COST AUDIT AND MANAGEMENT AUDIT- ALL YOU NEED TO KNOW

COST AUDIT:-

A cost audit is an audit of cost records on utilization of materials, labor, overheads, and other items of cost applicable to the production of goods. On the other hand, management audit has a much wider scope and it deals with the assessment of all managerial functions in a company.

In the context of accounting, an audit is the systematic examination of the books, vouchers, and records of a business to enable the auditor to report whether the accounts are properly drawn up (i.e., so as to exhibit a true and fair view of the company’s state of affairs).

Initially, the scope of audits was limited to verifying official transactions. However, more recently, it has been extended to other fields, including cost audit. Cost audits seek to verify the correctness of cost records or cost accounts.

Cost audit is an examination of the efficiency of the minute details of expenditure while the work is in progress; it does not constitute a post-mortem examination. The cost auditor can be appointed by the board of directors by taking prior permission of the central government. The cost auditor enjoys all the rights of a financial auditor.Ultimately, cost audits are valuable for decision-making, price determination, internal control, and internal efficiency.

Objectives of Cost Audit:-

If someone has to read about why Cost audits are important, they have to understand what are the objectives and benefits of cost audits. Some of the objectives of cost audit are enlisted below:

• To maintain the accuracy of the data related to cost.
• To ensure coverage of all arithmetic data in any account book. 
• It helps in maintaining all cost-related principles and complete adherence to preparing cost accounts.
• It helps in detecting errors, drawbacks, and frauds in accounts and correcting them immediately.
• To observe if all features of cost audit are properly followed.
• To check the overall working condition of the cost department also comes under the process of cost audit.
• For ensuring proper management and usage of cost strategies at the right time. 
• To develop correctness among internal auditors of the company. 

MANAGEMENT AUDIT:-

Management Audit refers to the process of a systematic and independent appraisal of the performance of managerial functions. In this process, critical examination of the policies, procedures, operations and programmes that are inherent to the internal control system. It is a part or extended version of the internal audit.

Scope of Management Audit:

A management audit is vast as compared to a financial review because it not only evaluates finance but also other features of a company. It has an efficiency for assessing management from top to lower level. Few main scopes of management audit are described below:

• Calculate the Effectiveness of the Management- It audits the entire level of management of a company.
• Execution of Principals and Policies- It reviews whether the policies and the principles deployed by the company is effective and successful.
• Locate and Examine the Differences-It helps to identify the differences in productivity and if the pattern set by the company is not fulfilled.
• Suggest for Improvement- The management audit suggests improvement in areas, e.g. purchase, sale, finance, administration, human resources, etc.,

Objectives Of Management Audit:

• Verify Efficiency- It aims at increasing productivity at all the levels of management and execution of policies.
• Give the Recommendation to Increase Efficiency- The management audit marks the incapabilities in various levels of management and provides suggestions to enhance the efficiencies.
• Evaluates the Potential of Policies and Planning- It audits and evaluates the policies and plannings structured by the management and judge if its appropriately implemented.
• Increase Profit- It helps to increase the profit margin by providing solutions to maximise the company’s resources in a valuable way.

DIFFERENCE BETWEEN COST AUDIT AND MANAGEMENT AUDIT

Cost audit	Management audit
Verification of cost records pertaining to certain specified goods	Appraisal of management performance
Checks whether cost accounting system followed in the company serves as a correct basis for ascertaining the cost of production	Examines the efficiency of almost every area of operations in the company
Mandatory for certain specified classes of companies producing specified goods	Voluntary (not a statutory obligation)
The scope is narrow	Wider in scope (almost all managerial functions are reviewed)
The auditor must act as a watchdog in verifying the company’s cost records	Auditor’s attitude is that of a friend, philosopher, and guide
Views the current system of cost computation	Applies its attention to future planning and performance
Annual (as per the directions of the Central Government)	Regular (conducted as per needs and desires of the company)
Quantitative audit	Qualitative audit
Examines the reliability of systems that produce cost information	Assesses efficiency and suggests improvements
Conducted by a qualified cost accountant	Conducted by an independent expert or consultant
Intimation of appointment of cost auditor to the Central Government	No such requirement