Cost Accounting

What is a Cost Audit? – Meaning and Definition

Cost Audit Meaning

An ongoing process of checking the accuracy of company costs. A cost audit is designed to uncover and correct or prevent errors in the accounting of materials and services to customers.

Often costs are not matched up against the service or work that has been performed. The auditors check that the number of hours and the material costs (such as labour and materials) are tallied accurately to ensure that the invoices match up with the work performed.

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.

A 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 by the principles 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 of the extent of efficiency of utilisation of factors of production.

Appointing Authorities of Cost Auditor

A cost auditor may be appointed by-

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

By external authorities such as by-

  • Government to conduct an audit on behalf of the 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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    1. Cost audit is used to ensure that manufacturing companies are not inflating cost of production to state the lower profitability in order to save tax.
      I hope it helps.

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