Difference Between Cost Audit and Management Audit

A management audit is an independent look at the things managers do at different levels of management to figure out what they do, how well they do it, and what they have accomplished. A cost audit, on the other hand, is the process of confirming the cost of production based on the records that a company keeps of how much it spends on materials, labor, and other costs.

Table of Contents

What does the word ‘Independent’ mean in Auditing?

‘Independent’ means that the opinion that an auditor expresses is not subordinate to the wishes of the party that appointed him. So, he does not follow the instructions of any such party while giving his opinion on the examination performed.

In this content, we will enlighten you on all the points of difference between a cost audit and a management audit.

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Comparison Chart

BASIS FOR COMPARISON	COST AUDIT	MANAGEMENT AUDIT
Meaning	A cost audit is a thorough check and examination of the cost statements, data, records, and systems to make sure they are correct.	Management Audit means that the whole company is looked at to evaluate its policies, plans, and management structure to see how well they work.
Is it mandatory?	Yes, it is required for some types of businesses to do a cost audit.	No, companies don’t have to do a management audit if they don’t want to.
Auditor’s Qualification	The person must be a practicing CMA.	Any independent expert, management consultant, or the company’s own internal auditor.
Periodicity	Every financial year, it is done.	It takes place over more than one fiscal year.
Audit Report Submission	There is a set amount of time in which the report must be turned in.	The management audit report doesn’t have to be turned in by a certain date.
Accountability	The shareholders and the central government are responsible to the auditor.	The auditor is answerable to the company’s management.
Objective	To figure out how reliable cost information is.	To look at how well management works so that it can be made better.
Base	Cost statements	Managerial Activities
Audit Techniques	Data about materials, labour, and costs are looked at and analysed.	Finds out how well the procedures and internal control systems are working and how reliable they are.
Focuses on	Accuracy of the costing system and figuring out how much something really costs to make.	Evaluation of management’s plans and actions.

Definition of Cost Audit

A cost audit entails having a third party examine the cost books, statements, records, and other documents to make sure that the production costs are accurately and fairly represented. It means figuring out how well the cost accounting system works. It consists of:

Whether or not the product under review follows the rules for cost account records that apply to it
The costing system will be looked at to see if it can be used to figure out how much the product under review costs.
Evaluation of the organization’s operational and other efficiencies in relation to the product under review
Getting the audit report to the right authority in the format they require

Standards on Cost Auditing tells the auditor how to do his or her job and what the auditor is responsible for when it comes to cost reporting at every step of the auditing process. The report on the cost audit is sent to both the Board of Directors and the Central Government.

Salient Features of a Cost Audit

Audit of Cost Records: Auditing an organization’s cost records, which includes checking statements, accounts, and other papers
Verification Process: It is a way to check the cost of making something.
Distinct and specially designed activity: It is something different that is done in addition.
Applicable to special entities: Aimed at businesses that produce, make, process, or mine

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Who performs a cost audit?

A Cost Audit can be done by a practicing Cost Accountant who has been chosen by the Board of Directors. In addition, the cost auditor must follow the Standards on Cost Auditing (SCA). He or she checks to see if:

The records of costs are correct.
The system, records, and procedures for cost accounting are all good.
The cost accounts follow the plan for cost accounting.
Cost records are kept and kept up-to-date as the law says.
The cost records show what it really cost to make, process, and sell the product.

Definition of Management Audit

Management auditing is the process of evaluating how well management functions are being done in a systematic and independent way. In this step, the policies, procedures, operations, and programs that are part of the internal control system are looked at with a critical eye. It is a part of the internal audit, or a longer version of it.

Specifically, a management audit is an evaluation of the systems that a company’s management chooses to use and puts in place. It looks for problems with the company’s internal control and ways to make the company run better.

Its goal is to figure out how well the management is doing so that the business’s activities can be regulated, which makes it easier to reach the organization’s goals on time. Its goal is to make management work better.

You must be wondering, Why is a management audit conducted?

