COST AUDIT |DEFINITION OBJECTIVES, ADVANTAGES & DISADVANTAGES

Cost Audit; It is an audit process for verifying the cost of manufacture or production of any object, on the basis of accounts as regards consumption of material or labour or other items of costs, maintained by the company. It stands for the verification of cost accounts and checks on the adherence to cost accounting plan. Cost Audit ascertains the accuracy of cost accounting records to ensure that they are in conformity with Cost Accounting principles, plans, procedures, and objective. We can say that the term cost audit means a systematic and accurate verification of the cost accounts and records and checking of observance to the objectives of the cost accounting.

DEFINITIONS OF COST AUDIT

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

The ICWAI defines cost audit as “system of audit introduced by the government of India for the review, examination, and appraisal of the cost accounting records and attendant information required to be maintained by specified industries”

From the above-cited definition of cost audit, it is clear that it is a systematic examination of cost accounts to verify the correctness of cost accounting records.

As per the Section 233 B of Company Law 1956, there is the provision for cost audit. Under this section, it is compulsory for all the public and govt. companies which are associated with the processing and production. If their aggregate value of net worth exceeds 5 crores or total sale exceeds 20 crores, the cost audit is must.

OBJECTIVES OF COST AUDIT

The following are some of the objectives for which cost audit is under taken:

  1. To establish the correctness of costing data. This is done by verifying the arithmetical correctness of cost accounting entries in the books of accounts.
  2. To ensure that cost accounting principles are governed by the management objectives and these are exactingly adhered in preparing cost accounts.
  3. To ensure that cost accounts are accurate and also to detect errors, frauds and wrong practice in the existing system.
  4. To check up the general working of the costing department of the organization and to make suggestions for improvement.
  5. To help the management in taking the right decisions on certain important matters i.e. to determine the actual cost of production when the goods are ready.
  6. To diminish the amount of detailed checking by the external auditor if effective internal cost audit system is in operation.

ADVANTAGES OF COST AUDIT

To The Management

  1. Cost audit helps in the detection of errors and frauds.
  2. The management gets correct and reliable data based on which they can make day-to-day decisions like price fixation.
  3. It helps in cost control and cost reduction.
  4. It assists the system of standard costing and budgetary control.
  5. It helps the management in inter-unit / firm comparison.
  6. It enables the management to identify loss making propositions.

To The Government

  1. Cost audit ensures well-organized functioning of the industry. This, in turn, nurtures a healthy competition among the different companies and paves a path for fast progress.
  2. It helps in the identification of sick units and enables the Government to make significant decisions.
  3. It helps in fixing prices in the case of essential commodities and checking undue profiteering.
  4. It enables to take decisions as to granting of subsidies, incentives and safeguard to various industries.
  5. It helps to take decisions as to levies, duties, and taxes.

To the Society

  1. Cost audit enables the Government to fix prices of essential commodities. This protects the interests of society.
  2. Cost audit enables the Government to keep a check on undue profiteering by the manufacturers and avoids non-natural price rise due to monopolistic tendencies.

To the Shareholders

  1. Cost audit reveals whether any of the products of the company are making losses. Thus though the company making an overall profit a loss making line may eat up the company’s profits. This is brought to the notice of the shareholders and the management is forced to take remedial measures, thereby making optimum utilization of resources.
  2. Cost audit ensures that the shareholders get a reasonable return on their investments.

DISADVANTAGES OF COST AUDIT

  1. Holding a Cost Audit can be costly. This is because a company will often bring in an independent auditor who is normally charging a higher price.
  2. A Cost Audit can be a long process which will likely involve more time. This extra time and effort can impact an employee’s day to day routine work.
  3. If a Cost Audit is carried out in order to find fraudulent activity it can take a long time by which time people pinching could have covered their tracks.
  4. Cost Audits involve a large amount of estimation and so there is the possibility that figures will be incorrect and if record keeping from the company is not good to start with then inaccuracies will be arises.