The Audit Report, Internal Audit and Cost Audit

In one line

There are three audits in this Act, and they answer different questions: the statutory audit says whether the accounts are true and fair, the internal audit checks the company's own systems from inside, and the cost audit checks what things actually cost to make.

In exam wording: the statutory audit report is governed by section 143(2) to (4); section 138 requires prescribed classes of companies to appoint an internal auditor, who shall be a chartered accountant or a cost accountant or such other professional as the Board may decide; and section 148 empowers the Central Government to direct the maintenance of cost records and the conduct of a cost audit by a cost accountant appointed by the Board.

Why the law has this at all

The statutory audit is an annual, external, backward-looking examination of one thing: whether the financial statements give a true and fair view. It is done once a year by somebody outside the company, and by the time it is finished the year is over.

That leaves two gaps.

The first gap is time and process. A yearly check cannot catch a control that has been failing since April. The internal audit runs continuously, inside the company, and reports to the Board. It is about whether the systems work, not about whether the final numbers add up.

The second gap is cost. Financial accounts show what a company earned and spent in total. They do not show what it costs to make one tonne of cement, and in industries where prices are regulated or where the public interest is engaged, that number matters a great deal. The cost audit examines it, and the report goes to the Central Government.

And note who each reports to, because that is the cleanest way to keep them apart: the statutory auditor reports to the members, the internal auditor to the Board, and the cost auditor to the Board and then to the Central Government.

Some words this chapter uses

Cost records are the particulars of material, labour and other items of cost. Cost auditing standards are those issued by the Institute of Cost Accountants of India with the Central Government's approval. A reservation is a qualification in a report. Net worth is defined in section 2(57). Remuneration in section 142 includes expenses and facilities but not fees for other services.

The statutory audit report, in outline

The full treatment is in [Rights, Duties and Liabilities of Auditors]. In short: the auditor reports to the members under section 143(2) on whether the accounts give a true and fair view of the state of affairs, the profit or loss and the cash flow; the report must also state the ten matters in section 143(3); and where any of them is answered in the negative or with a qualification, the reasons must be given under section 143(4). The report is attached to every financial statement under section 134(2), and its qualifications are read out at the general meeting under section 145.