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Cost Audit

Cost audit represents the verification of cost accounts and checking on the adherence to cost accounting plan of a company. 

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Advantage
Benefits to Management Benefits to Management
It helps to detect errors, frauds, inconsistencies etc. This improves the morale, makes the staff more watchful and helps them to improve the accuracy in their work. t ensures a high degree of reliabi... View More
Benefits to the Consumers Benefits to the Consumers
Cost audit helps the Government to fix the fair selling price of consumer goods. Thus the consumers get the benefits of fair price for the products of the company. It helps to reduce and control cost ... View More
Benefits to the Shareholders Benefits to the Shareholders
Cost audit helps to make proper valuation of closing stock and WIP and reveals the true picture of profitability of each product vis-a-vis for the entire company. It also highlights whether the manage... View More
Benefits to Government Benefits to Government
Cost audit helps the Government to fix selling prices of essential commodities accurately and thus prevents undue profiteering.
Benefits to Statutory Financial Auditor Benefits to Statutory Financial Auditor
Cost audit generates reliable data by maintaining constant internal check. Costing data, e.g., closing stocks of raw materials, WIP and finished stock, etc., is of great help to the statutory financia... View More
Disadvantage
Expensive Expensive
One primary disadvantage associated with cost audits is the excessive fees. Auditors are typically independent contractors who can charge relatively high prices for services rendered. In addition to i... View More
Lengthy Lengthy
Cost audits are also lengthy processes that require employee devotion Although the auditor may be an outside contractor, employees must provide requested information and be accessible in case further ... View More
Uncertainty Uncertainty
Because a major part of the process involves estimating, there is the possibility of numerical figures being wrong.Unorganized companies will not find cost audits helpful, because the process merely l... View More
Techniques and Procedures of Cost Audit
Ascertain Internal Controls

The auditor should examine the cost accounting system and ascertain the effectiveness of internal control systems in operation with regard to the cost function. This determines the detail and depth of... View More

Vouching

Vouching refers to establishing correctness of cost records with the help of documentary evidences, called vouchers, supporting and substantiating these records. These vouchers may be internally or ex... View More

Checking and Ticking

Cost auditor does tallying, totaling, examination of postings and cost computations. They put check-marks or tick-marks with colored pencils or pens to indicate the work that has done. They may also p... View More

Test Checking

In case the cost auditor is satisfied about the soundness of internal cost control system operational in the organization, they may resort to test checking instead of detailed examination of each item... View More

Valuation and Verification

Under cost audit, this work is particularly significant with reference to calculation of depreciation on productive assets and inventories of raw materials, work-in-progress and finished goods. Valuat... View More

Working Papers

Cost auditor should obtain and file with copies of cost manual, relevant decisions, cost codes,audit procedure followed by him and cost audit questionnaire.

Audit Notes

Cost auditor should maintain precise notes of all significant facts discovered by him. Working Papers and Audit Notes help cost auditor in carrying out audit work, preparation of Cost Audit Report, a... View More

Questionnaires

Cost auditor prepares questionnaires for obtaining information regarding procedures and practices relating to various types of costs incurred.

Cost Audit Report

The report is the culmination of cost audit. The Cost Auditor submits the report to the authority at whose order he has been appointed - Central Government or Court or the management, etc. A specimen ... View More

FAQs
What is Cost Audit?

Cost audit represents the verification of cost accounts and checking on the adherence to cost accounting plan of a company. Cost audit ascertains the accuracy of cost accounting records to ensure that the cost accounting records maintained are in conformity with cost accounting principles, plans, procedures and objectives.

What is Threshold limits for maintenance of cost records?

Different threshold limits have been prescribed in the Rules for applicability of maintenance of cost accounting records and coverage under cost audit. Rule 2(e) defines “cost records” as ‘books of account relating to utilization of materials, labour and other items of cost as applicable to the production of goods or provision of services as provided in Section 148 of the Companies Act 2013 and these Rules’. Any transaction – statistical, quantitative or other details – that has a bearing on the cost of the product or activity is important and forms part of the cost accounting records Every company, including foreign companies defined in clause (42) of Section 2 of the Companies Act 2013, engaged in the production of the goods or providing services, specified in Items A and B, having an overall turnover from all its products and services of Rs. 35 crore or more during the immediately preceding financial year, shall be required to maintain cost accounting record.

Which Companies not covered under Cost Audit?

However, this requirement does not apply to foreign companies having only liaison office in India which are engaged in production, import and supply or trading of medical devices listed in entry 33 of item B. Companies which are classified as a micro enterprise or a small enterprise including as per the turnover criteria under sub-section (9) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006) are also excluded from the purview of the rules. Further, as turnover of ‘immediately preceding financial year’ is required to be checked, every year company has to check the turnover of preceding financial year for maintenance of cost records. Companies whose revenue from exports in foreign exchange exceeds 75% of its total revenues or companies operating from special economic zones are exempt from the requirement of cost audit.

Appointment of Cost Auditor

The companies falling in rule 3 and fulfilling the criteria in rule 4 are required to appoint a cost auditor within 180 days of the commencement of every financial year. Cost auditor, as combined reading of rule 2 (b) and (c) reveals, can be: a cost accountant in practice or a firm of cost accountants or a limited liability partnership of cost accountants A cost accountant holding certificate of practice on part time basis is not entitled to conduct cost audit. Thus, only a cost accountant in whole-time practice can conduct cost audit.

Can Statutory Auditor be a cost auditor?

A statutory auditor appointed under Section 139 of the Act cannot be appointed as cost auditor of the company.

Contravention of Rule 4 and 5 of Companies (Cost Audit Report) Rules 2011

Cost auditor after the notification of The Companies (Cost Records & Audit) Rules, 2014, replacing the earlier rule of 2011, is no more required to submit the cost audit reports directly to the Central Government and he is only required to forward his duly signed report to the board of directors of a company within 180 days of the close of financial year with his remarks. It is the responsibility of the company to file the cost audit report with the Central Government through the online MCA portal. Moreover, when the company has already compounded the offence (for the non-submission of the cost audit reports), which is in this case, the offence has been made good and hence no criminal complaint could be filed against the company or other person.