SOURCE:- https://www.icwai.org/icwai/docs/FAQs_Cost%20Auditor_draft_letters.pdf
Frequently Asked Questions
on
Appointment of Cost Auditor by Companies
Q.1 Has the Government prescribed a new procedure for appointment of cost
auditor by the companies?
Ans. Yes. The procedure has been modified by the Cost Audit Branch of the
Ministry of Corporate Affairs vide General Circular No. 15/2011 dated 11
th
April
2011. The circular shall be effective from the financial year commencing on or
after the 1
st
day of April, 2011.
Q.2 What is the difference between new and old procedures of Appointment of
Cost Auditor by Companies?
Ans. Existing procedure for appointment of cost auditor required prior approval of
the Central Government under Section 233B (2) of the Companies Act, 1956.
However, under the present procedure, the prior approval would be deemed
to have been granted if the Central Government does not raise any query
within 1 month of filing of Form 23C.
Q.3 Will this procedure supercede the previous order issued in this regard?
Ans. Yes, with the issue of this new procedure, all earlier circulars issued with
respect to the Appointment of Cost Auditor by Companies will be superceded.
Q.4 Who can act as cost auditor?
Ans. The Company required to get its cost records audited under Section 233B(1)
of the Companies Act, 1956 shall appoint a cost auditor who is a Cost
Accountant as defined in clause (b) of sub-section (1) of Section 2 of the Cost
and Works Accountants Act, 1959 (23 of 1959) and who holds a valid
certificate of practice under sub-section (1) of Section 6 of that Act and
includes a Firm of Cost Accountants.
Q.5 Who is competent authority in companies to appoint cost auditor?
Ans. The first point of reference will be the Audit Committee and the Board of
Directors will appoint Cost Auditor on the basis of recommendation of the
Audit Committee. The Audit Committee shall ensure that the cost auditor is
free from any disqualification as specified under Section 233B(5) read with
Section 224 and sub-section (3) or sub-section (4) of Section 226 of the
Companies Act, 1956. [Draft model letter in this regard is given after FAQs at
Annexure -1]
In those companies where constitution of an Audit Committee of the
Board is not required by law, the words "Audit Committee" shall stand
substituted by the words "Board of Directors". Q.6 Is a cost auditor required to give any certificate in respect to his independence
and arm's length relationship with the appointing company?
Ans. Yes, the cost auditor is required to give a separate certificate to the audit
committee in respect to his/its independence and arm's length relationship
with the company. [Draft model letter in this regard is given after FAQs at
Annexure-2]
Q.7. How many cost auditors can be appointed under Section 224 (1B)?
Ans. Section 224 (1B) imposes a ceiling on the numbers of audits that an auditor or
firm of auditors can undertake. Accordingly, the ceiling on the number of cost
audits would operate as follows:
(a) In case a firm of cost accountants:- Twenty companies (other than private
companies) for every such partner of the firm who is not in full time
employment. Not more than ten out of twenty companies should have a
paid up share capital of Rs. 25 lakh or more.
(b) In case of individual cost accountant who is in full time employment:-
Twenty companies (other than private companies) of which not more than
ten should have a paid up share capital of Rs. 25 lakh or more.
Q.8 What procedure is required to be followed by a company in respect of
appointment of cost auditor?
Ans. The Company shall e-file its application with the Central Government on
www.mca.gov.in portal, in the prescribed Form 23C within ninety (90) days
from the date of commencement of each financial year, along with the
prescribed fee as per the Companies (Fees on Application) Rules, 1999 as
amended from time to time and other decuments as per existing practice i.e.
(i) certified copy of the Board Resolution proposing appopintment of cost
auditor; and
(ii) copy of the certificate obtained from the cost auditor regarding compliance
of section 224 (1-B) of the Companies Act, 1956. [Draft Letter as per
Annexure 1]
Q.9 What will happen if Central Government doesn't give its approval within 30
days of submission/ re-submission of the application?
Ans. After filing the online application by the Company, the same shall be deemed
to be approved by the Central Government, unless contrary is heard within
thirty (30) days from the date of filing such application.
However, if within thrity(30) days from the date of filing such application, the
Central Government directs the Company to re-submit the said application
with such addtional information or explanation, as may be specified in that
direction, the period of thrity days for deemed approval of the Cenntral Government shall be counted from the date of re-submisson by the Company.
