Scope of Cost Audit
There are two important aspects which come within the purview of cost audit. They are:
(a) Propriety audit
It is an audit concerned with such action and plans of management which have a bearing on the finance and expenditure of the company. The cost auditor has not only to see that an item of expenditure is properly sanctioned and supported by vouchers but also is justifiable ob grounds of propriety. He has therefore to report:
(i) Whether or not the planned expenditure could give optimum results.
(ii) Whether or not the size or channels of investment was/were designed to produce the best results.
(iii) Whether the return from investment in certain channels could be bettered by some alternative plan of action.
(b) Efficiency audit
It is an audit concerned with appraisal of performance to determine not only that the expenditure has been incurred according to plan but also to see that the results have been obtained as planned. It starts with examination of plan (such as financial or other functional budgets) and extends to the comparison of actual performance with the budgeted performance and finding out reasons for variances. It thus ensures that:
(i) Every $ invested in capital or in other fields gives the optimum return; and
(ii) Investment in different spheres of the business has been so balanced that it gives maximum results.
The cost auditor thus combines in himself the role of the Consultant and Financial Adviser. He helps the Chief Executive of the organisation in working out a sound overall judgement on the financial plans and performances of the company by coordinating the results of actions of the various departments.
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