Definition of Cost Audit

Cost audit has been defined by the Chartered Institute of Management Accountants, London as “the verification of cost accounts and a check on the adherence to the cost accounting plan”.

The Institute of Cost and Works Accounts of India defines, “cost audit efficiency of minute details of expenditure while the work is in progress and not a post-mortem examination.

Financial Audit is a fait accompli. Cost Audit is mainly a preventive, a guide for management policy and decision, in addition to being a barometer of performance. Thus the main functions of this audit are as given below:

  • To verify that the cost accounts are correctly kept accordance with the principals of costing employed in the industry;
  • To ensure that the cost accounting routine laid down by the business is properly carried out;
  • To detect errors and prevent fraud and possible misappropriation if the extent of efficiency of utilisation of factors of production.

Appointing Authorities

A cost auditor may be appointed by-

  • Internal authorities i.e., by the same management, to conduct cost audit as an aid to management.

By external authorities such as, by-

  • Government to conduct an audit on behalf of Government.
  • Customer to carry out cost audit on behalf of the customer.
  • Trade association or tribunal to facilitate cost audit on behalf of trade association or tribunal.

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