Paper 19: Cost and Management Audit [December_2021_Term]

FINAL EXAMINATION

Syllabus 2016

Paper 19: COST AND MANAGEMENT AUDIT (CMAD)

Time Allowed: 3 Hours Full Marks: 100

There are Sections A, B, C and D to be answered subject to instructions given against each.

Section A [20 Marks]

You are required to answer all the questions. Each question carries 1 mark.
Instructions: Each question is followed by 4 Answer choices and only one is correct. You are required
to select the choice which according to you represents the correct answer. [20 X 1= 20]

1 Which one of the following costs appeared only in Cost Accounts but not in Financial Accounts?
(i) Interest on mortgage and loans
(ii) Notional Interest on Capital
(iii) Dividend equalization fund, sinking, fund etc.
(iv) Loss due to scrapping of plan and machinery

2 The figures below are available for R Ltd. Budgeted production - 800 units, Standard hours per unit 25,
Actual production 576 units and actual working— 12000 hours. What is the Efficiency Ratio?
(i) 150%
(ii) 120%
(iii) 180%
(iv) 80%

3 Cost Auditing Standard 102 deals with ______________.

(i) Knowledge in performing of Audit of Cost Statements, Records etc.
(ii) Planning on Audit of Cost Statements, Records etc.
(iii) Ensuring conduct of Audit of Cost Statements
(iv) Documentation of Audit of Cost Statements, Records etc.

4 Operational Audit can lead to better management with the focus on ____________.
(i) transaction based analysis for fraud prevention.
(ii) compliance of Rules
(iii) budget monitoring
(iv) risk identification, process improvement

5 Planning an audit of Cost Statements is dealt in the _____________.

(i) Cost Auditing Standard 101
(ii) Cost Auditing Standard 102
(iii) Cost Auditing Standard 103
(iv) Cost Auditing Standard 104

6 The first step in audit of Educational Institutions _________________.

(i) read through the minutes of the meetings of the Managing Committee or Governing Body
(ii) check admission fees with admission slips signed by the head of the institution and confirm that the
amount had been credited to a Capital Fund
(iii) verify the annual statement of accounts
(iv) to examine the Trust Deed or Regulations

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7 Which of the following ratios appears as Profitability Ratio in Part D of Annexure to the Cost Audit Report?
(i) Net Profit to Net Sale
(ii) Value Added to Net Sales
(iii) Profit before Tax to Value Added
(iv) Net Profit to Share Capital

8 In which CRA Form, is the Cost Audit Report of a company filed with the Central Government?
(i) CRA 1
(ii) CRA 4
(iii) CRA 3
(iv) CRA 2

9 As per the Cost Auditing Standard 101, the risk of Material Misstatements has two components, viz. .
(i) Detection Risk and Audit Risk
(ii) Inherent Risk and Control Risk
(iii) Material Risk and Implicit Risk
(iv) Financial Risk and Explicit Risk

10 The audit of data or information, depicting social performance of a business in contrast to its normal economic
performance as measured in financial audit, is _______________.
(i) Energy Audit
(ii) Efficiency Audit
(iii) Propriety Audit
(iv) Social Audit

11 An audit which is based on the philosophy that role of business showed be quality of life through it’s
contribution in terms of better quality and services.
(i) Propriety Audit
(ii) Efficiency Audit
(iii) Consumer Services Audit
(iv) Market Research Audit

12 The local bodies are broadly classified into categories.

(i) four
(ii) eight
(iii) ten
(iv) two

13 Audit of Government Expenditure is one of the major components of Government Audit conducted by
____________________.
(i) Chartered Accountant
(ii) Cost Accountant
(iii) Comptroller and Auditor General
(iv) All of the above

14 __________ensure that every rupee invested in capital or other fields gives optimum returns.
(i) Appreciation
(ii) Deficiency
(iii) None of the above
(iv) Efficiency

