Difference between Cost Audit and Financial Audit

This article will help you to differentiate between Cost Audit and Financial Audit.

Difference # Cost Audit:

A. Scope:

1. The entire emphasis is on micro-aspects, the aggregates being considered for checks.

2. It is an examination of day-to-day opera­tion, in so far as the cost records are de­signed in accordance with the cost ac­counting rules and maintained by the company.

3. It includes efficiency audit and propri­ety audit,—thus it extends its coverage to the examination of other operating factors.

4. It depends on critical review and check­ing of the production process, control systems and analysis of cost components of materials, labour and overheads for compilation of cost statements.

5. It acts as a control device for the avoid­ance of profiteering motive.

6. Here, the statutory cost statements are examined fully so as to ascertain the cost of each process, operation and each prod­uct—quality wise.

7. It may lead to the performance/productivity/efficiency audit of systems and sub-systems of an industry.

8. Its application is limited to notified in­dustries only.

9. It ensures thorough checking and exami­nation of the cost records.

10. It serves the interest of the management and of the Government.

11. It aids both the company and Govt. for fixation of prices of products.

12. It is industry-oriented, basically product oriented.

13. It is conducted under Section 233B of the Companies Act, 1956.

B. Auditor:

1. The cost auditor is appointed by the shareholders in an Annual General Meeting of a company.

2. The cost auditor submits his report to the Central Government with a copy to the company.

3. The statute imposes penalty and prosecu­tion for any delay on the part of a cost auditor to submit his report.

4. The cost auditor is a cost accountant in practice.

C. Audit Report:

1. The cost audit report is submitted by a cost auditor to the Central Government with a copy to the company.

2. The format of the report is prescribed statutorily in the Cost Audit (report) Rules, 1996. It is divided into parts: Statutory affirmations in certificate and Reporting in an Annexure and Proforma.

3. It certifies the true and fair view of the cost of production and marketing of the ‘product’ only of a company.

4. The report highlights the areas of cost reduction and company’s performance, and contains auditor’s suggestions for improvement.

5. The report is treated as a confidential document both by the Government and the company. The information contents arc not disclosed either to the sharehold­ers or to the public.

Difference # Financial Audit:

A. Scope:

1. The entire emphasis is on macro-aspect, the individual transactions being scrutinized for check of the aggregates.

2. It is an examination of the books of ac­count after the close of the year.

3. It is concerned with the examination of transactions recorded in the books of ac­count.

4. It reviews the procedures and internal checks, and scrutinizes individual trans­actions for the purpose of verification of Profit & Loss Account and Balance Sheet.

5. It is not concerned with the avoidance of profiteering motive.

6. It does not do so. It indicates the finan­cial position and overall performance of the business, regardless of its perform­ance in various segments.

7. It does not possess these characteristics.

8. It is applicable to all classes of compa­nies and industries irrespective of size and nature of operations.

9. Its checks and examinations arc limited to ‘test’ or on ‘sample’.

10. It serves the interest of the shareholders.

11. It does not possess that scope.

12. It is organisation-oriented.

13. It is conducted under Sections 224-232 of the Companies Act, 1956.

B. Auditor:

1. The financial auditor is appointed by the shareholders in the general meeting.

2. The financial auditor reports to the share – holders of the company. His report is to be placed before the annual general meeting.

3. Such a provision is absent so far as the fi­nancial auditor is concerned.

4. The financial auditor is a chartered ac­countant in practice.

C. Audit Report:

1. The financial audit report is submitted by a financial auditor to the company (as a part of the audited Balance Sheet and Profit & Loss Account) for being placed before the annual general meeting.

2. The format is basically in the form of statu­tory affirmations in certificate in accord­ance with the Companies Act, and Manu­facturing & Other Companies (Auditor’s Report) Order, 1988.

3. It certifies the true and fair view of the state of affairs of the business of a com­pany as a whole.

4. Such scope is very limited in a financial audit report.

5. The report is disclosed to the sharehold­ers and even to the general public.