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   After inclusion of Cost Accountants in clause for Internal Audit u/s 138(1) of the Companies Act 2013,we find that there are some companies ,which are including the Cost Accountants and inviting them in the advertisements along with Chartered Accountants for the work of Internal audit.There are many / organizations which are not including us in their bidding process / tendering process or in their advertisement for Internal Audit mainly because they are either not aware about our eligibility / entitlement or they do not want to make any change in the same old process of selection followed years after years.

We suggest that whenever such advertisement appears in local media, the local CMAs of that area or Chapters should take up our case and should make them aware about our capabilities -legally and professionally. We have to emphasis that it is our right to participate in the process of bidding / tendering. We enclose herewith copy of our letter addressed to PMRDA(Annexure I) as a sample letter. May be the chapters or the CMAS find some points as given in the letter, useful in drafting the letter or pleading our case to the company or the authorities particularly when it is government company or organization.We would be happy if that it is put to use by any Cost Accountant.

We find to our surprise that lots of Cost Accountants are not sure whether they could do the Internal Audit andwhether they could get the assignment when they do not have (?) Internal audit experience We have tried to convince ourselves in this matter. In the same situation what would be the answer by any Chartered Accountants? They would, I am sure, never be bothered and would be assuming that their statutory auditing experience. or experience of concurrent audit would be sufficient for that purpose.

 We reproduce sec 138(1) of the Companies Act 2013

138. Internal audit (1) Such class or classes of companies as may be prescribed shall be required to appoint an internal auditor, who shall either be a chartered accountant or a Cost Accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company. “

Thus it gives the Practicing Cost Accountant the entitlement to work in the field of  Internal audit officially at par with Practicing Chartered accountant with the specific provision.

For Auditees for whom this is mandatory the rules framed have considered some criteria. Under the Rule 13 of Companies (Accounts) Rules, 2014, all listed Companies are required to appoint internal auditor whereas the criteria for unlisted company would depend first on basis whether it is public limited company or private limited company and then depending upon its preceding years income, amount of loan, capital and deposit it would be decided whether the company is covered in Internal Audit mandatorily.

It may be thus noted that

1.     The auditor can be Chartered or Cost Accountant or other Professional (may be technical expert / professional)He can be Employee auditor or external auditor

2.     The appointment is to be made by the board and he has to report to the board. The Internal Auditor shall submit his report to the Chairman of Audit Committee, and when there is no such committee to the Board of Directors. The Internal Auditor or a senior representative of the firm of Internal Auditor shall attend the Audit Committee meetings. Section 138 states that “the Central Government may, by rules, prescribe the manner and the intervals in which the internal audit shall be conducted and reported to the Board.” When it came to the rule, explanation to Rule 13 runs as “the Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit.” Thus, neither the Act nor the Rules is specifically saying about the manner or periodicity of internal audit. The periodicity of audit maybe on a quarterly basis (The Board may prescribe for a lesser period)

3.     The scope of work is not defined but would be to audit of functions and activities of the companies The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal auditIt would be better for the board and the Internal Audit if the Board shall (on the recommendation of the audit committee) give written terms of reference to the Internal Auditor

4.     As per Sec 144 of the Companies Act, the Statutory Auditor (the cost auditor) can not take assignment of Internal Audit of the same company and vice versa

5.     The Internal Auditors shall comply with the auditing standards.

 The Companies Act 2013 made first time the Internal audit mandatory. We have tried to make comparative chart showing Financial audit, Cost audit and Internal audit. It shows that in lot of respect Cost Audit is having similarity in its approach and working ways with internal audit




Statutory Financial Audit

Statutory Cost Audit

Internal Audit

Applicability- under the Companies Act Section-wise

Sec 139(1): Subject to provisions of this Chapter, every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting and the manner and procedure of selection of auditors by the members of the company at such meeting shall be such as may be prescribed. Provided that the Company shall place the matter relating to such appointment for ratification by members in every annual general meeting

Sec.148 (2): If the Central Government is of the opinion that it is necessary to do so, it may by order direct that the audit of cost records of class of companies, which are covered under the sub section (1) and which havenetworth of such amount as may be prescribed or a turnover of such amount as may be prescribed shall be conducted in the manner specified in the order.

Sec.138 (1)Such class or classes of companies as may be prescribed shall be required to appoint an internal auditor, who shall either be a chartered accountant or a Cost Accountant or such other professional as may be decided by the Board to conduct the internal audit of the functions and activities of the Company.

