Functional Responsibility of a Cost Auditor

After reading this article you will learn about the Functional Responsibility of a Cost Auditor.

The expression that an auditor is a watch-dog and not a bloodhound was made in the course of judgment in a leading case- The Kingston Cotton Mills Company Ltd.


A misfeasance action was taken by the liquidator against the auditor of the company to recover the amounts due for dividends which, it was alleged, were paid by the company out of inflated profit, arising from over-valuation of closing stock and non-allowance for depreciation in the value of Mill Site and Machinery.

It was alleged that the auditor was negligent in his duties as he relied upon the stock sheet prepared by the manager who for a number of years deliberately exaggerated the stock and thus over-valued the stock with a motive to get higher commission on the inflated profit. So, an action was brought against the auditor for the alleged negligence in verifying the correctness of the stock certificate.

It was held that the auditor, in the absence of suspicious circumstances, is not guilty of negligence on the ground that he relies upon the certificate made by a trusted official. ‘It is not the auditor’s duty to take stock’. He ‘does not guarantee the discovery of all fraud’. ‘An auditor is not bound to be a detective, to approach his work with suspicion or with a foregone conclusion that there is something wrong’.

He must ‘not be made liable for not tracking out ingenious and carefully laid schemes of fraud, when those frauds are undetected for years by the directors’ and cannot be held responsible for non-detection by the exercise of his reasonable care and skill.

Coming to the role of a cost auditor analogous to the role of a watch-dog, it can be stated that the duty on an auditor is to bark, when some irregularities are found by him while’ checking the books of cost accounts. So it appears that his duty is to warn the management about the possible danger.

The duty of a watch-dog is not to protect the assets of his master. His duty is to see whether his master is informed or warned about the possible danger. Similarly it is really very difficult on the part of the cost auditor to protect the interest of the company which may be lost due to weaknesses in the internal control system.


It is the duty of the company management to take remedial measures for the protection of the property, following the remarks of the cost auditor as to the accounting discrepancies and defects in internal control system. Coming to the role that the cost auditor is not a bloodhound, he would be ‘justified in believing tried servants of the company in whom confidence is placed by the company.

He is entitled to assume that they are honest, and to rely upon their representations, provided he takes reasonable care. If there is anything calculated to excite suspicion he should probe into the bottom, but in the absence of anything of that kind, he is only bound to be reasonably cautious and careful’.

He must be honest, sincere and methodical in his approach to detect errors and fraud. If after his completion of audit, a fraud is not discovered it does not necessarily mean that the cost auditor has been negligent or incompetent. He does not guarantee that no fraud exists.

The cost auditor is not expected to be unnecessarily spiteful towards people who may or may not be responsible for any act of manipulation or fraud. He is expected to conduct his cost audit work in consonance with the professional standards coupled with due care and skill.


The cost auditor is primarily responsible to make such an examination of the books and cost records of the company as would enable him to certify that the cost accounting records kept by the company give a true and fair view of the cost of production, and in the process, to assist the company management by pinpointing deficiencies in the use of resources or in the systems of ascertainment and control of work-in-progress and closing stocks.

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