Disadvantages of Cost Audit
Cost audits verify expense records and accounts. The audit also ensures that accounts and bookkeepers comply with ethical practices.
Effective cost audits provide a complete breakdown of expense that gives a company financial clarity about accounts. Although they provide such transparency, “there are many disadvantages to conducting cost audits.
One primary disadvantage associated with cost audits is the excessive fees. Auditors are typically independent contractors who can charge relatively high prices for services rendered.
In addition to initial charges, auditors may increase fees in the middle of the project if companies fail to prohibit such action in the contract. A person or corporation can essentially go from paying $4,000 to $6,000 for an audit.
Cost audits are also lengthy processes that require employee devotion.
Although the auditor may be an outside contractor, employees must provide requested information and be accessible in case further explanation of documents is necessary.
Although thorough, an auditor’s report is usually given three to five weeks after the balance sheet is released. This means people who have been stealing from an establishment have nearly a month to form an excuse or leave the company.
Because a major part of the process involves estimating, there’s the possibility of numerical figures being wrong.
Besides, if receipts and other forms of record-keeping are skewed, an auditor relying on such documents may produce an inaccurate report.
The following are the circumstances under which cost audit is ordered:
1. Price Fixation.
2. Cost variation within the industry.
3. Inefficient Management.
4. Tax Assessment.
5. Trade Disputes.