CS Kiran Mukadam
According to the Institute of Cost and Management Accountants of England, Cost Audit is defined as the verification of Cost Accounts and a check on the adherence to the Cost Accounting plan. The cost audit therefore comprises: (a) the verification of the cost accounting records such as the accuracy of the cost accounts, cost reports, cost statements, cost data, costing techniques and (b) examining these records to ensure that they adhere to the cost accounting principle, plans, procedures and objectives. Generally, Cost audit is an audit process for verifying the cost of manufacture or production an article on basis accounts as regard utilization of material or labour or other cost. In India, the central government empowers to issue the order of conducting the cost audit for specific industries under section 233B of the Companies Act 1956. If the central government prescribed, the company engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or labour or to other items of cost under section 209(1)(d) of the companies act 1956, to include such particulars in the books of account.
In new era of corporate world, the focus of the Ministry of Corporate Affairs working is no longer limited to the administration of companies but has increasingly acquired an all-inclusive role of addressing a vide sweep of functions – Corporate Governance reforms and the emerging legal framework. Therefore, the Ministry of Corporate Affairs has issued different orders for conducting audit of cost accounting records. Prior to issuance of Cost Audit Orders, individual cost audit orders were being issued by the Cost Audit Branch to the respective companies for each product covered.
Cost Account Record Rules 2011:-
1. Ministry of Corporate Affairs vide GSR No. 429/ (E) dated 3rd June 2011, have issued Companies (Cost Accounting Records) Rules, 2011.
These rules shall apply to following companies, including a foreign company as defined under section 591 of the Act-
Ø The company engaged in the production, processing, manufacturing, or mining activities and
Ø The aggregate value of net worth of the Company as on the last date of the immediately preceding financial year exceeds five crores of rupees;
Ø The aggregate value of the turnover made by the company from sale or supply of all products or activities during the immediately preceding financial year exceeds twenty crores of rupees;
Ø The company’s equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India.
3. Every company to which these rules apply, including all units and branches thereof shall, in respect of each of its financial year commencing on or after the 1st day of April, 2011, keep cost records for eight years.
4. Every company to which these rules apply shall submit form A along with compliance report in prescribed form- B, in respect of each of its financial year commencing on or after the 1st day of April, 2011, duly certified by a cost accountant, along with the Annexure to the Central Government, within 180 days from closing of the financial year.
5. If all the products/activities of a company, excluding the exempted categories, are covered under cost audit, then the company will not be required to separately file the compliance report.
6. The “cost accountant” is required to certify and state in compliance report whether the cost record has been maintained in accordance with the Rules. There is no ceiling on the number of Compliance Reports that can be authenticated by a cost accountant in whole-time practice.
7. A cost accountant working as permanent employee can authenticate the Compliance Report of the company where he is employed provided his membership dues are not in arrears. He cannot authenticate Compliance Report of any other company even under the same group.
8. The Company is responsible for maintenance of cost accounting records. Hence the preparation of the Annexure is the responsibility of the Company.
9. Ministry of Corporate Affairs has issued specified cost accounting record rules for telecommunication industry, Pharmaceutical, sugar, petroleum industry, fertilizers, electricity industry on 7th December 2011.
10. The Companies (Cost Accounting Records) Rules, 2011 are not applicable to:
- Wholesale or retail trading activities.
- Banking, financial, leasing, investment, insurance, education, healthcare, tourism, travel, hospitality, recreation, transport services, business/professional consultancy, IT & IT enabled services, research& development, postal/courier services, etc. unless any of these have been specifically covered under any other Cost Accounting Records Rules.
- Companies engaged in rendering job work operations or contracting/sub-contracting activities, and are paid only the job work or conversion charges, such as tailoring, baking, repairing, painting, printing, constructing, servicing, etc.
- Companies engaged in the production, processing, manufacturing or mining activities till such time they commences their commercial operations.
