Basic Abstraction
Cost audit is the independent audit of cost records maintained by companies. The concept of cost audit was introduced in 1965 when Companies Act, 1956 was amended to incorporate the provisions relating to the maintenance of cost accounting records and cost audit. Cost audit got an impetus in 2011 when its scope was expanded and the rules and reporting formats were simplified to address industry concern of confidentiality.
The Companies Act, 2013 has retained the provisions relating to maintenance of cost records and cost audit. The Ministry of Corporate Affairs notified the Companies (cost records and audit) Rules 2014 on June 30, 2014.
The new Rules mandate the maintenance of cost records in companies engaged in
- the production of specified goods in strategic sectors,
- companies engaged in an industry regulated by a sectoral regulator or a ministry or department of central government,
- companies operating in specified areas of public interest and
- companies engaged in the production, import and supply or trading of specified medical devices.
The Rules also provide for a threshold in terms of net worth or turnover of companies, thus, restricting its applicability to large companies.
The Government has mandated maintenance of cost records and cost audit only in those sectors, which might require policy intervention.
For the first time, it has brought construction companies, companies engaged in health services and companies engaged in education services within the ambit of cost audit. The government has categorised those as companies operating in the area of public interest.
The government has excluded the industries in which the competition among companies is significant. Presumably, the Government has taken the view that cost audit is not relevant in companies that operate in a competitive environment. It is argued that those companies maintain cost records voluntarily, as they are required to continuously analyse cost and revenue data for managing costs, in order to retain and enhance competitiveness on the face of competition from competing firms or competing substitutes. In those companies, the management information system draws data from cost records. Therefore, there is no need to mandate maintenance of cost records and cost audit. But there is a flaw in this argument. Cost audit is no less relevant for companies operating in a competitive environment.
Objectives of Cost Audit
Companies Act, 2013 aims to strengthen corporate governance by empowering the Board of Directors. It requires Independent Directors to get involved in critical decisions. They have been made responsible for strategy review, risk management, performance evaluation and key appointments. All these require analyses of cost and revenue data. If, we agree that managers are inherently opportunistic, the Board of Directors needs an assurance from an Independent agency about the integrity of cost and revenue information that is placed before it. Only cost audit by an independent cost auditor can provide that assurance.
The main objectives are as under
- To establish the accuracy of costing This is done by verifying the arithmetical accuracy of cost accounting entries in the books of accounts.
- To ensure that cost accounting principles are governed by the management objectives and these are strictly adhered in preparing cost
- To ensure that cost accounts are correct and also to detect errors, frauds and wrong practice in the existing
- To check up the general working of the costing department of the organization and to make suggestions for
- To help the management in taking correct decisions on certain important matters i.e to determine the actual cost of production when the goods are ready.
- To reduce the amount of detailed checking by the external auditor if effective internal cost audit system is in operation.
Advantages of Cost Audit
- Cost audit provides reliable cost data for managerial
- Cost audit helps management to regulate
- Cost audit acts as an effective managerial tool for the detection of errors, frauds and irregularities so that reliable and smooth functioning of the system is
- Cost audit reduces the cost of production through plugging loopholes relating to wastage of material, labour and
- Cost audit can fix the responsibility of an individual wherever irregularities or wastage are
- Cost audit improves efficiency of the organization as a whole and costing system in particular by constant review, revision and checking or routine procedures and
- Cost audit also enables comparison among different units of the factory in order to find out the profitability of the different
- Cost audit exercises moral influence on employees which keeps them efficient and
- Cost audit ensures that the cost accounts have been maintained in accordance with the principles of costing employed in the industry
- Cost audit ensures that proper records are maintained as to purchases, utilization of materials and expenses incurred on various items i.e wages and overheads etc. It also makes sure that the industrial unit has been working efficiently and
- The cost audit enables shareholders to determine whether or not they are getting a fair return on their It reflects managerial efficiency or inefficiency.
- Cost audit tells the true cost of From this the consumer may know whether the market price of the article is fair or not. The consumer is saved from the exploitation.
- Cost audit improves the efficiency of industrial units and thereby assists in economic progress of the
- Cost audit assists the 'Tariff Board' in deciding whether tariff protection should be extended to a particular industry or
- Cost audit helps to ascertain whether any particular industry should be given any subsidy in order to develop that
- 16.. Cost audit provides reliable data to the government for fixing up the setting prices of the various commodities.
- Cost audit helps the government to take necessary measures to improve the efficiency of sick industrial
Legal framework
Earlier Section 233B of the Companies Act, 1956
- 23C- Appointment of Cost Auditor
- 23D for intimation by cost auditor to Central Government
Under companies Act, 2013
- Section 148 read with Companies (Cost Record and Audit) Rules, 2014. Notified on 30th june,2014
- 1st amendment to the rules on 31st December,2014 (The Amendment Rules has introduced certain changes to the original Rules issued on June 30, 2014).
