 60
(i) Net Profit Margin (60/720) 8.33%
(ii) Return on Assets (60/800) 7.5%
(iii) Return on Equity (60/400) 15%
(iv) Asset Turnover (720/800) 0.9
(v) Inventory Turnover (240/720) ×100 33.33%

Question 3

A Company introduced a new product EZY with advanced technology in a product market
where there is huge competition with many competitors having an individual market share of
5% to 10%. A survey of the present market estimates that demand will increase by 80,000
units per year. The company is presently targeting 50% of the additional market demand as
competitors will need at least two years to match its product.

The Product EZY passes through three departments. Direct cost per unit of product at a
present rate: Material cost₹ 65 and Labour Cost ₹45. Overheads are absorbed based on
normal capacity. The following relevant information is given

Production Unit of Normal Monthly Full Hours

Dept Measurement monthly Allocated Overhead consumed by
capacity Fixed cost Rate (₹) the product₹
Overheads₹
X Machine Hour 12,500 50,000 10.50 2
machine hrs
Y Direct Labour 15,000 60,000 9.00 1.5
Hour labour hrs
Z Direct Labour 25,000 75,000 6.00 3
Hour labour hrs
The company has set a target of Selling and Distribution costs of `3,00,000 irrespective of
sales volume. The company normally sets a price by adding a mark-up on costs between 30%
to 40%.

You are required to suggest the price to take care of competition from the right perspective

Solution

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 Production Normal Monthly Fixed Full Variable Fixed Variable
Dept monthly Allocated Overheads Overhead cost per overhead overhead
capacity Fixed per Hour₹ cost per hour (₹) per unit per unit
Overheads₹ hour (₹) (₹) (₹)
X 12,500 50,000 4 10.50 6.5 8 13
machine
hrs
Y 15,000 60,000 4 9.00 5 6 7.5
labour
hrs
Z 25,000 75,000 3 6.00 3 9 9
labour
hrs
50% of the additional demand = 80,000 × 0.50 = 40,000 unit.

Cost of the product:

Direct Material ₹65.00

Direct Labour ₹45.00

Variable Factory Overheads ₹ 29.50

Fixed Factory Overhead ₹ 23.00

Selling & Distribution Overheads (₹ 3,00,000 ÷ 40,000) ₹7.50

Total cost ₹170.00

The Selling price will be in the range of ₹ (170 × 1.3) and ₹ (170 × 1.4) i.e., between ₹ 221 and ₹238.

Suggestion: The company can go for a lower price as it covers the full cost and ensures good
profit. Lower price will give better penetration in the market and keep competitors away for the
long term to match technology and price.

Question 4

ABC Co. has two Department producing small electrical goods. New Technology for the production
of X will induce the following cost:

Costs Department-A Department-B

Direct Material ₹ 240 200
Direct Labour Rate / Hours ₹ 120 100
Direct Labour Hours 2 hours 3 hours
Variable OH Per Hour ₹ 50 60
Fixed Per Hour (Based on 100% Capacity) ₹ 60 40
Value of Machine on revaluation ₹ 40 lakhs 28 lakhs

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New Technology cost = ₹25 lakhs, working capital = ₹ 7 lakh

The target volume of production in the 1st year is 2000 units @ 25% capacity

Variable Selling and Distribution Cost is ₹ 3 lakh for 2000 units. Expected return on investment
24%.

Suggest pricing of a new product for a new one or the existing ones at 80% capacity.

Solution

Costs Department-A Department-B Total

Direct Material 240 200 440
Direct Labour 240 300 540
Variable Overheads 100 90 190
Variable Selling & 150
Distribution Cost
Total (₹) 1320
100% capacity = 8,000 units. 80% capacity = 6400 units

Fixed Costs = (60 × 16,000 + 40 × 24000) = ₹ 19.20 lakhs. Capital investment = (40+ 28+25+7) = `
100 lakhs.

