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.
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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.
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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.
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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 experience.
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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, etc.
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 Central Government.
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.