The quality of an organization’s internal control system and its adherence to all relevant statutory regulations and rules may be evaluated with remarkable accuracy via an audit.
The word “financial audit” is familiar to anybody in the business world, since it is mandated by law for all businesses, government agencies, and other types of institutions.
Every year, businesses, whether for profit or not, must have their books audited. A cost audit, in contrast to a financial audit, is an annual report required by law to be submitted to the federal government on the effectiveness of production and operations.
Here, we’ll dissect the differences between financial audits and cost audits.
What is a cost audit?
The purpose of a Cost Audit is to ensure that the records, statements, papers, and accounts generated and kept by the business about the usage of material, labour, and other resources are accurate and provide a true and fair assessment of the cost of production. Moreover, it validates the audit firm’s cost accounting methodology.
Regardless of the size, structure, direction, or legal form of the business being audited, a cost audit is defined as an objective analysis of the costs associated with the manufacture of a product by the company in question. The directive came from the Central Government, and it specifies which industries must take part: those involved in production.
Features of cost audit
• It evaluates the accountant in the Netherlands costing system to see whether it’s a good fit for estimating the price of the item under discussion.
• It assesses whether the costs associated with the product under examination adhere to the norms established by the relevant cost accounting standards.
• It evaluates the effectiveness of the company’s operations in relation to the product under review, with the goal of ensuring that the cost audit report has all the information needed by regulation.
• Submitting the report in the required format is ensured.
What is a financial audit?
The objective of a financial audit is to determine whether or not the financial statements of a firm comply with applicable accounting principles and standards for use in financial reporting and disclosure. Auditors do extensive work on financial statements to get an objective judgement.
It must be done by all businesses, regardless of their size, kind, or mission (for-profit or non-profit). An auditor’s principal responsibility is to provide reasonable assurance that the company’s financial statements provide a truthful and fair perspective and are free of substantial misrepresentations that might mislead any party.
The auditor hereby attests that the following are true:
• The books are balanced and the accounts are produced.
• There is sufficient proof to back up the books of account.
• The financial data is presented in a straightforward financial statement.
• During bookkeeping, no transactions are missed.
In order to make a judgement as to whether or not the information is adequately revealed, an auditor conducting a financial audit must determine whether or not the entity’s accounting statement is credible, clear, and comprehensive.
Major differences between financial audit and cost audit
The following are some key distinctions between financial and cost audits:
• The term “cost audit” is used to describe a comprehensive analysis of a company’s cost records to determine whether or not they are in accordance with generally accepted cost accounting standards. A financial audit, on the other hand, is a methodical review of a business or institution’s financial records and books in order to verify the accuracy of the books, provide an opinion on the company’s or institution’s financial health, and report on the facts relating to its operations and outcomes.
• Whereas only a practising Chartered Accountant may undertake a financial audit, any certified cost accountant can execute a cost audit.
• The appointment of a cost auditor is made by the Board of Directors of a corporation based on the advice of the Audit Committee. Contrarily, the shareholders do so during the Company’s Annual General Meeting when they elect the financial auditor.
• The cost auditor checks the company’s cost books, cost statements, and cost accounts to see whether they conform to the cost accounting system. In contrast, the role of the financial auditor is to examine the company’s financial statements, books of account, accounting records, vouchers, papers, notes to accounts, etc. for accuracy and conformity with generally accepted accounting principles.
• The primary goals of a cost audit are to assess whether or not management has acted ethically and whether or not expenses have been properly allocated. To the contrary, in a financial audit, attention is paid more to whether or not the financial statement is in line with generally accepted accounting principles and whether or not the internal control system is functioning effectively.
• Every business, non-profit, and government agency must conduct an annual audit of its financial records. However, only some organisations, namely those involved in the manufacturing and production industries, are required to conduct a cost audit.
• During the Board Meeting, the cost auditor presents the Board of Directors with the cost audit report, which is subsequently sent to the Central Government. By contrast, during the
• Annual General Meeting, the financial auditor presents the financial audit report to the company’s shareholders.
An audit of a company’s costs is conducted to ensure that the company’s cost records are being kept and prepared correctly and in accordance with the accounting method used by the business.
Contrarily, the purpose of a cost audit is to have reasonable confidence that the financial statement fairly shows the status of the firm and that there are no major misstatements that may mislead any reader.