A company is owned by a large number of shareholders, but its operations are run by a small number of people who own a small amount of its equity. So, management audits by an independent authority are mostly done because ownership is spread out and management is set.

It is done with the hopes of:

Taking a look at how well management is doing at different levels
Describe the decisions or actions that are not in line with the organization’s goals.
Making sure that different levels of management know what the goals are
Making sure that controls are put in place at different levels that are adequate and work well
Evaluating plans made to help the organization reach its goals
Taking a look at the way the company is set up

Who performs Management audits?

The company is not required by law to do a Management Audit. So, the law doesn’t say that the auditor has to have these specific skills. So, the company’s board decides who will be a management auditor.

So, a management audit can be done by any expert or management consultant who is not part of the Board of Directors. But management audits can also be done by the company’s internal auditors.

Management The auditor has to give the report to the owners or managers of the company. There are no rules about how the report should be given. The auditor can make the report look however he wants and include whatever information he thinks is important. The report includes the auditor’s thoughts on things like:

The system of internal controls is good and can’t fail.
How the operating costs of production stack up against those of its competitors.
How well does the company do as a whole? If not, what can be done to make it better?
Management, workers, and staff get along well with each other.
The return on investment is good and fair.

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Key Differences Between a Cost Audit and a Management Audit

So far, we know what the two types of audits are and who does them. Now, we’ll look at how cost audits and management audits are different.

A management audit is a type of review in which the overall performance of the management is looked at by an independent authority through an objective and thorough evaluation. On the other hand, a Cost Audit is an outside look at how accurate the cost accounts are and how well they follow the cost accounting plan.
Businesses are not required by law to conduct management audits. Companies don’t have to do it. On the other hand, cost audits are required for certain types of companies.
As was said above, management audits are not required by law, so there are no specific skills that a management auditor must have. A management audit, on the other hand, can be done by any outside expert, management consultant, or internal auditor of the company. On the other hand, a cost audit can be done by a cost accounting firm or a practicing Cost and Management Accountant (CMA).
A management audit can be done whenever it is needed, whether that is less than a year or more than a year. There is no set time limit. On the other hand, a cost audit must be done every year, so it is done at the end of each financial year.
It’s not necessary to submit the management audit report by a certain deadline. The cost audit report must be turned in, though, within a certain amount of time.
The management audit report should be given to the company’s owners or those in charge of running the business. On the other hand, the Cost audit report should be sent to the board of directors and the central government.
The goal of a management audit is to figure out how well the management is using the company’s resources. On the other hand, a cost audit is done to make sure that the cost information in the company’s cost records is correct.
A management audit is based on the functions and activities of the enterprise’s management. Audits of costs, on the other hand, are based on cost statements.
The auditing techniques used in a management audit tend to find out if the procedures and internal control system in place are good and reliable. On the other hand, cost auditing uses auditing techniques to look at and analyze data about material, labor, and overhead costs.
The audit of a company’s management is called a “Management Audit.” During this audit, different management policies, operations, and functions are looked at, reviewed, and rated. A cost audit, on the other hand, looks at how accurate the cost system is and how much it really costs to make something.

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Objectives of the Cost Audit

To check the company’s cost accounts to see if they are being kept in the right way and if all the relevant standards and rules are being followed.
To detect fraud and errors.
To check the costs of each cost unit and cost center to make sure they have been calculated correctly.
To make it easier to set prices for goods and services.
To find out why things are going wrong and fix them.
To tell the company’s management, based on the comparison of cost records between firms, where performance needs to be improved.
To make sure that cost accounts and final accounts are always in sync.

Objectives of a Management Audit

To make sure that the firm’s resources, such as its people, money, materials, machines, and methods, are used well.
To make suggestions for ways to improve how things are done.
To figure out where the organization’s structure and system are weak and suggest changes that need to be made.
To show how well an organization plans, makes decisions, and meets its goals,
To predict problems and suggest ways to avoid and solve them.

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Conclusion

To sum up, we could say that the goal of a cost audit is to make sure that the cost accounting data is correct, while the goal of a management audit is to look at how management works.

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