Role & Responsibilities of Cost Auditor

  • Post last modified:20 April 2021
  • Reading time:8 mins read
  • Post category:Finance
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Role of Cost Auditor

In order to perform his work as a cost auditor, a cost auditor should clearly understand his position and also what he is expected to do. In other words he should understand the role which he is required to play.

Role of a cost auditor is difficult to be decided because in the provisions of the Companies Act, 1956 it is not stated clearly.

  • A Cost auditor is directed to be appointed by the Central Government for the cost audit of the company and after completing the cost audit he submits his cost audit report to the Central Government and also to the Board of Directors of the company and in this sense his role may be regarded as that of an agent.

  • The cost auditor performs the cost audit of the company as directed by the Central Government and so we can say that he works in the capacity of an agent of the Central Government. But the cost auditor is paid his remuneration for the cost audit work by the company and not by the Central Government.

Normally in agency business the agent is paid his commission/remuneration by the principal who has appointed him. The case of a cost auditor is, therefore, different from the normal agency work.

When cost audit is not compulsory for a company and the Board of Directors of the company appoints a cost auditor for doing the cost audit of the company, the cost auditor submits his report only to the Board of Directors and does not submit it to the Central Government.

  • The Cost auditor, in such case, performs the cost audit only to the extent and as directed by the Board of Directors and is paid his remuneration by the company. It can be said that the cost auditor plays the role of an agent.

Sometimes it is said that a cost auditor is an officer of the company whose cost audit he does. Though the status of the cost auditor is that of the officer of the company, he cannot be regarded as the officer of the company. He is not expected to work like the other officers of the company nor he is an employee of the company.

The cost auditor is required to play a role of an independent professional person. He is required to examine and verify the correctness of the cost accounts books and other costing records and without coming under influence of any person in the management of the company he is required to present his findings, observations, deficiencies in the operations of the company and errors and frauds found out by him honestly in the cost audit report prepared and submitted by him.

Responsibilities of Cost Auditor

In the past, cost auditors were held responsible for negligence in their duties only to the appointing authorities i.e. the Central Government or the company which appointed them. With the change in time the responsibilities of the cost auditors have increased and they are held liable to the third parties also. The responsibilities of a cost auditor can be stated as under:

  • Responsibility for negligence: If a cost auditor does his work of cost audit without taking due care or if he fails to do his assigned work by using the expected level of skill or standard expected from a professional person, it is regarded as negligence on the part of the cost auditor. Due to the negligence shown by the cost auditor while performing the cost audit, he becomes responsible to pay compensation for damages suffered by the appointing company or by any other third parties.

  • Responsibility for misfeasance: The term ‘misfeasance’ means breach of duty and the cost auditor becomes liable for equivalent damages suffered by the company or third party. (section 543).

  • Responsibilities under Indian Penal Code: Under Indian Penal Code a cost auditor is held liable for frauds, furnishing of false information, giving of false evidence, etc. and the sections of the Indian Penal Code provide following penalties to the cost auditor.

    • Section 177 prescribes simple imprisonment upto six months and fine upto Rs. 1000 for furnishing false information.
    • Section 188 and Section 199 state that a false statement on oath and a false declaration attracts criminal liability under these sections and provide imprisonment upto seven years and fine.
    • Section 193 provides imprisonment upto seven years and also fine for giving false evidence in judicial proceedings.
    • According to Section 197 for signing any certificate or document knowing it to be false imprisonment upto seven years and fine is the punishment prescribed.

  • Responsibility under the Cost and Works Act, 1959: Under the provisions of the CWAct, 1959, the council of the Institute of Cost and Works Accountants of India can take action for professional misconduct of a cost a auditor.

    Certain activities and acts on the part of the cost auditor are mentioned under the Act as professional misconduct and when a cost auditor committs such professional misconduct, the council forwards the case to the committee as per the rule and the disciplinary committee conducts the enquiry against the cost auditor.

    If found guilty, the council can remove the name of the cost accountant from the Register of Members for a period upto five years. If the Council feels that the removal of name should be for more than five years or permanently, it shall forward the case to the High Court and the High Court after due hearing shall decide the punishment to be given to the guilty cost accountant.

  • Responsibility under the Companies Act, 1956: Under section 227 and Section 229, a Cost auditor is held responsible for signing a false report or any other document and if he is proved guilty, he shall be punishable with fine. which may extent to rupees one thousand. (civil liability).

    Falsification of books (Section 539): If with the intent to defraud or deceive any person, cost auditor of a company destroys, alters, falsifies any books, papers or other documents he shall be punishable with imprisonment for a term which may extend to seven years and also with fine. (Criminal liability).

    Criminal liability under Section 628: If any return, report, certificate, balane sheet, statement or any other document required under the Companies Act contains a false statement and knowing that it is false, a cost auditor signs it as true, he shall be punishable with imprisonment for a term which may extend to two years and shall also be liable for fine.

    A cost accountant has a moral responsibility towards the third party and is also responsible to compensate for damages suffered by the third party due to any fraud or a false statement made by the cost auditor.

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