Return on investment required = ₹24 lakhs

Return required per unit = ` (19.2 + 24.0) lakhs /6400 = ₹675

Price to be charged per unit = (1320 + 675) = ₹ 1995

Question 5

A company is operating at 60% capacity with a turnover of ` 86.40 lakhs.

i. If the Company works at 100% capacity, the sales-cost relation is: Factory Cost is two-thirds
of sales value and Prime Cost is 75% of Factory Cost.
ii. Administrative and selling expenses (75% variable) are 20 % of sales value.
iii. Factory overhead will vary according to operating capacity as given below:
Operating 60% 80% 100% 120%
Capacity
Factory 19.80 21.60 24.00 30.00
Overhead ₹
Lakhs)
The company has planned to operate at 80% capacity. Moreover, it has received an export order
and the execution of the same will involve 40 % of capacity. The prime cost of the order is
estimated as ` 12.00 lakhs and the shipping expenses involved will be ` 2.00 lakhs. Taking the same
percentage of profit on the domestic sale, determine the minimum price to be quoted for the
export order.

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Solution

At 100% capacity.

Sale = 86.40 × 100/60 = ₹ 144 lakhs; Factory Cost =1.44 × 2/3 = ₹ 96 lakhs; Prime Cost = 96 × .75 =
₹72 lakhs; Factory overheads = ₹24 lakhs; Selling & Distribution Exp. = ₹28.8 lakhs; Variable S/D
Exp. =₹ 21.6 lakhs; Fixed S/D Exp. = ₹7.2 lakhs.

Particulars Operation 80% capacity (₹ Export order 40% capacity

Lakhs) (₹lakhs)
Prime Cost 57.60 12.00
Factory Overhead (Given) 21.60 8.40
Selling & Distribution Cost 17.28
Variable
Selling & Distribution Cost 7.20 2.00
Fixed
Total Cost of Sales 103.68 22.40
Sales Value (At 80% Capacity): 115.20
144 × 0.80
Profit 11.52 2.49
Profit % 10% on Sales 10% of Export Sales Value
Export Price to be Quoted 24.89
Let, Sales value = x, then Profit = 0.1x

Then 0.9 x = 22.40

Hence x = ₹ 24.89

Question 6

Write Short Notes

(a) What do you understand by environment audit and productivity audit?

(b) “Management Audit team should be multidimensional.” — Discuss.

(c) What are the Management Audit Questionnaires?

Answer:

(a) Environment Audit is a systematic, documented, periodic and objective review by related
entities, of facility operations and practice related to meeting environment requirements. Whereas
productivity audit is the process of monitoring and evaluating organizational practices to
determine whether functions, programmes, and organization itself are utilizing resources
effectively and efficiently so as to accomplish objectives.

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(b) As a management auditor is concerned with all aspects of business and the organization, ranging
from manufacture to marketing and finance, the management audit team should be
multidisciplinary to make multi dimensional approach to audit function.

(c) A management audit questionnaire is an important tool for conducting the management audit. It
is through these questionnaires that the auditors make an inquiry into important facts by
measuring current performance. Such questionnaires aim at a comprehensive and constructive
examination of an organization’s management and its assigned tasks.

Question 7

State four objectives of operational audit.

Solution

Generally, operational audit objectives include:

Appraisal of controls: The most significant gain an organization can derive from operational
auditing is

probably in the area of appraisal of controls.

a. Evaluation of performance: In performance appraisal, the operational auditor is basically

concerned not so much with how well technically the operations are going on, but with accumulating
information and evidence to measure the effectiveness, efficiency and economy with which the
operations are being carried on.

b. Appraisal of objectives and plans: Operational auditor may look into the aspects like whether

objectives are clearly spelt out and properly communicated to the personnel responsible for

implementation and whether the personnel have understood the objectives in the sense meant by

the management. Also, he can take note of any apparent conflict in the objectives for its effect on

operations.

c. Appraisal of organizational structure: Organizational structure provides the line of relationships

and delegation of authority and tasks. Therefore, this is also another important area for appraisal
by the operational auditor.

d. Program development and acquisition is performed in accordance with management’s general and
specific authorization.

e. Program modifications have the authorization and approval of management.

f. Processing of transactions, files, reports and other computer records is accurate and complete.

g. Source data that is inaccurate or improperly authorized is identified and controlled according to
prescribed managerial policies.

h. Computer data files are accurate, complete and confidential.

