Difference Between Cost Audit and Management Audit

Corporations and Businesses can evaluate and enhance their financial and operational procedures through two different types of audits: Cost Audits and Management Audits. A management audit is an impartial analysis of the managing tasks carried out at various management levels to ascertain their goals, effectiveness, and roles. However, a cost audit is a process of verifying the production cost that a business maintains, taking into consideration labor, material, and overhead costs, based on its accounting records.

Comparison Chart

What is a Cost Audit?

An independent assessment of an organization's cost accounting processes and expense data is called a Cost Audit. This is done in order to make sure that the organization's costs for products and services are calculated in line with cost accounting principles and to verify that plans, policies, processes, and legal requirements are being followed. Cost audits are primarily conducted to verify that production or service costs have been calculated correctly and consistently, and that cost records are accurate and comprehensive. Certain businesses, such as manufacturing, construction, and services, typically require cost audits.

Who Does Cost Audits?

A cost audit can only be carried out by a practicing cost accountant who has been chosen by the board of directors. In addition, adherence to the Standards on Cost Auditing (SCA) is mandatory for the cost auditor. He or she verifies if:

• The cost records are accurate.
• The cost accounting system, documentation, and protocols are sufficient.
• Cost accounts follow the cost accounting plan.
• Cost data are preserved and kept up to date in accordance with legal requirements.
• An accurate picture of the costs associated with manufacturing, processing, and marketing is provided by cost records.

Objectives of Cost Audit

• Double-check the company's cost accounts and ensure that all applicable rules and regulations are being followed and that they are being kept correctly.
• To identify faults and scams.
• To ensure that costs are determined accurately, verify the cost of each cost center and cost unit.
• To make it easier for the prices of products and services to be fixed.
• To detect and address unusual material and time loss.

Advantages of Cost Audit

The benefits of cost audit are listed below:

To The Management

• Cost audits assist in the identification of fraud and mistakes.
• Management receives reliable and precise information that allows them to make everyday decisions which include price fixing.
• It aids in cost reduction and control.
• It makes the budgetary management and standard costing method easier to use.
• It aids management in comparing different units or firms.
• It makes loss-making proposals easier for management to find.

To The Government

• Cost audits guarantee the industry runs smoothly. As a result, there is healthy rivalry across the many enterprises, which opens the door to quick advancement.
• It facilitates the identification of ill units and gives the government the ability to make appropriate decisions.
• It assists in regulating pricing for necessities and preventing excessive profiteering.
• It makes it possible to decide which industries should receive protection, incentives, and subsidies.
• It aids in decision-making about levies, duties, and taxes.

To The Society

• Cost audits for the government make price fixing for necessities possible, protecting society's interests.
• Through cost auditing, the government may prevent false price increases caused by monopolistic tendencies and monitor manufacturers' excessive profit.

To The Shareholders

• A cost audit shows which of the company's goods are losing money. As a result, even if the business is profitable overall, a loss-making segment might wipe out those gains. The shareholders are informed of this, and the management is compelled to take corrective action in order to maximize the use of available resources.
• A cost audit guarantees a just return on investment for the owners.

Disadvantages of Cost Audit

The drawbacks of cost audit are listed below:

• Since cost auditing requires a lot of capital and skill to be done effectively, it may be costly and laborious.
• Because management could feel that its activities are being questioned or criticized, it can lead to friction or conflict between the auditors and management.
• A poorly constructed cost accounting system for the firm may prevent the audit from identifying all potential cost reductions.
• If internal controls are not strong enough in the organization, it might not be able to find every instance of fraud.
• Not every industry or kind of business will find it relevant, and not every business will think that a cost audit is worthwhile.
• Due to its exclusive focus on cost-related data, it might not be able to give a comprehensive view of the company's financial performance.
• It might not be able to pinpoint every cause of the cost variations; instead, it might only report on them without offering an appropriate solution.

Management Audit

A Management Audit is a methodical evaluation procedure that looks at how effectively an organization performs, adheres to its policies, and uses its resources to fulfill its objectives. This evaluation comprises a methodical examination of leadership techniques, decision-making procedures, and managerial roles to pinpoint areas that require development and boost overall operational effectiveness. A management audit helps guarantee that management procedures continue to align with the company's objectives and encourages efficient use of material, financial, and human resources.

Who Does Management Audits?

Legally speaking, a company is not mandatory to conduct a management audit. As a result, the law does not statutorily provide any such credentials for the auditor. Thus, the choice of who will be chosen as a management auditor rests with the company's board.

The Board of Directors may choose to assign any independent expert or management consultant to conduct a management audit. Nonetheless, the company's internal auditors can also conduct them.

The report must be sent to the company's owners or management by the management auditor. There's no set structure that has to be followed while submitting the report. The auditor is free to provide the report in whichever format and with whatever content he deems appropriate. The report includes the auditor's assessment of the following issues:

• The internal control framework that is in place is reliable and appropriate.
• Production's operational costs' standing in relation to those of its rivals.
• The company's overall performance is adequate; if not, what can be done to make it better.
• Management, employees, and staff get along well with one another.
• There is a decent and adequate return on investment.

Objectives of Management Audit

• To ensure that all of the company's resources-including people, cash, materials, equipment, and procedures-are being used effectively.
• To make recommendations for enhancing operational procedures.
• To identify the organization's systemic and structural flaws and provide the required adjustments and recommendations.

Advantages of Management Audit

The benefits of management audit are listed below:

• After examining policies and programs, management audits reveal the management's strong and weak areas. It supports decision-making in areas like make or purchase, unit closure, business acquisition, etc. Thus, it facilitates an organization's seamless operation.
• It facilitates the effective use of organizational resources to meet set goals and objectives.

Disadvantages of Management Audit

The drawbacks of management audit are listed below:

• A management auditor is unable to comprehend real-world issues. Thus, their recommendations are theoretical rather than practical.
• It is an expensive auditing technique, appropriate only for large companies. Therefore, it is not appropriate for tiny businesses with little funding.
• The management audit's scope is ambiguous, which could make the ties between authority and accountability more difficult. Therefore, achieving a certain objective is not helpful.
• It needs to have set auditing procedures and processes. The management auditor may lack objectivity and follow directives from upper management, making it poorly defined.

Important Distinctions Between Management and Cost Audits

• A management audit is an appraisal in which an impartial authority conducts a thorough and objective evaluation of management's overall performance. On the other hand, a cost audit is an impartial assessment of the cost accounts' correctness and adherence to the cost accounting strategy.
• Companies are not required by law to conduct management audits. For businesses, it is optional. On the other hand, cost auditing is necessary for a few types of businesses.
• As previously stated, there are no set requirements for management auditor qualifications because management audits are not mandated by law. A management audit, however, may be carried out by any independent expert, management consultant, or internal business auditor. On the other hand, a cost audit can be carried out by a cost accounting business or a certified cost and management accountant (CMA).
• A management audit can be carried out anytime the need arises, whether that requirement is within a year or over a longer period of time. A cost audit, on the other hand, must be carried out annually and is therefore completed for each fiscal year.
• The filing of the management audit report is not subject to a deadline. On the other hand, there is a deadline for submitting the cost audit report.
• The management audit report is to be delivered to the company's owners or management. The cost audit report, on the other hand, must be presented to the company's board of directors and the central government.
• The goal of management auditing is to evaluate how well management uses the company's resources. In contrast, a cost audit is carried out to determine the accuracy of the cost data, as shown in the company's cost records.
• The enterprise's managerial operations and functions serve as the foundation for a management audit. On the other hand, cost audits are conducted using cost statements as the foundation.