Cost Audit Process: Key Steps, Compliance, and Importance

To conduct a cost audit, a company must appoint a cost auditor and submit the audit report to the central government within the specified time frame. Learn how legal experts in India perform cost audits by reading this blog.

A cost audit plays a vital role in ensuring that companies maintain accurate cost records, comply with regulatory standards, and operate efficiently. It serves as a systematic check to help businesses optimise their cost structures, identify inefficiencies, and improve overall financial transparency. Regular cost audits can help companies gain valuable insights into cost management and meet legal requirements.

What is a Cost Audit?

A cost audit is a comprehensive review and verification of a company’s cost accounts, cost records, and cost reports to ensure accuracy, compliance, and adherence to industry standards. The primary goal of a cost audit is to provide stakeholders with reliable cost information while also helping the organization optimize its cost management practices and meet regulatory obligations.

Procedure For Cost Audit

The cost audit process follows a structured approach to ensure accuracy and compliance. Three key steps include:

Appointment of Cost Auditor

Companies are required to form an audit Committee and appoint a cost auditor through the Board of Directors. Any company that falls under Secretarial Audit Applicability must appoint a cost auditor within 180 days of the start of the financial year. The Board must obtain written consent from the appointed auditor. For instance, the Board must appoint the cost auditor for FY 2022–23 by 27th September 2022, a period of 180 days from 1st April 2022.

Reporting to the Central Government

Once the cost auditor is appointed, the company must report the appointment to the Central Government by filing a notice. The company must submit this notice within the specified timelines.

• Within 30 days of the Board meeting where the appointment was made, or
• Within 180 days from the start of the financial year, whichever is earlier.

You must electronically file the notice using Form CRA-2, in accordance with the Companies (Registration Offices and Fees) Rules, 2014. Additional details on fees can be found in Appendix-3.

Submitting the Audit Report

Upon completion of the cost audit, the Cost Auditor must submit a signed Cost Audit Report, including observations, to the company’s Board of Directors. This must be done using Form CRA-3 within 180 days from the end of the relevant financial year.

Once the Board receives the report, it must be submitted to the Central Government within 30 days using Form CRA-4 to ensure compliance with regulatory requirements.

What is the Applicability of Cost Audit?

Rule 4 of the Companies (Cost Records and Audit) Rules, 2014 outlines the provisions for the applicability of cost audits. According to this rule, cost audits apply in the following cases:

• For companies involved in the products or services listed in Table A,
  • If the company’s overall annual turnover from all products or services exceeds INR 50 crore in the previous financial year, it must undergo a cost audit, and
  • The turnover from the specific product or service requiring cost records is at least INR 25 crore.

For companies involved in the products or services listed in Table B,

• • If the overall annual turnover exceeds INR 100 crore, a cost audit is required, and
  • The turnover from the specific product or service requiring cost records is at least INR 35 crore.

When assessing the applicability of a cost audit, the turnover from the immediately preceding financial year is taken into account. If a company falls under these criteria, it must appoint a practicing cost accountant to serve as the cost auditor, following the standard appointment procedures.

Applicability of Cost Records

Under Rule 3 of the Companies (Cost Records and Audit) Rules, 2014, the requirement to maintain cost records is applicable to companies listed in two categories:

• Table A – Regulated sectors
• Table B – Non-regulated sectors

Companies that are involved in manufacturing goods or providing services covered under Table A or Table B must maintain cost records in their books of accounts. Additionally, if the aggregate turnover from all products or services exceeds INR 35 Crore during the previous financial year, maintaining cost records becomes mandatory.

In summary, cost records are required in the following situations:

• The company operates in industries listed in Table A or Table B; and
• The company’s total turnover from all its products or services in the previous financial year exceeds ₹35 Crore.

Non-Applicability of Cost Audit

Under Rule 3 of the Companies (Cost Records and Audit) Rules, 2014, certain companies are exempt from the requirement to audit their cost records in the following cases:

• Export revenues exceed 75% of the company’s aggregate revenue, provided these revenues are earned in foreign exchange.
• Companies operating within Special Economic Zones (SEZs).
• Companies engaged in the generation of electricity for captive consumption through a Captive Generating Plant.

Cost Audit Under the Companies Act of 2013

Certain Indian enterprises are required to conduct cost audits based on their turnover and other factors. The obligation to perform cost audits is governed by the Companies Act of 2013 and the Cost Accounting Records Rules of 2011.

Key scenarios where cost audits apply include:

• Businesses that generated goods or services with a revenue of at least ₹50 Crore in the previous fiscal year.
• Companies involved in the manufacturing of specific products listed under the 2011 Cost Accounting Records Rules, regardless of their annual revenue. These products include:
  • Medications and drugs
  • Fertilizers
  • Sugar
  • Industrial alcohol
  • Electricity, and more

Additionally, the Indian government may notify certain businesses on a case-by-case basis to conduct a cost audit. Foreign companies that manufacture goods or provide services in India are also required to perform a cost audit, irrespective of their turnover.

