We explain that what is the difference between cost audit and financial audit with table. Every business transaction is under the scrutiny of an auditor. An auditor of each organization, institution or government organization is supposed to focus on the financial accounts and elements of the cost structure. Both the cost audit and the financial audit are accounting systems.
The audit is a process of inspection or physical examination of the financial records or books of accounts of an organization or institution carried out by an auditor. All organizations or institutions, whether they make a profit or not, financial records must be audited every year.
While practicing, it is a bit difficult to differentiate between cost audit and financial audit. The audit is performed to ensure that financial records are correct and presented to shareholders, the board of directors, and the government.
Cost auditing is a cost record auditing process. It is only for manufacturing and mining companies. An auditor examines the statement of costs, accounts, books that a company prepares on the purchase and use of materials, resources, labor costs, etc.
Financial auditing is a process of examining or inspecting the financial statements or records of an individual organization for tax, disclosure, and recordkeeping purposes.
The main difference between the cost audit and the financial audit that is, the cost audit provides a clear report of the expenses that were incurred during the production of the planned items. Whereas the financial audit is a profit and loss report and the balance sheet to declare the true nature of the business.
Comparison table between cost audit and financial audit (in table form)
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What is the cost audit?
Cost auditing is the process for auditing costs incurred in a financial year. The cost audit is performed by an experienced cost accountant who is an auditor to determine the total manufacturing costs of 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 costing report must be presented to the central government as well as to the board of directors within 180 days after the end of the fiscal year.
Cost auditing is a process of examining or inspecting cost records, account statements, or expense accounts that have been performed on planned items. It includes the purchase of materials, resources, labor 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 all the necessary data required by law in a particular format.
There are three types of cost audits. They are
- Efficiency audit is the measurement and use of economic resources in the most profitable way as planned by the company.
- The audit of property is financial and action expenses and management plans of the organization. The auditor should ensure that the authority approves the planned expenditure.
- Legal audit It is mandatory that the organization keep a transaction book, the objective of this audit is that the government must ensure the relationship between price and costs.
By performing the cost audit, you help management, shareholders and government to obtain adequate information on the cost. Help control costs and find out if fraudulent activities have been carried out.
What is the financial audit?
The financial audit is a comprehensive examination of the financial statements for disclosure. It is mandatory for all organizations registered under the Companies Act of 1956, whether they make a profit or not.
The financial audit is audited by the public accountant appointed by the shareholders of the company. Regardless of the structure or size and whether or not the organization makes a profit every year, the audit must be performed by an auditor and the report must be presented to the shareholders during the company’s annual general meeting.
The purposes of the audit are for the auditors to confirm that the statement or transaction maintained by the company is transparent and appropriate. They find out that
- In the ledgers, the account entries are prepared according to the format.
- Transactions and statements support the evidence provided by the organization.
- The transaction or statements are provided or maintained and are easily understandable.
- By preparing the books of accounts, no transaction is tampered with or misplaced.
There are some basic procedures for financial audits. They are
- Audit planning is a plan to collect data on the financial health of the organization using different methods. And auditors should plan the risk assessment with the company’s weaknesses in mind.
- Internal control It is a next step that involves internal controls, where the auditor inspects the procedure of financial accounts and records to indicate the financial status of the organization.
- Testing involves examining internal controls whether it is working or not. The auditor examines more about the financial procedure and more information to avoid or find errors.
- Reporting is the final step in the financial audit, the auditor’s report in stimulated format if the company is following the financial standard.
Main differences between cost audit and financial audit
- The main difference between cost audit and financial audit That is, cost audit reports costs, while financial audit reports the status of the company in terms of profit and loss.
- The cost audit is mandatory for all manufacturing and mining companies under Sec 209 and the financial audit is mandatory for all companies that are registered under the companies law of 1956.
- For the cost audit, the auditor is appointed by the board with the approval of the central government. While for the financial audit, the shareholders of the company appoint an auditor.
- The cost audit report must be submitted within 180 days after the end of the financial year. While the financial audit is presented during the annual general meeting of the company’s body every year.
- The cost audit is carried out when the government requires a report in one year through the exercise of cost accounting and the financial audit is a mandate to be performed every year through the practice of a certified public accountant.
Cost audits and financial audits are procedures that every company follows. The cost audit is mandatory only for manufacturing and mining companies, as it examines the cost of expenditures made on planned items. Financial auditing is mandatory for all companies regardless of the size or structure of companies registered under the 1956 Companies Act.
Financial auditing includes the inspection or examination of financial statements, records, and transactions. In both cases the auditor must be in office. The audit is carried out for the betterment of a company or organization that can prevent or take precautions against fraud and manipulate data. Both the audit procedure provides a real insight into the organization’s business.