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Essay on Cost Audit

Essay Contents:

  1. Essay on the Introduction to Cost Audit
  2. Essay on the Objects of Cost Audit
  3. Essay on the Types of Cost Audit Centre
  4. Essay on the Scope of Cost Audit
  5. Essay on the Advantages of Cost Audit
  6. Essay on the Disadvantages of Cost Audit

Essay # 1. Introduction to Cost Audit:


The term audit with reference to financial accounting means the examination of books of accounts in order to ensure that financial statements are prepared as per statutory requirement and they reveal a true and fair view of the business undertaking. The phrase cost audit is defined by ICMA, London as “the verification of cost accounts and a check on the adherence to cost accounting plan.”

According to this definition, cost audit involves two functions:

(1) To verify that cost accounting records such as statement of costs, cost reports, etc. have been maintained according to cost accounting system, and

(2) To verify whether cost accounting principles, plans, procedures and objectives have been adhered to by the organisation.


We can add a third function to the cost audit aspect, viz., to detect errors and to prevent frauds and misappropriations while preparing accounts.

The origin of the concept of cost audit could be traced to the Second World War period when the practice of cost plus contract began. In India, cost audit is statutorily prescribed as it assists management in decision-making process by providing adequate cost data. Cost audit helps management in many respects such as in price fixing, avoiding wastages, re-organisation of purchases and sales, in exercising internal control, etc.

Essay # 2. Objects of Cost Audit:

Cost audit has the following broad objects:


1. To see that proper and adequate cost accounting books and records are maintained.

2. To see whether cost accounting principles have been properly applied.

3. To compare actual cost incurred with those attainable under efficiency audit.

4. To examine the efficiency or otherwise of it, better utilisation of resources and whether maximum capacity has been achieved.


5. To determine the method of allocation and apportionment of overheads and to examine the system of valuation of stock.

6. To facilitate inter-firm and intra-firm comparison of cost and business performance.

7. To facilitate price fixation by furnishing cost data.

8. Casting a moral check on the cost accounting staff and achieving improvement of the cost accounting system.


9. Checking the correctness of cost accounting records.

10. Verifying the adherence of cost accounts to the established systems and procedures.

11. Ascertaining how far the cost accounting system is adequate for cost control and managerial decision-making.

12. Ascertaining whether cost reporting procedure is inadequate or wasteful.


13. Checking the reconciliation of costing profit or loss with the financial profit or loss.

14. Bringing out inefficiencies in the matter of utilization and procurement of materials, utilization of and payment to labourers and incurrence of overheads and direct expenses.

Essay # 3. Types of Cost Audit Centre:

1. Internal Audit:


An internal audit is an audit programme which is conducted by persons who belong to the organisation. Its scope and objects differ from business to business depending upon the need of management. In some organisation the internal audit and cost audit is performed by the internal auditor, while in others, they are conducted by different persons.

Its objects are as follows:

(a) To ensure accuracy and correctness of accounting by means of vouching. Internal audit includes the review of organisational, procedure, audit of stock, other assets and liabilities and audit of income and expenditure of the business,

(b) To detect and prevent frauds and errors,

(c) To ensure accounting is promptly carried out and according to the rules and principles,

(d) To ensure better control by checking the prescribed control plans, procedures and policies, and


(e) To bring out weakness of the system by pointing out the defects in the system.

2. Statutory or External Cost Audit:

A statutory audit is conducted by an external person who is not in the regular employment of the organisation. It is performed at the instance of government either by necessity or by choice.

It is ordered by the government under the following circumstances:

(a) Fixation of ceiling prices of goods and services to curb unjustified profit earning.

(b) To decide tariff protection to be offered to different industries.

(c) To facilitate payment of correct contract price in case of cost-plus contract.

(d) Where it is felt by the government that the business is inefficiently managed and costs show rising trend.

(e) To settle trade disputes arising out of wages and bonuses.

(f) In the best interest of general public.

