To the Board of Directors of M/S. _____________________________________ .

You have requested that we audit the Cost Accounting Statements as of M/S. ________ .
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 limitation of any cost accounting system, there is an unavoidable risk that even
some material misstatement 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 utilisation 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 progresses, 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 obataing 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.
XYZ & Co.
Acknowledge on behalf of
ABC Company by
_______________________
(Signed)
Name and Title : ______________________
Date :

WHO CANNOT BE APPOINTED AS COST AUDITOR ?

(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 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.

PARTICULARS TO BE INCLUDED IN COST AUDITORS REPORT TO

THE DIRECTORS OF THE COMPANY
1. Capacity
2. Cost accounting system
3. Production
4. Raw materials
5. Wages and salaries
6. Stores and spare parts
7. Depreciation
8. Overheads
9. Royalty / technical aid payments
10. Abnormal non-recurring features
11. Cost of production
12. Sales
13. Profitability
14. Cost auditors observation and conclusion
15. Reconciliation with financial account
16. Cost statement
17. Miscellaneous

PERFORMANCE OF COST AUDIT

Before performing audit cost auditor or should have a clear understanding of the
following :
1. Update the knowledge of industries for which he is going to conduct the cost
audit.
How knowledge of industry can be updated ?
1. Through discussion with the senior official of Industry
2. Publication related to the industries
3. Government survey
4. Statistics
5. Trade journal visit to the entity & its plant facilities
Audit evidence is documented informations obtained by the cost auditor in
arriving at the conclusion on accounting records, cost accounting statements.

COST AUDIT
Definition :
Verification of cost accounting & check on the adherence to cost accounting
plan.
This definition implies :
1. The objective of cost accounting must be co-ordinated into the
objective of the Company. The cost accounting plan should be
checked to see whether it leads to achievement of Company objectives
i.e., maximization of profit & efficiency.
2. It has to be examined whether the matter laid down for ascrting cost &
other relevant decision are being implemented.
3. The treatment of accirtaing abnormal gain and loss and other direct
and indirect expenses.
4. The voneling of cost figures according to cost accounting plans.
Q:

WHAT POINTS ARE TAKEN INTO CONSIDERATION

WHILE PLANNING AUDIT PROGRAM ?

Ans :
1.
2.
3.
4.
5.

Nature of business
Object of cost audit
The system of cost accounting
The system of internal control
The extent of audit whether the detail audit is required or it is limited
to the checking of framed and errors.
6. The area to be covered.

Q:
Ans :
1.
2.
3.
4.

WHAT ITEMS ARE INCLUDED IN COST AUDIT PROGRAM

TO BE VERIFIED ?
Material
Labour
Over head
Miscellaneous

Q:

WHAT ARE AUDITING PRINCIPLES ?

Ans : Vouching : Checking of posting in books of accounts with vouchers

and authenticity and validity of the voucher.
Checking and Ticking : Posting casting C/F etc are checked and
ticked with colour pencils.
Test Check

Q:

WHAT COST AUDITOR SHALL CHECK AND COLLECT

INFORMATION FOR THE PURPOSE OF HIS COST AUDIT ?

Ans :
1. Cost Accounting System
2. Financial Position
3. Production Capacity
4. Process of Manufacturing
5. Material Cost
6. Labour Cost
7. Over Head
8. Power & Fuel
9. Spare Parts
10.Depreciation
11.Loose Tools
12.Sales

Q:

WHAT SHOULD BE VARIFIED WHILE CHECKING THE

COST ACCOUNTING SYSTEM BY COST AUDITOR ?
OR
WHAT COST AUDITOR SHOULD KEEP IN VIEW
REGARDING SUITABLITY AND WEAKNESS OF COST
ACCOUTING SYSTEM ?
OR
WHAT WILL BE AN IDEAL COST ACCOUNTING SYSTEM
IN THE EYES OF COST AUDITORS ?

