Cost Audit

What is Cost Audit?

Cost audit is a vital and continuous process that a company must execute properly throughout its existence in the market. It deals with the complete verification of the cost records of the company along with different types of accounts. The main objective of cost audit is to track the cash flow in a company and correct the instances where wrong data exists. To know what is cost audit, you have to know about its functions, importance, and advantages.

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Objectives  of Cost Audit

All vital objectives of the cost audit are mentioned below. It helps a business person to understand the importance of the process.

  • Maintaining the accuracy of the data related to cost.

  • Coverage of all arithmetic data in any account book. 

  • Maintaining all cost-related principles and complete adherence to preparing cost accounts.

  • Detect errors, drawbacks, and frauds in accounts and correcting them immediately.

  • To see if all features of cost audit are properly followed.

  • Checking the overall working condition of the cost department also comes under the process of cost audit.

  • To ensure proper management and usage of cost strategies at the right time. 

  • Develop correctness among internal auditors of the company. 

If one has to understand what a cost audit is, the best way is to study its objectives mentioned above. 


Types of Cost Audits

There are several types of cost audit processes. Each one is done on behalf of some organization. Below are the examples.

  • Cost Audit on behalf of the government.

  • Auditing on behalf of Assist Management. 

  • Cost Audit on behalf of tribunals. 

  • Auditing for the trade association. 

  • Cost Auditing under the Statute of the company.

However, apart from the above, there are other types of cost audits that depend on the necessity of the companies. One has to understand the meaning of cost audit properly to exclusively design the process for a specific company.


Applicability of Cost Records

According to the Rule 3 of the Companies, Cost Records and Audit 2014, all cost records should be placed for the companies that produce commodities cited on Table A or Table B. The applicability of cost records will be considered mandatory in case of the above situation or has an aggregated turnover in the preceding year over INR 35 crore. 

So, the applicability of the cost records is generally for large companies with a high turnover. In no case, the cost records will be applicable if both the above conditions are not satisfied. 


Functions of the Cost Auditor

A cost auditor is the one who is responsible for the execution of cost auditing. The functions of a cost auditor are as follows.

  • Make clear cost audit reports with all the facts and data intact.

  • A cost auditor should make qualifiable reports.

  • Helping the central government with the cost auditing report in case of an investigation.

  • Cost auditor and financial audit have a vital connection as he has to omit the drawbacks and wrong implementations. 

 

Advantages of Cost Audit

There are a number of advantages of cost audit and they are mentioned below briefly.

  • The features of cost audit help it to point out any wastage for the company.

  • The importance of cost audit is there as it points out the drawback in the production process of a company. 

  • The stock value and worth of inventories can be integrated easily by cost auditing. 

  • Proper cost auditing ensures effective staff management and tracking the functions of a staff auditor. 

  • One of the other advantages of cost audit is to mark the inefficiency of staff or process that can decrease the profit of the company. 


Fun Facts

An efficient cost audit by a company can lead to a lesser number of incidents of fraud and laundering. Nowadays, large companies organize half-yearly cost-audits to be clear about cost-related outcomes.


Solved Examples

Q1. What is the provision of a Cost Audit?

Answer: The Companies Act, Section 148 states that there are two tables on which the applicability of the audit depends on. These are tables A and B. the details of Table A and Table B goods are as follows.

  1. Table A goods: Total turnover greater than 50 crores and aggregate turnover over 25 crores in case of commodities and services.

  2. Table B goods: Total turnover of goods over 100 crores and aggregate turnover over 35 crores for commodities and services. 

FAQ (Frequently Asked Questions)

Q1: What are the simple steps to carry out a Cost Audit for your company?

Answer: The simple steps to carry out a cost audit for your company are as follows.

  1. Know the position of the company.

  2. Check for the necessary changes to make in a financial year.

  3. Make good use of the reduction plan wherever applicable. 

The position of the company is determined by the place it holds according to the turnovers and profits. Expert cost auditors must always determine it primarily. Secondly, auditors should make the necessary changes to the various financial aspects of the company. An auditor should also look for less expensive substitutes that can bring down the expense of the company. Reduction plans, if taken efficiently can save a lot of money.  

Q2: What does the Cost Audit report contain?

Answer: The cost audit report basically contains all cost-related aspects of the company and they are given here in a nutshell.

Records

All the records related to cost accounting formed in a system in a given period of time should be integrated together.

Budgetary control

Budgetary control refers to another aspect that comes in the audit report. It contains the various ways that a company can follow to cut down the expenses without hampering the expected ROI.

Value of Inventory

Inventory values are another important aspect that comes under the cost audit report. It shows how much inventory a company needs to sell to get the desired profit. 

Other aspects that come to the cost audit report are values of export, internal audit, payment to the government, etc.