Example of a Cost Audit Acceptance Letter Auditing Help

Example of a Cost Audit Acceptance Letter:

The following letter is for use as a guide in conjunction with the considerations outlined in this Handbook and will need to be varied according to individual requirements and circumstances.

To the Board of Directors or the appropriate representative of senior management:

You have requested that we audit the cost accounting statements as of _____________ We are pleased to confirm our acceptance of this engagement subject to the approval by SECP. Our audit will be made with the objective of our expressing an opinion on the cost accounting statements.

We will conduct our audit in accordance with Companies (Audit of Cost Accounts) Rules 1998. It is required that we plan and perform the audit to obtain reasonable assurance about whether, the cost statements are free of material misstatements. A cost audit includes assessing the cost accounting principles used and significant estimates made by management, as well as evaluating the overall cost accounting system.

Because of the nature and other inherent limitations of an audit, together with the inherent limitations of any cost accounting system, there is an unavoidable risk that even some material misstatements may remain undiscovered.

In addition to our report on the cost accounting statements we expect to provide you with a separate letter concerning any material
weakness in cost accounting system which come to our notice.

We remind you that the responsibility for the preparation of cost accounting statements, capacity utilization statement and inventory statements is that of the management of the company. This includes the maintenance of adequate cost accounting records and internal controls, the selection and application of cost accounting principles. As part of our cost audit process, we will request from management written confirmation concerning representations made to us in connection with the cost audit.

We look forward to full cooperation with your staff and we trust that they will make available to us whatever records, documentation and other information are requested in connection with our audit. Our fees, which will be billed as work progress, are based on the time required by the individuals assigned to the engagement plus out-of pocket expenses.

Individual hourly rates vary according to the degree of responsibility involved and the experience and skill required.

We trust you have applied to the Securities and Exchange Commission of Pakistan, in the form prescribed in Sub-section 3 of Section 3 of the Companies (Audit of Cost Accounts) Rules 1998, for obtaining approval of our appointment as Cost Auditor. We are also sending a copy of this letter to SECP, to signify our acceptance, subject to their approval.

This letter will be effective for future years unless it is terminated, amended or superseded.

Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our audit of the cost accounting statement.

Acknowledge on behalf of
ABC Company by


Name and Title: _______________

Date: ______________


I. Production material
(Raw edible oils, chemicals and vitamins)
(a) Record of each item of production material in stock, required or actually used for producing, processing or manufacturing any of the products referred to in paragraph 2 shall be maintained. It shall show the quantity and cost of every receipt and issue made from the stock. All issues of production materials shall be reconciled with the figure shown in proforma ‘B’ of Schedule II, or in any form as near thereto as possible. Any losses/surpluses arising as a result of physical verification of inventories and adjustment thereof shall be clearly indicated in the cost records.

(b) Record of purchase/supply contracts entered into/with local and foreign suppliers will be maintained showing the rate at which the various quantities of materials are to be purchased. The record shall indicate principal features of each contract, particularly, conditions relating to the quality, price and period of delivery, discount for transit loss and terms of payment including cash discounts, if any, and compensation, the supply shall pay for delay in delivery and non-delivery. The records shall also show the deliveries received against each contract of material supply. The supply contracts shall also indicate the . conditions relating to rebate for quality variations in FFA (free fatty acids), colour and moisture in case of raw edible oils: and in case of other materials usual quality standards shall be specified in the supply contracts for the purpose of rebates.

(a) Where arrangements exist for production of any of the production materials by the facilities owned by the company, records showing the cost of manufacture of such materials indicating the break-up of raw materials consumed and conversion cost shall be maintained. The records shall also indicate the basis on which such materials are priced for transfer to the manufacture or processing of vegetable ghee/cooking oil.

(b) The cost, in addition to the basic price of the materials shown in the records shall also include all other charges incidental to the procurement of production materials up to the works.

(c) Any abnormal wastage of material whether in transit, storage or for any other reason, shall be recorded separately indicating the stage at which such losses occur. Method of dealing with such losses in the calculating of cost shall be indicated in the records. Normal wastages will be absorbed by the remaining material itself.

(d) Difference between the quantity of raw edible oils introduced into the process and the yield obtained, commonly referred to as the ‘process loss’ or ‘refining loss’ includes waste materials (by product) called ‘visible loss’ which is part of TFM (total fatty matter) and a small quantity of ‘invisible loss’. Realizable value of the by-products, extracted from the oil, shall be credited to the cost of oil.