- 2nd amendment dated 12th June,2015 as Companies (Cost Record and Audit) Amendment,Rules,2015- new form CRA-2(form for intimation of appointment of cost auditor by the company to central government) and form CRA-4 (form for filling cost audit report with the Central Government)
- 3rd Amendment dated 14th July,2016 as Companies (Cost Record and Audit)
- Amendment,Rules,2016 ( Definition of Cost Audit Report was changed
- Companies (cost records and audit) Amendment Rules,2017(Form CRA-1 and CRA-3)
- Companies (cost records and audit) Second Amendment Rules,2017(Definition of Custom Tariff Act Heading).
Section 148 of the Companies act, 2013
Central Government to specify audit of items of cost in respect of certain companies
1. The Central Government may, by order, in respect of such class of companies engaged in the production of such goods or providing such services as may be prescribed, direct that particulars relating to the utilization of material or labour or to other items of cost as may be prescribed shall also be included in the books of account kept by that class of companies:
Provided that the Central Government shall, before issuing such order in respect of any class of companies regulated under a special Act, consult the regulatory body constituted or established under such special Act.
2. If the Central Government is of the opinion, that it is necessary to do so, it may, by order, direct that the audit of cost records of class of companies, which are covered under sub-section (1) and which have a net worth of such amount as may be prescribed or a turnover of such amount as may be prescribed, shall be conducted in the manner specified in the order.
3. The audit under sub-section (2) shall be conducted by a Cost Accountant in practice who shall be appointed by the Board on such remuneration as may be determined by the members in such manner as may be prescribed:
Provided that no person appointed under section 139 as an auditor of the company shall be appointed for conducting the audit of cost records:
Provided further that the auditor conducting the cost audit shall comply with the cost auditing standards.
4. 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
5. If, after considering the cost audit report referred to under this section and the information and explanation furnished by the company under sub-section (6), the Central Government is of the opinion that any further information or explanation is necessary, it may call for such further information and explanation and the company shall furnish the same within such time as may be specified by that
Companies (Cost Record and Audit) Rules ( As amended from time to time)
“Cost audit report” means the duly signed cost auditor's report on the cost records examined and the cost statements which are prepared as per these rules including attachments, annexure, qualification or observations attached with or included in such report.”
“Cost records” means books of account relating to utilisation of materials, labour and other items of cost as applicable to the production of goods or provision of services as provided in section 148 of the Act and these rules;
There cannot be any exhaustive list of cost accounting records. Any transaction - statistical, quantitative or other details - that has a bearing on the cost of the product/activity is important and form part of the cost accounting records.
Cost records are to be kept on regular basis to make it possible to "calculate per unit cost of production/operations, cost of sales and margin for each of its products for every financial year on monthly/quarterly/half-yearly/annual basis“. What is required is to maintain such records and details in a structured manner on a regular basis so that accumulation is possible on a periodical basis.
“Central Excise Tariff Act Heading” means the heading as referred to in the Additional notes in the First Schedule to the Central Excise Tariff Act,1985.( Notified on 31st December, 2014)
Application of cost records. For the purpose of sub-section (1) of section 148 of the Act, the class of companies, including Foreign Companies defined in sub-section (42) of section 2 of the Act, engaged in the production of the goods or providing services, specified in Table 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 accounts namely:
TABLE
(A) Regulated Sectors
|
S. No |
Industry/ Sector/Product/Service |
Central Excise Tariff Act Heading (wherever applicable) |
|
1. |
Telecommunication services made available to the 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 Act 1997 (24 0f 1997); including activities that require authorization or license issued by the Department of Telecommunications, Government of India under Indian Telegraph Act , 1885 (13 of 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 3105. |
|
5. |
Fertilizers; |
3102 to 3105. |
|
6. |
Sugar and Industrials alcohol; |
1701; 1703; 2207. |
(B) Non-regulated sectors
|
S. No |
Industry/Sector/Product/Service |
Central Excise 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 purpose 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, ammunitions and explosives; |
3601 to 3603; 9301 to 9306 |
|
4 |
Propellant powder; 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 percent 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 by a port in relation to a vessel or goods regulated by the Tariff Authority for Major ports; |
Not Applicable |
|
8 |
Aeronautical services of air traffic management, aircraft operations, grounds safety services, grounds handling, cargo facilities and supplying fuel rendered by 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 |
Iron 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 signaling equipment's of all kind; |
8601 to 8608. |
|
14 |
Cement; |
2523; 6811 to 6812 |
|
15 |
Ores and Mineral products; |
2502 to 2522; 2524 to 2526: 2528 to 2530; 2601 to 2617 |
|
16 |
Minerals fules( other than petroleum),minerals oils etc.: |
2701 to 2708 |
|
17 |
Base Metals; |
7401 to 7403; 7405 to |
|
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, 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 centers, clinical centers or test laboratories; |
Not Applicable |
|
23 |
Education services, other than such similar services |
Not Applicable |
|
falling under philanthropy or as part of social spend which do not form part of any business; |
||
|
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 |
Papers |
4801 to 4802. |
|
29 |
Textiles; |
5004 to 5007; 5106 to 5113; 52OS to 521,2; 5303; 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; |
9018 to 9022 |
Applicability for cost audit
Every company specified in item (A) of rule 3 shall get its cost records audited in accordance with these rules 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 service or services for which cost records are required to be maintained under rule 3 is rupees twenry five crore or more.
