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.”
Smith and Day in their book ‘Advanced Cost Accountancy’ define it, “the term ‘Cost Audit’ is meant the detailed checking of the costing system, technique and accounts to verify their correctness and to ensure adherence to the objective of cost accountancy.”
R.W. Dobson Smith and Day, in their book Introduction to Cost Accountancy,’ defines it, “Cost audit is the verification of the correctness of cost accounts and the adherence to the cost accountancy plan.”
C ost 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.
The following are some of the objectives for which cost audit is undertaken:
1. To establish the accuracy of costing data. This is done by verifying the arithmetical accuracy 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 strictly adhered to in preparing cost accounts.
3. To ensure that cost accounts are correct and also to detect errors, frauds, and wrong practice in the existing system.
4. To check up the general working of the cost department of the organization and to make suggestions for improvement.
5. To help the management in taking correct decisions on certain important matters
6. to determine the actual cost of production when the goods are ready.
7. To reduce the amount of detailed checking by the external auditor, its effective internal cost audit system is in operation.
8. To find out whether each item of expenditure involved in the relevant components of the goods manufactured or produced has been properly incurred or not.