What is Cost Audit? Discuss Cost Audit Forms and Objectives.
Meaning of Cost Audit:
Cost Audit is the specific application of auditing principles and procedures in the field of cost accounting. It has been defined by London as “The verification of cost accounts and a check on the adherence to the cost accounting plan.” An analysis of the definition shows that cost audit performs three basic functions:
- Verify that the cost accounts have been properly maintained and complied.
- To check their adherence to the cost accounting plan.
- To detect errors and to prevent frauds and possible misappropriations.
Types of Cost Audit:
The two forms of cost audits are Propriety Audit and Efficiency Audit.
Propriety Audit: From the protective point of view, cost audit helps in detecting the errors, verifying that the cost accounts are maintained correctly in accordance with the generally accepted Cost Accounting Principles and ensuring that the prescribed system of cost accounting is properly carried out.
Efficiency Audit: From the constructive point of view, cost audit examines the effectiveness of existing procedures in respect of managerial decisions, possibility of drawing optimum results through the projected expenditure, opportunities of more profitable investment of money and the rate of return on capital employed.
Objectives of Cost Audit:
- To verify that the cost accountancy records made in the books of account are accurate.
- To certify that the principles of cost accountancy records have been fully applied in maintaining cost accounts properly.
- To find out that the management is adhering to the procedures and processes of cost accountancy which are pdetermined.
- To ensure that the cost accounts are correct to detect all errors and frauds.
- To see how far the prevailing practices of cost records are helpful for the management to take the decisions.
- To pinpoint the deficiencies or inefficiency in use of material, labour and machines and assist the management.
- To reduce the volume of work of the external auditor, if the internal cost system is in vogue.
- To exercise moral check on the cost accounting staff and attain efficiency in cost accounting system and procedures.