Differences between Internal Audit and External Audit:

Internal Audit:

1. Its scope is wide as it is conducted to suit the requirement of the organisation.

2. Internal auditor is responsible to the management.

3. It is voluntary.

4. It helps external audit.

5. It is continuous.

External Audit:

1. Its scope is limited as it covers the areas stipulated by the statue.

2. External auditor is responsible to Government.

3. It is compulsory.

4. It does not assist internal audit.

5. It is periodical.

Essay # 4. Scope of Cost Audit:

Cost audit covers two important aspects:

They are:

(a) Property Audit, and

(b) Efficiency Audit.

(a) Property Audit:

Kohler in his books on Dictionary of Accounts has defined the term property is “that which meets the tests of public interest, commonly accepted customs and standards of conduct.” Propriety audit is concerned with audit of various activities and plans of management which have a close bearing on the revenues and expenditure of the business. The cost auditor must ensure that each item of expense is properly sanctioned by the management and incurrence of such item of expense is justifiable under this audit.

A cost auditor has to ascertain:

(a) Whether the planned expenses results in optimum benefit or not,

(b) Whether the amount and ways of its incurrence are designed to give best result,

(c) Whether return on capital can be improved by some other alternative.

(b) Efficiency Audit or Performance Audit or Profitability Audit:

It relates to appraisal of the performance of a plan to know whether it has been efficiently executed. In other words, it ensures that the results obtained are according to the plans. It is concerned with examining the plans, comparison of the actual performance with budgeted performance and finding out the reasons for the variances so as to take remedial actions.

Its main object is to maintain economy by ensuring that whatever investments or expenses are incurred they result in maximum benefit. It also ensures a balanced investment or various projects so as to get optimum returns on capital employed.

Essay # 5. Advantages of Cost Audit:

(a) To the Management:

(i) Proper audit of cost accounts helps in revealing errors, frauds and inconsistencies.

(ii) Cost audit brings reliability in cost reports On the basis of which important decisions are taken.

(iii) By concrete suggestions cost audit can bring about improvement in systems and procedures.

(iv) Cost audit can improve the cost accounting method as an effective tool in cost control.

(v) Audited cost accounts facilitate inter-firm comparison.

(b) To the Cost Accountant:

(i) Cost audit acts as a check on the performance of the Cost Department staff as regards accuracy. This is a great benefit to the Cost Accountant.

(ii) The external cost auditor with his varied knowledge and experience can help the Cost Accountant in the matter of improvement of costing methods and cost reporting.

(iii) The mere fact that the cost accounts will be audited raises the importance of the cost accounts and the Cost Accountant in the entire organisation.

(c) To the Statutory Auditor:

Cost audit system builds the confidence of the statutory auditor on certain data and this relieves him of the necessity of detailed checking of those data.

(d) To the Shareholders:

(i) By pointing out inefficiencies, cost saving ways, etc. the cost auditor helps in the improvement of performance and profitability of the entire organisation. This benefits the shareholders immensely.

(ii) The shareholders can rely on the valuation placed on different categories of inventory certified by the management and reported through the financial statements, when those have been checked by the cost auditor.

(e) To the Customers:

(i) When customers purchase on cost plus basis, cost audit enables them to check the cost of products purchased.

(ii) When there is an escalation clause in sale contract, the customer can verify the increase in cost through cost audit before agreeing to the addition to original price.

(f) To the Government:

(i) The Government can have some reliable basis to fix prices of commodities in a price control scheme through audited cost data.

(ii) An audit of cost structure of an industry enables the Government to take decision on tariff protection.

(iii) In certain cases audited cost data may help the authorities in fixing up tax or duty on the cost of finished products.

Essay # 6. Disadvantages of Cost Audit:

Cost audit is said to have the following disadvantages:

(i) When the financial accounts are audited, audit of cost accounts is unnecessary.

(ii) If the cost accounts are prepared or maintained by a qualified cost accountant, there can be no reason for getting such cost accounts audited by another qualified cost accountant.

(iii) Cost audit may create unnecessary hindrance in day-to-day office work.

(iv) The cost auditor may be a qualified person, but he may not be always right in his judgement. Hence, the opinion of the cost auditor may not always be correct.

(v) Cost audit involves cost and this may not suit small organisations.

But proper thinking will reveal that many of the disadvantages cited above are not real disadvantages. If cost accounts are necessary, cost audit is also necessary. Moreover, the advantages of cost audit far outweigh its disadvantages.

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