A cost audit represents the verification of cost accounts and checking on the adherence to cost accounting plan. Cost audit ascertains the accuracy of cost accounting records to ensure that they are in conformity with cost accounting principles, plans, procedures and objectives. A cost audit comprises the following;
Verification of the cost accounting records such as the accuracy of the cost accounts, cost reports, cost statements, cost data and costing technique Examination of these records to ensure that they adhere to the cost accounting principles, plans, procedures and objective To report to the government on optimum utilisation of national resources
Objectives of cost audit
Prospective objective: Under which cost audit aims to identify the undue wastage or losses and ensure that costing system determines the correct and realistic cost of production. Constructive objectives: Cost audit provides useful information to the management regarding regulating production, economical method of operation, reducing cost of operation and reformulating cost accounting plans. Other objectives: The basic objective of cost audit is to ensure that the cost of production as well as cost of sales includes only those factors which are absolutely necessary and that those factors are used in the most efficient way. To verify that cost accounts/records are accurate. To detect all errors or frauds in cost records. To introduce some sort of internal audit with a focus on costs to reduce the work of financial auditor. Cost system must be different for different objectives and the cost auditor designs a system which works best and quickest. To see that the organisation maintains proper cost books, accounts and records either required by law or otherwise as a managerial decision. To verify that the basic principles of cost accountancy or related rules framed thereto to implement certain statutory provisions are properly carried out in maintaining cost accounts in the right manner. To report on the optimum utilisation of national resources, to the government.
Types of cost audit
Cost audit on behalf of management
Cost audit on behalf of a customer
Cost audit on behalf of government
Cost audit by trade association
Statutory cost audit
Circumstantial cost audit
Retention price fixation
Cost variation within the industry
Inefficient management
Tax assessment
Trade bargains and dispute
Cost audit under statute
Qualification
Basic qualification for a cost auditor is the prescribed examinations and practices by the professional nd regulatory body for cost and management accountancy of the country. In case a person is the member of other professional bodies, exemption should be allowed to him/her under the mutual recognition agreements (MRAs) to become a cost auditor.
Cost audit procedures
Cost audit comprises the following three steps: Review Verification Reporting
Format of cost audit report
I/We,........................................... having been appointed as Cost Auditor(s) under Section ........ Companies Act of .........................................................(mention name of the company) having its registered office at .................................................... (mention registered office address of the company) (hereinafter referred to as the company), have audited the books of account prescribed under the said Act, and other relevant records in respect of the .................................... (mentions name/s of product group/s) for the period/year.............................(mention the financial year) maintained by the company and report, in addition to my/our observations and suggestions in para 2.