This article throws light upon the three points of comparison between cost audit and financial audit. The points are: 1. Functional Relationship 2. Co-Operation and Co-Ordination: Cost Audit and Financial Audit 3. Co-Operation and Co-Ordination: Cost Audit and Financial Audit.
Comparison: Point # 1. Functional Relationship:
There are some fundamental differences between the three forms of audit: Financial audit, Cost Audit and Internal audit, with respect to their scope, approach, responsibility, performance and statutory obligations. But, they have some common interests.
The common interests are:
(i) Both the Financial Auditor and the Cost Auditor have to examine and ascertain, whether there are adequate systems of accounting commensurate with the nature, size and complexities of the operations of the company so that—
(a) the financial auditor can express his opinion on the ‘true and fair view’ of the state of affairs of the company (in the case of a Balance Sheet) and that of the profit for the year (in the case of Profit and Loss Account), and
(b) the cost auditor can express his opinion on the ‘true and fair view’ of the cost of production, processing, manufacturing and marketing of the product under reference (Statements of cost of production, cost of sales, sales realisation and margin).
(ii) All the three auditors have to examine and ensure whether there exists an effective system of internal check and internal control so as to prevent or detect errors and fraud, and whether the system is operating satisfactorily.
(iii) All the three auditors adopt similar means as regards examination of the systems of internal checks and internal controls, soundness in principle and effectiveness in operation.
(iv) All of them are required to verify and ensure that:
(a) The company is maintaining proper Fixed Assets records, in the books of account.
(b) There is an adequate internal control procedure commensurate with the size of the company and the nature of its business for the purchase of stores, raw materials including components, plant and machinery, equipment and other assets.
(c) Unserviceable or damaged stores and raw materials are determined.
(d) Records of sale and disposal of realisable by-products and scraps are maintained.
(e) There is a reasonable system of recording receipts, issues and consumption of materials and stores, commensurate with the size and nature of the business and that such system provides for reasonable allocation of materials and man- hours consumed to the related jobs.
(f) There is a system of authorisation at proper levels with necessary control on the issue of stores and allocation of stores and labour to jobs, with attendant internal control procedures, and
(g) Records of inter-company transactions are kept.
(v) All of them have to submit their audit reports to the company. Though the form and contents of such reports are different, there are some common items of information.
Comparison: Point # 2. Co-Operation and Co-Ordination: Cost Audit and Financial Audit:
A closer examination of the Cost Audit Report Rules, 1996, and the Manufacturing and Other Companies (Auditor’s Report) Order, 1988 would amply suggest that mutual cooperation and understandings have to be reached specially on matters like Fixed Assets, Work- in-progress and stocks, Stores and Materials accounting and control, Salaries and wages accounting and control, Related party transactions, Production statistics and recording, Overheads, etc. between the two statutory auditors.
Again, the Cost Auditor has to examine the statements of:
(i) Reconciliation of cost accounts with the financial accounts and
(ii) Total expenses incurred and the share allocable to the product under reference, and has to incorporate the information on Financial Position, Capital employed, Net worth, Production, Overheads, Sales, etc. after verification in his cost audit report. Most of these items being of revenue nature, the Cost Auditor has to depend primarily on the Profit & Loss Account audited by the Financial Auditor.
But occasions may arise when certain expense items have been treated in financial accounts in a way different from that of cost accounting principle, for example, works of capital nature internally undertaken treated as a revenue item. It may also come to the notice of the cost auditor that the total of salaries and wages accounted for in the cost records is not tallying with that in Profit and Loss Account, or scrutiny of Stores or Materials Ledger and related issue/return/transfer notes reveals inaccuracy in the consumption values incorporated in audited financial accounts, etc.
In all these circumstances, different treatments from either of the two auditors may give rise to discrepancies from the concept of ‘immateriality’. With a view to sorting out the problems of this nature and other allied matters, there should exist mutual co-operation and co-ordination between these two statutory auditors.
Comparison: Point # 3. Cost Audit Report and Financial Audit Report:
The Cost Auditor, in order to avoid unnecessary conflicts, should cross-check some of the information contained in the Financial Audit Report.
The common areas for the two reports may be:
(i) Comments on the maintenance of the cost accounting records under MAOCARO 1988.
(ii) The quantity and value of finished goods (if applicable).
(iii) The figures of Assets and Liabilities of the Cost Audit Report and those disclosed in the Balance Sheet.
(iv) The figures of repairs and maintenance and of the consumption of stores and spares, provided that the company is a single ‘product’ industry.
(v) The figures of Licensed and Installed capacities and those of actual production.
(vi) The consumption of various raw materials, process materials, etc.
(vii) The figures of sales subject to adjustments of excise duty.