BBA Notes - IIMT college of Management #types of auditing

1. 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.

2. 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 Is one of them. Cost audit is concerned
with the vilification of the correctness of the cost
records or cost accounts maintained in a business
concern.

3. • 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”.
• 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”.

4. CONCLUSIN
• 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 organisation, it is
generally felt necessary to compute the correct cost of
or services so as to charge the customers correctly.
• Cost Audit is an audit of the efficiency of minute details
of expenditure while the work is in progress and not a
post-mortem examination. The cost auditor can be
appointed by the Board of Directors by taking prior
permission of Central Government. The Cost Auditor
enjoys all such rights as of Financial Auditor. The Cost
Audit is useful for decision making, price
determination, internal control and internal efficiency.

5. Objectives
(i) To verify the Arithmetical Accuracy of cost books.
(ii) To keep Accounts as per costing principles.
(iii) To follow pre-determined norms and concepts of Cost
Accounting.
(iv) To provide all data relating to cost records to the
management for decision-making.
(v) To detect errors and frauds.
(vi) To make internal control more effective.

6. (vii) Verification of the adequacy of the books of
accounts and the accounting system.
(viii) Correct valuation of work-in-progress.
(ix) Verification of the total cost of each product,
process, operation, and job.
(x) Verification of inter-company transactions and the
reasonableness of the price charged for inter-
company transfers.
(xi) Advising the management for the adoption of
alternative courses of action by preparing the cost
plans.

7. Merits Of Cost Audit
(i) The Cost Audit checks the misuse of Raw Materials and Labour.
(ii) The Cost Audit is useful in checking inefficiencies.
(iii) The Cost Audit is very useful in highlighting irregularities and
frauds.
(iv) It is useful for checking inefficiencies and uneconomic activities.
(v) The Cost Audit provides all information for immediate action.
(vi) This will facilitate Budgetary and standard cost technique.
(vii) It is very useful in the valuation of inventory and work-in-
progress.
(viii) It is useful for cordial relation between employees and top
management.
(ix) It recommends a reasonable price to the consumers.
(x) It highlights the good as well as the week points of organisation.
Thus corrective action is suggested.

8. Qualifications Of Cost Audit
• The Cost Auditor can be appointed from the following
persons.
(i) Any person who is According to Cost and Works
Accountant Act is a Cost Accountant.
(ii) Any person who is a Charted Accountants according
to Charted Accountant Act and is a practicing Charted
Accountant.
(iii) He should be a member of Institute of Chartered
Accountant
(iv) He should be a fellow of 10 years standing.
(v) He should be practicing while appointed as Cost
Accountant.

9. Disqualifications
• The main disqualifications are as under.
(i) 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.
(ii) Any person who is appointed as Auditor of a
company cannot be appointed as Cost Auditor of the
same company.
(iii) Any person who becomes incompetent after his
appointment as Cost Auditor he should stop working
as cost Auditor since that date.

12. SCOPE OF COST AUDIT
• The cost audit extents to the verification and
checking of the following areas:
1. Services :Utilization of power, fuel, water, steam
and electricity and that of material, labour and
other costs like overheads allocated to the service
department.
2. Wages and Salaries : Maintenance of employment
and attendance records, overtime and idle time
records, allocation of wages and salaries among
various departments and those connected with the
capital work.

13. 3. Overhead : The overheads like production,
administration, selling and distribution should be
allocated on a reasonable basis. The cost auditor
ensures a fair and equitable distribution of
overheads between various departments,
reconciliation of the cost records with that of
financial records, overhead recovery rates, and
basis for allocation of cost between fixed and
variable.
4. Depreciation : Maintenance of fixed assets
registers with quantitative details, situation,
method of calculating depreciation, allocation of
depreciation in respect of the common assets.

14. 5. Production : Daily production reports, summaries
from daily to monthly, monthly to yearly and
comparison with past records and budgeted targets
including abnormal losses, work in-progress, etc.
6. Work-in-Progress : Maintenance of records viz., job
cards, work order, cost ledger, etc. and their
valuation method.
7. Stock Verification :Inventory records for stock –
both finished and unfinished products, spares and
stores, tools, machinery spares, etc, their values,
issue procedure and balances.

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