[Commerce Class Notes] on Cost Audit Pdf for Exam

Cost audit is an important and continuous process that a company has to execute properly during its entire existence in the market. It accounts for the complete verification of the cost records of the company and also takes into consideration the other different types of accounts. Tracking the cash flow in a company and correcting the instances where wrong data exists is the main objective of the cost audit. To understand in-depth what cost audit is, you have to understand its functions, importance, and advantages.

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Objectives of Cost Audit

If someone has to read about why Cost audits are important, they have to understand what are the objectives and benefits of cost audits. Some of the objectives of cost audit are enlisted below:

• To maintain the accuracy of the data related to cost.

• To ensure coverage of all arithmetic data in any account book. 

• It helps in maintaining all cost-related principles and complete adherence to preparing cost accounts.

• It helps in detecting errors, drawbacks, and frauds in accounts and correcting them immediately.

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

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

• For ensuring proper management and usage of cost strategies at the right time. 

• To 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 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 processes 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.