Difference Between Cost Audit and Management Audit

Cost and management 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. Both of these are discussed in the below paragraphs.

Management audit

Management audit is a process whereby the performance of directors or managers of an organization is evaluated. Although it is considered as a non-routine appraisal of the performance of a manager or group of managers, it is nowadays being worked out as a regular exercise in many organizations. By evaluating the performance of managers, management audit aims to examine and improve managerial effectiveness at all levels of the organization. It measures how well the management is applying its strategies and resources in meeting the organization’s goals and where is it lagging.

Management audit concentrates on all the aspects of management performance and not merely on financial matters as in the case of a financial audit. It involves a comprehensive examination of the organizational structure, its various departments, plans and policies, operational methods & processes, use of physical facilities, and human resources.

Every organization decides the scope of its management audit according to its own needs. Normally, it extends to all the functions of an organization like administration, personnel, marketing, finance, etc. wherever the effectiveness of managers needs to be examined. With the help of this audit, those activities or decisions are highlighted that are not in conformity with the company’s objectives.

A management audit may address a number of questions such as:

Whether the hiring process in the company effective and what is the retention rate?
Are the training programs being implemented wisely?
Whether the company’s overall policies and procedures in conformity with its objectives?
How are budgets prepared and whether targets are met by individual departments?
Are the company’s IT systems kept up to date?
How is the hierarchical structure in the company and whether there are clear lines of reporting?
Is the top management responsive towards employees, shareholders, and investors?
Does the management properly guide the company towards the achievement of financial and non-financial targets?
Are appropriate risk management measures in place?

Following are some important features of management audit:

Management auditing covers all aspects of management decision-making and examines the past, present, and future over a long period of time. As a result, it becomes a qualitative audit rather than a value and quantity audit.
Rather than using the company’s internal audit team, the board of directors will hire independent outside experts to conduct the management audit.
A management auditor’s primary qualification is an extensive business experience in related fields such as accounting, statistics, engineering, marketing, or administration. He should be a man of independent thought, capable of maintaining an unbiased viewpoint free of any financial, sentimental, or other influences. He should be technically competent in the performance of his responsibilities, having received all necessary education, training, and experience.
Management audits reveal mistakes in policy, judgments, and actions, as well as recommendations for how to avoid them.
Following the completion of a management audit, the audit firm will provide the board of directors with a comprehensive strategy to implement change.
Management audits are commonly performed prior to mergers, restructurings, bankruptcies, and succession planning in order to discover deficiencies in a company’s management.
Depending on the scope of its review, a management audit may take weeks or months to complete.

Cost audit

A cost audit is concerned with the verification of cost records/accounts and acts as a check on the adherence to cost accounting standards. It checks whether cost accounts, statements, and cost data are accurate and adhere to cost principles. Section 148 of the Companies Act 2013 confers powers on the Central Government to direct certain classes of companies to get their cost records maintained and audited by a cost accountant.

Rule 4 of the Companies (Cost Records and Audit) Rules, 2014 prescribes the list of companies engaged in the production of some specified goods on which cost audit is applicable. For more details on its applicability, please follow this link.

Cost auditing is a legal reporting exercise, as it is related to annual reporting to the government about the efficiency of operations with specific reference to a specified product(s) in a prescribed format. It limits the auditor’s ability to report by confining it to specific areas only. The report is not distributed to investors, i.e., shareholders. It does not study and evaluate the role of top management in leading and making decisions. Nevertheless, cost audit deals with many strategic functions of an organization and can be developed into a management audit by collaborating with the Board of Directors and broadening its scope.

Some of the important points related to cost audit are as follows:

Every company to which a cost audit is applicable needs to appoint a cost auditor within 180 days of the commencement of every financial year.
The Board of Directors of a company appoints its cost auditor and his remuneration is ratified by shareholders subsequently.
On the appointment of the cost auditor, the same has to be intimated by the company to the Central Government in e-Form CRA-2. This notice is to be made within 30 days of the board meeting in which the auditor is appointed or within 180 days of the commencement of the financial year, whichever is earlier.
To be eligible to be appointed as a cost auditor, the concerned party must be a cost accountant or a firm of cost accountants in practice. Also, the cost audit must be conducted in compliance with the cost auditing standards issued by the Institute of Cost Accountants of India.
Further, as per Section 148 (3), a statutory auditor of the company appointed under Section 139 cannot serve as a cost auditor.
A cost auditor appointed under Section 148 continues in such capacity till the expiry of 180 days from the closure of the financial year or until he submits the cost audit report for the relevant financial year. However, the company has a right to remove him from office before the expiry of his term, through a board resolution, and after giving him a reasonable opportunity of being heard.
On the completion of the cost audit, the cost auditor is required to submit his duly signed cost audit report to the company’s Board in e-Form CRA-3. Such a report has to be furnished within 180 days from the closure of the financial year to which the report relates. The report should provide the auditor’s reservations, observations, or suggestions if any.
After examining the cost audit report and within 30 days of its receipt, the Board of Directors of the company needs to furnish such report to the Central Government in e-Form CRA-4 along with full information and explanation on every reservation or qualification contained therein.

Key Takeaways

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