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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
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.
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”.
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.
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
therefore, price.
choose to get cost accounts of the applicant audited to establish whether the
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
other expenses under Section 209 (as amended to date) and may be required to
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
The aim of cost audit under statute seems to be that the Government wishes to
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
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.
Types of cost audit: The following are the important types of Cost Audit:
Efficiency Audit.
Propriety Audit.
Statutory Audit.
related books and accounts of specified establishments. The chief aim of these
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.
Report: Here the report is submitted to the In this, Audit report is submitted to
Government/Owner/Company Law Board. shareholders.
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.