Cost Audit under The Companies Act 2013 & Rules

A cost audit represents the verification of cost accounts and checking on the adherence to cost accounting plan. Cost audit ascertains the accuracy of cost accounting records to ensure that they are in conformity with cost accounting principles, plans, procedures and objectives. A cost audit comprises the following;

-Verification of the cost accounting records such as the accuracy of the cost accounts, cost reports, cost statements, cost data and costing technique

-Examination of these records to ensure that they adhere to the cost accounting principles, plans, procedures and objective

-To report to the government on optimum utilisation of national resources

The Companies in India are regulated under The Companies Act, 2013 and let us explore the provisions in depth.

What is cost records?

The definition of the word ‘cost records’ has been 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 the goods or provision of services as provided in section 148 of the Act and the Companies (Cost Records and Audit) Rules.

Which companies are required to maintain cost records?

The class of companies, including foreign companies, engaged in the production of the goods or providing services, specified in the Annexure A below, 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.

Which provision governs the cost audit?

The Section 148 of The Companies Act, 2013 read with The Companies (Cost Records and Audit) Rules, 2014 and Cost and Works Accountants Act, 1959.

What is cost audit?

There is no definition given in The Companies Act, 2013 or in any other Law. However, as per general definition “the verification of cost records and accounts and a check on the adherence to the prescribed cost accounting procedures and the continuing relevance of such procedures may be termed as cost audit.

Which companies are required to do cost audit?

Every company specified in (A) regulated Sector as given under Annexure A, 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.

Every company specified in (B) Non-regulated Sector as given under Annexure A 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.

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 generation of electricity for captive consumption through Captive Generating Plant.

Who can be a Cost Auditor?

Only a Cost Accountant can be appointed as Cost Auditor for conducting cost audit. Cost Accountant” means a cost accountant as defined in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 and who holds a valid certificate of practice under sub-section (1) of section 6 of that Act.

Provided that no person appointed statutory auditor of the company shall be appointed for conducting the audit of cost records.

Here as per my interpretation, only a Chartered Accountant can be appointed as Statutory Auditor of the company, he cannot be cost auditor of same company even though he is cost accountant also. This clarification is given so that while conducting audit, cost auditor furnishes unbiased audit report.

When to appoint a Cost auditor?

A Cost auditor has to be appointed within one hundred and eighty (180) days from the starting of Financial Year by every company on whom these provisions are applicable.

What is the procedure to appoint a Cost Auditor?

The companies which are required to appoint an Internal Auditor have to follow the below given procedure: –

1. Prepare notice of board meeting along with draft resolution(s) to be passed in the board meeting for candidate consideration for appointment as Cost Auditor and sending engagement letter or consent letter from the proposed Cost Auditor.

2. Obtaining engagement letter or consent letter.

3. Sending of Notice along with Agenda of Board meeting to all the Directors of company and finalising general meeting notice for ratification of appointment of cost auditor by shareholder of company.

4. Convene board meeting and pass the following Board Resolution.

5. 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)

6. Sending of Appointment letter to Appointed Cost Auditor.

7. File e-Form returns along with attachments with the Registrar of Companies regarding appointment of Cost Auditor within thirty (30) days from date of Board Meeting.

8. Convening of General Meeting and passing of Ordinary resolution by shareholders.

9. Intimation 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)

10. Filing of E-form for passing of ordinary resolution in general meeting within thirty (30) das from the general meeting.

11. Making entry in register, minute books, etc of company.

What forms are required to appoint a Cost Auditor?

For appointment of cost auditor, only two E-form is required i.e. MGT-14 and CRA-2 both forms have to be filled within thirty days (30) from date of respective meetings.

What are other important aspects of cost audit?

The report on the audit of cost records shall be submitted by the cost accountant to the Board of Directors of the company. A company shall within thirty days from the date of receipt of a copy of the cost audit report prepared furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained therein in E-form CRA-4 to department.

What is penalty for complying with provisions?

1. If any of the provisions of 148 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 fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees

2. If an auditor of a company contravenes any of the provisions of cost audit, 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

3. Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally

4. Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable

Annexure A

The companies, including foreign companies, engaged in the production of the goods or providing services, specified in the table below, 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, namely:-

• Regulated Sectors

No.	Industry/ Sector/ Product/ Service	Customs Tariff Act Heading”(wherever applicable
1	Telecommunication services made available to users by means of any transmission or reception of signs, signals, writing, images and sounds or intelligence of any nature and regulated by the Telecom Regulatory Authority of India under the Telecom Regulatory Authority of India Act, 1997 (24 of 1997); including activities that requires authorisation or license issued by the Department of Telecommunications, Government of India under Indian Telegraph Act, 1885	Not applicable.
2	Generation, transmission, distribution and supply of electricity regulated by the relevant regulatory body or authority under the Electricity Act, 2003 (36 of 2003);	Generation- 2716; Other Activity-  Not Applicable
3	Petroleum products; including activities regulated by the Petroleum and Natural Gas Regulatory Board under the Petroleum and Natural Gas Regulatory Board Act, 2006 (19 of 2006);	2709 to 2715; Other Activity-  Not Applicable
4	Drugs and pharmaceuticals;	2901 to 2942; 3001 to 3006.
5	Fertilisers	3102 to 3105
6	Sugar and industrial alcohol;	1701; 1703; 2207.

