Cost recovery is an integral part of Indonesian Production Sharing Contract(PSC).The mechanism functionas an incentive to attract investment in oil and gas exploration and production.The separation of functionin PSC between the government and the contractor leads an information asymmetry over cost recovery.This issue makes the cost recovery calculation vulnerable to manipulation.In the context of the agencyproblem,the audit on cost recovery is deemed crucial as the government procedure to secure its share frominappropriate reimbursed cost.The paper presents the challenge of traditional cost recovery audit,and a proposal to implement a Risk-Based Audit(RBA)approach as a strategic monitoring tool over cost recovery.The RBA provides anefficient and effective audit practice to maintain audit quality.The paper also adds to the literature on thegovernment practice in addressing agency problem in PSC's cost reimbursement system based on a casestudy in Indonesian PSC environment.
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