Applicability of Cost Records and Cost Audit
Non-Compliance with various provisions with regard to Cost Records/Audit results in issue of Notices by MCA and advisory by ICMAI
With the advent of technology innovations and its adoption by the government departments, it has become very easy for the regulators to identify the non-compliances at ease and issue notices to ensure compliance in letter and spirit
MCA has mandated the maintenance of Cost Records and/or its cost audit under section 148 of the Companies Act 2013. Also, responsibility was casted upon the financial auditors and Directors to give declarations in their reports to about the applicability of Cost Records and its maintenance. Somehow, the provisions were not complied with fully and a casual approach was adopted to this provision. But the review of data being filed through various other forms with MCA, the Cost Audit Branch was able to identify the non-compliances. Thereafter. MCA issued notices to various companies for not maintaining the Cost Records, for non-appointment of Cot Auditors or for non-filing of cost audit reports. This became possible because of the availability of data with regard to the organisations/their products from the systems maintained by the MCA.
Please note that the applicability is primarily based on the turnover of previous Year and HSN codes of the products produced/manufactured by the company.
As the companies are required to intimate through Director’s Responsibility Statement that whether maintenance of cost records as specified by the Central Government under sub-section (1) of section 148 of the Companies Act, 2013, is required by the Company and accordingly such accounts and records are made and maintained
The companies not covered under cost audit in the previous year should seek a yearly opinion with regard to the applicability of cost records under section 148 and if applicable, immediately start the system of maintenance of cost records as per CRA-1 so that voluntary Assurance Certificate as per guidance note issued by Institute of Cost Accountants of India for Maintenance of Cost Records could be obtained before submission of cost record maintenance disclosure in the Director’s Report.
The Financial Auditors/Directors may review the applicability of Cost Records and Cost Audit every year and better it would be if a certificate is taken from Practicing Cost Accountant with regard to the applicability of section 148 of the Companies Act so as to avoid any adverse action at later stages as has been seen in the recent notices.
The companies should follow the guidance note on the “RESPONSIBILITY OF DIRECTORS: AS REGARDS MAINTENANCE OF COST RECORDS”
The MCA issued a notification containing Companies Cost Records and Audit Rules which are available at
https://icmai.in/upload/pd/Companies_CRAR_2019.pdf
The organisations were categorised in two sectors
(A) Regulated Sectors
(B) Non-regulated Sectors
Regulated Sector included the companies dealing in Telecom, Electricity, Petroleum Products, Drugs and pharmaceuticals, Fertilizers and sugar
Non-Regulated sectors included the companies other than above but mentioned in the Table B primarily Steel, cement, Engineering Goods, rubber, Implants etc. For specific HSN codes under cost audit, please refer to the notification as mentioned in this article or can write to us at navneetic@yahoo.com.
Applicability of Cost Records Maintenance: Limit -Overall Turnover Rs 35 Crores and above in the previous year
The companies engaged in the production of the goods or providing services, specified in the Table A and/or B, having an overall turnover from all its products and services of rupees thirty-five crore or more during the immediately preceding financial year, shall include cost records for such products or services in their books of account.
Applicability of Cost Audit: Limit –
1) Overall Turnover Rs 50 Crores and above, Specific Turnover Rs 25 Crores and above for Regulated Sector and
Every company dealing in products and services of regulated sectors need get its cost records audited in accordance with these rules if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is rupees fifty crore or more and the aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained is rupees twenty-five crore or more.
2) Overall Turnover Rs 100 Crores and above , specific Turnover Rs 35 Crores and above for the Non-Regulated Sector in the previous year.
Every company dealing in the non-regulated sector as per the notification need to get its cost records audited in accordance with these rules if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is rupees one hundred crore or more and the aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained is rupees thirty-five crore or more.