(e) Realizable value of the used chemicals recovered shall be credited to the cost of such materials to arrive at the net cost of chemicals consumption.

(f) By products, such as oxygen or carbon dioxide and the nitrogen as the case may be, obtained from the generation of hydrogen, by different processes, shall also be credited to the respective process cost centres to determine the net cost of hydrogen available for use.

g) The records shall be maintained in such detail as may enable the company to compile the cost data in Annexures A-I, and A-2, of Schedule II or in any form as near thereto as practicable.

II. Director Labour

(a) Adequate record shall be maintained to show the attendance of workers employed by the company whether on regular, temporary, or piece-rate basis or on contractual basis. Proper record shall also be maintained in respect or payment made for overtime work and other production incentives given to the workers and payments to any contract for the work performed.

(b) Fair and reasonable allocation shall be made for wages paid to such direct labour as has been utilized in m ore than one department, between the various manufacturing departments or cost centres and the basis of such allocation shall be consistently followed. Idle time or lay-off payments shall be recorded separately indicating the reasons and the method of treatment in he calculation of the cost of the items referred to in paragraph 2. Any wages being expenditure on additions to plant, machinery or other fixed assets shall be allocated to the relevant capital heads in the accounts.

(c) In case of wages and salaries being allocated on a basis other than actuals, reconciliation of wages reconciliation of wages and salaries to the actuals and the treatments of variances, if any, in
determining the cost of the products shall also be indicated in the cost records.

Ill. Steam

(a) Adequate records shall be maintained to ascertain the cost of steam produced and charged to different processes. The cost of steam may be determined on an estimated basis if it is not possible to determine the actual cost. In case the cost of steam is allocated to different processes on any basis other then actual cost, reconciliation of the actual cost of steam produced and the treatment of variances, if any, in determining the cost of items referred to in Paragraph 2, shall be indicated in the cost records.

(b) The record shall be maintained in such details as may enable the company to compile the cost data in Annexure A-3 of proforma ‘A’ of Schedule II or in any form as near thereto as practicable.

IV. Hydrogen

Adequate records shall be maintained to ascertain the cost of hydrogen produced and charged to vegetable ghee and cooking oil production as well as that sold.

v. Water

Appropriate record shall be maintained to determine the cost of water used by the company. The expenditure on water shall be allocated to boiler house and oil processing on estimated basis which shall be used consistently from year to year and indicated in the cost records.

VI. Electric Power

(a) Adequate records, showing quantity and cost of electric power purchased, with fixed charges and duties incurred thereon, shall be maintained. The cost of electric power shall be kept separately for each item. The consumption shall be calculated on a reasonable basis and applied consistently.

(b) Where electric power is generated by the company itself or by its
wholly owned subsidiary, separate records, shall be maintained in such details as may enable the company to compile; cost data in Annexure A-4 or proforma ‘A’ of ‘Schedule II’ or in any form as near thereto practicable.

(c) The records shall be so maintained as to enable the assessment of consumption of power by the different departments or manufacturing units or cost centres. Allocation of the cost of electric power shall be on the basis of technical estimates in the absence of meters are installed or on the basis of technical estimates in the absence of maters. In the case of fixed charges or fuel adjustment surcharge claimed by KESC or WAPDA, irrespective of the actual power consumed and if the amount payable as per actual consumption falls below the contractual minimum, the difference between the contractual minimum and the actual amount shall be created as fixed/period cost and treated accordingly. Cost of power consumed in and chargeable to non-manufacturing departments, if significant, shall be shown separately.

VII. (a) Record of each item of consumable stores shall be maintained to show the used for the manufacture of items referred to in paragraph 2.

(b) Cost of consumable stores shall include all direct charges incidental to be charged to relevant cost centres on the basis of actual consumption. The items issued for capital expenditure, such as addition to plant and machinery.

(c) Wastage of consumable stores, whether in transit, storage or at any point, shall be quantified and shown separately. Method of dealing with such losses in costing shall also be indicated in the cost records.

VIII. Repairs and maintenance

Adequate record showing expenditure incurred on workshop facilities for repairs and maintenance of plant and machinery shall be maintained. Details of cost determination and their basis of allocation of repairs and maintenance expenditure to different department or manufacturing units or cost centres shall be indicated, Cost of work of capital nature of heavy repairs and maintenance cost, benefit of which is likely to be spread over a period longer than are financial year, shall be shown separately.