Activity wise

The Auditor shall make a report to the members of the Company on the accounts examined by him and on every financial statements which are required by or under this Act to be laid before the Company in general meeting and the report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required  to be included in the audit report under the provisions of this Act or any rules made thereunder or under any order made under sub section 11 and to the best of his information and knowledge, the said accounts, financial statements give a true and fair view of the state of the company’s affair as at the end of its financial year and profit or loss and cash flow  for the year and such other matters as may be prescribed.

Audit of the Cost Records under sub section (1) provided further that the auditor conducting the cost audit shall comply with the cost auditing standards. Explanation: For the purpose of this section the expression cost auditing standards are issued by the Institute of Cost and Works Accountants of India (now Institute of Cost Accountants of India) constituted under the Cost and Works Accountant Act, 1959 with the approval of Central Government. The auditor give opinion that the statements in the annexure to the Cost Audit Report gives/does not give a true and fair view of the Cost of Production or products/ rendering of services, cost of sales, margin and other information relating to product(s)/services under reference.

The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor formulate the scope, functioning, periodicity and methodology for conducting the internal audit.


Members in Annual General Meeting on the recommendation of the Board of Directors and report is also given to the Members

Board of the Directors on the recommendation of Audit Committee. The report is given to the Board of Directors

Board of the Directors on the recommendation of Audit Committee. The report is given to the Board of Directors

Eligibility criteria

All Companies

Class of companies specified in the C (CRand A) Rules as amended. For regulated Industries Turnover Rs.50 or more Cr. And for unregulated industry Turnover Rs. 100 Cr. Or more.

1.Every Listed Co.  2. Unlisted Co. having paid up Share Capital Rs. 5o Crore or more turnover Rs. 200 crore or more or loan /borrowing from banks or FI o/s Rs. 100 cr or more or outstanding depositing Rs. 25 cr or more 3. Private Co. turnover Rs. 200cr or more and o/s loan/borrowing Rs. 100 cr or more


Statutory Audit is conducted with the objective of ensuring truthfulness and fairness of the financial statements of an entity. Since external agency want an independent cheque on truthfulness of information provided, the audit exists.

Cost Accounting has evolved to control the costs and provide data for decision making. It is also audit of efficiency by optimizing resources and reducing wastages. Certifying Cost Statements and other data as true and FAIR.

Internal audit is conducted with the objective of review of internal controls, checks and financial or no financial operations of the organization. This is to effectively reduce risk of non-compliance  and bringing economy in the organization in all areas of operations.

Method Used

Initially vouching and confirmations were basic tools. Now test checking of internal controls and system are tools for reliability of financial data.

Observations of operations minutely and analyzing the same was initial thrust. Now operations review and appraisal of management functions has become thrust area.

Evaluation of various internal controls and review of day to day operations to bring economy and reduce risk is prime areas.


In the present framework, Cost Audit serves / tries to serves the organization in following manner

i. Management gets reliable data for its day-to-day operations like price fixing, control, decisionmaking, etc.

ii. A close and continuous check an all wastages will be kept through a proper system of reporting to management.

iii. Inefficiencies in the working of the company will be brought to light to facilitate corrective action.

iv. Management by exception becomes possible through allocation of responsibilities to individual managers.

v. System of budgetary control and standard costing will be greatly facilitated.

vi. Reliable check on valuation of closing stock and work-in-progress can be established.

vii. Helps in detection of frauds and errors.                                                                             

ix. Cost Audit ensures that proper records are kept as to purchases and utilization of material and expensesincurred on wages, etc. It also makes sure that the valuation of closing stock and work-in-progress is on fair basis. Thus, the shareholders are assured of a fair return on their investment.

By close observations of the above, we sense the similarities in the aims and objectives of the Internal Audit and Cost Audit.Both look for review of day -to-day operations and particularly to evaluation and improve the effectiveness of risk management, Control and governance process.

Let us note the recent change CARO reporting (the Companies -Auditors report) order 2015. The earlier requirement of financial auditors reporting on the adequacy or not of Internal audit system in CARO has been dispensed off in CARO 2015 and now he is not required to report on that aspect. Thelatest change in Cost Audit scene is of notification dated 31st Dec 2015.Howeverafter the notification you find that the Cost Auditor is required / continued to require to comment in his report CRA 3 on the adequacy or not of Internal audit system. Considering these two facts, as on today the Cost Accountants have more role to play than Chartered Accountant in Internal Audit.

