Procedure of Cost Audit

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on August 22, 2021

The Cost Auditor should keep in mind the object of Cost Audit while preparing the Plan of Cost Audit. He should distribute the work to his subordinates. He should have detailed knowledge about the organisation. The Cost Audit programme should be designed in such a way that the work should be finished within minimum period and at a minimum cost.
The following are the main items of Cost Auditor:

1. Audit of Materials

Cost Auditor should observe the following while Auditing the materials:
(i) He should check Material Ledger. He should see Bin Card to note Receipt and issue of material.
(ii) All payments related to materials must be vouched from material receipt vouchers.
(iii) He should see the purchase of material, receipt, wastage and return of material if any.
(iv) He should also see what is the practice with regard to defective and out-dated materials.
(v) He should also see whether cost calculation regarding the output is made after due note of defective materials.
(vi) He should also see whether the materials issue price is more than the prescribed level.
(vii) He must also see what is the procedure of purchase and issue.
(viii) He must ensure that there is no misappropriation or theft of material.

2. Audit of Labor

The cost auditor should note the points while audit of labor
(i) He should see Attendance Register, Supervisor Register, leaves, and Gate-keepers Records.
(ii) When wages are paid according to piece Rate, Cost Auditor should the complete record of each worker’s output and the same should be vouched from job card.
(iii) When time Rate for Wage payment is used he must see what is the procedure of recording over time and should be sanctioned by some responsible officer.
(iv) Incentive plans wage payment should be checked if any under use.
(v) The total Direct cost should be verified from various labor cost tables.
(vi) The Wages Record, its payments are subject to Internal Audit. He should see that it is satisfactory.

3. Audit of Over-Heads

The overheads are Electric Bill, Gas, Coal, Rent, Salary etc. The Auditor should see the distribution of these expenses according to each department. The following other actions should be taken into Account.
(i) Whether the expenditure is desirable or not should be cheeked from production and sale point of view.
(ii) These expenses should not be more than the proportionate output.
(iii) He should see that actual expenditure should not more than standard expenditure.
(iv) He should also see how overheads are allocated on semi-manufactured goods.
(v) The Cost Auditor should be aware about Administration, sales and capital expenditure.
(vi) He should also see the budgeted overheads and comparison to actual overheads and variation should be checked seriously.

4. Audit of Plant

Cost Auditor should note the following points while auditing of a plant.
(i) The Cost Audit should see the plant capacity, whether the full capacity is exercised or not.
(ii) He should see the method of depreciation whether the application of such method is desirable or not.
(iii) The daily expenditure regarding plant must be checked seriously.
(iv) The present position of the plant be checked physically.
(v) The sale of plant should be checked seriously.

5. Audit of Stock

(i) The stock should be checked seriously and must be verified and physically counted.
(ii) The stock should be in proportion to proposed output.
(iii) The Cost Auditor should see the minimum or Maximum and order limit seriously.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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