AUDIT EVIDENCE A) INTRODUCTION AUDITING IS A LOGICAL PROCESS An auditor is called upon to access the actualities of the situation, review

w the statements of account and give an expert opinion about the truthness and fairness of such accounts. This he cannot do unless he has examined the financial statements objectively. Objective examination connotes critical examination and scrutiny of the accounting statements of the undertaking with a view to assessing how far the statements present the actual state of affairs in the correct context and whether they give a true and fair view about the financial results and state of affairs. An opinion founded on a rather reckless and negligent examination and evaluation may expose the auditor to legal action with consequential loss of professional standing and prestige. He needs evidence to obtain information for arriving at his judgment. The audit evidence is the information used by the auditor in arriving at the conclusions on which the auditors opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information. Audit evidence is necessary to support the auditors opinion and report. B) EVIDENCE IN AUDITING- AN ILUSTRATION Let us assume that X runs a small shop to sell bread. Each morning the bread manufacture deliver a certain quantity of bread to him. The selling price gives him a 25% gross margin over the cost price. When X receives fresh supply of bread he pays for the previous day supply suppose you are asked to audit the transactions of one day. The first step would be to ask X to prepare a statement of account for the day under audit. The statement may appear as below. PARTICUARS Rs. PARTICULARS Rs. Cost of bread Miscellaneous exp. Profit for the day 240 20 40 300 Cash sales Credit sales 200 100 300

As auditor you have to collect evidence to support the transactions of the day. Let us think of the kind of evidence which may be available. 1. You can visit the shop on the morning of the day for which the audit is being conducted and count the loaves of bread delivered by the manufacture to X.

2. You can visit the shop on the evening of the day under audit and count the cash- inhand. 3. You can examine the copy of challan/ bill given by the manufacture, or check creditors account. 4. You can examine the receipt given by the manufacturer for the money paid to him by X the next day. AUDIT TECHNIQUES For collection and accumulation of audit evidence, certain methods and means are available and these are known as audit techniques. Some of the techniques commonly adopted by the auditors are the following: 1. Posting checking 2. Casting checking 3. Physical examination and count 4. Confirmation 5. Inquiry 6. Year- end scrutiny On the basis of Scope:

QUALIFICATION OF COST AUDITOR: SECTION 233 B(1) The person to be appointed as cost auditor of a company is required: a) To be the cost accountant within the meaning of the Cost and Work Accountant ACT, 1959. b) To hold a certificate of practice issued by the institute of Cost and Work Accountant of India. The cost auditor may be an individual cost accountant or a firm of cost accountants with at least two partners. A firm of cost accountants is required to be constituted with the previous approval of the central government. DISQUALIFICATION OF COST AUDITOR According to SECTION 233 B(5), the following persons cannot be appointed or reappointed to conduct audit of the cost accountant of the company:

a) A person who has been appointed to conduct the audit of a company under section 224 (Financial Audit). b) A body corporate c) An officer or employee of a company d) A person who is a partner or who is in the employment of an officer or employee of the company. e) A person who is indebted to the company for an amount exceeding Rs.1000 or who has given any guarantee or provided any security in connection with the indebtedness of any kind of any third person to the company for any third person to the company for an amount exceeding Rs.1000.

APPOINTMENT OF COST AUDITOR A cost auditor is appointed by the Board of Directors of the company with the previous approval of the Central Government. But before an auditor is appointed the company must receive a cost audit order from the government. The appointment of the cost auditor is valid only for the year for which he has been appointed. The Board of Directors are free to appoint a different person as a cost auditor in the subsequent years.

MEANING OF COST AUDIT Cost audit implies audit of cost records. It may be defined as the verification of the correctness of cost accounts and to the adherence to the cost accounting plan. It is an audit process for verification of the cost of manufacture or production of any article on the basis of accounts relating to utilization of material, labour, and other items of cost maintained by the company with the accepted principles of cost accounting. The Government of India has taken steps to study the cost structure of certain basic industries such as coal, sugar, drugs, tyres, cement etc. and to administer the prices charged by this industries. Such control is aimed at assuring a fair price to the consumer and a fair return to the manufacture. Statutory provisions as regards cost audit were introduced by the companies (Amendment) Act 1965. Section 209(1) (d) deals with provisions relating to the cost records. Cost audit is an effective control of cost audit.

FEATURES OF COST AUDIT

1. Cost audit is the audit of cost records. 2. The process of cost audit involves verification of the cost of manufacture or production or processing of any item on the basis of cost records for material, labour and overheads as maintained by the enterprise in compliance with the recognized principles of cost accountancy. 3. It is a specific and specialized activity and it is conducted in addition to the audit of financial statements by the cost auditor. 4. Cost audit is a supplementary form of audit and it is mainly directed to the those companies, which are engaged in production, manufacture, processing, or mining activities. 5. The cost auditor checks the cost accounts to verify the following: I. The cost records as prescribed by law have been maintained or not II. They reflect a true and fair view of the cost of production, processing and marketing of products under audit. AIMS AND OBJECTIVES OF COST AUDIT Cost audit aims at bringing out the weakness. If any, in the cost accounting system and to disclose probable inefficiencies in all facets of operations and performance. The main objectives of cost audit are as follows: 1. To establish the correctness of cost records and accounts. 2. To ensure adherence to the cost accounting plan. 3. To serve as an effective tool of cost control. 4. To protect the interest of the consumers by ascertaining true cost and fair selling price of the products manufactured. 5. To check wastage of material and labour. 6. Advising management as regards the areas where the performance calls for improvement. 7. To assist management in fixing the responsibility of employees and improve performance by highlighting deficiencies or inefficiencies in the use of material, labour and machines. 8. To institute cost consciousness. 9. Facilitate inter-firm comparison of costs, selling price fixation, tariff rate determination. 10. To act as a moral check on staff associated with cost accounting and keeps them vigilant while performing their duties. 11. To examine whether the cost statements present a fair view of the cost information. The above points of the objectives of cost audit reveal that the cost audit is not only useful for the proprietors and industrialists but also protects the interest of the consumers.

 CEILING ON NUMBER OF COST AUDITS As per Companies (Amendment) Act, 1988, the ceiling on number of cost audit to be undertaken would be the same as n case of independent financial audits under Section 224(1B). 1. A cost accountant cannot be a cost auditor of more than 20 Companies at a time. 2. A firm of cost accountants cannot take up cost audit of more than 20 companies per partner. In computing the above 20 companies not more than 10 Companies shall be those companies, which have paid up capital of Rs.25 Lakhs and above.

IMPORTANCE OF COST AUDIT Cost audit is gaining popularity and increasing adaptation in modern business organization. The increasing size of business enterprises and complexity of operations themselves necessitate the need for cost control with a view to reduce the wastage and improve overall operational efficiency. Cost audit serves as an effective tool of cost control. Cost audit aims at to bring out the weaknesses in the cost accounting system and disclose inefficiencies in all facets of operation and management of the organization. The importance of cost audit can also be judged from numerous advantages from it. It can be studied from the view points of producer, management and shareholders.