Introduction:
Navigating the intricate world of corporate rules and regulations can be a daunting task for both businesses and professionals. In the realm of finance and compliance, understanding cost audits is paramount. This comprehensive FAQ guide aims to simplify the complexities surrounding cost audits, as outlined in Section 148 of the Companies Act, 2013 and Companies (Cost Records and Audit) Rules, 2014. By providing clear answers to your questions, this guide becomes your trusted resource for grasping the fundamentals of cost audits.
Selection Process
Q1: How is the cost auditor selected in companies with an audit committee?
A1: The audit committee recommends a qualified cost accountant or a cost accountancy firm.
Q2: What happens after the audit committee’s recommendation?
A2: The Board of Directors approves the appointment, ensuring the chosen auditor meets the necessary criteria.
Remuneration
Q3: How is the cost auditor’s remuneration determined?
A3: The Audit Committee recommends the remuneration for the cost auditor.
Q4: What role does the Board of Directors play in approving the remuneration?
A4: The recommended remuneration is considered and approved by the Board of Directors.
Q5: Is shareholder approval required for the remuneration?
A5: Yes, the remuneration approved by the Board is ratified by shareholders in the Annual General Meeting, ensuring transparency and fairness.
Cost Records Applicability
Q6: What types of companies are obligated to maintain cost records?
A6: Every Companies, including foreign companies defined in Section 2(42) of the Companies Act, engaged in producing goods or providing services and having a total turnover of ₹35 crores or more in the preceding financial year and covered under Regulated Sectors (A) or Non-regulated Sectors, are required to maintain cost records,.
Q7: How are these applicable companies classified?
A7: Applicable companies are classified into two categories: Regulated Sectors (A) and Non-regulated Sectors (B), based on the nature of their products or services.
Q8: Are there any exemptions from maintaining cost records?
A8: Yes, foreign companies operating only liaison offices and Micro and Small Enterprises, as per the criteria in the Micro, Small and Medium Enterprises Development Act, 2006, are exempted from maintaining cost records, promoting growth for smaller businesses.
Q9: How can businesses determine their applicability under these rules?
A9: Businesses can use Harmonized System of Nomenclature (HSN) codes assigned under the Goods and Services Tax (GST) to identify their products or services. If the HSN code corresponds to a specific product or service under regulated or non-regulated sectors and the turnover exceeds prescribed limits, the rules apply.
Maintenance of Cost Records
Q10: What form do companies need to use for maintaining cost records?
A10: Companies are required to maintain cost records in Form CRA-1, as specified under the rules.
Q11: How often should cost records be updated?
A11: Cost records must be updated regularly. Companies have the flexibility to choose a monthly, quarterly, half-yearly, or annual update cycle, ensuring accurate and up-to-date financial information.
Q12: What calculations are mandatory in cost records maintenance?
A12: Cost records must facilitate the calculation of per unit cost of production, operation, and sales for each product or activity. Additionally, companies need to maintain data enabling the calculation of margins for their products and services.
Q13: How do cost records benefit companies beyond compliance?
A13: Cost records serve as a valuable tool for effective management. They enable companies to exercise operational control over various processes and costs, aiding in informed decision-making. Moreover, by analyzing cost data, companies can identify areas where resources can be utilized optimally, promoting economies in operations and overall efficiency.
Cost Audit Applicability
Q14: When is a cost audit mandatory for companies in regulated sectors?
A14: Companies in regulated sectors must conduct a cost audit if their overall annual turnover from all products and services exceeds ₹50 crore in the preceding financial year.
Q15: Are there specific criteria for individual products or services in regulated sectors?
A15: Yes, if the aggregate turnover of any individual product or service (as per Rule 3) is ₹25 crore or more, a cost audit is mandatory for that specific product or service within regulated sectors.
Q16: When is a cost audit obligatory for companies in non-regulated sectors?
A16: Companies in non-regulated sectors must undergo a cost audit if their total annual turnover from all products and services exceeds ₹100 crore in the preceding financial year.
Q17: Are there specific criteria for individual products or services in non-regulated sectors?
A17: Yes, in non-regulated sectors, a cost audit is obligatory for any individual product or service if its aggregate turnover (as per Rule 3) is ₹35 crore or more.
