INTERNAL AUDIT – ROLE OFCOST ACCOUNTANTS
STUDY BY CMA R P GORE and CMA S R PIMPLE
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
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COMPARATIVE CHART
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Statutory Financial
Audit
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Statutory Cost Audit
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Internal Audit
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Applicability- under the Companies Act Section-wise
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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
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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.
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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.
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Activity wise
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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.
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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.
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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.
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Appointment
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Members in Annual General Meeting on the recommendation of the
Board of Directors and report is also given to the Members
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Board of the Directors on the recommendation of Audit Committee.
The report is given to the Board of Directors
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Board of the Directors on the recommendation of Audit Committee.
The report is given to the Board of Directors
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Eligibility criteria
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All Companies
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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.
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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
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Objectives
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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.
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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.
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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.
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Method Used
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Initially vouching and confirmations were basic tools. Now test
checking of internal controls and system are tools for reliability of
financial data.
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Observations of operations minutely and analyzing the same was
initial thrust. Now operations review and appraisal of management functions
has become thrust area.
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Evaluation of various internal controls and review of day to day
operations to bring economy and reduce risk is prime areas.
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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.
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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
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Steps
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SIA No
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Particulars
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Steps
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SIA No
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Particulars
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1
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Basic Principles
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6
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3
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Documents
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2
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7
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Quality Assurance
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9
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Communications
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3
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1
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Planning
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8
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Reporting
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Term of engagement
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9
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5
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Sampling
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5
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10
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Evidence
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10
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6
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Analytical Process
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‘_________________________________
________________________
R P GORE COST
ACCOUNTANTAnnexure I
B.COM, FCMA, Dip IFRS(ACCA) London
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
To,
The Chief Administrator
PUNE METROPOLITAN REGION DEVELOPMENT
AUTHORITY.,
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 competent “All 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
CMA R P GORE, COST ACCOUNTANT