Any business needs the auditing process to not only ensure they are complying with laws and rules but that they are running their company as cost-effectively as possible. All companies, even if they don’t turn a profit, need to have their accounts audited annually by law, but there are two quite different kinds of audits to wrap your head around.

But what are the main differences between a financial audit and a cost audit and why and how they are conducted for businesses in the UK?

What is a financial audit?

A financial audit refers to the examination of financial records and business accounts by an independent body that is conducted for compliance, taxation or for disclosure purposes. It ensures high accuracy in the given reports and is a systematic and completely unbiased examination of a company or institution’s finance books and records.

What is a Cost audit?

A cost audit refers to the verification of accounts and costs of a business and a careful compliance accounting process. It is an independent examination of the correctness of the cost statements and accounts and their conformity with the cost accounting plan. In essence, it’s all about assessing the efficiency of a business. 

What are the differences?

• A cost audit is done by a cost accountant whereas a financial audit is done by a chartered accountant. A cost accountant analyses the cost records and books to check they are in line with the company system, whereas a chartered accountant focuses on how ‘correct’ the books are and whether or not they are in line with accounting standards.
• Cost audits are generally appointed by a board of directors, whereas financial autos are appointed by the shareholders.
• With a financial audit, it’s all about the compliance of the statements and how effective the internal control system is. With a cost audit, it’s all about the efficiency and efficacy of operations.
• A cost audit is submitted directly to the government, whereas a financial audit is submitted to shareholders.
• A financial audit is compulsory for all businesses and a cost audit is only compulsory for manufacturing and production businesses.

Generally speaking, both financial audits and cost audits are important processes suitable for a variety of businesses and situations. One is engineered to serve the interests of shareholders and the other is engineered to serve the interest of management. Both are there to serve a purpose and should be considered by enterprises of all shapes and sizes.