Secretarial Audit

The Procedure for a Cost Audit

To perform a cost audit, the company needs to appoint a cost auditor, and submit the audit report to the central government within a respective time frame. Read this blog to know how cost audits are performed with the help of legal experts in India.

Cost audit refers to the verification of books and vouchers of various accounts and the examination of their cohesiveness to the cost accounting plan. It applies to all companies (even foreign companies) which produce goods or provides services mentioned in Table A and Table B of Rule 3 of the Companies (Cost Records and Audit) Rules 2014. 

Hence, it’s crucial to know the procedure of cost audits. So, in this article, we shall lay a step-by-step guide to explain how a cost audit is performed. But before conferring on the procedure of cost audit and understanding in India, it is crucial to understand the meaning of a cost audit. 

Meaning of Cost Audits

Cost audit refers to the auditing of cost records. 

What are Cost Records?

Cost records are books of the accounts associated with the use of labour, resources, and other items of cost that produce goods or provide services as mentioned in Section 148 of the Act and the Companies (Cost Records and Audit) Rules.

What is A Cost Audit?

Hence, primarily, a cost audit involves a liberal assessment of a company’s cost accounting to assess its validity. 

Cost audit mainly includes 2 key elements:

  1. Adherence: It means scrutinizing whether cost accounting records are as per cost Accounting Service procedures, principles, and objectives.
  2. Accuracy: To certify that the cost reports and statements produced based on cost accounting records are precise and valid.

The Procedure of Cost Audit

Appointment of Cost Auditor

The company is required to have an Audit Committee, and a cost auditor has to be appointed by the Board of Directors of that committee. Each company that falls under Cost Audit Applicability should appoint a cost auditor within 180 days from the start of every financial year. 

For the appointment, the auditor’s written consent should be obtained by the company’s Board of Directors. For example, the appointment of the cost auditor for FY 2022-23 should be concluded within 180 days from 1st April 2022, that is, before 27th September 2022.

Reporting to the Central Government

After the appointment of the cost auditor, the company shall report it to the Central Government by filing a notice. 

The notice shall be sent within the following:

  1. The time of 30 days after the Board meeting in which the appointment is made
  2. Under the period of 180 days from the beginning of the financial year, whichever is earlier

The notice shall be sent via electronic mode, in form CRA-2, and the fee as mentioned in Companies (Registration Offices and Fees) Rules, 2014 (Refer Appendix-3).

Submitting the Audit Report

After the achievement of the audit, Cost Auditor has to submit the signed Cost Audit Report together with the observations in Form CRA-3 to the Company’s Board of Directors within a hundred and eighty days from the termination of the relevant financial year. After receiving the audit report through the Cost Auditor, within 30 days, the company’s Board of Directors has to deliver that Cost Audit report to the Central Government in Form CRA-4.

Applicability of Cost Records

There are two tables in Rule 3 of the Companies (Cost Records and Audit) Rules, 2014. They are: 

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

The companies need to include cost records in their books of accounts that are involved in producing goods or providing services as covered under table A or Table B. Besides, and they also need to include the aggregate turnovers from all their productions or services of more than INR 35 crores during the previous financial year.

To put it briefly, cost records are compulsory in the case of the following scenarios.

  1. The company is involved in manufacturing goods or providing services that are listed in Table A or Table B; and
  2. The company’s total turnover from all its production or service in the previous financial year is more than ₹35 Crores.

What is the Applicability of Cost Audit?

Rule 4 of the Companies (Cost Records and Audit) Rules, 2014 contains the provisions for audit of cost applicability. As per rule 4, the cost audit is relevant in the following scenarios –

  • Companies involved in the products or services described in Table A are accountable to Cost Audit during the immediately previous financial year if–
  • Overall annual total turnover from all the products or services of the company is INR 50 Crore or more; and
  • Total turnover from the individual product or service for which cost records are required is INR 25 Crore or more.
  • Companies involved in the products or services described in Table B are accountable to Cost Audit during the immediately previous financial year if–
  • The overall yearly total turnover of all the products or services is INR 100 Crore or more; and
  • Total turnover from the individual product or service for which cost records are required is INR 35 Crore or more.

It should be considered that for the reason of assessment of the applicability of cost audit, the immediately previous financial year turnover is to be observed. If any company is included in a cost audit, it will have to appoint a practising cost accountant as the cost editor and conduct the process for such an appointment, as shown before.

Non-Applicability of Cost Audit

The companies that are mentioned under rule 3 do not require their cost records to be audited in the case of the following scenarios –

  • The companies’ export revenues exceed 75% of their aggregate revenue. The export revenues are needed to be in foreign exchanges; or
  • The companies that are working from the special economic zones (SEZs);
  • The companies that are engaged in the generation of electricity for confined consumption through Captive Generating Plant.

Maintaining The Cost of Records

Every company which manufactures goods or provides services mentioned in Table A or Table B has to maintain the cost records according to sec 148(1) of the Companies Act, 2013 if its total turnover from all its products or services is ₹35 crores or more during the immediately previous financial year.

Why Maintain Cost Records?

Keeping cost records enables the maintenance of multiple costs and operations to achieve ideal economies in the use of resources. Besides, maintaining cost records allows easier calculation of the per-unit cost of operations, cost of sales and margin, or cost of production for each of its products or services regularly.

Which Form is Required?

Companies that fall under the rules of Companies (Cost Records & Audit) Rules, 2014 have to maintain the cost records in Form CRA-1.

Conclusion

To sum up, a cost audit refers to the liberal assessment of the cost accounting of a company to assess its validity. It applies to every company that produces goods or provides services stated in Table A and Table B of Rule 3 of the Companies (Cost Records and Audit) Rules, 2014. Lastly, in order to perform a cost audit, the company needs to appoint a cost auditor and submit the audit report to the central government within a respective time frame. For more information related to the audit, get in touch with the experts from Vakilsearch

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