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Internal Controls
Question 1 June 24(22)(7m)

Explain Briefly about Adequacy of Internal Controls

Solution

As per SA 200 read with SA 315, 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 the plan of an organisation and the procedures and records that are concerned with the
safeguarding of assets and the reliability of financial controls.

Internal control so far as financial and accounting aspects are concerned, aims at the following:

(i) Providing the flow of work through various stages.

(ii) There should be proper segregation of personnel duties so that no single person can be in a
position to handle whole of the work from its beginning to its end.
(iii) Adequate documentation should be made at each stage of work.
(iv) The transactions are recorded with appropriate amounts and in timely manner and that too as
per the applicable accounting policies and practices
(v) The assets should be properly safeguarded.
(vi) The access to the assets should be restricted to only authorised persons.
(vii) Existence of organisational chart would help in fixing responsibilities.
(viii) Building up of a system to locate the deviations and departures from the prescribed
procedures and to detect the frauds and errors automatically without mush loss of time.
(ix) Standardized records and formats should be evolved. It would ensure availability of right
information at right time.
(x) There should be an efficient Management Information System.
(xi) Minimization of loss and wastages.
(xii) Employees should be encouraged to do good work and comply with the procedures. Special
attention should be given to the disgruntled employees.
(xiii) Adequate cut off procedures should be formulated so that the transactions of one period can
be separated from the transactions of other period

Question 2

Explain briefly about the Scope of Internal Control.

Solution

Internal control is an essential pre-requisite for efficient and effective management of any
organization and is therefore, a fundamental ingredient for the successful operation of the
business in modern days. In fact, an effective internal control system is a critical success factor
for any organization in the long term. Internal control has now been recognized as

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fundamental and indispensable to modern auditing. Thus internal control has its all embracing
nature and is concerned with the controls operative in every area of corporate activity as well as
with the way in which individual controls interrelate.

The scope of internal control, according to the aforesaid definitions, extends well beyond
accounting control. In an independent financial audit or the statutory audit, the auditor is
concerned mainly with the financial and accounting controls. However, in an operational audit (as
part of internal controls), the auditor reviews all the controls including operational functions. The
internal controls can be broadly classified into following four main categories: financial &
accounting controls, administrative controls, operational controls and compliance controls.

(i) Administrative Control: Administrative controls include all types of managerial controls related
to the decision-making process. An example of administrative controls is the maintenance of
records giving details of customers contacted by the salesmen.

(ii) Operational Control: This is exercised through “management accounting” techniques viz.
budgetary control,standard costing etc.

(iii) Financial and Accounting Control: This control refers primarily the management plans,
objectives and procedures that are concerned with the safeguarding of assets, prevention and
detection of fraud and error, accuracy and completeness of accounting records, and timely
preparation of reliable financial information.

(iv) Compliance Control: These controls aim at ensuring compliance with applicable laws and
regulations. These Controls also help to ensure compliance with laws regarding the system and
intellectual property.

Question 3 June 24(22)(7m)

Discuss Audit Procedures for Conducting Audit of Self Help Groups ?

Solution

The Self Help Group (SHG) movement in India has emerged as a pivotal strategy for empowering

rural communities, especially poor women and marginalized groups. Here’s an overview of the key

elements, benefits, and auditing approach of SHGs.

Key Features of the SHG Movement

1. Financial Intermediation: SHGs serve as a unique model that combines self-management with
access to affordable financial services. The focus is on both social and economic development for
women members.

2. Formation and Facilitation: SHGs are formed with the support of government initiatives or non-
governmental organizations (NGOs). They connect not only with banks but also with broader
development programs to enhance their impact.

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3. Benefits: SHGs offer significant economic benefits, such as access to credit, savings, and
income generating activities. They foster social empowerment by promoting collective decision-
making and enhancing the social status of women

Applying the Field Balance Sheet Approach to Audit

The Field Balance Sheet Approach involves several key steps during the audit process for SHGs:

1. Background Review: Conduct a preliminary examination of group-level records, including the cash
book. Review member passbooks to verify the accuracy of data entries and postings.

2. Prepare Field Balance Sheet: The auditor prepares a Field Balance Sheet based on the SHG’s
internal records, aimed at assessing retained earnings.