- Ancillary products/activities of companies incidental to their main operations (i.e. products/activities that do not constitute their main line of business) and wherein the total turnover from the sale of each such ancillary products/activities do not exceed 2% of the total turnover of the company or Rs.20 crores, whichever is lower. However, required details of all such ancillary products/activities may be maintained under a miscellaneous group and disclosed appropriately.
- Generation of electricity for captive consumption. For this purpose, the term “Captive Generating Plant” shall have the same meaning as assigned in Rule 3 of the Electricity Rules, 2005.
- Own manufactured products that are consumed exclusively by the company for the sole purpose of production, processing, manufacturing, or mining of its other products or activities that are subject to cost audit.
- Hundred percent Export Oriented Units.
Cost Audit –
The central government has issued different orders dated 2nd may 2011 [Eight Industries], 3rd May 2011 [Six Industries], 30th June 2011 [Eight Industries]. All industries covered under this orders, shall be audited its cost records on or after 1st April 2011. The central government enlarged the scope of cost audit through issuing cost audit order on 24th January 2012 and included another nine industries under cost audit. The following industries shall get its cost accounting records audited by cost accountant on or after 1st April 2012.
- All companies to which the Companies (Cost Accounting Records) Rules, 2011 apply and
- The company engaged in the production, processing, manufacturing or mining of the following products/activities, including intermediate products and articles or allied products thereof and
|SN||Name of the Industry||Relevant Chapter Heading of the Central Excise Tariff Act, 1985|
|1||Jute, cotton, silk, woolen or blended fibers/textiles||Chapters 50 to 63|
|2||Edible oil seeds and Oils (incl. vanaspati)||Chapters 12 and 15|
|3||Packaged food products||Chapters 2 to 25 (except Chapters 5, 6, 14, 23 and 24)|
|4||Organic & Inorganic Chemicals||Chapters 28, 29, 32, 38 and 39|
|5||Coal & Lignite||Chapter 27|
|6||Mining & Metallurgy of ferrous & non‐ferrous metals||Chapters 26 and 74 to 83 (except
Chapters 76 and 77)
|7||Tractors & other motor vehicles (incl. automotive components)||Chapters 84, 85 and 87|
|8||Plantation Products||Chapters 8, 9, 21 and 40,|
|9||Engineering machinery (incl. electrical & electronic products)||Chapters 84 and 85|
- If the aggregate value of the turnover made by the company from sale or supply of all its products/activities during the immediately preceding financial year exceeds hundred Crore of rupees
- If the company’s equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India
Features of cost Audit-
- Every cost auditor shall forward his report to central government and company within 180 days from the end of financial year of the Company
- The company and every officer of the Company shall render necessary assistance to the cost auditor so as to enable him to complete the cost audit.
- The annexure prescribed with cost audit report shall be approved by Board of Director before submitting the same to central government. The annexure shall also be signed by company secretary and at least one Director of the Company. If there is no company secretary, then two Directors shall sign the same.
- No person in employment can be appointed as a cost auditor.
- The company shall within 30 days from the date of receipt of the copy of the cost audit report, furnish to the central government with full information and explanations on every reservation or qualification remarks.
- Sometimes, the central government may direct to circulate the cost audit report to members.
- A cost accountant in full time practice or a firm of cost accountants appointed for conducting cost audit of a product/activity of a company is eligible to also authenticate the Compliance Report of the Company in respect of Companies (Cost Accounting Records) Rules 2011
- A cost auditor would be deemed to have concluded his appointment as cost auditor and eligible to accept appointment of another company within the limits of Section 224 (1B) .
