Cost audit

Cost audit may be defined as “the verification of cost records and accounts and a check on the adherence to the prescribed cost accounting procedures and the continuing relevance of such procedures.”Cost audit is the verification of the correctness of cost accounts and a check on the adherence to the cost accounting plan.

This is, it involves not only the examination of cost accounts but also the fact that the plan prepared in this connection has been duly executed. Cost audit as an audit of the efficiency of minute details of expenditure in which the work is in progress and not a post-mortem examination.

The first function of cost audit is the verification of cost accounting records according to the cost accounting system, and the second function is the checking on the adherence to the cost accounting plan.

A cost audit, therefore, includes verification of correctness of the cost accounts, cost statements, cost reports, cost data, and costing techniques applied and finally checking these data to see that they adhere to cost accounting principles, plans, procedures, and objectives.

Objects of Cost Audit

The main objects of cost audit are:

(i) To verify that the cost accounting records (or costing books) are accurate.

(ii) To certify that costing principles have been fully adhered to in maintaining cost accounts.

(iii) To find out whether the predetermined cost accounting procedures and processes have been strictly followed by the management.

(iv) To detect errors and frauds, which might have been committed intentionally or otherwise in preparing cost accounts.

3. Verification of cost accounts and other relevant data.

4. Comparison of the actual cost for the year with the cost pertaining to previous two years.

8. It helps in price fixation of goods and services of national importance.

Types of cost audit

  • Cost audit on behalf of management
  • Cost audit on behalf of a customer
  • Cost audit on behalf of government
  • Cost audit by trade association
  • Statutory cost audit
  • Circumstantial cost audit
  • Retention price fixation
  • Cost variation within the industry
  • Inefficient management
  • Tax assessment
  • Trade bargains and dispute