15 The relationship between budgeted hours and maximum possible working hours in a budget period is
_________________.
(i) Actual usage of budgeted capacity ratio

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(ii) Actual capacity usage ratio
(iii) Standard capacity usage ratio
(iv) All of the above

16 Which one of the followings in an example of Solvency Ratio?

(i) Debt Equity Ratio
(ii) Capital turnover Ratio
(iii) Debtors Turnover Ratio
(iv) None of above

17 What shall Cost of Self-generated utilities for own consumption comprise of?
(i) Administrative overheads
(ii) Distribution cost
(iii) Factory overheads
(iv) Selling overheads

18 There is no requirement of Audit Working Papers while conducting audit and they only result in loss of time.
(i) The Statement is Correct
(ii) The Statement is Incorrect
(iii) The Statement is Incomplete
(iv) None

19 Which Cost Accounting Standard deals with Overall Objectives of the Independent Cost Auditor and conduct
of an Audit?
(i) Cost Auditing Standard 101
(ii) Cost Auditing Standard 102
(iii) Cost Auditing Standard 103
(iv) Cost Auditing Standard 104

20 Remuneration of the Non-Executive Directors is treated as _____________ .

(i) Employee Costs
(ii) Administrative Overheads
(iii) Salaries and Wages
(iv) Management Expenses

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Section B [20 Marks]

You are required to answer all the questions. Each question carries 1 mark.
Instructions: Each question is followed by a space where you are required to type your answer.
[20 X 1= 20]

1 How would you treat the abnormal cost for computation of cost?
Type your answer here
The abnormal cost must be excluded from computation of cost.

2 Which section of Companies Act deals with Internal Audit?

Type your answer here
Section 138 of the Companies Act 2013 deals with provisions of Internal Audit.

3 XBRL is a language based on_________________.

Type your answer here
XML family of languages.

4 Treatment of Revenue in Cost Statements deals with.

Type your answer here
CAS 24

5 Section 17 (2) of the _______________specifically requires the auditor to conduct an examination of the
overdue debts, if any, and a valuation of the assets and liabilities of the society.
Type your answer here
Co-operative Societies Act, 1912

6 _______________ Audit involves the detailed examination of all the transactions by the auditor
continuously throughout the year or at regular intervals.
Type your answer here
Continuous

7 Financial Position and Ratio Analysis forms part of _____________ of the Annexure to Cost Audit Report.
Type your answer here
Part D

8 A systematic, documented, periodic and objective review by related entities, of facility operations and
practice related to meeting environment requirements is known as ____________.
Type your answer here
Environment Audit

9 Value Addition is the difference between ______________ and the cost of bought out materials and
services
Type your answer here
Net output value

10 Market Research is part of _______________ Cost.

Type your answer here
Selling and Distribution

11 ________________ is the process of efficiently overseeing the constant flow of units into and out of an
existing inventory.

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Type your answer here

Inventory Management

12 The following details are relating to A Ltd.

Royalty paid on production Rs. 60,000, Job Charges Rs. 15,000, Special Design Charges Rs. 25,000 and
Software Development Charges related to Production Rs. 20,000.
Calculate the Direct Expenses as per CAS 10.
Type your answer here
Rs. 1,20,000

13 If the auditor has identified a weakness in the previous year and reported the same to the management,
but it continues to exist in the current year, then it would constitute ___________.
Type your answer here
Continuing Failure

14 Standard Costing is used for the purpose of _______________.

Type your answer here
Cost Control

15 As per section 135 of the Companies Act, 2013 every company having net worth of Rs.500 crore or more
or Turnover of Rs.1000 crore or more or a net profit of Rs.5 crore or more during any Financial Year shall
constitute a __________________ Committee.
Type your answer here
Corporate Social Responsibility

16 Under ______________ Audit, the auditors try to bring out cases of improper, avoidable, or infructuous
expenditure even though the expenditure has been incurred in conformity with the existing rules and
regulations.
Type your answer here
Propriety

