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Objectives of Cost Audit

 To verify the Arithmetical Accuracy of cost books.


 To keep Accounts as per costing principles.
 To follow pre-determined norms and concepts of Cost Accounting.
 To provide all data relating to cost records to the management for
decision-making.
 To detect errors and frauds.
 To make internal control more effective.

Objectives from the viewpoint of Government

 Is any specific industry needs special attention.


 Is protection be given to specific industry.
 How is the management of the industry?
 Is the closure of industry beneficial to the management?
 Is that industry suitable to the public or not.
 To recommend a reasonable selling price to the consumers.

Definition of Cost Audit

The term Cost Audit means the examination of books of account and
vouchers to ascertain their accuracy. The exact calculation of the cost of a
product is called Cost Audit.

Meaning

‘Audit‘ may be described as a systematic examination of the books, vouchers


and records of a business to enable the auditor to satisfy himself and to report
whether the accounts thereof are properly drawn up so as to exhibit a true and
fair view of the state of affairs of the business.

Initially, the scope of the audit was limited to the verification of the
transactions of financial nature but in recent times, it has been extended to
other fields also Cost audit its one of them. Cost audit is concerned with the
verification of the correctness of the cost records or cost accounts maintained
in a business concern.

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The Institute of Cost & Works Accountants of India defines ‘cost audit‘as “an
audit of efficiency of minute details of expenditure while work is in progress
and not a post-mortem examination. Financial audit is a ‘fait accompli’. Cost
Audit is mainly a preventive measure, a guide for management policy and
decision, in addition to being a barometer of performance”.

The Institute of Cost and Management U K has defined ‘Cost Audits’ as “the
verification of the correctness of cost accounts and a check on the adherence
to the cost accounting plan”.

According to Smith and Day, “By the term, ‘Cost-Audit’ is meant the
detailed checking of the costing system, techniques and accounts to verify
their correctness and to ensure adherence to the objective of cost accounting”.

In the words of R W Dobson, “Cost Audit is the verification of the correctness


of cost accounts and of the adherence to the cost accountancy plans”.

On the basis of the analysis of the above definitions, it can be said that cost
audit is the detailed checking as well as the verification of the correctness of
costing techniques, systems and cost accounts. In any manufacturing concern
or in a service organization, it is generally felt necessary to compute the
correct cost of or services so as to charge the customers correctly.

For this purpose, cost accounts or costing records are maintained. But, only
the maintenance of cost accounts is not sufficient. In order to ascertain the true
and accurate cost of products and services, it is necessary to ensure that these
records are accurate and correct. As such, there is a need to get the costing
records properly audited and checked by a properly qualified and trained
professional.

Types of Cost Audit:

The main types of Cost audit are the following:


(i) Cost Audit as an Aid to Management:
The aim is to see that all information placed before management is relevant,
reliable and prompt so that management can discharge its duties well. It must
also be seen that no relevant or pertinent information is suppressed.
(ii) Cost Audit on Behalf of a Customer:

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Often contracts are placed on “Cost Plus” basis. In other words, the customer

will determine the final price to be paid on the basis of exact cost plus an

agreed margin of profit. The customer, in such a case, usually gets cost

accounts of the product concerned audited to establish correct cost and,

therefore, price.

(iii) Cost Audit on Behalf of Government:

Sometimes the Government is approached with request for financial help or

protection. Before taking a decision on the request, the Government may

choose to get cost accounts of the applicant audited to establish whether the

need for help is genuine or is a result of mere inefficiency.

(iv) Cost Audit under Statute:

The Amendment Act of 1965 has inserted a new section, 233B, in the

Companies Act, 1956 whereby the Central Government may order that certain

classes of companies will get their cost accounts audited by a member of the

Institute of Cost and Works Accounts of India. Only such companies as are

required to maintain proper records regarding materials consumed, labor and

other expenses under Section 209 (as amended to date) and may be required to

get their cost accounts audited.

The powers and duties and manner of appointment of the cost auditor are the

same as that of external financial auditor and the same disqualifications will

apply. The cost auditor will submit his report to the Company Law Board with

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a copy to the company. The right to investigate all aspects of cost accounts is

presumably granted to the cost auditor.

