What is the difference between financial audit and cost audit


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What is the difference between financial audit and cost audit

  1. 1. What is the difference between financial audit and cost audit? by Monisha Agarwal Financial Accounting and Cost Accounting are two branches of the accounting system. The same criterion holds well so far as the distinction between cost audit and financial audit is concerned. Thus, in principle there exists difference but it is difficult to make a clear-cut distinction between cost audit and financial audit in practice. An auditor, whether of cost accounts or of financial accounts, is very much concerned with financial aspect of each and every business transaction. In cost audit, he is expected mainly to concentrate on the items comprising cost structure whereas in financial audit he has to examine the terms of financial accounts, such as capital creditors and debtors, other assets, etc. This, however, leads to the following points of distinction: 1. Audit of Financial Accounts has been made statutorily compulsory by the Companies Act, 1956 while Cost Audit is not compulsory except in certain cases, i.e., in case of companies which carry on manufacturing or mining business which are required to maintain Cost Accounts under Sec. 209(1) (b) of the Companies Act and to get their accounts audited under Sec. 233B. 2. In financial audit, the auditor is required to report on the Profit and Loss Account and Balance Sheet as to whether the former exhibits the true picture of profit or loss and under the latter, he has to certify whether the expenditure involved has been incurred prudently or not. He has to find out the cost of manufacture of each unit of goods or articles. 3. The Financial Auditor is required to examine that the business transactions have been recorded correctly but the Cost Auditor has to see that the decision in accordance with which the transactions have been made, have been taken wisely. 4. The Financial Auditor sees that the expenses incurred are properly authorised and are supported with proper vouchers while the Cost Auditor ensures that the expenditure incurred has been aimed at achieving better results. 5. The Cost Auditor is concerned with the scrutiny of reliability or otherwise of transactions and the Cost Auditor is concerned with the propriety and efficiency thereof.
  2. 2. 6. For closing stock, the Financial Auditor has to verify it and to ensure that it has been correctly valued for the purpose of Balance Sheet but the Cost Auditor has to verify its adequacy or otherwise to meet the needs of the organization. 7. In financial audit, the transactions made and recorded in the financial books are checked while in cost audit, an advice is made available for the future on the basis of previous records and experience. 8. The financial audit exhibits whether correct profits have been arrived at or not, but in cost audit, the possibilities of earning more profits under the present circumstances are to be explored. 9. Financial audit is usually conducted by the owners of an industrial enterprise but the cost audit is ordered at the instance of outside parties such as the Government, Industrial Tribunals, customers, etc. 10. A financial Auditor has to certify the arithmetical accuracy of Ledger entries and castings but a Cost Auditor has to consider the storage cost. 11. In financial audit, the financial aspect of accounts is the matter of concern but in cost audit, the cost aspect of accounts is of main concern. 12. The job of a Financial Auditor is to conduct the checking in the office and to submit his report to the management on whose behalf he has conducted the audit but a Cost Auditor has to examine the working in the factory and to report to the Company Law Board and also to the company. 13. The financial auditor is appointed normally by the shareholders in General Meeting while the Statutory Cost Auditor is appointed by the Board of Directors with the previous approval of the Central Government. 14. The financial audit is conducted every year while cost audit is conducted whenever such a step is required to be undertaken by the Government or Industrial Tribunal. 15. The financial audit is a sort of post-mortem audit while cost audit is forward-looking i.e., it has tendency to make suggestions for future.
  3. 3. Cost Audit And Financial Audit 1- Cost Audit as prescribed under section 233B of Company Act, 1956. This is the audit governed by statute such as the company's Act.... We ensure that the cost statements of the Company (ies) are prepared as per Cost Accounting standard issued by the Institute of Cost Accountants of India. We analyze the performance and provide the Management Reports to the Company (ies) We evaluate and report on the internal controls We provide assurance to the shareholders regarding the performance of the Company We provide assurance to the lenders of the Company (ies) regarding the stability and financial position of the business We provide assurance to the various regulatory authorities Financial Audits :This is a review of operation carried out sometimes continuously specially assigned staff with in the client business. We analyze in depth, the internal controls and accounting policies We provide regular reports on on-going working of the Company We verify transactions and report compliance with respect to the Company(ies) policies & procedures We ensure early detection of fraud and mitigate its effect on the business We provide suggestions for improvement in the performance of the Company Special audit : Special audit evolves from the accounts audit on the Government general account whereby certain fact(s) or situation(s) come(s) under special focus. Should the audit on the Government general account detect problems with financial management or operation worth to be further analyzed, the Commission of Audit would proceed to follow up works, searching for causes and presenting suggestions, viable and practical, aiming at elevating the financial management efficiency by the public departments. Performance audit Performance Non statutory audit This are the audit not specially required by law this scope of the audit will be outline by the contract between the auditor and the clients External audit External audit is that which is critical review of the representation of the published financial statements it is compulsory for all company (ies) which are listed in the stock exchange. Final Audit Final audit is commenced when all account has been closed and final accounts are been prepared. Social Audit: Social audit is performed to know the corporate social responsibility. Concurrent Audit The concept of concurrent audit has been introduced to reduce time gap between occurrences of transaction and is overview or checking. It serves the purpose of effective internal control. Concurrent audit is an examination, which is contemporaneous with the occurrence of transactions or is carried out as near thereto as possible. The main focus while conducting concurrent audit it to ensure that transactions are not dealt with in routine but in adherence with the
  4. 4. systems and procedures laid down. We ensure that the transaction or decisions are within the policy parameters laid down, they do not violate the instructions or policy prescriptions, and that they are within the delegated authority and in compliance with the terms and conditions for exercise of the delegated authority.