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Statutory Provisions Connected with Cost Audit & Maintenance of Cost Records

CS Jose Thomas  |  Practising Company Secretary  |  Knowledge Driven, Client Centric

• Under Section 148(1) of Companies Act 2013, the Central Government may prescribe audit of items of cost in respect of certain companies engaged in the production of such goods or providing such services as may be prescribed under Companies (Cost Audit and Record Rules) 2014.
• The government may direct that particulars relating to utilization of material, labour or such items of cost as may be prescribed shall also be included in the books of accounts maintained by such class of companies (Maintenance of Cost Records).
• Under Section 148(2), the Central Government has the power to direct audit of cost records of the companies covered under section 148(1) (Cost Audit).
• Under Section 148(3), where a company includes the particulars relating to items of cost in the books of account in pursuance of a resolution passed by the company, the audit of cost records shall be conducted by a cost accountant who shall be appointed by the Board on such remuneration as may be determined by the members.
• As per Rule 14 of the Companies (Audit and Auditors) Rules, 2014, the appointment of a cost auditor shall be as follows:
  • In the case of companies required to constitute an audit committee — the Board shall appoint a cost accountant on the recommendations of the Audit Committee, which shall also recommend remuneration. The remuneration recommended shall be approved by the Board of Directors and ratified subsequently by the shareholders.
  • In the case of other companies not required to constitute an audit committee — the Board shall appoint an individual who is a cost accountant in practice, and the remuneration of such cost auditor shall be ratified by shareholders subsequently.
• No person appointed under Section 139 as an auditor of the company shall be appointed for conducting the audit of cost records.
• Auditor conducting the cost audit shall comply with the cost auditing standards. The cost audit shall be in addition to the audit conducted under Section 143.
• 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 in pursuance of a direction under sub-section (2) furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained therein (Form CRA-4).
• As per Rule 3, Companies (Cost Record and Audit) Rules 2014 — companies engaged in the production of goods or providing services having an overall turnover from all its products and services of ₹35 crore or more during the immediately preceding financial year, shall include cost records for such products or services in their books of account.
• As per Rule 4 — Regulated Sector (Item A of Rule 3): Cost records shall be audited if the overall annual turnover from all products and services during the immediately preceding financial year is ₹50 crore or more, and the aggregate turnover of the individual product or service for which cost records are required is ₹25 crore or more.
• As per Rule 4 — Non-Regulated Sector (Item B of Rule 3): Cost audit required if the overall annual turnover from all products and services is ₹100 crore or more, and the aggregate turnover of the individual product or service is ₹35 crore or more.
• The requirement for cost audit shall NOT apply to a company:
  • Whose revenue from exports, in foreign exchange, exceeds seventy-five percent of its total revenue; or
  • Which is operating from a Special Economic Zone; or
  • Which is engaged in generation of electricity for captive consumption through a Captive Generating Plant.
• As per Rule 5, every company under these rules, including all units and branches, shall in respect of each financial year commencing on or after 1st April 2014, maintain cost records in form CRA-1.
• As per Rule 6, every company to which cost audit is applicable shall within one hundred and eighty days of the commencement of every financial year, appoint a cost auditor.
• Every company shall inform the cost auditor of his appointment and file a notice of such appointment with the Central Government within thirty days of the Board meeting in which such appointment is made, or within 180 days of the commencement of the financial year, whichever is earlier — through electronic mode in form CRA-2.
• Every cost auditor appointed shall continue in such capacity till the expiry of one hundred and eighty days from the closure of the financial year or till he submits the cost audit report, for the financial year for which he has been appointed.
• The cost auditor may be removed from his office before the expiry of his term, through a board resolution after giving a reasonable opportunity of being heard to the Cost Auditor and recording the reasons for such removal in writing. The form CRA-2 to be filed with the Central Government for intimating appointment of another cost auditor shall enclose the relevant Board Resolution to the effect.
• The cost statements, including other statements to be annexed to the cost audit report, shall be approved by the Board of Directors before they are signed on behalf of the Board by any director authorised by the Board, for submission to the cost auditor to report thereon.
• Every cost auditor who conducts an audit of the cost records of a company shall submit the cost audit report along with his or its reservations or qualifications or observations or suggestions, if any, in form CRA-3.
• Every cost auditor shall forward his duly signed report to the Board of Directors of the company within a period of one hundred and eighty days from the closure of the financial year to which the report relates. The Board of Directors shall consider and examine such report, particularly any reservation or qualification contained therein.
• Every company within a period of thirty days from the date of receipt of a copy of the cost audit report shall furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained therein, in form CRA-4 in Extensible Business Reporting Language (XBRL).