17 The cost of operating a common facility, activity or service which is shared by two or more cost object is
known as ______________.
Type your answer here
Common Cost

18 ______________ analysis helps an enterprise to Identify the most and least profitable products or
services.
Type your answer here
Profitability

19 The cost centre which primarily provides auxiliary services across the entity is known as _________
Type your answer here
Support Service Cost Centre

20 Which Form is required for giving intimation of appointment of cost auditor by the company to the
Central Government?
Type your answer here
Form CRA-2

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Section C [48 Marks]

You are required to answer any 4 out of 6 questions in this section

Instructions: Each question is followed by a space where you are required to type your answer.
Candidate shall provide adequate reasons/workings in brief, in support of their answers. [4 X 12= 48]

1 (a) The Financial Profit and Loss Account of PAN LTD., a manufacturing company for the year ended 31st
March, 2021, was Rs. 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 Rs. 95,000.
(ii) Interest was received amounting to Rs. 1,05,000 from outside the business investment.
(iii) Voluntary Retirement payment of Rs.3,80,000 was not included in the Cost Accounts.
(iv) Some renovation work was carried out at a cost of Rs. 6,20,000 and its useful life was only for five
years.
(v) Donation of Rs. 1,28,000 towards CSR commitment was not considered in the Cost Accounts.
(vi) Insurance claim of Rs. 18,05,000 relating to previous year received during the year.
(vii) Loss on sale of investments amounts to Rs. 32,800.
(viii) The closing inventory of raw materials was undervalued Rs.30,600 and that of finished goods was
overvalued Rs. 2,30,700 in the financial records.
(ix) Post retirement medical grant to the extent of Rs. 2,80,000 was not considered in Cost Accounts.
(x) Profit from Retail trading activity amounting to Rs. 1,90,000.

On the basis of the above information answer the following questions:

(i) Compute Total Amount of Expenses/Loss not considered in Cost Accounts. 3

Type your answer here Rs. 13,16,800

Workings: Amount (Rs.)

Expenses/Loss not considered in Cost Accounts:
(a) Loss on Sale of Investments 32,800
(b) Donation towards CSR Commitment 1,28,000
(c) Post-retirement Medical grant 2,80,000
(d) Voluntary Retirement payment 3,80,000
(e) 4/5 of Renovation Expenses Amortized 4,96,000
Rs. 13,16,800

(ii) Compute Total Amount of Incomes not considered in Cost Accounts. 3

Type your answer here Rs.23,95,100

Workings: Amount (Rs.)

Incomes not considered in Cost Accounts:
(a) Profit on Sale of old assets 95,000
(b) Interest received from outside investment 1,05,000
(c) Insurance claim for previous year received 18,05,000
(d) Profit from Retail Trading Activity 1,90,000
(e) Effect of Undervaluation/overvaluation
of closing inventory (Rs.2,30,700 – Rs.30,600) 200100
Rs. 23,95,100

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(iii) Compute Profit as per Cost Accounts? 2

Type your answer here Rs. 1,04,93,180

Workings: Amount (Rs.)

Profit as per Financial Accounts 1,15,71,480
Add: Expenses/Loss not considered in Cost Accounts 13,16,800
Less: Incomes not considered in Cost Accounts (23,95,100)
Profit as per Cost Accounts Rs. 1,04,93,180

(b) Briefly state the objective of formulating Cost Accounting Standards? 4

Type your answer here
Cost Accounting Standards are a set of standards that are designed to achieve uniformity and
consistency in cost accounting principles and practices.
The Institute of Cost Accountants of India, recognising the need for structured approach to the
measurement of cost in manufacture or service sector and to provide guidance to the user
organisations, Government bodies, regulators, research agencies and academic institutions to achieve
uniformity and consistency in classification, measurement and assignment of cost to products and
services, has constituted Cost Accounting Standards Board (CASB) with the objective of formulating the
Cost Accounting Standards.
The Cost Accounting Standards:
(i) Provide a structured approach to measurement of costs in manufacturing process or service
industry;
(ii) Integrate, harmonize and standardize cost accounting principles and practices;
(iii) Provide guidance to users to achieve uniformity and consistency in classification, measurement,
assignment, and allocation of costs to products or services;
(iv) Assist in clear and uniform understanding of all the related issues of various user organizations,
government bodies, regulators, research agencies and academic institutions.