Action by MCA and ICMAI due to non-compliance with Section 148 of the Companies Act
MCA being the custodian of the various reports being filed with it, keeps reviewing the data being submitted and seeks clarifications and issue notices if required. Recently MCA issued various notices after review of the cost audit reports and now ICMAI has come up with the advisory and we need to follow the advisory. The organisations need to ensure the accuracy of data, timely completion of data and filing of the cost audit report. The crux of the advisory is given below.
- In case of non-compliance with reporting of Specific Unit of Measurement as per relevant HSN codes, the cost auditor may have to report it by a of qualification.
- Non-Compliance with timelines with regard to approval of cost audit annexures, submission of cost audit report and filing of Cost Audit Report alongwith Annexures shall have to be reported to MCA by Cost Auditors
The organisations must ensure compliance with the timelines and also report the correct UOM to avoid any issues later.
Attention is drawn to the recent advisory issued by the Institute of Cost Accountants of India wherein it has been advised to ensure that the Unit of Measurement are reported strictly as specified under Customs Tariff Act/Companies Cost Records and Audit Rules in the Cost Audit Annexures.
The cost auditor will be under obligation to mention by way of qualifications/Matter of emphasis or disclosure in case of non-compliance with Rule 31 as specified below. A proper Management Representation needs to be obtained in case of deviation and reported in the Cost Audit Report. It means during the conduct the cost audit the MRL must be obtained explaining the deviation for reporting in the cost audit reports
Rule 31 CCRAR. Unit of Measurement (UOM)
The Unit of Measurement (UOM) for each Customs Tariff Act Heading, wherever applicable, shall be the same as provided for in the Customs Tariff Act, 1975 (51 of 1975) corresponding to that particular Customs Tariff Act Heading
Not only this, the Cost Auditor has been mandated to report to MCA in case there is any delay in the complying with the time lines with regard to completion of cost audit by 27th Sep 2024 (In case of Financial years ending on 31st Mar 2024) and/or filing of the cost audit report in XBRL within 30 days from the date of receipt of cost auditors.
Filing of Cost Audit Report
Rule 6(6) of Companies Cost Records and Audit Rules (CCRAR) states Every company covered under these rules shall, within a period of thirty days from the date of receipt of a copy of the cost audit report, furnish the Central Government with such report alongwith full information and explanation on every reservation or qualification contained therein, in Form CRA-4 in Extensible Business Reporting Language format in the manner as specified in the Companies (Filing of Documents and Forms in Extensible Business Reporting language) Rules, 2015 alongwith fees specified in the Companies (Registration Offices and Fees) Rules, 2014
The text of the advisory is given below:
ADVISORY FOR THE MEMBERS
Unit of Measure (UOM) For compilation of Annexures to the Cost Audit Report
All the members of the ICMAI are hereby advised to ensure that Annexures to Cost Audit Report under The Companies Act 2013 are complied strictly using the Uni t of Measure as specified under the Customs Tariff Act 1975. In case of any deviation the same needs to be clearly mentioned in the cost audit report by way of appropriate Qualification or Matter of Emphasis or Disclosure. Explanation / Justification shall be obtained from the company in form of Management Representation Letter (M RL) and the same shall be mentioned in the Cost Audit Report.
For example. in case of Pharma industry. where the Unit of Measure is to be given in terms of weight, weight of Drug (excl excipients) shall be used for compilation of Annexure to the Cost Audit Report.
Submission of Cost Audit Report
All Practising members of the ICMAI are hereby advised to ensure strict adherence to the statutory timelines for submission of the Cost Audit Report as per The Companies (Cost Records and Audit) Rules 2014. In case there is a delay, the same needs to be informed to appropriate authorities including Cost Audit Branch, MCA, GOI.
The explanations given above are based on our understanding of the provisions and authorities/any other person may have different point of view. Readers are requested to check all the relevant provision.
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Please feel free to get in touch with us at 9810175020 or on navneetic@yahoo.com in case any further clarification is required.
Author: CMA Navneet Kumar Jain | Partner | Jitender Navneet & Co., Delhi, Cost Accountants
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