3. Private Meetings with Members: The auditor conducts private interviews with 25% of the total
members to validate information and understand decision-making patterns within the group.

4. Meeting with the SHG Group: If serious issues are identified during the audit, the auditor holds
a meeting with the entire group for further discussion and clarification.

5. Reporting: Upon completion of the audit, the auditor summarizes any weak practices that could

jeopardize savings or affect record reliability. Recommendations for better practices are
provided. The auditor submits the Field Balance Sheet and a summary report to the microfinance
institution (MFI)/bank and all group members, adding comments to assist in credit provision
decisions.

Question 3 Dec23(22)(7m)

What is the necessity of Internal Audit Explain ?

Solution

(i) Internal Audit assists management to improve internal controls by identifying weaknesses in
systems and provides an opportunity to correct those weaknesses. Internal auditors deal with
issues that are important to the continued existence and prosperity of any organisation.
(ii) It helps to detect errors and frauds and provides suggestions to rectify the same and to pre-
empt possibility of recurrence.
(iii) It steps in time to detect the misuse of resources, which helps to reduce infructuous
unnecessary expenses.
(iv) It helps in improving the processes and workflow. It also works as a morale check.
(v) The Internal audit checks the books of accounts, detects errors and frauds and helps in its
correction which makes the act of External/Statutory Auditor easier. He can rely on the
internal audit reports and reduce the audit time.
(vi) The vigil by Internal Audit team and timely intervention, keeps operating staff on their toes
for keeping Books updated.
(vii) Independent review of operations/business.

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Question 5 Dec 23(22)(7m)

State that the special steps to be taken by Auditor Related to Audit of Educational
Institution and that of its students

Solution

The special steps involved in the audit of an educational institution include a variety of
conventional and special type of audit of documents:

Examination of basic Constitution of the Institution:

• Documents relating to formation of the institution, affiliation, Management structure,

Governing Body, ownership, etc. requires due attention for fund monitoring, donation, spent
approval process, affiliation fees payment, etc.
• Examine the Trust Deed, or Regulations in the case of school or college and note all the
provisions affecting accounts. In the case of a university, refer to the Act of Legislature
and the Regulations framed thereunder.
• Approving authority for expense, fund transfer, bank account operation, etc. Read through
the minutes of the meetings of the Managing Committee or Governing Body, noting
resolutions affecting accounts.
• To see that these have been duly complied with, especially the decisions as regards the
operation of bank accounts and sanctioning of expenditure.

For examination data relating to students:

• Semester / Class-wise Student Register with details of Student name, address, Aadhar
No./Card, Guardian details, Contact No., etc. and fee structure (full fees, half fees,
sanctioned waiver, etc.) mapped for ensuring accuracy of collection.
• Where collection through direct Banking takes place, the Bank Statement to be equated
with fees receivable/ recoverable‘ for completeness check and proper revenue /collection
(advance/ arrear) recognition.
• Fees collected and Fees Book counterfoil reconciliation also can be carried out for fees
collected at the Counter. Collection against every student, whose names are appearing in the
Student Register‘ to be validated and unpaid ones to be followed-up.
• Updating of Student Register‘ w.r.t discontinued, transferred students, drop-outs, etc. to
be carried out on timely basis.
• Fees condonation by appropriate authority to be considered for reconciliation between
receivable fees and received.
• Admission and other collections (late fees, transfer charges etc.) need to be tracked for
separately and booked under appropriate Account Heads.
• Confirm that hostel dues were recovered before students‘ accounts were closed and their
caution deposits appropriately adjusted/refunded.
• Verify other sources of income (rental income from landed property with the rent rolls,
bank Fixed Deposit interest from Deposit Certificates, etc.)

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Forensic Audit
Question 1 June 24(22)(7m)

What is the need for Forensic Audit ? Explain the need for Forensic Audit Procedures ?

Solution

Need for Forensic Audit:

As of now, forensic auditing has emerged as a specialized field in the industry that requires a
specific skill set to detect the fraud, leaving no scope for overlap, but to determine an
organisation’s needs, forensic auditing is significant in dealing with early warning signals of fraud.

