The following are the main types of cost audit:
Cost Audit to Assist
The main object of these types of cost audit is to make available accurate and prompt information to management to assist it in making critical managerial decisions. The function of this audit is to ensure the management of the accuracy of cost accounts. In these 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 specific units when Government is approached for protection or financial help;
- To determine the accurate cost of the contract given to a private firm under a cost-plus basis;
- To fix reasonable prices of certain items of production 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 the 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 the price based on 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 the minimum price to avoid cut-throat competition among its members;
- To maintain prices at a certain level to prevent undue profiteering
On 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 between cost and prices.