Cost vs. Financial Audits – What’s the Difference?


 In some cases, you may hear the terms ‘cost’ and ‘financial’ used interchangeably when it comes to auditing, but the truth is that they both refer to very different processes.

Cost and financial audits therefore have very different applications within businesses, while they’re also carried out by different practitioners and overseen by alternative leadership groups within a company.

In this post, we’ll explore both audit types and their key differences, while asking precisely how they’re used within companies.

What’s a Cost Audit?

In general terms, a cost audit is an independent examination of a company’s cost statements and accounts.

It focuses on the accuracy of these fiscal statements, while ensuring that it conforms with the cost accounting plan already laid out.

It’s the board of directors that typically appoint the auditor, while the audit itself studies records and statements relating solely to business costs.

What’s a Financial Audit?

Conversely, a financial audit describes a broader analysis of a company’s finances, including both incoming and outgoings.

This process involves a systematic and objective examination of your firm’s books and financial statements, in order to determine their accuracy and determine compliance with existing tax laws.

This type of audit is usually commissioned by shareholders, while it will utilise documentation such as overall company accounts, books and annual financial statements.

What Are the Main Differences?

As we can see, cost audits are more niche and focused on examining the cost production of a business’s output.

This involves the analysis of cost accounts that have been prepared and documented by the company, while this will be carried out by a qualified and practising cost accountant.

As we’ve already touched on, a financial audit is far broader and more sweeping, analysing all bookkeeping records and receipts.

This must be carried out by an accredited chartered accountant, who will appraise both company incomings and purchases in order to determine if the reports are accurate or (in some cases) fraudulent.

As we’ve already touched on, another key difference is that directors will usually request a cost audit as part of an internal reporting process. Conversely, shareholders will commission a financial audit, which will be carried objectively by an external partner.

How and When are Cost and Financial Audits Used?

Typically, directors will request a cost audit to determine the efficiency and sustainability of the company’s spending, in order to ensure compliance with the existing accounting standards and effectiveness of the internal control system.

This process is compulsory for all companies engaged in the manufacturing sector, while it provides an insight into a business’s cost base when compared to output and sales.

Conversely, financial audits are compulsory for all businesses, while their core emphasis is the analysis of the overall efficiency of operations and compliance with tax laws and requirements.

They can also be requested at random by HMRC, so it’s crucial that your firm is prepared for such an event at all times.