- The following persons shall be disqualified for appointment of as cost auditor of a company under section 226 of the companies act 1956-
- Body corporate
- An officer or employee of the company
- A person who is partner or who is an employment of an officer or employee of the company
- A person who is debtor or creditor with related to company for an amount of exceeding Rs. 1000
- A person who hold any security of that company
- Under section 224(1B), the company shall appoint elsewhere or firm as its cost auditor if such person or firm is, at the date of such appointment or re-appointment, holding appointment as auditor of the specified number of companies or more than the specified number of companies. As per section 224(1C), the specified no. of companies per partner of firm/ individually includes twenty companies, in the case of a person or firm holding appointment as auditor of a number of companies each of which has a paid-up share capital of less than rupees twenty-five Lakhs, or in any other case, twenty companies, out of which not more than ten shall be companies each of which has a paid-up share capital of rupees twenty-five Lakhs or more. In above specified no. of Companies, following audits of companies not included-
i) Private Company (After Companies amendment act 2000)
ii) Guarantee companies having no share capital (Department’s Letter No. 8/12/(224)/74-CL-V, dated 28-9-74)
iii) Foreign companies (Circular No. 21 of TSF No. 35/3/75-CL-III, dated 24-9-1975)
iv) Branch audit of the Indian Companies not counted for calculating the specified number u/s 228 and as per Department circular No. 21/75(35/3/75-CL-III), dated 24.09.1975.
v) Special Audit, investigations and audit of co-operations set up under separate act.
Procedure for Appointment cost auditor-
- Company appoint cost auditor who hold valid certificate of practice of the Institute cost Accountants of India [ICAI],
- In company, Audit Committee of Board shall be first point of reference regarding appointment of Cost Auditor.
- The Audit Committee shall be consider disqualification as per section 224(1B) of Cost Auditor at the time of his appointment. Audit Committee shall be responsible for such Compliance.
- The Audit Committee shall obtain a certificate from cost auditor certifying his/its independence and arm length relationship with company. Then, the Board of Directors of the company approves his appointment in their meeting.
- After that the Company shall file form 23C within 90 days from the date of his appointment and attach a copy of certificate received from cost auditor and Board resolution. However, under the present procedure, the prior approval would be deemed to have been granted if the Central Government does not raise any query within 30 days of filing of Form 23C.In case the Central Government raises any query within the said period of 30 days, the company would be required to clarify the issues and re-submit the Form 23C. The period of 30 days, in this case, would run from the date of resubmission of Form 23C
- After expiry of 30 days from filing of form 23C, the company issues a formal letter of appointment as approved by the Board to cost auditor.
- Cost Auditor shall inform through filing of e-form (form 23D) along with copy of appointment to Central government regarding his consent to adopt the appointment.
- The Company is required to disclose full particulars of the cost auditor along with the due date and actual date of filing of the Cost Audit Report by the cost auditor, in its Annual Report for each relevant financial year. Since the notification has made effective from April 1, 2011, companies under cost audit are required to furnish the details in its Annual Report from the financial year 2010-11. Since the cost audit report of a particular financial year may not have been submitted before publication of the Annual Report, relevant details of due and actual date of filing for the last financial year and the due date of filing for the current year may be published in the Annual Report.
- If there is no audit committee, then Board of Director of that company shall be responsible for the implementation of above procedure.
The Ministry of corporate affairs has framed the different rules, orders in respect of utilization of labour or other items of cost in the books of account. This orders enlarged the scope of cost audit than the individual specific industry cost audit order. Now the company shall be required to comply with compliance report and cost audit simultaneously, if the products covered under different orders. Also, the department have mandated to file the cost audit report [form –I] and compliance report [form –A] for the year 2011-12 onwards [including the pending report relating to any previous year] by using the XBRL taxonomy. Such different orders on cost audit have been created complexity in mind of stakeholders regarding their implementation and follow up. Many companies are unaware about the applicability to their companies and put into operation of cost accounting record still now. Therefore, the Ministry of corporate Affairs and other authorities should take steps towards familiarization of cost audit concept in mind of stakeholders who covered first time under this. Such steps will be helpful to take away the complexity of cost audit orders and avoids the irregularity in implementation of government order.