This article will help you to differentiate between Internal Audit and Statutory Cost Audit.

Difference # Internal Audit:

A. Scope:

1. (a) The work of audit under the system is mainly performed by the employ­ees, i.e. internal staff of the company.

(b) The work can be done by any person having training and skill on the sub­ject and no academic or professional qualification is prescribed.

2. The extent of work to be undertaken is determined by the management of the company.


3. The function may cover the areas be­yond the scope of specific cost account­ing records and related internal controls. It may embrace the non-traditional ar­eas, such as management audit, opera­tion audit, propriety audit, etc., includ­ing the activities other than the ‘prod­uct’ under cost audit.

4. Examination, review and appraisal of the company’s activities can be made con­tinuously throughout the year under the system.

5. Though MAOCARO, 1988 recom­mends for such audit system, it is not governed by any statute. It is optional and voluntary.

6. It is an advisory function.

B. Approach:


1. The function aims at ensuring that the systems of cost and financial account­ing are efficient so that the information presented to the management through­out the period is accurate and discloses material facts.

2. The approach of internal auditor to the work is through the organisation chart and procedures manual.

3. Generally, various items of this audit work are sub-divided ‘as per operating functions and lines of management re­sponsibility’.

4. The approach of this function aims at bringing about an improvement in the overall system of the organisation by a systematic review of business operations and related internal controls, and ensur­ing that the work done is according to the pre-established plans, policies and procedures of the company.

C. Responsibility:


1. The internal auditor is responsible only to the company.

2. Delegation of authority and responsibil­ity to an internal auditor is determined by the company management.

3. The system does not bind the company with any obligation to rectify or to take action on deficiencies pointed out in the report.

4. The assignment of responsibilities to an internal auditor can be altered by the management to suit purposes.

D. Status:


1. Although the internal auditor is inde­pendent of all-other departments of the organisation, he has to perform his tasks as per the desire of the company’s top management.

2. (a) The internal auditor is a salaried em­ployee of the company,

(b) In case of an audit firm being engaged to perform this function, such firm’s activities arc also determined as per terms of reference.

E. Reporting:

1. It has no standardised reporting format and the report is of the nature of recom­mendations.

F. Objectives:


1. The primary object of this function is to aid the company management.

2. This function aims at appraising the ef­fectiveness of new operations in differ­ent departments or any organisational unit of the enterprise.

Difference # Statutory Cost Audit:

A. Scope:

1. The work of audit under the system is performed by professionally qualified and experienced Cost Accountants who are not the employees of the company.

2. The extent of work to be undertaken arises from the responsibilities laid down in the Companies Act, 1956, and Cost and Work: Accountants’ Act, 1959, and is determined by the scope of provisions contained in the Cost Audit Report Rules, 1996 and the relevant Cost Accounting Records Rules for the industry under cost audit.


3. The function is limited only to the ‘prod­uct’ for which the Central Government has ordered for audit of cost accounts. It cannot embrace its activities in other products of the industry for which orders have not been issued.

4. The examination of the books of cost accounts, statements and related activi­ties is only at the end of a year.

5. It is governed by a statute. The introduc­tion of this audit is a ‘must’ for a com­pany under the orders of the Govern­ment.

6. It is an attest function.

B. Approach:


1. The functional approach is governed by the Cost Auditor’s duty and responsibil­ity to satisfy himself that the cost state­ments show a ‘true and fair view’ of the profit or loss, cost of production, etc., for the financial period and of the state of the affairs at the end of that period.

2. The cost auditor’s approach to the work is through various cost statements and other relevant books of cost accounts in terms of the relevant cost accounting record rules.

3. The basis of sub-division of cost audit work is basically determined in relation to the ‘product’ under audit and to the relevant cost statements.

4. The approach of the Cost Audit function is to undertake a review for the purpose of determining the scope of the exami­nation of the books of cost accounts, and thereby to ensure the reliability of the cost data placed before the Cost Auditor.

C. Responsibility:

1. The statutory cost auditor is responsi­ble only to the Central Government and partially to the company.

2. The statutory cost auditor draws his au­thority and responsibility from the Com­panies Act, by being appointed.


3. The system binds the company to fur­nish the Central Government with full information and explanation on every reservation or qualification made in the report as per Section 233B (7) of the Companies Act.

4. The responsibilities assigned to a cost auditor arc not subject to alterations till the provisions in the Statute are amended.

D. Status:

1. The cost auditor is independent of the company management both ‘in fact and mental attitude’.

2. The statutory cost auditor is an inde­pendent agent for and on behalf of the Government, though he earns his remu­neration from the company for such statutory services rendered.

E. Reporting:

1. It has a standardised Cost Audit format, and the report may contain qualified or unqualified or adverse or disclaimer of opinion.

F. Objective:

1. The primary object here is to aid the Central Government for reliable cost accounting and authentic cost data.

2. The objective of this function is to ex­press an opinion on the cost statements and other books of cost accounts exam­ined by the cost auditor.