Cost Audit and Propriety Audit

Cost Audit and Propriety Audit:


Propriety audit stands for verifi cation of transactions in the best interest of the public, commonly
accepted customs and standards of conduct. The term “propriety” has been defi ned by Kholer
as “that which meets the tests of public interest, commonly accepted customs and standards of
conduct and particularly as applied to professional performance, requirements of Government
regulations, and professional codes.” The tests boil down to consideration of fi nancial prudence
and economy, instead of too much dependence on documents, vouchers etc. It shifts the emphasis
to fi nd the wisdom and appropriateness of expenditure, rather than verifying whether it has been
duly authorized or evidenced by proper vouchers etc.


In other words, the propriety audit seeks to ensure that the planned expenditure would yield
the optimum returns and there is no other better alternative available. It seeks to ensure that the expenditure is not only appropriate to the circumstances of each case, it has indeed achieved the
objectives for which it has been incurred. The audit of public sector undertakings as undertaken by
the Comptroller and Auditor-General of India is the best example of propriety audit.


The Cost Audit Reports can be termed as propriety audit as these reports seeks to ensure that
actual expenditure at each stage is appropriate and optimum returns have been achieved. The
cost auditor always aims at ensuring that the actual expenditure should not be prima facie more
than what the occasion demands. The cost auditor has to report on matters which appear to him
to be clearly wrong in principle, cases where the company’s funds have been used in a negligent
or ineffi cient manner, arm’s length pricing of related party transactions, etc. These are the areas
where the propriety aspect is involved and therefore cost audit may be in the nature of “propriety
audit”.