Page 253 - DCOM509_ADVANCED_AUDITING

Advanced Auditing

Notes 13.2 Concept of Cost Audit

According to the Institute of Cost and Management Accountants of England, cost audit represents
the verification of cost accounts and a check on the adherence to cost accounting plan. Cost audit,
therefore, comprises:
(a) Verification of the cost accounting records such as the accuracy of the cost accounts, cost
reports, cost statements, cost data and costing techniques, and
(b) Examination of these records to ensure that they adhere to the cost accounting principles,
plans, procedures and objectives.
It, therefore, means that the cost auditors attention and approach should be to see that the cost
accounting plan is in consonance with the objectives set by the organization and the system of
accounting is geared towards the attainment of the objectives. A cost accounting system designed
to exercise control over cost may be different from the one if the objective is to fix price. The cost
auditor should examine whether the methods laid down for ascertaining expenses as direct or
indirect are cases in point. The cost auditor should also establish the correctness or otherwise of
the figures by the processes of vouching verification, reconciliation etc.
The origin of the concept of cost audit could be traced to the Second World War period when the
practice of assigning cost plus contracts started. However, probably India is the only country in
the “free” world where cost audit is statutorily prescribed. The management will be in a position
to know what price is to be fixed for a product, whether the wastages are avoidable, whether to
re--organize purchase or sales or inventory systems to make the work more efficient and so on.
Existence of such a system of audit will also be of great use for maintaining internal control and
internal check and can be an advantageous even to the statutory financial auditor. Cost audit,
apart from having all the normal ingredients of audit namely vouching, verification etc. has
within its compass elements of efficiency audit.

Notes Cost audit can offer valuable assistance to the management in its decision making
process since it ensures reliable cost accounting data and information.

13.2.1 Types of Cost Audit

Cost audit is basically carried out at the instance of the management for obvious advantages.
Apart from this, different other circumstances also sometimes occasion audit of cost accounts.
The different types of cost audit that we come across may be the following:
Cost Audit on behalf of the Management: The principal object of this audit is to see that the cost
data placed before the management are verified and reliable and they are prepared in such
detail as will serve the purpose of the management in taking appropriate decisions. The detailed
objectives include:

(a) Establishing the accuracy of the costing data, as for example, cost of material used, allocation
of wages into direct and indirect and on different products, functions and cost centres.
(b) Ensuring that the objectives of cost accounting are being achieved through appropriate
collection, segregation, analysis and compilation of data.
(c) Ascertaining abnormal losses and gains along with the relevant causes, expressed in
financial terms in a manner that the person responsible for such loss or gain is identified.
(d) Determination of the unit cost of production in a precise but practicable manner.

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