Archive for the 'Cost Audit' Category

Cost audit and its Objects

In simple words the term cost audit means a systematic and accurate verification of the cost accounts and records and checking of adherence to the objectives of the cost accounting.

As per ICWA London “cost audit is the verification of the correctness of cost accounts and of the adherence to the cost accounting plan.”

In cost audit auditor has to perform the following duties:

  1. Examine the correctness of the cost records maintained by the concern and
  2. To report as to whether the cost accounting plans have been adhered to or not.

Cost audit is done to keep the cost per unit to the minimum.

Object of cost audit (Following are the basic object of cost audit)

  1. To verify the correctness of the cost accounting records.
  2. To find out whether the principles of cost accountancy have been fully and correctly applied in maintaining cost records.
  3. To search for the deficiencies in the cost record system of the company.
  4. To attain efficiency in cost accounting systems and procedures.

Difference between Cost Audit and Financial Audit

The basic nature of audit is checking and it holds good for both the cost audit as well as the financial audit. However following are the points of difference between these two audits:

1. Compulsory nature – Financial audit is compulsory for all the companies registered under companies act, 1956.

Cost audit is not compulsory for all the companies. Only in the case of manufacturing or mining companies they have been specifically asked by the central government to maintain cost accounts under section 209 and get those accounts audited under section 233b.

2. Purpose – The purpose of the financial audit is to report on the profit and loss account and balance sheet as to whether they show true and fair view of the business or not.
The purpose of the cost audit is to certify that whether the expenditure incurred on the production of items has been incurred prudently or not.

3. Expression of opinion – The financial auditor has to comment upon the accuracy of the transactions recorded and the cost auditor has to comment upon the correctness and wise ness of the decisions taken in production of items.

4. Instance – Financial audit is conducted at the instance of the shareholders.

Cost audit is done at the requirement of third parties like government, industrial organizations etc.

5. Appointment – Financial audit is appointed normally by the shareholders in the general meeting whereas the board of directors with the previous approval of the central government appoints a cost auditor.

6. Recurrence – Financial audit is conducted every year whereas a cost audit may be done in the year in which it is required by the government or any other agency.

7. Stock – In financial audit auditor has to check the exact value of closing stock for the purpose of balance sheet, whereas in the cost audit the auditor has to check the adequacy of the stock keeping in view of the needs of the concern.

8. Report – In the financial audit the report is submitted to the management to be laid in the general meeting of the shareholders, the report of the cost auditor is submitted to the company and also to the central government within 180 days from the end of the company’s financial year to which the cost audit