What is the difference between financial audit and cost audit
What is the difference between financial audit and
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.
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
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,
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
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.
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
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
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
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.