COST AUDIT

Audit
The word audit means the examination of the books of accounts and
document with a view to verify the accuracy and the correctness of the data shown
in the financial statements. It may be a statutory audit or a non statutory audit.

Cost Audit
Cost audit is the audit of cost accounts. It is the specific application of
auditing principles and procedures in the field of cost accounting.

CIMA London- “the verification of the cost accounts and adherence to the cost
accounting principles, plans and procedures’.

As per the above definition, two main functions of cost audit are;

1. to verify that cost accounts have been correctly maintained and compiled
according to the cost accounting system employed by the company and,

2. To check its adherence to the cost accounting plan i.e., the prescribed
procedures of cost accounting are carried out.

Types of Cost Audit

Propriety Audit

This audit is checking of the executive actions in an organization. The

expenditures by the management might have the proper documentation in terms of
bills and vouchers. However, the auditor will check –

Whether the spending has given the optimum results

Size and the channel of spending was designed to produce the best results
There is no better plan of action

Example – Audit conducted by the Comptroller and Auditor General of India

(CAG) in government companies.
Efficiency Audit

This consists of the appraisal of performance to determine whether or not the

plan has been executed efficiently. It aims to ensure that –

1. Every rupee invested in the business gives the optimum results

2. The investment is so balanced between different investments that
provides the optimum results

Objectives of Cost Audit

General Objectives

1. Ensure adherence to prescribed procedures of cost accounting

2. To detect errors and frauds
3. check the accuracy of the inventory valuation
4. to verify the cost of each unit and center to ensure the accurate ascertainment
5. help the price fixation
6. to ensure periodical reconciliation with financial accounts
7. ensure optimum usage of resources
8. to inculcate the habit of cost consciousness
9. to advise management about under utilization and such other problems.

Social Objectives – in the interest of consumers, shareholders and society.

1. Help fix reasonable prices

2. Help increase the productivity by optimum usage of resources
3. To avoid evasion of tax by correct inventory valuation
4. Help identify the unproductive product lines and to divert the resources to
productive lines
5. To bring the inability and inefficiency of the management to the notice of the
shareholders.
Advantages of Cost Audit

To Management
1. Detection of errors and frauds
2. Improve the quality of the reports
3. Suggestions on the weaknesses in the systems and procedures
4. improve the effectiveness cost control
5. audited cost data helps in inter-firm comparison

To Shareholders
1. highlights the efficiency/inefficiency of the management in utilizing the
available resources
2. helps shareholders determine whether they are getting a fair return on their
investment

To Consumers
1. Consumers get the products at fair prices. This is because the cost audit
ascertains the true cost of the product on which the price of the product is
based

To Government
1. Helps fixing the prices and avoids profiteering
2. Helps in quick settlement of bills in case of cost plus contracts by ensuring the
accuracy
3. Audited cost data is taken as more reliable in case of most of the public
companies
4. Contributes to the betterment of the economy by revealing the inefficient and
unproductive areas of the industry.
Distinction between Cost Audit and Financial Audit
Point of Distinction
1. Statutory Requirements
2. Objective
3. Scope
4. Nature of audit
5. Time limit
6. Qualification of auditors
7. Appointment of Auditors
8. Submission of Audit
Report
Financial Audit Cost Audit
Compulsory for all JSCs Compulsory in certain
specified companies only
Detection and prevention Emphasizes on propriety
of errors and frauds and and efficiency of
ensure correctness of performance
accounts
Covers the operations of Emphasizes on operations
the entire organization relating to the product
Financial Audit is not Cost audit is
complementary complementary to financial
audit
No time limit prescribed Cost books must be
for Financial Audit completed within 90 days
and report be completed in
180 days from the close of
the financial year
CA ICWA
Appointed by an ordinary Appointed by the BoDs
resolution with the approval of
Company Law Board and
GOI.
Submitted shareholders Submits the report to
and discussed in Annual Company law Board with a
General meeting copy to the company