Cost audit programme is an essential prerequisite for conducting an audit. It is a plan of action drawn in advance before taking up the audit, and to help the auditor to cover the entire area of his function thoroughly.
The audit programme should include all the usual broad steps that a financial auditor includes in his audit programme. However, the significant things that should not be missed are: proper vouching of expenses, capital and revenue character determination, allocation of expenses, apportionment of overheads, arithmetical accuracy, the statutory requirements, examination of contracts and agreements, review of the Board’s and shareholders’ minute books to trace important decisions having bearing on costs, verification of title deeds and documents relating to properties and assets, etc. Cost audit, in order to be effective, should be completed at one time as far as practicable. The exact content of cost audit largely depends on the size of the organisation, range of products, production process, the existence of a well organized costing department and of a well designed costing system, and the existence of a capable internal auditing system. Other relevant considerations may be:
Review of Cost Accounting Records
This will include:
- Method of costing in use – batch, process or unit.
- Method of accounting for raw materials; stores and spares, wastages, spoilage, defectives, etc.
- System of recording wages, salaries, overtime and spares, wastages, etc.
- Basis of allocation of overheads to cost centers and apportionment of service department’s expenses.
- Treatment of interest, recording of royalties, research and development expenses, etc.
- Method of accounting of depreciation.
- Method of stock-taking and its valuation including inventory policies.
- System of budgetary control.
- System of internal auditing.
Verification of cost statements and other data
This will include the verification of:
- Licensed, installed and utilized capacities.
- Financial ratios.
- Production data.
- Cost of raw material consumed, wages and salaries, stores, power and fuel, overheads, provision for depreciation etc.
- Sales realization
- Abnormal, non-recurring and special costs.
- Reconciliation with financial books.
