Cost Audit vs Financial Audit
Every business transaction is under the scrutiny of an auditor. An auditor of every organization, institution, or government organization is supposed to concentrate on financial accounts and cost structure items. Cost audit and financial audit both are accounting systems.
Auditing is a physical inspection or examination process of an organization or institution’s financial records or books of accounts done by an auditor. All the organizations or institutions whether it makes a profit or not, the financial records should get audited every year.
While practicing it is a little difficult to differentiate between the cost audit and financial audit. Auditing is done to make sure that financial records are correct and submit to shareholders, the board of directors, and the government.
Cost auditing is an auditing process of cost records. It is only for the manufacturing and mining companies. An auditor examines the cost statement, accounts, books that are prepared by a company on purchase and use of material, resources, labor cost, and so on.
Financial auditing is a process of examination or inspection of financial statements or records of an individual organization for taxation, disclosure, and records purposes.
The main difference between the cost audit and financial audit is, the cost audit gives a clear report of expenditure that was done during the production of planned items. Whereas financial audit is a report of profit and loss and balance sheet to declare the true nature of business.
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What is Cost Audit?
Cost auditing is the process to audit the costs incurred in a financial year. Cost audit is done by an experienced cost accountant who is an auditor to ascertain the entire costs in manufacturing the items that the organization has planned to produce.
The cost accountant is appointed by the board of directors with the approval of the central government. The report on costing must be submitted to the central government as well as to the board of directors within the 180 days after completing the financial year.
The cost audit is a process of examination or inspection on cost records, statements, or accounts of expenditure has done on planned items. It includes the purchase of materials, resources, labors, and production of products by the company.
The cost audit report confirms the fair view of a business and the appropriate transaction of the organization. The cost report includes the all necessary data required by law in a particular format.
There are three types of Cost audit. They are
- Efficiency audit is the measurement and utilization of the economic resources in the most profitable way as planned by the corporate.
- The propriety audit is financial and expenditure of action and plans of the management of the organization. The auditor should make sure that the planned expenditure is approved by the authority.
- Statutory audit is compulsory that organization has to maintain a book of transactions, the aim of this audit is the government should make sure of the relationship between the price and costs.
By conducting the cost audit, it helps the management, shareholders, and the government on proper information about the costing. It helps to control costs and finds out if any fraudulent activities have taken place.
What is Financial Audit?
Financial auditing is a thorough examination of financial statements for disclosure. It is compulsory for all the organizations registered under the companies act 1956, whether it is making a profit or not.
The financial auditing is audited by the practice charted accountant who is appointed by the shareholders of the company. Irrespective of structure or size and whether the organization making a profit or not every year auditing has to done by auditor and report has to be submitted to the shareholders during the annual general meeting of the company.
The purposes of auditing are that auditors confirm the statement or transaction are maintained by the company is transparent and appropriate. They ascertain that
- In the account books, the entries of accounts are prepared as per format
- The transactions and statements are supporting the evidence that is provided by the organization
- The transaction or statements are provided or maintained and are easily understandable.
- While preparing account books no transaction is manipulated or misguided.
There are some basic procedures for financial audits. They are
- Audit Planning is a plan for collecting data on the organization’s financial status by using different methods. And auditors should plan for risk assessment keeping the company’s weakness in mind.
- Internal Control is a next step that involves the internal controls, where the auditor inspects the procedure of financial accounts and records to state about the organization’s financial status.
- Testing involves the examination of internal controls whether it is working or not. The auditor looks into more on the financial procedure and more information to avoid or find errors.
- Reporting is the final step in the financial audit, the auditor report in stimulated format whether the company is following the financial standard.
Main Differences Between Cost Audit and Financial Audit
- The main difference between the cost audit and financial audit is, cost audit reports the costs while financial audit reports the status of the company in terms of profit and loss.
- Cost audit is compulsory for all the manufacturing and mining companies as per Sec 209 and financial audit is compulsory for all the companies who are registered under the companies act 1956.
- For cost auditing auditor is appointed by the board of directors with the approval of the central government. While for financial audit, an auditor is appointed by the shareholders of the company.
- The cost audit report must be submitted within 180 days of the financial year completion. While the financial audit is presented during the annual general body meeting of the company every year.
- Cost auditing is conducted when a report is required by the government in a year by practicing cost accountant and financial auditing is a mandate to conduct every year by practicing a charted accountant.
Cost audits and financial audits are both procedures that every company follows. The cost audit is mandatory only to manufacturing and mining companies as it examines the cost of expenditure made on planned items. The financial audit is compulsory for all the companies despite the size or structure the companies registered under the companies act 1956.
Financial audit includes the inspection or examination of financial statements, records, and transactions. In both cases the auditor must be practicing. The auditing is done for the betterment of a company or organization which can prevent or take cautions on fraud and manipulate data. Both the auditing procedure gives a true insight into the organization’s business.
Word Cloud for Difference Between Cost Audit and Financial Audit
The following is a collection of the most used terms in this article on Cost Audit and Financial Audit. This should help in recalling related terms as used in this article at a later stage for you.