Maintaining the Cost of Records

Every company that manufactures goods or provides services listed in Table A or Table B is required to maintain cost records in accordance with Section 148(1) of the Companies Act, 2013, if the total turnover from all products or services exceeds ₹35 Crores during the immediately preceding financial year.

Why Maintain Cost Records?

Maintaining accurate cost records allows companies to effectively track various operational costs and optimize the use of resources. It helps businesses calculate the per-unit cost of operations, cost of sales, margins, and the overall cost of production for each product or service on a regular basis. This ensures better cost control and informed decision-making.

Which Form is Required?

Companies that fall under the Companies (Cost Records & Audit) Rules, 2014 are required to maintain cost records using Form CRA-1, ensuring compliance with statutory regulations.

Difficulties in the Cost Audit Process

Companies often encounter various challenges when conducting a cost audit, including:

• High costs and time demands: Conducting a cost audit can be expensive and time-consuming, particularly for smaller companies with limited resources.
• Lack of expertise: Some companies may not have the necessary skills or resources to complete a comprehensive cost audit, leading to incomplete or inaccurate results.
• Resistance to change: Implementing the modifications suggested by the cost auditor may face resistance from employees, making it difficult to enforce improvements.
• Inadequate record-keeping: Poor record-keeping can result in incomplete or incorrect data, complicating the audit process and reducing the accuracy of the findings.
• Deficient cost accounting systems: If a company’s cost accounting system is inaccurate or underdeveloped, the cost audit may not fully capture the true expenditures of the business.
• Compliance with regulations: Ensuring compliance with all applicable laws and regulations during a cost audit can be complex and challenging for businesses.

How to Ensure a Perfect Cost Audit

To ensure a successful cost audit, businesses should follow these key steps:

• • Choose a qualified cost auditor: Selecting an experienced and skilled cost auditor is essential. A competent auditor can streamline the process, ensuring that the audit proceeds smoothly.
  • Provide accurate and comprehensive data: To ensure thorough analysis, businesses must provide the auditor with complete and reliable information covering all cost centers and allocation schemes.
  • Conduct regular internal audits: Performing regular internal audits helps companies identify and resolve issues in their cost accounting practices before the official audit takes place.
  • Implement quality control procedures: Ensuring the accuracy and dependability of cost accounting data through robust quality control procedures will facilitate a more efficient audit process.
  • Adhere to the latest regulations: Companies must comply with the most up-to-date cost audit regulations, as well as any relevant laws, to avoid complications during the audit.
  • Act on audit findings: Businesses should address any issues uncovered during the audit by implementing the auditor’s recommendations to improve cost management and compliance.

Conclusion

In summary, the Procedure for Cost Audit is essential for ensuring accuracy in cost accounting, maintaining compliance with legal requirements, and enhancing overall business efficiency. By following these steps, companies can identify and address inefficiencies, effectively manage costs, and fulfil their regulatory obligations. Adhering to these procedures not only strengthens financial transparency but also improves decision-making, supporting long-term growth and business sustainability.

FAQs for Cost Audit

What is a cost audit, and why is it important?

This is foundational for any reader unfamiliar with the concept. It gives them an overview of what a cost audit is and why businesses need it. This question satisfies both new readers and those seeking a quick explanation.

Which companies are required to conduct a cost audit?

The answer to this question is critical because it clarifies who is impacted by cost audit regulations. It helps companies determine if they need to conduct a cost audit based on their industry, size, and turnover.

What are the main objectives of a cost audit?

Understanding the purpose of a cost audit is essential. This question clarifies how it benefits companies by improving cost control, efficiency, and compliance, making it a key reason to include this in any comprehensive content on the subject.

How does a cost audit differ from a financial audit?

A clear distinction between cost audits and financial audits is important for readers to understand the scope of each. This question addresses a common area of confusion.

What is the process for appointing a cost auditor?

The appointment process is a procedural aspect that companies need to be familiar with. This FAQ ensures that businesses know the legal requirements, ensuring compliance with regulatory standards.

How long does a cost audit take to complete?

Timing is a practical concern for businesses, especially for those new to cost audits. This aids companies in planning and allocating resources accordingly.

What are the penalties for not conducting a cost audit?

Readers often want to know the consequences of non-compliance. This question addresses the risks involved, such as fines or legal repercussions, motivating companies to adhere to audit requirements.

How can companies prepare for a cost audit?

Practical steps for preparation are essential for businesses looking to conduct a cost audit. This question is crucial as it provides actionable advice on how to be audit-ready.