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Unit 8: Cost Audit

Cost audit overcomes the limitations of financial and management audit. The cost audit is an Notes
important system in the auditing, because the cost audit is also a well-managed examination of
books and accounts by the learned auditors. Some authors have defined the coat audit as:
According to ICWA, London, “Cost audit is the verification of cost accounts and a check on the
adherence to the cost accounting plan.”

ICWA, India defines cost audit as, “An audit of efficiency of minute details of expenditure while
the work is in progress and not a post-mortem examination. Cost audit is mainly a preventive
measure, a guide for management policy and decision, in addition to being a barometer of
performance.”

In other words, the term cost audit means examination of books of accounts and vouchers so as
to ascertain their accuracy in the system.

8.1 Scope and Areas of Cost Audit

Cost audit is concerned mainly with propriety and efficiency audit. The company law is silent in
respect of scope and areas of cost audit. Some of the areas/scopes which may be examined by the
cost auditor are mentioned below:

(a) Raw Materials: The cost auditor must make the following tests about raw materials:
(i) Check the purchasing routine, the purchase order, stores indent, bills of payment
etc.,
(ii) Verify the various levels of stock, i.e., maximum level, minimum level and average
level,

(iii) Is the stock of raw material in conformity with the output activities? Exceeding the
quantity necessary for the output reduces the liquidity of funds naturally increases
the output costs,
(iv) Raw materials has been issued under signed acquisition cards by the authorised
persons,
(v) Check the routine of storage, bin cards, stores ledger, disposal, wastage and damagers,
(vi) The different items related with the receipt, issue and balance have been the subject
matter of adequate accounting in terms of quantity and price. The ledger of raw
materials should be verified from the hand-over slips or receipt vouchers,
(vii) Check the issue of raw materials, pricing of issues, etc.

(viii) Effecting in purchasing raw materials, whether materials are purchased at economic
buying quantity,

(ix) Reasonableness of losses, scraps, wastage, etc., arising out of manufacture,
(x) Adequacy of the procedure for posting stores ledger and bin card on a day-to-day
basis,

(xi) The auditor must also see whether there exists any loophole by the theft of the raw
material is possible, and
(xii) Reasonableness of the value of closing stock vis-à-vis opening stock and production
programme.

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