Cost Accounting

What is a Cost Audit? – Meaning and Definition

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

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.

In this article, we will discuss in great detail what is a cost audit and why it is important for manufacturing entities.

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 a cost audit on behalf of the customer.
  • Trade association or tribunal to facilitate cost audit on behalf of trade association or tribunal.

Who Can Be a Cost Auditor?

Only a Cost Accountant can be appointed as a cost auditor. This typically requires meeting the following criteria:

  1. Certification: Hold a valid certificate of practice under the relevant regulatory body. In India, for instance, this refers to the Institute of Cost Accountants of India (ICMAI).
  2. Membership: Be a member of the relevant professional accounting association. Again, in India, this would be the ICMAI.
  3. Experience: Possess a minimum of years of experience in cost or management accounting.

It’s important to note that regulations regarding cost auditors can vary depending on the country or region. But typically, a cost accounting background and relevant professional certification are essential requirements.

Purpose and Objectives of Cost Audit

A cost audit plays a vital role in ensuring the financial health of a company. It goes beyond a simple review of expenditure, delving deep into the accuracy and efficiency of a company’s cost accounting system.

One of the primary goals of a cost audit is to authenticate the dependability of cost data. This entails verifying if the accounting system complies with accepted cost accounting rules. The audit rigorously scrutinizes documents to identify any inaccuracies or deliberate distortion of expenses. The audit might identify areas of inefficiency or unnecessary spending by assessing expenses at the product or department level.

Cost audits may be mandated by regulators or demanded by specific stakeholders in certain instances. This is especially pertinent for organizations in specific industries or those that surpass a specified size barrier. Irrespective of the motive behind conducting a cost audit, the procedure provides substantial advantages for both internal management and external stakeholders who have a vested interest in the financial success of the organization.


A cost Audit is the verification of the cost accounts and the cost accounting plan’s conformance. In other words, it entails the study of expense accounts and the execution of the plan created for this purpose.

Show More


    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.

Leave a Reply