Thus, there are a few instances on the occurrence of which an entity should direct for forensic
Audit, like:

(i) Theft of business information or where business systems have been hacked.
(ii) Issues identified by Whistle-Blowers
(iii) Reconciliations resulted in unidentified material differences
(iv) Suspicious of fraud or illegal activity.
(v) Turnover has occurred and balances are showing negative results.

Forensic Audit Procedures:

Since the forensic audit is more of an investigation and collection of evidence, it is of great
importance that the audit should be conducted with an attitude of professions scepticism.

However, a scientific approach involving the use of forensic audit procedures should be used to
conduct the assignments. These procedures are more towards detecting possible material
misstatements in the financial records that result in fraudulent activities. Besides, forensic data
analysis and fraud investigation techniques, a tool named „triangle‟ also are used for addressing
the presence of three-element that are common to any fraud being committed:

• Incentives – a motive that drives a person to commit fraud.

• Attitude – an ability to rationalize fraudulent behaviour.
• Opportunity – that enables a person to commit fraud.

Question 2 Dec23(22)(7m)

In a company ,the Management on a source information , is of the view that there is

embezzlement of cash receipts . As a Forensic Auditor how would you proceed to verify ?

Solution

The forensic audit investigation is the utilization of specialized investigation skills to conduct the
forensic audit engagements in such a manner that the outcome can be presented in a court of law
as evidence. The auditor should use an approach considering both the aspects of

i) whether the fraud could have occurred and

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ii) whether the fraud could not have occurred.

With this approach, the forensic auditors will be able to bring the reality closer to the general
public, especially the circumstances where perception and reality are not aligned.

An auditor can follow a multi-step method for fact-finding in case of forensic audit engagements:

• Accept the forensic audit assignment. It is always useful to carry out a preliminary
investigation prior to development of a detailed plan of action.
• Evaluate the allegations or suspicions. Set out the objectives to be achieved and Conduct
due diligence background notes.
• Complete the preliminary stage of the investigation. The evidence should be sufficient to
ultimately identify the fraudster, the mechanics of the fraud scheme, and the amount of
financial loss suffered.
• Check the prediction assuming that there will be litigation.
o Begin with an external investigation.
o Gathering the required proofs and evidence.
o Preparing report on findings.

Queston 3

Discuss the need for Forensic Accountants

Solution

➢ Forensic Accounting is a specialized practice area focusing on engagements resulting from

actual or anticipated frauds, disputes, or litigations. This field, which involves utilizing
accounting, auditing, CAATs/Data Mining Tools, and investigative skills to detect frauds and
mistakes, is in increasing demand due to the rise in cyber-crimes and frauds. Government
bodies, PSUs, the insurance sector, banks, investigating agencies, and various firms have
forensic accounting departments engaging forensic auditors.
➢ Maurice E. Peloubet coined the term "Forensic Accountant" in 1946, indicating its relevance
beyond traditional financial statement preparation. In India, the potential for chartered
accountants to enter this field is growing, with agencies like the CBI involved in forensic
accounting.
➢ The increasing number of regulatory and administrative bodies will demand more forensic
reviews, involving cost accountants in forensic practices. The changing nature of accounting and
auditing standards supports this trend.
➢ According to Accounting Today, nearly 40 percent of the top 100 American accounting firms
are expanding their forensic and fraud services. This trend suggests that forensic practices
will soon significantly contribute to Indian CMA firms' revenues. The ACFE's 2018 report
highlights 2,690 cases of occupational fraud across 125 countries, resulting in losses over $7
billion, with 72 cases from India. This underscores the growing demand for professionals who
can identify and prevent fraud, especially amid tough economic conditions and heightened
corporate governance scrutiny.

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➢ The prominence of forensic audits has been amplified by high-profile cases like those of Vijay
Mallya and Nirav Modi, and the significant NPA build-up by state-owned banks, leading to
increased efforts to detect, prevent, and legally address fraud.

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Anti Money Laundering

Question 1 June24(22)(7m)

Explain how money laundering works ?and enumerate the offences of money laundering as per
prevention of money laundering act (PMLA) 2002.

