Difference Between Cost Audit and Financial Audit

Edited by Diffzy | Updated on: April 30, 2023


Difference Between Cost Audit and Financial Audit

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Audit is a commerce term used in many financial transactions. It’s a checking of various account books by a professional called auditor which is then followed by physical inspection of inventory to make sure all departments are following documented system of recording transactions. Audits can be done from within an institution by employees of a particular department and can be done externally also. Auditing is a good way of evaluating the efficacy of an association’s internal control and compliance with laws applicable to the enterprise. There are two types of audits, financial audits and cost audits, to general public these terms might sound similar but they are significantly different.

Cost Audit vs. Financial Audit

These terms are often used in business and may be rather confusing at times. Financial auditing is not a new concept for business students or anybody else involved in the field, since it is a legal necessity for firms, government entities, and institutions. Every company, whether profitable or not, must have its finances examined by an auditor once a year. Financial audit is sometimes compared with cost audit, which is a mandatory reporting procedure in which yearly reports are given to the central government about the effectiveness of production and operation of a certain product.

Difference Between Cost Audit and Financial Audit in Tabular Form

Definition A cost audit is an objective evaluation of the accuracy of the cost statements and accounts, as well as their compliance with the cost accounting strategy. Financial auditing is the methodical, unbiased study of company’s or financial accounts and archives to express an opinion on them.
By who is the audit performed? Executed by a working Cost Accountant. Executed by a working Chartered Accountant.
Who Appoints the auditor? Board of Directors Stockholders
Study Cost records, statements, accounts. Financial Statements, Books of Accounts, Documents, Vouchers, and so on.
Highlight Analysis of the efficiency of operations and propriety of actions of the management. Compliance with the accounting standards and effectiveness of the internal control system.
Compulsion Compulsory for all companies. Compulsory for the companies engaged in the manufacturing business.

What is a Cost Audit?

A cost audit is a process of auditing that involves verifying the production of costs by checking the expense books, statements, documents, and accounts created and recorded by management about expenditure, personnel, and other resources to ensure that the accounts are accurate and fair. It also validates that the company's current cost accounting system is suitable. Cost auditing, in layman's terms, refers to an impartial assessment of cost information concerning the manufacture of a product by an entity, regardless of its size, form, direction, or legal form, in order to provide an assessment on such data.

There are many features of cost audit:

  1. Investigates the company's rating system to determine whether it is appropriate to determine the cost of the product being reviewed.
  2. Checks the effectiveness of the accounting rules for the product in question.
  3. It evaluates the effectiveness of the company while referring to the product being considered to ensure that the cost audit report contains all the relevant facts required by law.
  4. Ensures that the report is sent correctly.

Cost audits are classified as follows:

  1. Statutory audit- It is the organization's obligation to keep a record of transactions, and the objective of this audit is to guarantee that the government ensures a price-cost connection.
  2. Propriety audit - This is an examination of organizations or program's cash flow and performance. The auditor is accountable for guaranteeing that the estimated expenditures are sanctioned by the management.
  3. Efficiency audit- This entails measuring and utilising economic resources in the most lucrative manner.

The audit is based on the government's annual reporting of performance on certain products. It limits the auditor's capacity to report by limiting it to specific regions exclusively. The report is no longer provided to shareholders, who are investors. It does not educate or assess senior management's role in leadership and decision-making. Cost evaluations are related to an organization's various strategic activities and can be expanded into management evaluation in partnership with the Board of Directors.

Some important aspects related to cost audit:

  1. Every corporation that is subject to a cost audit must engage a cost auditor within 180 days of the start of each fiscal year.
  2. A company's cost auditor is appointed by the Board of Directors, and his compensation is later approved by shareholders.
  3. The individual should be a practising cost accountant or a firm of cost accountants, for being eligible for appointment as a cost auditor. Additionally, the cost audit must be carried out in accordance with the Institute of Cost Accountants of India's cost auditing criteria.
  4. Under Section 139, a statutory auditor of the corporation designated cannot work as a cost auditor, according to Section 148.
  5. Conferred by Section 148, a cost auditor remains in that role until 180 days after the end of the financial year or until they submit the cost audit report for the relevant year. The firm nonetheless, has the power to remove him from office before the end of his term by passing a board resolution and providing him with a sufficient opportunity to explain.
  6. After completing the cost audit, the auditor must submit his / her duly signed audit report to the company's Board of Directors via e-Form CRA-3. After the end of the financial year, such a report must be submitted within 180 days. The report should provide the auditor's reservation, comments, or suggestions if available.

What is Financial Audit?

Financial auditing is a technique in which the auditor reviews the corporation's economic reports to see if applicable accounting rules and guidelines for financial reporting and disclosure are being followed. The auditors thoroughly study the financial statement in order to form a reasonable foundation for expressing their judgement on it. It is required for all organisations, regardless of size, legal structure, orientation, or other factors. The primary goal of the auditor is to guarantee that the company's financial statements reflect an accurate and fair picture and are free of serious misstatements that might mislead any party. A financial audit is a legal obligation for the vast majority of enterprises and government agencies.