Q18: What are the exemptions from cost audits under Rule 3?
*A18: Companies falling under Rule 3 are exempted from cost audits if they meet any of the following criteria:
- Export Revenue: Companies whose revenue from exports constitutes over 75% of their total revenue.
- Special Economic Zone (SEZ): Companies operating within a special economic zone.
- Captive Generating Plant: Entities engaged in electricity generation for captive consumption through a Captive Generating Plant, as per the definition in the Electricity Rules, 2005.*
Appointment Process
Q19: What is the timeline for the appointment of a cost auditor?
A19: Companies specified in Rule 3 must appoint a cost auditor within 180 days of the start of each financial year.
Q20: What are the eligibility criteria for a cost auditor before their appointment?
A20: Before appointment, a cost auditor must provide written consent and a certificate ensuring eligibility, adherence to Section 141 criteria, and disclosure of professional matters’ status.
Q21: How does a company formally inform the appointed cost auditor and what is the timeline for this notification?
A21: The Company informs the appointed cost auditor and files a notice of appointment with the Central Government within 30 days of the Board meeting or within 180 days from the financial year’s commencement, whichever is earlier, via electronic mode in Form CRA-2.
Q22: What is the tenure of a cost auditor, and how can they be removed from their position?
A22: The cost auditor serves until 180 days from the financial year’s closure or until the submission of the cost audit report. Removal is possible through a board resolution after providing a fair hearing.
Q23: How are casual vacancies filled in the context of cost auditors?
A23: Any casual vacancy due to resignation, death, or removal is filled within 30 days by the Board, with intimation to the Central Government in Form CRA-2. The company must promptly inform the Central Government about the appointment of the new cost auditor using Form CRA-2 within thirty days of the appointment.
Cost Audit Report
Q24: When is the cost audit report submitted, and what does it include?
A24: The cost auditor submits Form CRA-3, detailing audit findings, reservations, qualifications, or suggestions, within 180 days from the financial year’s closure.
Approval of Cost statement and Reporting
Q25: What is the process for approving cost statements and submitting them for review?
A25: The cost statements, along with other necessary documents for the cost audit report, must be approved by the Board of Directors. These statements are then signed on behalf of the Board by a director authorized specifically for this purpose. The approved statements are submitted to the cost auditor for their review and report.
Q26: What steps are taken for the review and reporting of the cost audit findings to the authorities?
A26: The Board of Directors conducts a thorough examination of the cost audit report within 180 days from the financial year’s end, focusing on any reservations or qualifications.
Within 30 days of receiving the cost audit report, the company submits Form CRA-4 to the Central Government. This submission includes detailed explanations for any reservations or qualifications and is in Extensible Business Reporting Language format as per specified rules.
Q27: How are special cases and regulatory compliance addressed in the context of cost audits?
A27: Companies with extended Annual General Meeting timeframes under Section 96(1) of the Companies Act, 2013, can file Form CRA-4 within the extended period for filing financial statements under Section 137.
Q28: Does Section 143 of the Companies Act also apply to cost auditors, and what are its implications for their powers, duties, and reporting of frauds?
A28: Section 143 of the Companies Act extends its powers and duties to cost auditors, ensuring alignment with broader regulatory requirements. This includes provisions related to their responsibilities, reporting of frauds, and other key aspects of their role.
Conclusion: Cost audits might sound daunting, but this FAQ guide breaks down the complexities into simple, easy-to-understand answers. For businesses and professionals aiming for financial transparency and regulatory compliance, these FAQs are your key to understanding the fundamentals of cost audits under Section 148. Stay informed, stay compliant – this guide is your pathway to hassle-free financial and compliance management.
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About the Author: Author is a Qualified Company Secretary, with over five years of comprehensive experience and knowledge in navigating complex Act, Rules and Regulations, including but not limited to The Companies Act, 2013, FEMA, LODR, PIT, SEBI ICDR and more. With a strong passion for law and ongoing pursuit of an LLB degree, possess a comprehensive understanding of legal principles and practices. Author can be connected at malhotrabhuvesh@gmail.com.
Disclaimer: The information provided in this article is for general informational purposes only and does not constitute legal advice. For legal advice, please consult with a Qualified Company Secretary familiar with the relevant laws and regulations. I make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the article or the information contained in it.
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