Auditing is a great way of assessing the effectiveness of an organization’s internal control system and compliance with statutory laws and rules applicable to the enterprise. Financial Audit is not a new term for business class and all the other people relating to it, as it is the legal requirement of the companies, government organizations and institutions.
All the companies, whether profit-making or not, have to get their accounts audited every year by an auditor. Financial Audit is often contrasted with cost audit which is a statutory reporting process, wherein yearly reporting is made to the central government with respect to the efficiency in production and operation of a particular product.
In this article, we are going to discuss the difference between cost audit and financial audit.
Content: Cost Audit Vs Financial Audit
|Basis for Comparison||Cost Audit||Financial Audit|
|Meaning||Cost audit is an independent examination of the correctness of the cost statements and accounts and its conformity with the cost accounting plan.||Financial audit is a systematic unbiased examination of a company or institution's finance books and records, so as to express the opinion on it.|
|Audit||Performed by a practicing Cost Accountant.||Performed by a practicing Chartered Accountant.|
|Appointment of auditor||Board of Directors||Shareholders|
|Analyzes||Cost records, cost statements and cost accounts.||Financial Statement, Books of Accounts, Documents, Vouchers, etc.|
|Emphasis||Analysis of the efficiency of operations and propriety of actions of the management.||Compliance with the accounting standards and effectiveness of the internal control system.|
|Compulsion||Compulsory for all companies.||Compulsory for the companies engaged in the manufacturing business.|
|Report submission||To the Shareholders at the Annual General Meeting of the company.||To the Board of Directors at the Board Meeting, which is then submitted to Central Government.|
Definition of Cost Audit
Cost Audit can be understood as the auditing process in which cost of production is verified thoroughly by examining cost books, statements, documents, and accounts, which are prepared and maintained by the company concerning the use of material, labour and other resources so as to confirm that the accounts present true and fair view. It also confirms that the cost accounting system of the enterprise is also appropriate.
Simply put, Cost Audit refers to an unbiased examination of cost information concerning the production of a product by an entity, irrespective of its size, structure, orientation and legal form, so as to give an opinion on such information. It has to be conducted by specific industries, i.e. the industries which are engaged in the production business, as per the order was given by the Central Government.
Characteristics of Cost Audit
- It analyses the costing system of the enterprise to determine whether it is suitable for the cost ascertainment of the product under consideration.
- It evaluates the conformity of the applicable cost accounting rules, to the product under consideration.
- It assesses the operating efficiency of the concern, while referring to the product under consideration, to ensure that the cost audit report contains all the necessary details required by law.
- It ensures the submission of the report in the stipulated format.
Definition of Financial Audit
Financial Audit is the auditing process in which the auditor independently assesses the financial statements of the company to identify whether relevant accounting principles and standards are duly complied with, for the purpose of financial reporting and disclosure. The auditors examine the financial statement to a considerable degree, in order to attain a rational basis to express his/her opinion on it.
It is mandatory for every organization irrespective of its size, legal structure, orientation (profit-making or non-profit making), etc. The primary objective of the auditor is to ensure that the financial statement of the company presents a true and fair view, and are free from material misstatement which may mislead any party.
For this purpose, the auditor confirms that
- The accounts are prepared as regards the entries in the account books.
- The account books are properly supported by evidence.
- The information provided by the financial statement is easily understandable.
- No transactions are omitted during the preparation of the accounts.
In a financial audit, the auditor has to confirm that the accounting statement provided by the entity is reliable and transparent, as well as it covers all the aspects of the concern, so as to form an opinion, that the information is appropriately disclosed.
Key Differences Between Cost Audit and Financial Audit
The difference between cost audit and financial audit are discussed in the points given below:
- Cost Audit refers to the thorough examination of the cost of production of the output produced by the entity, based on the cost accounts prepared and maintained by the company, in this regard, as per the cost accounting principles. On the flip side, a financial audit is a scientific examination of the account books and records of a company and institution to check the accounts, to express an opinion and to report the facts concerning its operations and results thereof.
- Cost Audit is performed by a practising cost accountant, whereas a practising Chartered Accountant can conduct a financial audit.
- When it comes to appointment, a cost auditor is appointed by the company’s Board of Directors on the recommendation of the audit committee. As against, the appointment of a financial auditor is done by the shareholders, at the Company’s Annual General Meeting.
- The cost auditor analyses the cost records, cost books, cost statements and cost accounts, to ascertain whether they are in line with the company’s cost accounting system. On the contrary, the financial auditor analyses a company’s financial statements, account books, accounting records, vouchers, documents, notes to accounts, etc. to check the correctness of the entries made in the books and its compliance with the accounting standards.
- In cost audit, the emphasis is laid on the analysis of efficiency of operations and propriety of actions of the management. Conversely, in financial audit, more emphasis is given to compliance of the financial statement with the accounting standards and effectiveness of the internal control system.
- Financial Audit is compulsory for all companies, organizations and institutions. As opposed, cost audit is mandatory for specific entities only and that too which are engaged in manufacturing and production business.
- The cost auditor submits the cost audit report to the Board of Directors at the Board Meeting, which is then submitted to the Central Government. In contrast, the financial auditor submits the financial audit report to the shareholders at the company’s Annual General Meeting.
Cost Audit aims at examining the cost accounts of the enterprise, so as to determine that they are appropriately maintained and compiled as per the system followed by the concern. On the other hand, the objective of cost audit is to get plausible assurance that the financial statement presents the correct position of the enterprise and there is no material misstatement, that can mislead anybody.