Purpose of Cost Audit

The primary purpose of Cost audit is to express an opinion on the cost accounts of the company whether these have been properly maintained and compiled according to the cost accounting system followed by the enterprise or not. However the purposes of cost audit may be segregated into general and social objectives. The general objectives can be described to include the following:

• Verification of cost accounts with a view to ascertaining that these have been properly maintained and compiled according to the cost accounting system followed by the enterprise.
• Ensuring that the prescribed procedures of cost accounting records rules are duly adhered to.
• Detection of errors and fraud.
• Verification of the cost of each “cost unit” and “cost centre” to ensure that these have been properly ascertained.
• Determination of inventory valuation.
• Facilitating the fixation of prices of goods and services.
• Periodical reconciliation between cost accounts and financial accounts.
• Ensuring optimum utilization of human, physical and financial resources of the enterprise.
• Detection and correction of abnormal loss.
• Inculcation of cost consciousness.
• Advising management, on the basis of inter-firm comparison of cost records, as regards the areas where performance calls for improvement.
• Promoting corporate governance through various operational disclosures.

Social purposes of cost audit

The following deserve special mention

• Facilitate in fixation of reasonable prices of goods and services produced by the enterprise.
• Improvement in productivity of human, physical and financial resources of the enterprise.
• Channelize enterprise resources to most optimum, productive and profitable areas.
• Availability of audited cost data as regards contracts containing escalation clauses.
• Facilitate in settlement of bills in the case of cost-plus contracts entered into by the Government.
• Pinpointing areas of inefficiency and mismanagement, if any for the benefit of shareholders, consumers, etc., such that necessary corrective action could be taken in time.