Every company specified in item (B) of rule 3 shall get its cost records audited in accordance with these rules 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 maintained under rule 3 is rupees thirty five crore or more.
The requirement for cost audit under these rules shall not apply to a company which is covered in rule 3,and-
- whose revenue from exports, in foreign exchange, exceeds seventy five percent of its total revenue;or
- which is operating from a special economic zone;
- which is engaged in generation of electricity for captive consumption through Captive Generating PIant. For this purpose, the term "Captive Generating Plant" shall have the same meaning as assigned in rule 3 of the Electricity Rules, 2005";
Maintenance of records
Every company under these rules including all units and branches thereof, shall, in respect of each of its financial year commencing on or after the 1st day of April, 2014, maintain cost records in form CRA-1.
Provided that in case of company covered in serial number 12 and serial number 24 to 32 of item (B) of rule 3,the requirement under this rule shall apply in respect of each of its financial year commencing on or after 1st day of April,2015.
The cost records referred to in sub-rule (1) shall be maintained on regular basis in such manner as to facilitate calculation of per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities for every financial year on monthly or quarterly or half-yearly or annual basis.
The cost records shall be maintained in such manner so as to enable the company to exercise, as far as possible, control over the various operations and costs to achieve optimum economies in utilisation of resources and these records shall also provide necessary data which is required to be furnished under these rules.
Cost audit
The category of companies specified in Rule 3 and the thresholds limits laid down in Rule 4, shall within one hundred and eighty days of the commencement of every financial year, appoint a cost auditor.
"Provided that before such appointment is made, the written consent of the cost auditor to such appointment, and a certificate from him or it, as provided in sub-rule (1.A), shall be obtained";
(1A) The cost auditor appointed under sub-rule (1) shall submit a certificate that-
- the individual or the firm, as the case may be, is eligible for appointment and is not disqualified for appointment under the Act, the Cost and Works Accountants Act, 1959 (23 of 1959) and the rules or regulations made thereunder;
- the individual or the firm, as the case may be, satisfies the criteria provided in section 141 of the Act, so far as may be applicable;
- the proposed appointment is within the limits laid down by or under the authority of the Act; and
- the list of proceedings against the cost auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and ";
Every company referred herein shall inform the cost auditor concerned of his or its appointment as such and file a notice of such appointment with the Central Government within a period of thirty days of the Board meeting in which such appointment is made or within a period of one hundred and eighty days of the commencement of the financial year, whichever is earlier, through electronic mode, in form CRA-2, along with the fee as specified in Companies (Registration Offices and Fees) Rules, 2014.
Every cost auditor appointed as such 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.
"Provided that the cost auditor appointed under these rules 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;
Provided further that 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:
Provided also that nothing contained in this sub-rule shall prejudice the right of the cost auditor to resign from such office of the company.";
Any casual vacancy in the office of a cost auditor, whether due to resignation, death or removal, shall be filled by the Board of Directors within thirty days of occurrence of such vacancy and the company shall inform the Central Government in Form CRA-2 within thirty days of such appointment of cost auditor.
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 of the 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 and the Board of Directors shall consider and examine such report, particularly any reservation or qualification contained therein.";
Every company covered under these rules shall, within a period of thirty days from the date of receipt of a copy of the cost audit report, 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 format in the manner as specified in the Companies (Filing of Documents and Forms in Extensible Business Reporting language) Rules, 2015 along with fees specified in the Companies (Registration Offices and Fees) Rules, 2014.".
The provisions of sub-section (12) of section 143 of the Act and the relevant rules made thereunder shall apply mutatis mutandis to a cost auditor during performance of his functions under section 148 of the Act and these rules.
Nutshell
Cost audit has not lost relevance, even for companies operating in a competitive environment. Benefits from cost audit outweigh its cost. If a company is already maintaining cost records, the incremental cost is the audit fee. The cost of regular staff, which support the audit, is fixed in nature. Therefore, while the cost is immaterial, benefits in terms of improved corporate governance are immense, may not be from the management's perspective.
By introducing the concept of 'public interest', which is difficult to define, the government has made the 2014 Rules unnecessarily complicated and difficult to implement. Rules should be transparent and simple. The current Rules provides the scope for jockeying for inclusion and exclusion of companies from the ambit of cost audit. The government should bring all companies, except small companies, within the ambit of cost audit. It is also important that the cost accounting profession quickly upgrades skills in developing costing systems for emerging businesses, including those in the service sector.
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