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

Before a general discussion on the matter is made it should be pertinent to note that an internal auditor:

(i) Is an employee of the company,

(ii) Has to be loyal to the company by responding to the uses and requirements of the company management, although independent of the accounts’ chief and of other functional departments,


(iii) Has no legal obligations either to the Government or to the cost auditor, and

(iv) Has no criminal liability other than the contractual liability arising from the service agreement or terms of reference (in case of audit firms hired for the purpose) entered into between him (or hired Audit Firm) and the management. As against the background the cost auditor’s appointment his duties and responsibili­ties and liabilities stand on a different footing.

The requirements expected from a cost auditor are for public interest. Moreover, some of the following acts or omissions:

(i) Certifying a report without examination being made;


(ii) Failure to disclose in a cost or pricing statement, a material fact known, which it is necessary to disclose so as not to make the statement misleading;

(iii) Failure to report a known material misstatement appearing in a cost or pricing statement;

(iv) Gross negligence in professional duties;

(v) Failure to obtain sufficient information to warrant expression of an opinion; and


(vi) Failure to invite attention to any material departure from the generally accepted procedure of cost accounting and pricing applicable to the circumstances, on the part of a statutory cost auditor constitute professional misconduct according to the Cost and Works Accountants Act.

Further, unlike the internal auditor, he is subject to criminal liability under sec. 197 of the Indian Penal Code for issuing or signing any certificate required by law, knowing or believing that such certificate is false in any material point, and held responsible for the damage caused to his clients arising from negligence and liable to guilty of misfeasance if the company suffers any loss due to his wrongful performance of duty.

Under all these circumstances, the liability of a statutory cost auditor is far greater than the internal auditor. Again, neither the Cost Accounting Records Rules nor the Cost Audit Report Rules nor any other law in India lay down any provision to make use of the work of internal audit for carrying out external audit—cost or financial audit.

The creation of internal audit department within a company is a matter of choice and convenience to the company management so as to meet their own objectives and purposes including an objective in particular to assist the external Cost or Financial Auditor with a view to tiding over the problems associated with such audit disciplines.


In spite of the existence of internal audit department, it is up to the Cost Auditor’s personal choice and judgement to depend or not to depend, to rely or not to rely, on the work of the internal auditor. The binding between the external cost auditor and internal auditor on some aspects of audit is neither legal nor a compulsion but a matter of convenience based on mutual relationship and co-ordination.

“The internal auditor’s responsibility is to the management and he is in no sense a servant of the independent auditor. It follows, therefore, that the extent to which the internal auditor can so arrange his work as to be of specific assistance to the independent auditor will depend upon— the decision of the management, the scope of internal audit and the number of staff employed thereon. Consultation between the two auditors, and where necessary with the management, should however ensure that so far as is practicable the fullest possible assistance is available to the independent auditor”—(Institute of Chartered Accountants, Eng. and Wales).

In this regard, the following recommendations contained in the international auditing guideline issued by the International Federation of Accountants are very relevant—

“The report of the external auditor is his sole responsibility, and that responsibility is not reduced by any use he makes of the internal auditor’s work. Thus, judgements relating to the audit of the financial information must be those of the external auditor.”


“The external auditor should also test the work of the internal auditor which he intends to use. The nature, timing and extent of his tests will depend upon the external auditor’s judgement as to the materiality of the area concerned to the financial statements taken as a whole and the results of his evaluation of the internal audit function and of the specific internal audit work. His tests may include examination of items already examined by the internal auditor, examination of other similar items and observation of the internal auditor’s procedures.”

The ultimate responsibility of the Statutory Cost Auditor for expressing his opinion about the proper maintenance of cost accounting records by the company “so as to give a true and fair view of the cost of production, processing, manufacturing activities and marketing of the product under reference” is bestowed upon him. Accordingly, he cannot take shelter under the plea that he relied on the internal auditor and the internal control system.