Solution

How Money Laundering Works:

To identify and report potential money laundering and address compliance requirements, financial
institutions must have a deep understanding of how the crime works. Money laundering involves
three steps:

(i) Placement

(ii) Layering and

(iii) Integration

These are a complex series of transactions that start with depositing funds, then gradually moving
them into what appear to be legitimate assets.

• Placement refers to how and where illegally obtained funds are placed. Money is often placed
via Payments to cash based businesses; payments for false invoices; „smurfing‟ which means
putting small amounts of money (below the AML threshold) into bank accounts or credit cards;
moving money into trusts and offshore companies that hide beneficial owners‟ identities; using
foreign bank accounts; and aborting transactions shortly after funds are lodged with a lawyer
or accountant.
• Layering refers to separating criminal funds from their source. It involves converting the illicit
proceeds into another form and creating complex layers of financial transactions to disguise
the funds‟ origin and ownership. Criminals do this to obfuscate the trail of their illicit funds.
So, it will be hard for AML investigators to trace the transactions.
• Integration refers to the re-entry of the laundered funds into the economy in what appears to
be normal, legitimate business of personal transactions. This is sometimes done by investing in
real estate or luxury assets. It allows launderers and criminals to increase their wealth

The offense of Money Laundering:

➢ Money-Laundering has been defined in the Prevention of Money Laundering Act,2002 under
Section 3, wherein a person shall be guilty of the offences of money-laundering, if such person
is found to have directly or indirectly:
• Attempted to indulge or
• Knowingly assisted or
• Knowingly is a party or

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Is involved in one or more of the following processes or activities connected with proceeds of
crime, namely: Concealment; or Possession; or Acquisition; or Use; or Projecting as untainted
property; or Claiming as untainted property.

➢ Section 2(u) of PMLA defines “Proceeds of Crime” as any property derived or obtained, directly
or indirectly, by any person as a result of criminal activity relating to a scheduled offense or
the value of any such property, or where such property is taken or held outside the country,
then the property equivalent in value held within the country or abroad.
• “Proceeds of Crime” include property not only derived or obtained from a scheduled
offense, but also any property which may directly or indirectly be derived or obtained as a
result of any criminal activity relatable to the scheduled offense.
➢ The Schedule to PMLA lists all offenses which have been defined as scheduled offenses. As
per Section 2(1) (y) of PMLA, Scheduled Offence means:
• The offenses specified under Part A of the Schedule; or
• The offenses specified under Part B of the Schedule, if the total value involved in such
offenses is one crore rupees or more; or
• The offences are specified under Part C of the Schedule

An offense of money laundering cannot exist independently. It is evident that money laundering
comprises a predicate offense well and is usually the result of the commission of a predicate
offense is the sine qua non for the existence of an offense under PMLA that the money in question
is „proceeds of crime‟ derived from the commission of a predicate offense. In the absence of a
predicate offense, there can be no offense of money laundering

Question 2

Describe the circumstances under which a person can be searched under Section 18 of the
PMLA. Additionally, explain the prerequisites for arresting an individual under Section 19,
highlighting the authorities involved and the procedural steps that must follow post-arrest.

Solution

Section 18 of the PMLA deals with power to search a person

If an authority has reason to believe (the reason for such belief to be recorded in writing)

that any person has

• secreted about his person or

• in anything under his possession, ownership, or control any record or proceeds of crime
which may be usefulfor or relevant to any proceedings under this Act, the authority may
search that person and seize such record or property which may be useful for or relevant
to any proceedings under this Act.

Arrest under PMLA (Section 19)

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Under Section 19 of PMLA, the Deputy Director, Assistant Director, or any other officer
authorized on this behalf by the Central Government by general or special order, has the power to
arrest a person.

A person can be arrested by the concerned authority, if such authority, is based on material in his
possession,

• Has reason to believe that such a person has been guilty of an offence punishable under
PMLA, and
• The reason for such belief has been recorded in writing After arresting such a person, the
authority is bound to: -
• Inform the arrested person about the ground for his arrest
• Forward a copy of the arrest order along with the material in his possession to the
Adjudication Authority
• Produce such person, within 24 hours, before the Special Court or Judicial Magistrate or a
Metropolitan Magistrate, as the case may be, having jurisdiction.

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