The aim of cost audit under statute seems to be that the Government wishes to

know, as an instrument of control, the costs of various goods. Government has

the power to prescribe the forms in which cost audit reports are to be made

out. These are designed not only to verify information, but also to convey

good deal of information to Government.

(v) Cost Audit on Behalf of the Trade Association:


Sometimes trade associations seek to maintain prices at a certain level. For
this purpose, the accuracy of costing information submitted by various
concerns has to be checked. The trade associations may seek to have full
information about production capacity and the relative efficiency of
productive processes.

Merits of Cost Audit

The chief merits of cost audit are as under:

 The Cost Audit checks the misuse of Raw Materials and Labour.
 The Cost Audit is useful in checking inefficiencies.
 The Cost Audit is very useful in highlighting irregularities and frauds.
 It is useful for checking inefficiencies and uneconomic activities.
 The Cost Audit provides all information for immediate action.
 This will facilitate Budgetary and standard cost technique.
 It is very useful in the valuation of inventory and work-in-progress.
 It is useful for cordial relation between employees and top
management.
 It recommends a reasonable price to the consumers.
It highlights the good as well as the week points of organization. Thus
corrective action is suggested.

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Scope of cost audit

Types of cost audit: The following are the important types of Cost Audit:
 Efficiency Audit.
 Propriety Audit.
 Statutory Audit.

1. Efficiency Audit: Efficiency Audit is directed towards the measurement of


whether corporate plans have been effectively executed. It is concerned with
the utilization of resources in an economic and most remunerative manner to
achieve the objectives of the concern.

2. Propriety Audit: The propriety Audit is concerned with executive actions


and plans on the finance and expenditure of the company. The auditor has to
judge whether the planned expenditure is designed to give optimum results.

3. Statutory Audit: It is the compulsory audit which required maintaining the

related books and accounts of specified establishments. The chief aim of these

types of audit is that the government wants to ascertain the relationship

between costs and prices.

Qualifications of Cost Audit

The Cost Auditor can be appointed from the following persons.

 Any person who is According to Cost and Works Accountant Act is a


Cost Accountant.
 Any person who is a Charted Accountants according to Charted
Accountant Act and is a practicing Charted Accountant.
 He should be a member of Institute of Chartered Accountant.
 He should be a fellow of 10 years standing.
 He should be practicing while appointed as Cost Accountant.

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Disqualifications

The main disqualifications are as under.

 A person cannot be appointed as Cost Auditor who According to


company Act 1956 U/S 226 is not competent to be appointed as Cost
Auditor.

Any person who is appointed as Auditor of a company cannot be
appointed as Cost Auditor of the same company.

Any person who becomes incompetent after his appointment as Cost
Auditor he should stop working as cost Auditor since that date.

Difference between cost audit and financial audit

Cost Audit Financial Audit

Where to use: Where Cost Accounting techniques are


Where Financial Accounts are prepared.
used such as Manufacturing organizations there cost Audit
It is applied there.
is needed.

Object: The object of cost audit is to see how to reduce The object of financial audit is to see
cost of output. that books of account are accurate.

Variation of What: In cost Audit, total cost and per unit The Financial Audit lays stress that
cost of output is shown or varified. Financial Position is shown true and fair.

Related to: It is only related to per unit cost of Financial Audit is related to total income
output. and expenditure.

Laws: The Cost Audit is related to test working efficiency Financial Audit is to see whether laws
of the organisation. and formalities are carried on or not.

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Who does it: This Audit can be done by external parties
The Financial Audit is done by owners
such as Government, customer Trade Associations,
of the organisation.
Tribunals etc.

It is the duty of Financial Auditor to see


Valuation of closing stock: Here Cost Audit sees that the
whether the proper valuation of the stock
stock is not more than the required quantum.
is done or not.

Report: Here the report is submitted to the In this, Audit report is submitted to
Government/Owner/Company Law Board. shareholders.

The Financial Audit is confined to the


Scope: The Cost Audit is confined to Factory/Works.
office.

Interest: This Audit protects the interest of Government


It protects the interest of shareholders.
and Producers.

Period: Its report not confined to any specific period but It is generally after one year or related to
related to objectives. some special time.

Appointment: The Cost Audit is appointed with the prior


The Financial Auditor is appointed in
permission of the Central Government or by the Board of
General meeting of the company.
Directors.

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