Cost of Auditor Auditing Help

Development of Cost Audit Profession:

During World War 1, a large number of contracts were awarded on cost plus basis, which made it necessary for the contractors to maintain cost accounting records. Cost Accounting techniques are needed not only to help management exercise cost control, but the cost accounting records are also needed for such clients who place orders on cost plus basis. In such cases, the client has the right to  examine cost accounting records or have performed cost audit. In USA, Defence sup pliers and contractors have to maintain cost accounting records in accordance with Cost Accounting Standards laid down by the Cost Accounting Standards Board (CASB). This is subject cost audit to ensure its authenticity. The Cost Accounting in its developed form helps the management of manufacturing concerns in improving in its developed form helps the management of manufacturing concerns in improving the efficiency, in making the business decisions and in evaluating the performance of entities in the same industrial sector through standardizing the systems and procedures. However it is only in India, Pakistan and Bangladesh that cost audit has been formalized under Companies Ordinance/Acts. India is the pioneer in introducing Cost Audit and Bangladesh, only Cost & Management Accountants are eligible to conduct cost audit. In Pakistan Chartered Accountants are also eligible to conduct cost audit.

Professional Qualifications:

Statutory cost audit was introduced in Pakistan under the Companies ( Audit of Cost Accounts) Rules 1998 [Appendix 1]. Under sub-rule (1) of rule 3 thereof, it has been laid down that every company shall be required to get its cost accounts audited by a cost auditor who is a Chartered Accountant within the meaning of the Chartered Accountants Ordinance 1961 [X of 1961] or a Cost and Management Accountants Act, 1966 [XIV of 1966].


Under sub-rule (2) and (3) of rule 3 of the Companies (Audit of Cost Accounting) Rules 1998, the cost auditor shall be appointed by  the directors with the prior approval of the SECP within 60 days of the clause of the financial year of the company.

“The company shall apply to the SEep in the form, set out in Appendix-1 to the Companies (Audit of Cost Accounts) Rules 1998, for appointment of cost auditor, not later than 30 days before date on which cost auditor is as be appointed.” “The cost auditor is appointed by the directors subject to the prior approval of the SECP. An example or any variation of it may be used after the directors of the client company have agreed to appoint the cost auditor and have applied to the SECP. in the prescribed term, for its prior approval.”


The persons ineligible for appointment as Cost Auditor have been specified in sub-rule 4 of rule 3 of the Companies (Audit of Cost Accounts) Rules, 1998. Cost and management accountants in practice, who are not eligible for appointment as cost auditor should not offer themselves for appointment. The ineligibility are briefly explained as under:

(i) The same accountant or accounting firm, who has been appointed as an auditor of the Company, under Section 252 of the Companies Ordinance 1984 shall not be appointed as a cost auditor. A financial or corporate auditor of a company therefore, shall not be appointed as a cost auditor of the same company, at the same time. Accountants who are already acting as auditors of financial statements of a company shall not be appointed as cost auditors of the same company.

(ii) A person who is, or has been at any time during the preceding three years, a director, officer or employee of the Company shall not be appointed a cost auditor.

(iii) A person who is a partner of a director, officer or employee of the company; or an employee of a director, officer or employee of the company shall not be appointed as a cost auditor. The cost auditor cannot be a partner or an employee of any director, officer or employee of the company.

(iv) A spouse of a director of the company shall not be appointed as a cost auditor, of that Company.

(v) A person who is indebted to the company for any amount at the relevant time.

(vi) A body corporate shall not be appointed as a cost auditor. A cost auditor, therefore, has to be an individual or a firm, and not a corporate body.

Power and Duties:

Statutory provisions regarding audit of cost accounts are contained in Section 258 of the Companies Ordinance 1984. These are reproduced below:

“Section 258, “Audit of Cost accounts: (1) Where are company or class of companies is required maker clause (c) of sub-section (1) of 230 to include in its books of account the particulars referred to therein, the Federal Government may direct that an audit of cost accounts of the company shall be conducted in such manners and with such stipulations as. may be specified in the order, by an auditor who is a chartered accountant within the meaning of the Chartered Accountants Ordinance, 1961 (X of 1961) or a cost and management accountant within the meaning of the Cost and Management Accountants Act, 1966 (XIV of 1966); and such auditor shall have the same powers, duties and liabilities as an auditor of a company and such other powers, duties and liabilities as may be presented. “

The cost auditor has the same powers and duties as the financial auditor may have in terms of Section 255, including the following:-

(1) Every auditor of a company shall have a right of access at all times to the books, papers, accounts and vouchers of the company, whether kept at the registered office of the company or elsewhere, and shall be entitled to require from the company and
the directors and other officers of the company such information and explanation as he thinks necessary for the performance of the duties of the auditors.
(2) In the case of a company having a branch office outside Pakistan, it shall be sufficient if the auditor is allowed access to such copies of, and extracts from, the books and papers of the branch as have been transmitted to the principal office of the company in Pakistan.
(3) If any office of a Company refuses or fails, without lawful justification, the onus whereof shall lie on him, to allow any auditor access to any books and papers in his custody or power, or to give any such information possessed by him as and when required, or otherwise hinders, obstructs or delays an auditor in the performance of his duties or the exercise of his powers.

5(a) Records for Cost Audit and Financial Audit:-

Section 255 and its sub-sections quoted in the foregoing paragraph defines the. powers and duties of auditors, appointed under Section 252( 1) of the’ Ordinance and auditors and duties of auditors appointed under Section 252(1) of the Ordinance and auditors and duties of auditors appointed under .Section 252(1) of the Ordinance and auditor appointed under Cost Audit Rules. References made in the sections to books of accounts and to balance sheet, profit and loss account or income and expenditure account for the financial auditor would mean accounting records and capacity utilization statement, statement of closing :stock and cost accounting statements (schedules anti amexures) would mean cost records for the cost auditor.

Although the role of the cost auditor has been defined while discussing the objectives of cost audit. The position of the financial auditor and that of the cost auditor i slightly different. The position of an auditor of the Company is construed as a servant against of the shareholders and it is his duty to examine the affairs of the company on their behalf and report to then his findings. The position of a cost auditor, however, is different because he is appointed by the management (Board of Directors), subject to prior approval of Scientific & Exchange Commission of Pakistan, and his position is to be interpreted in view of the provisions of the Companies (Audit of Cost Accounts) Rules 1998.

Posted on November 3, 2015 in Cost Audit

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