Cost Audit Slide 1 of 2

Prepared By : Asstt. Professor. Asif Mahbub Karim CA ( Inter.),KPMG, CMA(Finalist) MBA, MCFC, MBA, B.com. PGDIR(DU) PhD Fellow 11 February 2013 asifmkarim@ymail.com , www.asifmkarim.webs.com asifmkarim 2013

Meaning
Cost Audit means the verification of the correctness of cost accounts and to the adherence to the cost accounting plan.

Cost audit also means a detailed checking of the costing system , techniques and accounts to verify the correctness and to ensure adherence to the objective of cost accounting.

Importance
Cost Accounting systems and controls vary from organization to organization. Obviously smaller companies will require less audit on cost than larger ones. Cost Accounting controls are those related to the physical inventory and the related costs from the point at which raw materials are requisitioned to the point at which the manufactured products is completed and transferred to storage.

Definition
Cost audit is defined as a systematic check of all the elements of cost in a manufacturing or a service oriented company and conveying the information to the management and other interested parties. It embodies the cost control mechanism and analyses ways to have control on the cost structure of an organization.

Methodology
Step 1 : Understanding the Internal Control. Cost Accounting Information System. Step 2 : Assess planned control risk . Step 3 : Evaluate cost benefit of testing control. Step 4 : Design test of controls and substantive tests of transactions for the Cost Accounting System. Step 5 : Determining Audit procedures , Sample size, Items to select , Timing.

Purpose of Cost Audit

Following are some of purpose of cost audit: 1. To verify the accuracy of cost accountancy entries in the books of account. 2. To find out whether the cost accounts have been properly maintained according to the principles of costing employed in the industry concerned. 3. To verify that the cost statements are properly drawn up as per the records and that they represent a true and fair view of cost of production and marketing. 4. To check out relevant and accuracy entries in the books. So, that all entries are traceable to their proper heads of accounts. 5. To find out if the cost audit procedure suggested or prescribed by management is adhered or not. 6. To detect any fraud or error in the entire system of recording data.

Criticism
As such cost audit do not have any criticism but we can broadly highlight a few of its limitations. First data dealt with are historical. Second in experienced cost auditor. Third period of inflation. Finally dynamics behavior of cost pattern.

Financial Audit Vs. Cost Audit

1 Financial Audit are mandatory under Companies Act 1994. Cost Audit is not so. 2. Objective : Financial Audit to express an independent opinion regarding true and fairness of the books. The cost audit objective is to check the accuracy of cost involved in calculating the cost of production. 3. Test Basis : Financial audit is done on test basis , whereas the cost audit is done elaborately to determine correctness of the books of information. 4. Inventory: Financial auditor work is to check the valuation of closing inventory to assess the value in balance sheet , where as the cost auditor comments on adequacy of such stock.

Differences Continued ..
5. Financial Auditor must check the accuracy of the closing sock valuation where as the cost auditor must check the method of valuation too . For instance if FIFO , LIFO , or AVCO followed and properly recorded.