Cost audits play a pivotal role in ensuring transparency and accuracy in a company’s financial reporting. This article delves into the fundamental aspects of cost audits, their scope, objectives, governing sections, applicability, and the process of conducting them.
COST AUDIT
A cost audit is a systematic examination of a company’s cost accounting records and verification of the accuracy of cost accounting reports and statements. The primary purpose of a cost audit is to ensure that the cost accounting records are maintained in accordance with established accounting principles and that the cost information reported by the company is accurate and reliable.
The definition of the word ‘cost records’ is provided under rule 2 (e) of the Companies (Cost Records and Audit) Rules, 2014 which means books of account relating to the utilization of materials, labour and other items of cost as applicable to the production of goods or provision of services as provided in section 148 of the Act and the Companies (Cost Records and Audit) Rules.
SCOPE AND OBJECTIVE:
The scope and objectives of a cost audit are defined by regulatory authorities or professional bodies, depending on the jurisdiction and industry. The primary goal is to ensure that the cost information used for decision-making is accurate and transparent. The main objective is to review and examine the cost accounting records maintained by the company. This includes a detailed examination of cost ledgers, cost statements, and other relevant documents. The cost auditor verifies the accuracy of cost statements and reports submitted by the company. This involves checking the mathematical accuracy, compliance with accounting principles, and consistency with financial statements. This, in turn, helps the company to enhance its cost control mechanism.
GOVERNING SECTION:
Section 148 of The Companies Act, 2013 read with The Companies (Cost Records and Audit) Rules, 2014 and Cost and Works Accountants Act, 1959.
APPLICABILITY (Rule 3 of The Companies (Cost Records and Audit) Rules, 2014):
The class of companies, including foreign companies (as defined in clause 42 of Section 2 of the Act) engaged in the production of the goods or providing services, specified in the Table provided under Rule 3 of The Companies (Cost Records and Audit) Rules, 2014, 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.
1. As per Rule 4 of The Companies (Cost Records and Audit) Rules, 2014, every company specified in (A) regulated Sector as given in the Table, shall get its cost records audited 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 services for which cost records are required to be maintain is rupees twenty-five crore or more.
2. As per Rule 4 of The Companies (Cost Records and Audit) Rules, 2014, every company specified in (B) Non-regulated Sector as given in the Table, shall get its cost records audited 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 maintain is rupees thirty-five crore or more.
3. As per Rule 4 of The Companies (Cost Records and Audit) Rules, 2014, the requirement for cost audit under these rules shall not apply to a company which is required to maintain cost records and:
(i) whose revenue from exports, in foreign exchange, exceeds seventy-five (75) per cent of its total revenue; or
(ii) which is operating from a special economic Zone.
(iii) which is engaged in the generation of electricity for captive consumption through Captive Generating Plant..
CONDUCTING COST AUDIT:
1. The audit under Section 148(2) of The Companies Act 2013 shall be conducted by a cost accountant in practice who shall be appointed by the Board.
2. No person appointed as an auditor under Section 139 of the Act shall be appointed to conduct the audit of cost records.
3. The Auditor conducting the cost audit shall comply with the cost auditing standards.
4. The audit conducted under this Section shall be in addition to the audit conducted under Section 143.
5. The report on audit of cost records in Form CRA-3 shall be submitted by the cost accountant in practice to the Board of Directors of the Company.
6. The company shall within thirty days from the receipt of cost audit report, furnish such report along with full information and explanation on every reservation or qualification contained therein, to the Central Government in E-Form CRA-4.
CONSEQUENCES FOR NON COMPLIANCE:
If any default is made in complying with the provisions of this Section:
1. The company and every officer who is in default shall be punishable as per Section 147(1) of the Act: the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees, or with both.
2. The cost auditor who is in default shall be punishable as per Section 147(2) to (4) of the Act:
(i) the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees or four times the remuneration of the auditor, whichever is less. Provided that if an auditor has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees or eight times the remuneration of the auditor, whichever is less.
(ii) Where an auditor has been convicted under sub-section (2), he shall be liable to:
a) refund the remuneration received by him to the company; and
b) pay for damages to the company, statutory bodies or authorities or to members or creditors of the company for loss arising out of incorrect or misleading statements of particulars made in his audit report.
(iii) The Central Government shall, by notification, specify any statutory body or authority or an officer for ensuring prompt payment of damages to the company or the persons under clause (ii) of sub-section (3) and such body, authority or officer shall after payment of damages to such company or persons file a report with the Central Government in respect of making such damages in such manner as may be specified in the said notification.
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Feel free to contact the author for further clarification at 9953808432 or via mail at [email protected]. The author is the founder of SINGHANIA & ASSOCIATES (Practicing Company Secretaries Firm) based in Delhi.
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