Let us look the same point from another angle The Institute of Internal Auditors have recently defined Internal Audit as “independent objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic disciplined approach to evaluate and improve the effectiveness of risk management, control and governance process.”After going through the definition we can surely state that it includes to check / ensure various Internal and external compliances, to minimize riskand to monitor the internal controls, to optimize the resources – Cost and Processes  and to see effective governance process and ethical practices

Take any cost audit report and we find that it is much comparable to the above Internal Audit report.We check the correctness/ calculations of excise duty; service tax and VAT thus all the indirect taxes are checked by us. We are reconciling the assessable values. Thus we check all indirect tax compliances or maximum external compliances. As part of our audit exercise, we check MIS and check the consumption parameters with standards or norms. We also study the budgets, compare it with actuals, try to find effectiveness of internal controls we find out product-wise cost, we also give details of the capacity utilization. Thus we are accustomed to study and work out Internal and external compliances

 We are also knowing and reporting whether through performance report or report to the management the optimum use of resources Thus both audits are efficiency and effectiveness auditsNow can this experience of Cost Audit not useful or to be considered for / counted for Internal audit?

It is indeed true we have better exposure to costing and we do product costing going to deep extent and studying processes and raw materials keenly. We go through various process / machines and various ways in which costs can be reduced. In our Cost Audit report product-wise or department-wise cost of production and can particularly have better understanding of costs and profitabilityand hence are surely could suggest /can advise the company for various ways to reduce the cost.Thus it is our opinion based on the arguments given above that the COST AUDIT EXPERIENCE SHOULD BE CONSIDERED WHILE CONSIDERING EXPERIENCE FOR INTERNAL AUDIT ASSIGNMENTS.





Foot note :The Institute of Chartered Accountants has developed Internal audit standards as given below. Till the time our Institute develops Internal audit standards

 We feel there is no harm to go through the standards developed and use it









Basic Principles






Quality Assurance












Term of engagement









Analytical Process
















Bldg E-7,Flat 604, LakeTown Co-Op HsgSociety,Bibwewadi, Pune 411037

Mob 9860221012 Tel 020-65231012 Email :  gore.raja@gmail.com


Date 23rd Mar. 2016



The Chief Administrator


S No 152/153,4th Floor,

Maharaja Sayajirao Gaikwad UdyogBhavan, Aundh, PUNE

Ref :- Your Advertisement in daily sakal today for expression of Interest for Internal Audit asking only Chartered Accountants

Dear Sir,

With reference to the advertisement for Internal Audit assignment, you have invited only chartered accountants and denied the Cost Accountants right to participate in the process of selection/ bidding.

Please note following points

1)    Our Institute -The institute of Cost Accountants of India is formed by the Act of parliament and it is a professional body. The members are regulated by strict code of conduct. The members are professionals working in the field of Accounts and Audits

2)    The Cost Accountants are authorized to do Internal audit of companies as per sec 138 of Companies act 2013. It means that the Government accepts our role in Internal Audit

3)    There are various State Government organizations like MSSIDC and CIDCO which had also invited us in bidding process for Internal Audit

4)    Way back in 2012 the finance department of Government accepted our role in Internal audit and inspection field of bank-we refer master circular Finance department, the Government of India.(F NO 7/1242012-BOA Audit dated 26/9/2012)Quote " 11. Inspection and Internal Audit department should be strengthened with   adequate man power having requisite experience. - The team should consist of a proper mix of audit officers / Chartered Accountants / Cost Accountants / CISA Qualified / Seniors ……" Unquote (stress provided by the undersigned)

5)    The Comptroller and Auditor General also has agreed for our role in Internal Audit

6)    The Cost Accountants are thus qualified legally to do the Internal audits and they are competent to complete the assignment to the satisfaction of the authorities

7)    The PMRDA is a statutory authority constituted by notification by The State Government. Thus it comes under the ambit of inclusive definition of ‘State’ under article 12 of our fundamental right given by our constitution considering as a group of professionals Thus you as state can not discriminate between two individuals or two groups when both are equally competentAll the eligible, qualified and suitable persons are entitled to claim right to be treated equally in the matter of awarding contract by the Government and public authorities.” [See R.D.Shetty v. International Airport Authority, Tata Cellular v. Union of India, and Monarch Infrastructure Pvt. Ltd. v. Commr., Ulhasnagar Municipal Corporation (supra)

8)    This may also be against ‘the Public Interest’ as by restricting the entry of more number of professionals you are reducing a chance to having better/more competitive bid. Thus may be possibility of waste of public money


We request you to immediately amend the Advertisement including Cost Accountants and giving us sufficient time to participate in the process. Please revert if you need any clarification


Thanking you