• Non-Regulated Sectors

No.	Industry/ Sector/ Product/ Service	Customs Tariff Act Heading” (wherever applicable)
1.	Machinery and mechanical appliances used in defence, space and atomic energy sectors excluding any ancillary item or items; Explanation. – For the purposes of this sub-clause, any company which is engaged in any item or items supplied exclusively for use under this clause, shall be deemed to be covered under these rules.	8401; 8801 to 8805; 8901 to 8908.
2.	Turbo jets and turbo propellers;	8411
3.	Arms and ammunitions and Explosives;	3601 to 3603; 9301 to 9306.
4.	Propellant powders; prepared explosives (other than propellant powders); safety fuses detonating fuses; percussion or detonating caps; igniters; electric detonators ;	3601 to 3603
5.	Radar apparatus, radio navigational aid apparatus and radio remote control apparatus;	8526
6.	Tanks and other armoured fighting vehicles, motorised, whether or not fitted with weapons and parts of such vehicles, that are funded (investment made in the company) to the extent of ninety per cent, or more by the Government or Government agencies;	8710
7.	Port services of stevedoring, pilotage, hauling, mooring, re-mooring, hooking, measuring, loading and unloading services rendered for a Port in relation to a vessel or goods regulated by the Tariff Authority for Major Ports under the Major Port Trusts Act, 1963 (38 of 1963);	Not applicable.
8.	Aeronautical services of air traffic management, aircraft operations, ground safety services, ground handling, cargo facilities and supplying fuel rendered at the airports and regulated by the Airports Economic Regulatory Authority under the Airports Economic Regulatory Authority of India Act, 2008 (27 of 2008);	Not applicable.
9.	lron and Steel;	7201 to 7229; 7301 to 7326
10.	Roads and other infrastructure projects corresponding to para No. (1) (a) as specified in Schedule VI of the Companies Act, 2013 (18 of 2013);	Not applicable.
11.	Rubber and allied products; including products regulated by the Rubber Board constituted under the Rubber Act, 1947 (XXIV of 1947);	4001 to 4017
12.	Coffee and tea;	0901 to 0902
13.	Railway or tramway locomotives, rolling stock, railway or tramway fixtures and fittings, mechanical (including electro mechanical) traffic signalling equipment’s of all kind;	8601 to 8608,8609
14.	Cement;	2523; 6811 to 6812
15.	Ores and Mineral products;	2502 to 2522; 2524 to 2526; 2528 to 2530; 2601 to 2617
16.	Mineral fuels (other than Petroleum), mineral | oils etc.;	2701 to 2708
17.	Base metals;	7401 to 7403; 7405 to 7413; 7419; 7501 to 7508; 7601 to 7614; 7801 to 7802; 7804; 7806; 7901 to 7905; 7907; 8001; 8003; 8007; 8101 to 8113.
18.	Inorganic chemicals, organic or inorganic compounds of precious metals, rare-earth metals of radioactive elements or isotopes, and Organic Chemicals;	2801 to 2853; 2901 to 2942; 3801 to 3807; 3402 to 3403; 3809 to 3824.
19.	Jute and Jute Products;	5303, 5307,5310
20.	Edible Oil;	1507 to 1518
21.	Construction Industry as per para No. (5) (a) as specified in Schedule VI of the Companies Act 2013 (18 of 2013);	Not applicable.
22.	Health services, namely functioning as or running hospitals, diagnostic centres, clinical centres or test laboratories;	Not applicable.
23.	Education services, other than such similar services falling under philanthropy or as part of social spend which do not form part of any business.	Not applicable.
24.	Milk powder;	0402
25.	Insecticides;	3808
26.	Plastics and polymers;	3901 to 3914; 3916 to 3921; 3925
27.	Tyres and tubes;	4011 to 4013
28.	Pulp and Paper;	4701 to 4704,4801 to 4802.
29.	Textiles;	5004 to 5007; 5106 to 5113; 5205 to 5212; 5303;5307 5310; 5401 to 5408; 5501 to 5516
30.	Glass;	7003 to 7008; 7011; 7016
31.	Other machinery and Mechanical Appliances;	8402 to 8487
32.	Electricals or electronic machinery;	8501 to 8507; 8511 to 8512; 8514 to 8515; 8517; 8525 to 8536; 8538 to 8547.
33.	Production, import and supply or trading of following medical devices, namely:- i. Cardiac stents; ii. Drug eluting stents; iii. Catheters; iv. Intra ocular lenses; v. Bone cements; vi. Heart valves; vii. Orthopaedic implants; viii. Internal prosthetic replacements; ix. Scalp vein set; x. Deep brain stimulator; xi. Ventricular peripheral shud; xii. Spinal implants; xiii. Automatic impalpable cardiac defibrillators, xiv. Pacemaker (temporary and permanent); xv. Patent ductus arteriosus, atrial septal defect and ventricular septal defect closure device; xvi. Cardiac re-synchronize therapy ; xvii. Urethra spinicture devices; xviii. Sling male or female; xix. Prostate occlusion device; and xx. Urethral stents:	9018 to 9022″].

Disclaimer: – The above article is prepared keeping in mind all the important and basic question as well as provision of section 148 of the Companies Act, 2013 which comes in mind of a professional or other stakeholder while appointing an Cost Auditor. The author has tried to cover all the important and basic question. Under no circumstance, the author shall not liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.

(The Author is Corporate Consultant and provides varied array of services including Start-ups mentor, Secretarial, Legal, Trademark, taxation, Audit, GST, Book keeping and other ancillary advisory service in Delhi, Chandigarh as well as The National Capital Region (NCR) and can be contacted through email id:- triptishakyacs2017@gmail.com and Contact Number: 91-8178515005)