Ans :
1. Cost accounting system should be according the need of
organization and it should be designed after taking all the business
activities of the organization.
2. Manufacturing process of product.
3. Internal control system
4. Cost ascertainment of the by product and method of its
appointment.
5. Standard Costing system
6. Budgeting control system
7. Prime Cost (DM + DL + DE)

Purpose of verifying the capacity of a plant is to know under utilized

capacity so that it can be reported to management for increasing production
and efficiency.
1. Rated Capacity
2. Normal machinery after making allowances for holidays and
mantaince.
3. Machine utilization card
4. Manufacturing process and documentation of completion of different
stages of unit.
5. Final stage after which any unit may be treated as completed in every
respect.
6. External factors affecting production demand & supply
7. Production budget
8. Machine history card.
Q : HOW SHOULD A COST AUDITOR SHOULD VERIFY
MANUFACTURING PROCESS DURING THE CONDUCT OF HIS
COST AUDIT ?

Ans : In order to make his audit most useful the cost auditor should make a
spot visit to the plant to see the working process plant layout flow of
material and production.

Q:

HOW SHOULD A COST AUDITOR VERIFY MATERIAL ?

Ans :
1.
2.
3.
4.
5.
6.
7.
8.

Items of direct and indirect cost

Cost of raw material used
Quantity of raw material used
Material various into their supported explanation
Quantity the wastage and reported action to reduce it.
System of material receipt issue & inspiete
Method of valuation inventory
Internal control system of material
Q:

HOW TO VERIFIED THE POWER & FUEL ?

Ans :
1.
2.
3.
4.
5.
6.

Total cost of power and fuel

Allocation to different cost center ( % wish )
Whether power is internally guranted
Adequacy of system allocating of cost of power and fuel
Whether any residuary is used on fuel (in call of sugar industry)
Any leakage of power from this source of supply to the lossge

Spare Parts :
1.
2.
3.
4.
5.
6.
7.
8.

Spare parts at the beging of the pe___

Spare parts pu_____
Missing spare parts
System of inventory control and maitaing of policies
Purchase policy
Differciating between spare parts
Receipts & issue system
Produce of stock taking

Main objective of reporting to management is to inform it

1. Whether the cost accounting system
2. Cost control
3. Cost presentation are effective reliable and adequate
Q:

WHAT SHOULD BE CONSIDERED WHILE DRAFTING THE

COST REPORT TO THE MANAGEMENT ?

Ans : The main object of the cost audit report is to inform the management
about cost accounting system its control and presentation are effective
reliable and adequate.
1.
2.
3.
4.
5.
6.

The accuracy and adequacy of prime cost

The adequacy of cost records
The correctness and adequacy of production
Increase in prime cost due to negligence of management
Increase in production cost as compared previous year
Any wastage and spoilage during the manufacturing process

Cost auditors report mainly focus on adequacy of cost accounting record, its
control and presentation.
Q:

AREAS WHICH IS IMPORTANT IN MANUFACTURING

OPERATION ?

Ans :
1. Planning and Production Control
This area is concerned with production planning and utilization of
comic use of production facilities.
2. Facilities Plat & Equipment
Facilities which uses in production process and include plant and
equipment installation and maintenance.
3. Material & Energy
Availability of raw material in right quantity right place and right time
& at right price.
4.Personal
Well trained skilled person in the right size is required to operate the
production facilities.
5. Quality Control
6. Safety
7. Law and regulatory
8. Maintenance
Quality cost are the cost that are aimed to developed and maintained the
image of a Company & its product in the market.
There are four classes of quality cost.
1. Prevention cost :- Cost stem from designing implementing and
manufacturing of quality system.
a. Quality Training
b. Pilot Studies
c. Reliability Enquiry
d. System development
2. Appraisal costs concern with inspection of material & product
a.
b.
c.

Inspection
Laboratory Testing
Dawn Time

3. Internal failure costs

Cost which relates to manufacturing process.
a.
b.
c.

Wastage
Rework
Break Down

4. External failure cost associated with supply of poor quality product to

customers and includes
a. Cost of quality and warranty
b. Customer complain
c. Replacement after sales / services
Q:

WHAT IS THE EFFECTIVE TOOL OF MANAGERIAL

CONTROL ?

Ans : Internal Audit :

Operational auditor in addition to assuring themselves that accounts
are properly reflect the facts also appraise polices procedures use of
management effectiveness of methods special problems and other
problems and other phases of operations.
Q:

WHY THE CONCEPT OF INTERNAL AUDITING SHOULD

NOT BE BROADEN IN PRACTICE ?

