Page 149 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes
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Caution Whether the audit is internal or periodic, it aims at providing suggestions
regarding improvements in effective cost account plan and reduces the additional cost
audit work.

(b) Specific Cost Audit: The specific cost audit is arranged by customers, business
enterprises, government or special undertakings for some specific objectives. The
objectives of specific cost audit can be divided into following categories:
Cost Audit on behalf of Government: The government may appoint a cost auditor to
conduct cost audit where it is necessary:

 To do so in the opinion of the government under section 233B of the Companies
Act, 1956,
 To ascertain correct cost of specific units when government is approached for
protection or related help,
 To ascertain correct cost of contract given to private enterprise under ‘cost
plus’ method, and
 To fix reasonable prices of products.
Cost Audit on behalf of a Customer: Sometimes, cost audit may be conducted on behalf
of a customer when he agrees to pay price for a product on “cost plus” method. The
customer in such a case gets cost accounts of the product concerned audited to establish
correct cost so that he may be able to pay price on the basis of correct cost plus an
agreed margin of profit.
Cost Audit on behalf of Trade Association: Sometimes, a trade association may appoint
a cost auditor to conduct cost audit:
 To ascertain comparative profitability of association of members,
 To determine minimum price to avoid competition among its members, and

 To maintain prices at various levels.
Cost Audit on behalf of Tribunals: Sometimes, Labour Tribunals may direct the audit of
cost accounts to settle trade disputes for more wages, bonuses, share in profit, etc.
Similarly, Income-Tax Tribunals may also direct the audit of cost accounts to assess
correct profit for tax purposes.

(c) Statutory Cost Audit: Statutory cost audit means that audit which is arranged to fulfil
the provisions of a certain statute. It may be both financial audit and cost audit. Such
audit of the accounts of the government departments and statutory bodies is conducted
by the representative of the CAG of India.
(ii) On the basis of Nature: On the basis of nature, the cost audit is divided into following
categories:
(a) Propriety Audit: This audit is the audit of such actions and plans of management
which have a bearing on the finance and expenses of the company or enterprise. The
cost auditor has to examine the following activities:

 Whether the size and channels of expenses were designed to produce the best
results,
 Whether the return from expenses on capital as well as current operations
could not be bettered by some other alternative plan of action, and

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