2 (a) ‘The need for Productivity/Efficiency Audit has arisen in order to examine effectiveness ofresource
utilization’.— Explain Efficiency Audit. How can Efficiency Audit be carried out? 3+3
Type your answer here
The Productivity/Efficiency Audit is basically an analysis of the productivity of the resources deployed by
any organization. It is generally done to generate information about the status of productivity in the
organization for the purpose of determining the scale of efficiency and effectiveness of „resource
utilization‟. The term „resources‟ here would include not only “money” but also “men”, “machines”,
“materials” and “methods”. In other words, the objectives of Efficiency Audit is (a) to attain optimum
result, and (b) to improve on the benchmarks.
Efficiency Audit would generally comprise –
a. comparison of expected returns on utilization of the resources vis-a-vis the actual returns;
b. comparison of optimum returns on utilization of the resources vis-a-vis the actual returns;
c. the steps taken to improve benchmarks of returns and the utilization.
The Efficiency Audit is actually “productivity of every resource employed”. The following tools are used to
carry out such audit:
a. (i) Ratio analysis - Return on capital employed - Return on sales - Turnover ratios of fixed assets,
current assets, inventories, category-wise debtors etc.
(ii) Capacity utilization of plant, machinery and equipment against available capacity.
b. Productivity analysis of man (labour) hours in time and cost.
c. Material consumption against norms and benchmarks.

(b) MNP Ltd. appoints you as Management Auditor to check internal system in the area of data processing.
List out the areas covered by such study. 6

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Type your answer here

The study on data processing need emphasize economy, secrecy and prompt reporting. The questions
which be put before the Management relating to present vis a vis an efficient system are summarized
below:
(i) What are the level of data processing and e-governance in the organization?
(ii) Has the right balance between such methods being achieved over all?
(iii) Are the job done by people within or is outsourced?
(iv) Are computer systems used where appropriate, compatible with the software installed?
(v) Is the computer installation appropriate in size, workload and staffing?
(vi) What control is exercised on input to an output from the computer installation, and if by a
control system is this sufficiently independent?
(vii) What are the hierarchies who have access to the computer installations?
(viii) How is the amendment/upgradation of such program controlled?
(ix) Does the systems testing cover operating systems, files management, operation messages, data
management, job control routines and fault detection?
(x) Are computing and other sharing of platform arranged? If so, is the cost justified by the extent of
the utilization of the main computer on other data processing?
(xi) Is there full documentation of all programs and systems with adequate back up?
(xii) stem security protected by efficient and renowned agencies?

3 (a) Discuss the applicability of Cost Records and Cost Audit as per Rule 4 of the Companies (Cost Records and
Audit) Rules, 2014 (as amended), read with Rule 3, in the following Cases: 3
(i) M/s. PQR Ltd. furnishes the following information in regard to the immediately preceding
Financial Year:
Turnover of Table A Products under Rule 3 is Rs. 19 crore
Turnover of Table B Products under Rule 3 is Rs. 15 crore
Turnover of other products is Rs. 76 crore.

