Cost Audit

We already know that there are certain types of accounting – one of which is cost accounting. It is a specialized accounting system where we allocate the costs of various goods and processes of a company. So the audit of such accounting obviously also needs a specialized process and person. Let us learn more about the cost audit.

Browse more Topics under Types Of Audit

• Statutory Audit
• Internal Audit
• Advantages and Limitations of Internal Audit
• Propriety and Efficiency Audit
• Secretarial Audit
• Other Forms of Audit

Cost Audit

The Cost and Works Accountants of India (ICWA) actually defines a cost audit as a system that reviews and examines cost accounting records.

This means it examines the accuracy of the costing records and that all cost accounting principles were adhered to. It helps to determine whether the cost accounts reflect a true picture of the organizations financial status.

So cost accounting comprises of a lot of factors. Let us take a look at some of these,

• The first objective of a cost audit is to determine if the cost plan that is in place is effective and fulfills its purpose.  Say for example the objective of the cost accounting is to maximize the efficiency, then the figures collected will be different. But if the purpose is to fix prices, then the cost accounting plan will differ. A cost audit will help determine if the organization is on the right path.
• The treatment of the numbers and figures must also be audited. A cost audit has to ensure that treatment of special items like an abnormal loss, indirect expenses etc.
• There is also vouching for a process for the numbers and figures collected as well.

Learn more about Statutory Audit here in detail.

Advantages of a Cost Audit

Management needs data to make all the major decisions like price setting, manufacturing decisions etc. The process of cost accounting provides the management with this data. And cost audit ensures the accuracy of this process, so it is equally important. Let us take a look at some advantages of a cost audit.

• Cost audit ensures that the organization keeps a close check on any wastage in the company. This could be wastage of labor, materials, stores etc. When such wastage is discovered the company will be able to take steps to correct these.
• It also helps in pointing out any inefficiencies in the production process. Solving such inefficiencies will help the company save a lot of money.
• Also, a cost auditor closely examines various expenditures and compares them to standards. This will help him find any errors that the financial auditor may have missed.
• A cost audit actually helps the statutory auditor with his job as well. Audited costing data helps him determine the value of stocks, managerial remuneration, and other such aspects.
• Cost auditing also allows fixing individual responsibility. This will allow the management to effectively manage their staff.

Solved Question for You

Q: Is there any provisions for a statutory cost audit?

Ans: Section 148 of the Companies Act has provisions regarding cost audits of companies. And the provisions state that cost audit is applicable in the following two situation,

1. Table A of specified goods and services,
   • where turnover from the goods and services is more than 50 crores
   • Aggregate turnover from the individual product for which cost records are necessary  is 25 crores or more
2. Table B of specified goods and services
   • where turnover from the goods and services is more than 100 crores
   • Aggregate turnover from the individual product for which cost records are necessary  is 35 crores or more