The following are the main types of cost audit:
Cost Audit to Assist
The main object of this types of cost audit is to make available accurate and prompt information to management to assist it in taking important managerial decisions. The function of this audit is to ensure management the accuracy of cost accounts. In this types of audit, a cost auditor suggests the ways reduce the cost of production and to make an improvement in the cost accounting plan.
Cost Audit on behalf of the Government
The Government may appoint a cost auditor to conduct cost audit where it is necessary-
- To ascertain correct cost certain units when Government is approached for protection or financial help;
- To ascertain correct cost of contract given to private firm under cost-plus basis;
- To fix reasonable prices of certain items of production so as to prevent undue profiteering.
Cost Audit on behalf of a Customer
Sometimes, the audit may be conducted on behalf of a customer when he agrees to pay price for a certain product on “ cost plus”. The customer in such a case gets cost accounts of the product concerned audited to establish correct cost so that he may be able to pay price on the basis of correct cost plus an agreed margin of profit.
On behalf of Trade Associations.
Sometimes, a trade association may appoint a cost auditor to conduct cost audit-
- To ascertain comparatively profitable of its members;
- To determine minimum price to avoid cut-throat competition among its members;
- To maintain prices at a certain level so as to prevent undue profiteeringOn behalf of Tribunals
Sometimes, labour Tribunals may direct the audit of cost accounts to settle trade for more wages, bonuses, share in profit, etc. Similarly, Income- Tax Tribunals may direct the audit of cost accounts to assess correctly for assessment purposes.
Cost Audit under Statute. The Central Government may, under section 233-B of the Companies Act. 1956 order that certain classes of companies which are required to maintain proper records regarding materials consumed, labour and other expenses under section 209 are required to get their cost audited. The aim of such types of the audit is that the Government wants to ascertain the relationship of cost and prices.