Ans : There are three reasons for this :

a. Ability of the enterprises to afford so broad audit
b. Difficulty of obtaining people who can do a broad type of audit
c. People dont like to be reported upon
Components of Production / Manufacturing Environment.
1.
2.
3.
4.
5.
6.
7.
8.
9.

Planning & production control

Facilities, plant and equipment
Personal
Material & Energy
Quality control
Safety
Environmental issues
Law and regulatory compliance
Maintenance

Legal Provision of Cost Audit

Section 230(1)(c) of the Companies Ordinance, 1984 provides in case of
companies engaged in production, processing, manufacturing or mining
activities to include such particulars utilizing material labour, items of courts
or other inpub as may be prescribed if such companies is required by the
authority by a general or special order to include such particular in the books
of accounts.

Cost Accounts record order 230(1)(e) of the Companies Ordinance 1984

framed.
Appendix
1. Vegetable Ghee & cooking
(Cost accounts records) order 1990
1st Jan,1991 came into force.

III

2. ___ Industries (Cost accounts record)

order 1994

IV

3. Sugar Industries (Cost Accounts record)

order 2001

are required to maintain cost accounting record.

Other industries may be brought into the audit of cost audit as when cost
accounting record and order may be issued.
India started cost audit in 1960 & shall there are 40 industries subject to cost
audit.
In India & Bangladesh cost and management accounts are required to
conduct cost audit where as in Pakistan Chartered Accountants and cost
management accounts are required to conduct cost audit kindly refer
section 258 of Companies Ordinance 1984.
Appointment of cost auditor.
Cost accountant shall be appoint with approved of Corporate Law Authority
within 60 days from the corporate of Company Accounts.

258 specifics that the right and duties of cost auditors are the same as auditor
of the Company.
From this we can conclude that the duties of the cost auditors are the same
as an auditor of the Company. Therefore we can refer section 255 of the
Company ordinance 1984 which describes the duties of the auditor.
1.
2.
3.
4.
5.
6.

To access book of accounts both financial and cost.

To call information and explanation
To visit branches
To take technical advice
To sign cost audit report
To receive notice attend annual general meeting

Duties of Cost Auditors

1. To make report to the directors of the companies within 60 days of his
appointment and submit two copies of the same to Securities
Exchange Commission of Pakistan & registrar concern.
2. Duties to qualify the report where he thinks it is necessary.
3. To keep the information which he received during the conduct of audit
confidential.
4. To know the management regarding irregularities in maintenance of
accounts.
5. He should make compliance with the companies Audit of Cost
Accounts rules 1998 & cost accounting records rules.
6. He should report the adequacy of policies & procedures.
7. He should keep his professional knowledge updated.

A. Independence
B. Integrity & Objectively
Integrity not implies honesty but also fair dealing and truth
fullness.
Objectively imposes the obligation all professional accounts to
be fair, intellectually honest and free of conflict of interest.

1. We have obtained all the information and explanation which to the

best of our knowledge and belief were necessary for the purpose of
this audit
2. In our opinion :
a. Proper cost accounting record as required under section 230(1)
(c) required by these rules have been kept by the Company.
b. Proper returns statement and schedules for the purpose of audit
of cost accounts have received from the branches not visited by
us.
c. The said books and records give the information required by the
rules in the member so required.
3. In our opinion and to the best of our information :
a. The annexed statement of capacity utilization and stock and
trade are in agreement with books of accounts of the Company
and exhibits true and fair view of the Companys affairs and
b. Cost accounting record have been properly kept so as to give a
true and fair view of the cost of production, processing
manufacturing and marketing of the under mentioned product
namely :
I
II
III

___________
___________
___________

The matter contained in the annexture form part of this report

1. Cost auditor should be appointed by directors of the Company after

prior approval of corporate law authority with 60 days of close of
financial accounts.
I 30 days
Statement of production capacity of the plant in term of machine hrs
production units or actual lefit.
Statement should be signed by chief executive and chief accountant.
Report to the directors
Within 60 days if his appointment two copies to corporate law authority and
registrar concerned.
Functional area might be marketing sales, distribution product including
accounting and financial control.