(a) Adequate records shall be maintained showing the cost of packing materials and direct wages and other expenses incurred in respect of different items packed. Where such expenses are not capable of being charged directly against individual items, basis of apportioning the expenses shall be early indicated in the cost records and applied consistently.

(b) Where the tin containers are fabricated by the company itself or wholly or partly fabricated by the outside in fabricators for the company or wholly or partly manufactured tin containers are purchased from the market, separate record shall be maintained
for each lot of the container sunder each category.

(c) In case of tin containers are wholly or partly manufactured fabricated by the company itself the records shall be maintained in such details as may enable the company to compile the cost data in the form of Annexure A 5 of proforma ‘A’ of Schedule II.

X. Chilling

Appropriate record of cost incurred in connection with refrigeration facilities provided for chilling of items referred to in paragraph 2 shall be maintained in sufficient details as may enable the company to compile the cost .data in Annexure A-6 of proforma ‘A’ of Schedule II.

XI. Depreciation

(a) Adequate record shall be maintained showing value and other particulars of the fixed assets in respect of which depreciation is to be provided and records shall inter alia indicate the cost of each item of assets, the data of its acquisition and the rate of depreciation.

(b) Basis on which depreciation is calculated and allocated to the various departments and products shall be clearly indicated in the records.

(c) Amount of depreciation chargeable to the different department, manufacturing units or cost centre, for the fmancial year shall be in accordance with the provisions of clause ‘F’ of part II of the Fourth Schedule to the Companies Ordinance, 1984 and shall
relate to the plant and machinery and other fixed assets utilized in such departments or units or cost centres. The method once adopted shall be applied consistently.

XII. Insurance

a) Record shall be maintained showing the insurance premia paid for the various risks covered on the assets and other interests of the company.

(b) Method of allocating insurance cost to the various cost centres shall be indicated in the cost records and followed consistently.

XIII. Other fixed overheads

Adequate records showing the amounts comprising the manufacturing overhead expenses and details of apportionment thereof to the various departments or manufacturing units or cost centres, shall be maintained. The factory over heads shall include among other items, indirect labour cost along with its share of labour related costs such as fringe benefits, other labour and staff welfare expenses, and establishment expenses of manufacturing of items referred to in paragraph 2.

XIV. Administration, selling and distribution

Adequate records. shall be maintained showing the items comprising administration, selling and distribution expenses and apportionment thereof to the different products and the basis of allocation of overhead cost shall be indicated in the records.

XV. By-product

Adequate records shall be maintained showing the quantity of by-products obtained and the basis of pricing adopted for giving credit thereof to the main product. Any subsequent use of the byproducts, such.as soap stock being converted into laundry soap, and other products like glycerene etc., shall also be recorded and reconciled.

XVI. Work-in-process and finished goods inventories

Record of work-in-process inventories at each material stage of process and finished goods inventories, physically checked and verified at the close of the financial period, duly reconciled with the books of accounts, shall be maintained. Method of valuation of work-in-process and the finished goods inventories shall be indicated in the cost records so as to reveal the cost elements which have been taken into account in such computation. The cost elements shall be related to the items referred to in the proforma ‘A’ of Schedule II. The method adopted shall be consistently followed. Treatment of differences, if any, on physical verification of stocks with book balances, shall also be indicated in the records.

XVII. Statistical statements and other records

a) Statistical statements and other records such as yield statement, TFM (total fatty matter), recovery and other by-products statement details relating to chemical and energy consumption, tinplate yield and scrap records and relevant data shall be maintained in such details as may enable the company to comply with the requirements of this Schedule and Schedule II and to enable the cost auditor to report and per form his duties under section 258 of the Companies Ordinance, 1984.

(b) Companies may develop appropriate standards for use as a basis to evaluate performance property.

XVIII. Reconciliation of cost and financial accounts

(a) The cost records shall be periodically reconciled with the financial accounts to ensure accuracy. Variations, if any, shall be clearly indicated and explained.

(b) The reconciliation shall be done in such a manner that the profitability of the product, as per cost statement, is correctly judged and reconciled with the overall profits of the company from all its activities.

(c) Adequate cost records shall be maintained in a manner so that the cost statements as required in Schedule II (proforma ‘A’ and
annexures) can be compiled and the cost auditor is able to verify the statements with the records.

Posted on November 4, 2015 in Cost Audit

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