What is Cost Audit?
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.
Table A Goods: Total turnover greater than 50 crores and aggregate turnover over 25 crores in case of commodities and services.
Table B Goods: Total turnover of goods over 100 crores and aggregate turnover over 35 crores for commodities and services.
FAQs on Cost Audit
1. What are the simple steps to carry out a Cost Audit for your company?
The simple steps to carry out a cost audit for your company are as follows.
Know the position of the company.
Check for the necessary changes to make in a financial year.
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.
2. What does the Cost Audit report contain?
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.
3. What are the types of cost audits?
The term Cost Audit holds for a number of business actions and there are different types of cost audits. Each one is done on behalf of some organization. Here are some examples are given below:
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.
Also, apart from the above types of cost audits, there are other types of cost audits that depend on the necessity of the companies.
4. What is the applicability of cost records?
According to Indian law, Rule 3 of the Companies, Cost Records and Audit 2014, all the cost records have to be placed for the companies that produce commodities cited in Table A or B. The applicability of cost records shall be considered mandatory in the given case or if the company has an aggravated turnover of over INR 35 crore in the previous year. So it can be seen that the applicability of cost records is generally for companies with a high turnover. However, in no case, the cost records will apply if both the conditions are not specified.
5. What are the functions of a cost auditor?
A cost auditor is a person who has been commissioned for the execution of a cost audit by the company. A cost auditor has to perform various functions. Some of the functions of the cost auditor has been listed below:
He has to make clear cost audit reports with all the facts and data intact.
A cost auditor should always make reports which are of the required quality and can qualify as an authentic record-based document.
To Help the central government and its agencies with the cost auditing report in case of an impending investigation.
The Cost auditor and financial audit have a vital connection as he has the task to omit the drawbacks and wrong implementations.
6. What are the advantages of Cost Audit?
The Cost Auditor has a variety of functions that he has to perform which are of paramount importance to the company, the shareholder and the government. Some of the advantages of a cost audit are given below:
One of the most important features of a cost audit report is to point out any wastage for the company.
The cost audit report points out the drawback in the production process of a company.
From the perspectives of the investors and shareholders, the stock value and worth of inventories can be integrated easily by cost auditing.
The Proper process of cost auditing ensures effective staff management and tracking of the functions of a staff auditor.
The cost audit helps to mark the inefficiency of staff or processes that can decrease the profit of the company.
7. What are the provisions of a cost audit in Indian law?
According to the Companies Act 2013, Section 148 of the act states that there are two tables on which the applicability of the audit depends. These tables are known as Table A and Table B. The details of Table A and Table B are given below:
Table A goods: Total turnover greater than 50 crores and aggregate turnover over 25 crores in case of commodities and services.
Table B goods: Total turnover of goods over 100 crores and aggregate turnover over 35 crores for commodities and services.
