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Unit 12: Cost Audit

completed or not. It evaluates the actual performances and compares them with the Notes
pre-determined targets. It concentrates on results and not on the files. It can be particularly
useful in many situations like the following:
1. A progressive management may conduct management audit periodically to assess the
performances of various managers- and link a system of incentives with such an assessment.
This appraisal may be conducted on the basis of objective and predetermined standards.
2. Such an audit is highly oriented. It does not question whether the procedures have been
followed or not. It concerns itself primarily with the results and with the ratios of inputs
and outputs.
It measures in quantitative terms, the various inputs that a manager uses in terms of
man-hours, wages, materials, overheads, or capital resources. The outputs are measured
in terms of quantity, return or performance targets. The performances are evaluated by
relating inputs with outputs.
3. In many circumstances an outside agency may be interested in getting a management
audit conducted. Thus the government may order a management with a view to examine
the efficiency of the management of a particular industrial unit.
4. Similarly, a bank or a financial institution may like to get a management audit conducted
before advancing loans or before agreeing to participate in the equity capital of an
undertaking.

5. Foreign collaborators may also like to get management audit conducted periodically.
This would help them in assessing the management potential of their associates.
6. In case of government organizations also, there is an urgent need to review the methods
of audit.

Notes Management audit evaluates the actual performances and compares them with the
pre-determined targets.

The present system of audit may be replaced by a suitable form of management audit so that the
basic outlook of government officials is changed and they become result-oriented rather than
procedure-bound. Management audit, if properly undertaken, can be an excellent tool of
management control in many situations. Whether performing a compliance or a management
audit, auditors must obey four basic rules. First, audits must provide information for a defined
need, that is, the customer’s need. Second, auditors must be capable of performing their duties.
Third, audits must measure performance against agreed criteria. Fourth, audit conclusions must
be based on fact.

Rule 1: Serve your Customers

Audits provide information: All affected parties need to know if product, process and system
controls are present and being applied, and obviously it doesn’t hurt to know whether these
controls actually work. An auditor evaluates the controls against requirements and produces a
report. If controls are present and working, all parties’ confidence in the process is increased. If
controls are missing or not working, then resources can be applied to fix the problems.
Auditors serve three customers: The auditee, the client and the organization. Auditees’ primary
goal may be to simply pass the audit, but auditees trying to derive the most benefit from the
audit will also want to know whether the organization is functioning effectively. In this case, an

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