Auditing is one of the best methods that help in assessing and examining the effectiveness, cost and financial records, procedures, and internal control system of an organization. An auditor audits (evaluate) the performance of the company by following the laws and principles of accounting. The two types of audits are cost audit and financial audit. In this article, we will understand the complete difference between both these terminologies. The blog contains the following fundamental concepts.
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Definition Of Cost Audit
Cost audit refers to the act of evaluating and analyzing cost aspects like cost statements, cost records, cost documents, etc of an organization so as to ensure the accuracy and fair image of its accounts. Cost audit also confirms that the company’s current cost accounting system is appropriate. In a nutshell, a cost audit refers to the impartial examination/analysis of cost data/information regarding the manufacture of goods by an organization, regardless of its size, form, orientation, or legal form, so as to provide a point of view on such information.
Characteristics Of Cost Audit
Some of the main characteristics of cost audit are as follows.
- Cost audit helps an auditor analyze the costing system of the firm and let us know whether it is appropriate for cost ascertainment of goods under consideration.
- It helps to detect all the errors in the cost records of the business entity.
- It helps in optimum utilization of national resources.
- It ensures that all the cost reports are submitted in a specified form.
- Look over the effectiveness of accounting principles for the goods under consideration.
Definition Of Financial Audit
Financial audit refers to the act of analyzing financial aspects like financial statements, books, etc. of the company to ensure that the relevant accounting rules and laws(guidelines) for financial reporting are being followed. Also, In a financial audit, the auditor examines all the economic reports of an organization. The auditor analyzes and study the financial statement thoroughly to attain a reasonable basis for expressing his/her views on it.
A financial audit is mandatory for every organization, regardless of factors like size, orientation, legal structure, etc. The financial auditors primarily aim on representing a true and fair picture of the financial statements of the company, and that they are free from material serious misstatements.
Difference Between Cost Audit And Financial Audit(Table)
|Basis For Difference||Cost Audit||Financial Audit|
|Definition||It refers to the activity of evaluating the correctness of cost statements and accounts, as well as their conformity with cost accounting strategy and plan.||It refers to the unbiased analysis of an organization’s financial accounts(finance books, statements, records, etc) and archives to express the opinion on them.|
|Who Performed it?||Performed by working Cost Accountant.||Performed by working Charted Accounting.|
|Examine/Study||Cost records, cost statements, and accounts.||Financial statements, documents, books of accounts, vouchers, and so forth.|
|Compulsion||It is compulsory for all companies.||It is compulsory for the companies engaged in the manufacturing businesses.|
Key Differences Between Cost Audit And Financial Audit
Some of the key differences between cost audit and financial audit are as follows.
- Cost audit refers to the act of evaluating and analyzing cost aspects like cost statements, cost records, cost documents, etc of an organization so as to ensure the accuracy and fair image of its accounts. On the other hand, a Financial audit refers to the act of analyzing financial aspects like financial statements, books, etc. of the company to ensure that the relevant accounting rules and laws(guidelines) for financial reporting are being followed.
- The practicing cost accountants are responsible for performing cost auditing. On the other hand, Charted Accountants are responsible for carrying out financial auditing.
- While the cost auditor is appointed by the company’s board of directories on the recommendation of the previous audit committee, financial auditors are appointed by shareholders at the AGM(Annual General Meeting) of the company.
- The cost auditor focuses on analyzing cost records, cost books, cost statements, and cost accounts in order to ensure that they are in accordance with the company’s cost accounting system. On the other hand, the financial auditor analyses a company’s account books, financial statements, accounting records, vouchers, notes to accounts, documents, etc. to check the accuracy of accounts and their compliance with the accounting principles/standards.
- While cost audit is required only for certain companies i.e those companies which are engaged in manufacturing business, the financial audit is mandatory for all businesses, organizations, and institutions.
So with the above discussions and explanations, we can conclude that the main objective of a cost audit is to examine the cost accounting system of a business entity, in order to make sure that they are suitably maintained as per the system followed by the concern. On the other hand, a financial audit emphasizes the accuracy of the financial statements with the accounting standard. The practicing cost accountants are responsible for performing cost auditing. On the other hand, Charted Accountants are responsible for carrying out financial auditing.