A financial audit is a legally mandated requirement for enterprises and government agencies. Tax audits conducted in accordance with the Income-tax Act are also included in this category. It is an exploratory critical assessment undertaken by an approved independent agency, as well as a monitoring system, to determine how well the organization's accounts comply with expectations within a defined framework. The accounts are prepared accurately in terms of the entries in the account books, and the account books are adequately supported by evidence.

Features of a financial audit:

  1. All industries are required to conduct a financial audit, plus every firm which has been established under the Companies Act, private or public, is required to have its books of accounts audited at least once a year.
  2.  A financial audit's principal purpose is to establish an opinion on an accounting estimate. The auditor is required to state if the financial statements offer an accurate and fair picture of the organization's business.
  3. At each AGM, the owners or shareholders of a firm choose a mandatory auditor. The commission is for a term of five years, following which the auditor may be re-appointed for another five years, subject to Rule 5 of the Companies Rules, 2014.
  4. The Companies Act of 2013 establishes the qualifications of the auditor who conducts financial audits. A Chartered Accountant or chartered accountant firm can only be appointed as an auditor if it is a company. However, formal research should be done only by external agencies. He cannot be a company employee checking his accounts.
  5. 5- A company's Annual General Meeting must be held within six months of the financial year end, and notice of the AGM must be provided to all members at least 21 days before the AGM. Along with the notification of the AGM, stockholders should be provided with a copy of the Directors' Report and Audited Financial Statements, as well as the auditors' report.

Key Differences Between Cost Audit and Financial Audit in Points

  1. Cost Audit refers to the cost-effectiveness of a company-produced product, based on cost accounts prepared and maintained by the company, in this case, in terms of cost calculation. However, financial auditing is a systematic review of a company's account books for auditing accounts, commenting and reporting facts relating to its operations and results.
  2. The efficiency and effectiveness of management functions is the subject of cost estimate. However, during the audit, it is critical to review the financial statements are compatible with accounting standards and that the internal control system is functional.
  3. Cost Audit is made into an effective cost accountant and an active Chartered Accountant can do financial research.
  4. The Cost Auditor is appointed by the company's Board of Directors on the suggestion of the previous audit committee. On the contrary, financial auditors are appointed by shareholders at the Company's Annual General Meeting.
  5. Cost evaluation Checks that the company's accounting system serves as an appropriate basis for verifying production costs. Although the financial statements ensure that a sound and accurate view of the company's position is represented in its financial statements
  6. The Auditor-General audits cost records, expense books, expense statements, and expense accounts to see if they are compliant with the company's accounting system. An auditor, on the other hand, audits a company's financial statements, account books, accounting records, vouchers, papers, notes, accounts, etc. to ensure the accuracy of the accounts and compliance with accounting standards.
  7. Financial audits are required for all businesses, organizations, and institutions. Cost checks, on the other hand, are required only by certain companies, including those in the manufacturing and manufacturing sector.
  8. At a meeting, the auditor-general presents the audit report to the Board of Directors, which is subsequently presented to the Central Government. The Auditor-General, on the other hand, presents the audit report to shareholders during the company's Annual General Meeting.


Ultimately, cost audit checks the cost accounts of organisations and enterprises to verify if the accounts are correctly managed and created in accordance with the system in place. The goal of a cost audit is to obtain as much assurance as possible that the financial statements depict the proper situation of the business and that there are no substantial misstatements that may mislead anyone. The primary distinction between a cost audit and a financial audit is that a cost audit provides a detailed summary of expenditures incurred throughout the manufacturing of scheduled products. Financial audit, on the other hand, is a report of profit/loss and balance sheet to proclaim the genuine nature of business.

Audit of costs Verifies cost records for specific commodities, but under financial audit, transactions are verified and documented in the books of account. Cost auditing is required for certain kinds of enterprises that produce certain items, whereas financial auditing is a statutory audit. Cost audits and financial audits are both practises that all businesses must undergo. Only manufacturing and mining businesses are required to conduct cost research, which assesses the estimated cost. Financial audits are required for all firms registered under the Companies Act of 1956, regardless of size or structure. Audit includes auditing or evaluating financial statements, records, and transactions. The auditor must practice in both cases. Research is designed to help the company or organization to avoid or detect fraud and data manipulation. Both the research process and the research report provide a true picture of the organization's activities. Finance, cost, these terms are used in our everyday lives even though people might not be related to financial sector, however seeing it in deeply these terms definitely have a lot to them, this article would give one a clear distinctive view of both, as both these auditing methods gives us a accurate acumen into the industry businesses.



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"Difference Between Cost Audit and Financial Audit." Diffzy.com, 2024. Mon. 15 Jul. 2024. <https://www.diffzy.com/article/difference-between-cost-audit-and-financial-audit-15>.

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