Type your answer here

In this case the following position emerges:
Overall Turnover is Rs. 110 crore which is > = Rs. 35 crore. Therefore Cost Records are required to be
maintained for Table A and Table B Products.
Overall Turnover is Rs.110 crore which is >= Rs. 100 crore and aggregate Turnover of the Products under
Rule 3 (Table A & Table B products) is Rs. 34 Crores which is >= Rs. 25 Crore but <= Rs. 35 crore.
Conditions of Rule 4(1) of the Companies (Cost Records and Audit) Rules, 2014 (as amended) are fulfilled
and cost audit is applicable for Table A Products.
Though the overall turnover is more than Rs. 100 crore, aggregate Turnover of the Products under Rule 3
(Table A & Table B products) is less than Rs. 35 crore [Rule 4(2)]. That is why, Table B products are not
covered under cost audit.

(ii) M/s. LMN Pvt. Ltd. furnishes the following information in regard to the immediately preceding
Financial Year: 3
Turnover of Table A Products under Rule 3 is Rs. 20 crore
Turnover of Table B Products under Rule 3 is Rs. 22 crore
Turnover of other products is Rs. 63 crore.

Type your answer here

In this case the following position emerges:
Overall Turnover is Rs. 105 crore which is >= Rs. 35 crore. Therefore, Cost Records are required to be
maintained for Table A and Table B Products.

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Overall Turnover is Rs. 105 crores which is >= Rs. 100 crores and aggregate Turnover of the Products
under Rule 3 (Table A & Table B products) is Rs. 42 Crores which is >= Rs. 35 crores. Since the conditions
of Rule 4(1) and Rule 4(2) of the Companies (Cost Records and Audit) Rules, 2014 (as amended) are
fulfilled, Cost Audit is applicable for both Table A and Table B Products.

(b) Explain the Stages of an Audit of Cost Statement. 6

Type your answer here
The stages of an Audit of Cost Statements are:
1. Planning
2. Performing and
3. Reporting

1. Planning Stage: Once the entity’s acceptance or continuation decision has been made, the first stage is
planning the audit. The planning stage involves:
(i) Understanding the entity and its environment
(ii) Risk identification and Strategy
(i) Risk and materiality assessment
A well-planned audit will ensure that sufficient appropriate evidence is gathered to minimize risk of
material misstatement at the cost statement level.

2. Performing Stage: The second stage is performance or execution stage of the audit, which involves
detailed testing of internal controls, material consumptions, cost accumulation, allocation,
apportionment, and absorption. This detailed testing provides the evidence that the cost auditor requires
to determine whether the cost statements have been fairly presented. The performing stage involves:
(i) Execution
(ii) Audit Procedures
(iii) Audit Findings

3. Reporting Stage: The final stage of the audit involves drawing conclusions based on the evidence
gathered and arriving at an opinion regarding the fair presentation of cost statements. The cost auditor’s
opinion is expressed in the cost audit report. At this stage of the audit, a cost auditor will draw on their
understanding of the client, their detailed knowledge of the risks faced by the client, and the conclusions
drawn when testing the entity’s controls, transactions, cost heads, item of cost and related disclosures.
So, the final or reporting stage involves:
(i) Conclusion
(ii) Reporting

4 (a) You are appointed as Internal Auditor of a Hospital. State your approach for steps to be taken for
conducting the audit. 7
Type your answer here
The points stated below are to be considered for conducting audit of a hospital.
(i) Check the letter of appointment to ascertain the scope of responsibilities.
(ii) Study the Charter or Trust Deed under which the hospital has been set up and take a special
note of the provisions affecting the accounts.
(iii) Examine, evaluate and verify the system of internal check and internal control and determine
the nature, timing and extent of the audit procedures.
(iv) Vouch the entries in the Patient's Bill Register with the copies of the bills issued. Test check
the selected bills to see that these have been correctly prepared taking into consideration the
period of stay of each patient as recorded in the Attendance schedule.
(v) Vouch the collection from patients with the copies of the bills and entries in Bills Register.

