Introduction: A cost auditor, an essential player in a company’s regulatory landscape, independently examines cost accounting records to ensure compliance with laws and regulations. A cost auditor plays an important role in the compliance regulation of the company related to cost records. He is responsible for the preparation of cost audit report. Understanding when and how to appoint a cost auditor is critical for businesses subject to the Companies Act of 2013. This article provides insights into the regulations governing cost auditor appointments, the eligibility criteria, the appointment procedure, and the consequences of non-compliance.

When to Appoint a Cost Auditor:

A Cost auditor shall be appointed within one hundred and eighty (180) days from the commencement of every Financial Year on whom the provisions of cost audit are applicable.

Applicability for Appointment of Cost Auditor:

The Companies Act of 2013 and the Companies (Audit and Auditors) Rules of 2014 govern the appointment of cost auditors. Certain types of businesses are required to appoint a cost auditor to review their cost accounting records in accordance with these regulations.

  • A cost auditor must be appointed by businesses that produce, process, manufacture, or mine particular goods or services. 

Businesses that produce, process, manufacture, or mine particular goods or services are required to appoint a cost auditor. The Companies (Cost Records and Audit) Rules of 2014 specify the goods and services on the list. Products like pharmaceuticals, fertilizers, sugar, textiles, and engineering goods are included on this list.

  • Companies whose revenue is greater than a predetermined amount.
Applicability for maintenance of Cost records Applicability for Cost Audit
If the turnover of company which engaged in above  mentioned  activities, having a turnover Rupees 35 Crore or more in Immediate preceding financial year, has to comply with maintenance of Cost Records (as per CRA-1) If the turnover of company which engaged in above   mentioned activities, having a turnover Rupees 100 Crore or more in Immediate preceding financial year, then Cost Audit is applicable on it.

NOTE: For this purpose Turnover means Gross turnover from the sale or supply of all products or services during the financial year. It includes the turnover from Job Work or Loan License operation & Export benefit received but excludes duties & taxes.

(3)  Certain listed businesses must have a cost auditor appointed by the Securities and Exchange Board of India (SEBI). 

For certain listed businesses SEBI has mandated the appointment of a cost auditor.

ELIGIBILITY:

(1) Cost Accountant within the meaning of the Cost and Works Accountants Act, 1959, or

(2) Any such Chartered Accountant within the meaning of the Chartered Accountants Act, 1949 and a Fellow of the Institute of Chartered Accountants of India for a period of 10 years and has passed Part-I of the Management Accountancy Examination of the Institute of Chartered Accountants of India, or

(3) Other person, as may possess the prescribed qualifications.

WHO CAN APPOINT  A COST AUDITOR

As per the provisions of the Companies Act of 2013 and its regulations, any of the following can appoint a cost auditor:

  • Board of Directors: A cost auditor can be appointed by a company’s Board of Directors on its own. A resolution must be approved at a board meeting to make the appointment.
  • Shareholders: The shareholders of a company can also appoint a cost auditor. An Ordinary resolution approved by shareholders at a general meeting shall be passed for this purpose.
  • Central Government: If the Central Government believes that a company’s cost accounting records are incomplete or inaccurate, it can order the company to hire a cost auditor.

PROCEDURE:

1. Send notice of board meeting to all the directors of the company for appointment of Cost Auditor.

2. Obtain consent letter from the proposed cost auditor.

3. Convene Board meeting and pass the following Board Resolution for the appointment of cost auditor:

RESOLVED THAT  pursuant to the provisions of section 148 of the Companies Act, 2013 read with Rule 14 of the Companies (Audit and Auditors) Rules, 2014 and The Companies(Cost Records and Audit) Rules, 2014 and other applicable provisions, if any, the consent of the board be and is hereby accorded to appoint __________ as the Cost Auditor for auditing the cost accounting records of the company for the financial year ______ on a remuneration of Rs.___________ per annum plus out of pocket expenses that may be incurred.

RESOLVED FURTHER THAT Board of directors of the company be and is hereby authorized to do all such acts, deeds, things and matters as may be necessary in their absolute discretion to give effect to the Resolution.”

4. Sending of Outcome of Board Meeting to Stock exchange wherever company’s securities are listed within 30 minutes from the conclusion of meeting. (this point is applicable for listed companies only)

5. Send Appointment letter to Appointed Cost Auditor.

6. File e-Form CRA-2 along with attachments with the Registrar of Companies regarding appointment of Cost Auditor within thirty days from date of passing the Board Resolution.

QUALIFICATIONS/DISQUALIFICATIONS/RIGHTS AND DUTIES: SECTION 148(5)

The qualifications, disqualifications, rights, duties and obligations applicable to auditors under Section 141 shall, so far as may be applicable, apply to a cost auditor appointed under this section and it shall be the duty of the company to give all assistance and facilities to the cost auditor appointed under this section for auditing the cost records of the company.

ROTATION OF COST AUDITOR: SECTION 139

Section 139 of The Companies Act 2013 does not apply to the Cost Auditors and hence provisions of this section will not be applicable to Cost Auditors.

Hence Rotation of the Auditors will not be applicable to Cost Auditors.

CONSEQUENCES OF NON COMPLIANCE: SECTION 148(8)

If any default is made in complying with the provisions of this section,—

(a)  the  company  and  every  officer  of  the  company  who  is  in  default  shall  be punishable in the manner as provided in section 147(1);

(b) the cost auditor of the company who is in default shall be punishable in the manner as provided in section 147(2) to (4).

Company & Every Officer of Company: SECTION 147(1)

  • If any of the provisions of sections 139 to 146 (both inclusive) is contravened, 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 imprisonment for a term which may extend to one year or with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees, or with both.

Cost Auditor of the Company: SECTION 147(2) to (4)

  • If an auditor of a company contravenes any of the provisions of section 139, 143, 144 or 145, 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.

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 one lakh rupees but which may extend to twenty-five lakh rupees.

  • Where an auditor has been convicted under sub-section (2), he shall be liable to—

(i) refund the remuneration received by him to the company; and

(ii) pay for damages to the company, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report.

  • 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.

Conclusion: Understanding the nuances of cost auditor appointments is crucial for companies aiming for regulatory compliance. The process, eligibility criteria, and consequences of non-compliance are intricate aspects that demand careful consideration. By staying informed and adhering to regulatory requirements, businesses can navigate the complexities of cost auditor appointments seamlessly.

Author Bio

Qualification: CS
Company: Singhania and Associates
Location: DELHI, Delhi, India
Member Since: 13 Dec 2021 | Total Posts: 33
CS Sonali Singhania is an associate member of the Institute of Company Secretaries and the founder of Singhania & Associates (Practicing Company Secretaries Firm) based in Delhi. I am a competent professional having great post-qualification experience in Corporate Law, Labour law, SEBI, RBI et View Full Profile

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