Types of Cost Audit Free Essay Example

• Cost Audit to assist Management: The main object of this type of cost audit is to make available accurate, relevant and prompt information to management to assist it in taking important managerial decisions.
• Cost Audit on behalf of the Government: The government may appoint a cost auditor to conduct cost audit where it is necessary

(a) to do so in the opinion of the government under section 233-B of the companies Act, 1956;

(b) to ascertain correct cost of certain units when government is approached for protection or financial help;

(с) to ascertain correct cost of contract given to private firms under cost plus basis;

(d) to fix reasonable prices of certain items of production so as to prevent undue profiteering.

• Cost Audit on behalf of a customer: Sometimes, cost audit may be conducted on behalf of a customer when he agrees to pay price for a certain product on ‘cost plus’ basis

A. Advantages Of Cost Audit To The Management

1. Cost audit provides reliable cost data for managerial decisions.
2. Cost audit helps management to regulate production.
3. Cost audit acts as an effective managerial tool for the detection of errors, frauds and irregularities so that reliable and smooth functioning of the system is continued.
4. Cost audit reduces the cost of production through plugging loopholes relating to wastage of material, labor and overheads.
5. Cost audit can fix the responsibility of an individual wherever irregularities or wastage are found.
6. Cost audit improves efficiency of the organization as a whole and costing system in particular by constant review, revision and checking or routine procedures and methods.
7. Cost audit helps in comparing actual results with budgeted results and points out the areas where management action is more needed.
8. Cost audit also enables comparison among different units of the factory in order to find out the profitability of the different units.
9. Cost audit exercises moral influence on employees which keeps them efficient and alert.
10. Cost audit ensures that the cost accounts have been maintained in accordance with the principles of costing employed in the industry concerned.

B. Advantages Of Cost Audit To The Shareholders

1. Cost audit ensures that proper records are maintained as to purchases, utilization of materials and expenses incurred on various items i.e wages and overheads etc. It also makes sure that the industrial unit has been working efficiently and economically.
2. The cost audit enables shareholders to determine whether or not they are getting a fair return on their investments. It reflects managerial efficiency or inefficiency.
3. Cost audit ensures a true picture of company’s state of affairs. It reveals whether the resources like plant and machinery are being properly utilized or not.

C. Advantages Of Cost Audit To The Society

1. Cost audit tells the true cost of production. From this the consumer may know whether the market price of the article is fair or not. The consumer is saved from the exploitation.
2. Cost audit improves the efficiency of industrial units and thereby assists in economic progress of the nation.
3. Since price increase by the industry is not allowed without justification as to increase in cost of production, consumers can maintain their standard of living.

D. Advantages Of Cost Audit To The Government

1. Cost audit assists the ’Tariff Board’ in deciding whether tariff protection should be extended to a particular industry or not.
2. Cost audit helps to ascertain whether any particular industry should be given any subsidy in order to develop that industry.
3. Cost audit provides reliable data to the government for fixing up the setting prices of the various commodities.
4. Cost audit helps the government to take necessary measures to improve the efficiency of sick industrial units.
5. Cost audit can reveal the fraudulent intentions of the management.
6. Cost statements may be helpful to authorities in imposing tax or duty at the cost of finished products.
7. Cost audit facilitates settlement of trade disputes of the companies.

Difference b/w Cost Audit and Financial audit:

The basic nature of audit is checking and it holds good for both the cost audit as well as the financial audit. However following are the points of difference between these two audits:

1. Compulsory nature. Financial audit is compulsory for all the companies registered under companies act, 1956. Cost audit is not compulsory for all the companies. Only in the case of manufacturing or mining companies they have been specifically asked by the central government to maintain cost accounts under section 209 and get those accounts audited under section 233b.
2. Purpose. The purpose of the financial audit is to report on the profit and loss account and balance sheet as to whether they show true and fair view of the business or not. The purpose of the cost audit is to certify that whether the expenditure incurred on the production of items has been incurred prudently or not.
3. Expression of opinion. The financial auditor has to comment upon the accuracy of the transactions recorded and the cost auditor has to comment upon the correctness and wise ness of the decisions taken in production of items.
4. Instance. Financial audit is conducted at the instance of the shareholders. Cost audit is done at the requirement of third parties like government, industrial organizations etc.
5. Appointment. Financial audit is appointed normally by the shareholders in the general meeting whereas the board of directors with the previous approval of the central government appoints a cost auditor.
6. Recurrence. Financial audit is conducted every year whereas a cost audit may be done in the year in which it is required by the government or any other agency.
7. Stock. In financial audit auditor has to check the exact value of closing stock for the purpose of balance sheet, whereas in the cost audit the auditor has to check the adequacy of the stock keeping in view of the needs of the concern.
8. Report. In the financial audit the report is submitted to the management to be laid in the general meeting of the shareholders, the report of the cost auditor is submitted to the company and also to the central government within 180 days from the end of the company’s financial year to which the cost audit

In simple words, the term cost audit means a systematic and accurate verification of the cost accounts and records and checking of adherence to the objectives of cost accounting.