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Arrears of dues should be properly carried forward. Where these are deemed to be
irrecoverable, these be written off under due authorizations.
(vi) Interest and/or dividend income should be vouched with reference to the Investment
Register and the interest dividend warrants.
(vii) In case of legacies and donations which are received for specific purposes, it should be
ensured that any income there from is not utilized for any other purposes.
(viii)Where receipts of subscription show significant deviations from the budgeted figures, these
should be thoroughly inquired into and the matter should be brought to the notice of the
trustees or the Managing Committee.
(ix) Government grants or grants from local bodies should be verified with reference to the
correspondence with the concerned authorities.
(x) Clear distinction should be made between the capital and revenue items.
(xi) The capital expenditure should be incurred under the proper authorization of a valid
resolution of the trustees or the Managing Committee.
(xii) Verify the system of internal check as regards purchase and issue of stores, medicine, etc.
(xiii) Examine that the appointment of the staff, payment of salaries etc., are duly - authorized.
(xiv) Physically verify the investments, fixed assets and inventories.

(b) Explain briefly the concept of “Adequacy of Internal Control”. 5

Type your answer here
The auditor should obtain an understanding of the accounting system sufficient to identify and
understand major classes of transactions, manner of initiation of transactions, significant accounting
records, supporting documents and specific accounts in the financial statements and the accounting and
financial reporting process. Accounting control comprises of the plan of an organisation and the
procedures and records that are concerned with the safeguarding of assets and the reliability of financial
controls. Internal control, as far as financial and accounting aspects are concerned, aims at the following:
(i) Flow of work through various stages.
(ii) Segregation of personnel duties
(iii) Adequate documentation.
(iv) The transactions are recorded with appropriate amounts and time
(v) The assets should be properly safeguarded
(vi) Proper authorisation.
(vii) Existence of organisational chart
(viii) System to locate the deviations and departures from the prescribed procedures
(ix) Standardized records and formats. It would ensure availability of right information at right time.
(x) Efficient Management Information System.

5 (a) During the period 16.08.2020 to 29.08.2020 (two weekly off in between), the manufacturing unit of CDE
Ltd. had to be closed down due to a widespread agitation on job reservation by a community of the State.
The workmen demanded full wages but it was negotiated to (i) they will work on weekly off on three
chosen weeks without overtime and (ii) the rest will be with no wages for direct workers and adjusted
against eligible leave for staff and indirect employees. The normal working of the unit is on all days except
52 weekly off and 11 statutory holidays. The details of the expenses incurred for the year ended March
31, 2021 are as follows:
(Amount in Rs. Lakh)
Indirect/Fixed Cost Whole Year
Indirect Wages and Salaries 675
Power, Boiler, Security partly used during closure 10
Depreciation 355
Other Fixed Expenses 538
Total: 1,578

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On the basis of the above information answer the following questions:

(i) What is the abnormal stoppage of working in the manufacturing unit of CDE Ltd.? 2
Type your answer here 9 working days

Workings:
Abnormal cost due to closure abnormally is not included in the Cost of Production. In the given case, CDE
Ltd has normal working of (365-52-11=) 302 days. The abnormal stoppage consisted of (16/8/20- 29/8/20
= 14 days) -2 days = 12 working days less 3 compensatory working days i.e. 9 working days.

(ii) Compute Depreciation to be charged for the closed period. 3

Type your answer here Rs. 10.65 lakhs

Workings:
Normal working days = 302
Actual abnormal stoppage consisted of 9 working days
Hence, the percentage of abnormal loss comes to (9/302)x100 = 3% approximately.
Depreciation for whole year = Rs. 355 lakhs
Therefore, Depreciation to be charged for the closed period is 3% of Rs. 355 lakhs = 10.65 lakhs

(iii) Compute Total Abnormal Cost during closure to be charged for the closed period. 4
Type your answer here Rs. 57 lakh (approx.)

