Internal audit is
one of the internal control procedures that are to be followed by the
various departments and employees of the organization. The objectives
and scope of internal audit cover the following:
-Verification of compliance with established policies.
-Verification of the effective operation of established systems and
-Verification of both fixed and current assets of the organization.
-Based on the above findings, suggest improvements in the system controls
in order to plug the loopholes.
An internal audit
manual indicating the scope of verification of each functional area
within the organization is necessary so that the responsibility entrusted
to the internal audit department is clear to the functional departments
and external auditors also. Whether the controls as aforesaid are operating
normally without breakdown of any system is to be observed by internal
auditor. In judging the adequacy or otherwise of the internal audit
functions, the following aspects need to be taken into consideration:
and experience of the internal audit staff.
- The level of the head of the department in relation to other departmental
- The scope of internal audit is incorporated in the internal audit
manual and its adequacy to the needs of the organization.
- Adequacy and competency of staff employed in the internal audit department.
- The frequency of reports issued to the departments and the following
up till final recommendations are sent to the Chief Executive or Audit
- The coverage of internal audit in all areas as mentioned in the internal
- Objectivity of the reports issued and the promptness with which the
action taken by the company on such reports.
The cost auditor
should go through the financial auditors observations before finalizing
this item. Where there is no internal audit system in the company the
cost auditor should advise for instituting internal audit considering
the size, etc, of the organization. Thus in order to comment on the
scope and performance of internal audit the statutory cost auditor should
review the work of the internal auditor with special references to his
competence, objectivity and work performance. The following questionnaire
will enable the cost auditor to evaluate the work of the internal auditor
as well as the internal audit department:
- What is the organizational
step-up of the departments?
- Is the staff employed in the department adequate?
- Are the qualifications of staffs adequate?
- Is the staff competent?
- Is the staff independent?
- To whom do they report frequently and with what effect?
- Is there any internal audit manual?
- Is a program of internal audit drawn up before the commencement of
the financial year?
- Does the program cover the audit of all the important transactions
and records of the company including statutory cost accounting records?
- Is the scope of the internal audit wide enough to extend to areas
such as management audit, operational audit and the system analysis?
- What is the system of reporting irregularities noticed during internal
- Is prompt corrective action taken by the management on the basis of
internal audit reports?
- Is there much duplication of work between the statutory audit and
The cost auditor has to study and comment on the capacity utilization.
While ascertaining such capacity it may be observed that due to bottleneck
in some of the departments the production is suffering. The cost auditor
should point out the matter to the company and obtain explanations from
the management. He then will be in a position to suggest for improvement
by rectification of general imbalance in production facilities. In a
particular industry it may be observed that packing is the bottleneck.
If more labour or improved machinery is available in the packing department
the production can be increased to a great extent to cope with the demand.
an index of efficiency showing the effectiveness of individual or combined
factors used in producing goods or services. Men, machines, capital,
power and services all contribute to productivity and the extent to
which each does so may be ascertained by the ratio of output to input
of each individual factor. Thus the factoral productivities such as
labour productivity, material productivity, etc.. should be ascertained
by the cost auditor. He should then evaluate the performance of men,
machines or other services and compare the present productivity with
the productivity of previous year. He will be in a position to suggest
for improvement in performance by concentrating on areas offering scope
for increased productivity.
The cost auditor
should discuss with the management of the company to ascertain the key
or limiting factors which may be one or more of the following:
- Absence of demand.
- Stiff competition or availability of cheaper substitutes.
- Non-availability of materials, skilled labour, machines, power etcc.
- Non-availability of transport facilities or infrastructures.
He after discussing
with the management might suggest for profit maximization with the optimum
use of such scarce resources with the help of linear programming, simulation,
etc.. He should study the present inventory policy of the organization.
He should examine whether the perpetual inventory system is in operation
with due classification of materials by value. He should also see whether
maximum, minimum and reorder levels are being fixed by the company and
such levels are reviewed from time to time. He would compute stock turnover
ration wherever possible. He would also see whether purchases are made
following economic ordering quantity policy. He should discuss with
the management if there are shortcoming in the inventory policy. This
may help him to make suggestions for improvements in performance by
improved inventory policies.
The cost auditor
may give a qualified report where:
- He has not received any information or explanation, or
- A record has not been maintained as per cost accounting records, rules,
- The record does not give the information in the manner required by
- A true and fair view of the cost of production etc. is not reflected.
He should write
to the company for furnishing information etc.. Where he is submitting
a qualified report he should mention under this item the various points
of qualifications and reasons therefore in addition to indicating these
qualifications in the main certificate of the cost audit report. Where
records relating to power generation are not maintained by the company
the qualified report may be Proper record required under the pertaining
section of the companies act
As per rules the cost records
should be reconciled periodically, say monthly, quarterly or half yearly
but at the end of the accounting year with the financial books of accounts
so as to ensure accuracy of the data.