Statutory cost audit was introduced in Pakistan under the Companies (Audit of Cost Accounts) Rules 1998. Under sub-rule (I) 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 Accountant within the meaning of the Cost and Management Accountants Act, 1966 [XIV of 1966].
Under sub-rule (2) and (3) of Rule 3 of the Companies (Audit of Cost Accounts) Rules 1998, the cost auditor shall be appointed by the directors with the prior approval of the SECP within 60 days of the close of the financial year of the company. “The company shall apply to the SECP in the form, set out in Appendix-I 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 to be appointed.” The cost auditor is appointed by the directors subject to the prior approval of the SECP. An example of an audit acceptance letter is shown as Appendix II at the end of the Handbook. The 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 form, 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 ineligibilities 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 as 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 corporate body 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.