Workings:
The percentage of abnormal loss is 3% (approx.)
Amount in Rs. lakh
Whole Year Closed period
Indirect Wages & Salaries 675 20.25
Power etc. used during closure excluded 10.00
Depreciation 355 10.65
Other Fixed Expenses 538 16.14
Total Abnormal Cost during closure 57.04

(b) State the necessity of Internal Audit. 3

Type your answer here
The necessity of Internal Audit is as follows:
(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 improve them which help the
management to take corrective action.
(iii) It detects the misuse of resources in time which helps to reduce unnecessary expenses.
(iv) It increases the morale of honest staff because evaluation of performance of any staffs will be made
at any time.
(v) 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.
(vi) It helps capacity building for organizational effectiveness.

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6 You are required write Short Notes on any 4 out of 5 4 X 3 = 12

(a) Management Audit Evidence 3

Type your answer here
Unlike Financial Audit or other audits there can be no fixed items of evidence to be checked by a
management auditor. A management auditor has to rely more on his experience and acumen to identify
areas of review and study, particularly areas of weaknesses to be overcome, strengths to be exploited
and risk to be properly covered.
The auditor’s evidence comes from his discussions with the people concerned in the organisation, the
survey and review of various reports of the organisation, including internal audit reports, inspection
reports or any investigation reports, physical inspection, test examination of various transactions,
inspection of important departmental files, monthly performance review statements, minutes and notes
and above all personal observations.
Evidence can be gathered either by sampling techniques or by going into full details depending upon
what the samples reveal. The evidence should be such that an auditory can draw valid conclusions, duly
verifying the same with the people concerned. It should be understood that a management auditor does
not rely on a voucher as an evidence, but shall fall back on various records, including vouchers as
evidence for his audit, if the samples demand so. There is no area of restrictions for obtaining evidence.

(b) Qualified Audit Report 3

Type your answer here
A Qualified Audit Report is given by the cost auditor 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 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.

(c) Limitations of Internal Control System 3

Type your answer here
Internal control can provide only reasonable but not absolute assurance, this is because there are some
inherent limitations of Internal Control, such as:
(i) Cost: management’s consideration that a control be cost- effective;
(ii) No control for unusual transaction: the fact that most controls do not tend to be directed at
transactions of Unusual nature;
(iii) Human Error: the potential for human error; These include the realities that human judgement in
decision- making can be faulty and that breakdowns in internal control can occur because of human
error. For example, there may be an error in the design of, or in the change to a control.
(iv) Abuse of authority: the possibility that a person responsible for exercising control could abuse that
authority, for example, a member of management overriding a control;
(v) Inadequate procedure: The possibility that procedures may become inadequate due to changes in
Conditions and compliance with procedures may deteriorate;
(vi) Manipulations by management: with respect to transactions or estimates and judgments required in
the preparation of financial statements.

(d) Advantages of Audit Programme 3

Type your answer here
An audit programme is a detailed plan of the auditing work to be performed, specifying the procedures to
be followed in verification of each item and the financial statements and the estimated time required. To
be more comprehensive, an audit programme is written plan containing exact details with regard to the

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conduct of a particular audit. It is a description or memorandum of the work to be done during an audit.
Audit programme serves as a guide in arranging and distributing the audit work as well as checking
against the possibility of the omissions.
The main advantages of an audit programme are as follows:
(i) It serves as a ready check list of audit procedures to be performed.
(ii) The audit work can be properly allocated to the audit assistants or the article clerks.
(iii) The auditor may easily know the extent of work done at any point of time. Thus, the progress of
work done can be under the supervision and control of the auditor.
(iv) Audit programme would not only be useful for the audit assistants in carrying the audit work but
for the principal too as he would be in a position to account for the individual responsibilities.
(v) A uniformity of the work can be attained as the same programme would be followed from time to
time.
(vi) It is a useful basis for planning the programme for the following year.

(e) Code of Ethics in the field of Cost and Management Accounting 3

Type your answer here
As professionals in the field of Cost and Management Accounting, the members of the Institute are bound
by a code of professional ethics. This code stipulates and binds them to the highest level of care, duty and
responsibility to their employers and clients, the public and their fellow professionals.
The objectives of the accountancy profession are to work to the highest standards of professionalism, to
attain the highest levels of performance and generally to meet the public interest requirement.
These objectives require following basic needs to be met:
(i) Credibility in information and information systems;
(ii) Professionalism identified by employers, clients and other interested parties;
(iii) Confidence that there is a framework of professional ethics to govern the provision of services.

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 Paper 19: Cost and Management Audit [December_2021_Term]

Section D [12 Marks]

Case Study

You are required to answer all questions in this section

Instructions: Each question is followed by a space where you are required to type your answer.
Candidate shall provide adequate reasons/workings in brief, in support of their answers.

The bio-gas produced from wash of alcohol in KLM Industrial Alcohol Ltd. is used as a supplement with
fuel oil in generating steam. The steam is used in steam turbine for production of power and the exhaust
of steam turbine is recycled for manufacture of alcohol. In process, the fall in enthalpy (heat content)
value of the steam is 10%. The following details are extracted from the Cost Accounting records of the
Company for the year ended March 31, 2021:

Boiler (Rs.) Turbine (Rs.)

Cost of Water 6,80,000
Fuel Oil 6,00,00,000
Bio-gas plant expenses 1,68,00,000
Stores and Chemicals 1,80,000
Salaries and Wages 20,00,000 4,80,000
Repairs and Maintenance 44,00,000 1,80,000
Depreciation 12,00,000 4,40,000
Other expenses 26,00,000 80,000
High pressure steam Generated (MT) 24,000
Power Generated (KWH) 18,00,000

On the basis of the above information answer the following questions:

(i) Compute Total Cost of ‘Steam’ for the year ended March 31, 2021. 3
Type your answer here Rs. 87,860,000

Workings:
Total Cost of ‘Steam’: Amount (Rs.,000)
Generation: 24,000 MT
Cost of water 680
Fuel Oil 60,000
Biogas plant expenses 16,800
Stores, chemicals 180
Salaries, wages 2,000
Repairs, maintenance 4,400
Depreciation 1,200
Other expenses 2,600
Total 87,860

(ii) Compute Total Cost of ‘Power (generated) from Steam turbine’ for the year ended March 31, 2021. 3

Type your answer here Rs. 89,040,000

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 Paper 19: Cost and Management Audit [December_2021_Term]

Workings:
Total Cost of ‘Power (generated) from Steam turbine’: Amount (Rs.,000)
Generation: 18,00,000 KWH
Cost of Steam 87,860
Salaries, wages 480
Repairs, Maintenance 180
Depreciation 440
Other expenses 80
Total 89,040

(iii) Compute ‘Credit for Exhaust Steam’ per KWH of ‘Power (generated) from Steam turbine’ for the year ended
March 31, 2021. 3
Type your answer here Rs. 44.52

Workings:
Power Generated 18,00,000 Kwh
Total Cost of ‘Power (generated) from Steam turbine’ Rs. 8,90,40,000
Credit for exhaust steam is 90% of Total Cost of ‘Power (generated) from Steam turbine’ i.e. 90% of Rs.
8,90,40,000= Rs. 8,01,36,000
Therefore, ‘Credit for Exhaust Steam’ per unit of KwH of ‘Power (generated) from Steam turbine’ for the
year ended March 31, 2021 is Rs. 8,01,36,000/18,00,000 = Rs. 44.52

(iv) Compute Cost of Power/unit used in manufacture. 3

Type your answer here Rs. 4.95

Workings:
Power Generated 18,00,000 Kwh
Total Cost of ‘Power (generated) from Steam turbine’ Rs. 8,90,40,000
Less: Credit for Exhaust Steam 90% (-)Rs. 8,01,36,000

Cost of power used in manufacture Rs. 89,04,000

Therefore, Cost of Power/unit used in manufacture is Rs. 89,04,000/18,00,000 = Rs. 4.95 (approx.)

END

The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 15