Q.10 How cost auditor will be appointed?
Ans. After compliance of the matters hereinabove described, the Board of Directors
of the Company shall issue formal letter of appointment to the cost auditor, as
approved by the Board of Directors.
Q. 11 What is the obligation of appointed cost auditor with respect to the information
to Central Government
Ans. The Cost Auditor shall inform the Central Government within thrity days of
receipt of formal letter of appointment from the Company. Such intimation
shall be done in the prescribed form alongwith a copy of such appointment.
An e-form is being developed by the Ministry and the same will be notified
shortly.
Q. 12 Is there any obligation on the part of companies regarding disclosure of
appointment of cost auditor?
Ans. The Company shall disclose full particulars of the cost auditor along with the
due date and actual date of filing of the Cost Audit Report by the cost auditor,
in its Annual Report for each relevant financial year. Since the notification has
come into effect from April 1, 2011, companies under cost audit will be
required to furnish the details in its Annual Report from the financial year
2010-11.
Since the cost audit report of a particular financial year may not have been
submitted before publication of the Annual Report, relevant details of due and
actual date of filing for the last financial year may be published in the Annual
Report.
Q. 13 Is there any penalty provision for non-compliance of provisions of the said
circular?
Ans. Yes, the circular states penal provisions both for companies and cost auditor
as under:
• Non compliance by Companies
If a Company contravenes any provision of this circular, the company and
every officer thereof who is in default, including the persons referred to in subsection (6) of Section 209 of the Act shall be punishable as provided under
sub-section (2) of Section 642 read with sub-section (5) and (7) of Section
209 and sub-section (11) of Section 233B of Companies Act, 1956.
Relevant provisions of Section 209 of the Companies Act, 1956 are as
follows:
Sub- section (5) of Section 209 provides that if any of the persons referred to in sub-section (6) fails to take all reasonable steps to secure compliance by
the company with the requirements of this section, or has by his own wilful act
been the cause of any default by the company thereunder, he shall, in respect
of each offence, be punishable with imprisonment for a term which may
extend to six months, or with fine which may extend to ten thousand rupees,
or with both:
Provided that in any proceedings against a person in respect of an offence
under this section consisting of a failure to take reasonable steps to secure
compliance by the company with the requirements of this section, it shall be a
defence to prove that a competent and reliable person was charged with the
duty of seeking that those requirements were complied with and was in a
position to discharge that duty:
Provided further that no person shall be sentenced to imprisonment for any
such offence unless it was committed wilfully.
Sub- section (6) of Section 209 provides that the persons referred to in subsection (5) are the following, namely:—
(a) where the company has a managing director or manager, such managing
director or manager and all officers and other employees of the company; and
(d) where the company has neither a managing director nor manager, every
director of the company;
Sub- section (7) of Section 209 provides that if any person, not being a person
referred to in sub-section (6), having been charged by the managing director,
manager or Board of directors, as the case may be, with the duty of seeing
that the requirements of this section are complied with makes default in doing
so, he shall, in respect of each offence, be punishable with imprisonment for a
term which my extend to six months, or with fine which may extend to ten
thousand rupees, or with both.
Relevant provision of Section 642 of the Companies Act 1956 is as under:
Sub-section (2) of Section 642 provides that any rule made under sub-section
(1) may provide that a contravention thereof shall be punishable with fine
which may extend to five thousand rupees and where the contravention is a
continuing one, with a further fine which may extend to five hundred rupees
for every day after the first during which such contravention continues.
• Non compliance by Cost Auditor
If default is made by the cost auditor in complying with the aforesaid
provisions, he shall be punishable with fine, which may extend to five
thousand ruppees
***DRAFT Letter
Annexure-1
Ref. No. ___________
Date: ____________
To
The Chairman
Audit Committee of Board of Directors
______ Limited,
Dear Sir,
Sub: Cost Audit of XXX Limited for the year ending 31st March 201_ .
This has reference to my/our proposed appointment/reappointment as Cost Auditor
of your company for the financial year ending on 31st March 201_. I/We shall be
happy to accept the appointment/ re-appointment as Cost Auditor of your Company,
if so made by your Board of Directors.
We would like to inform you that we are free from any disqualifications as specified
under Section 233B (5) read with Section 224 and sub-section (3) or sub-section (4)
of Section 226 of the Companies Act, 1956.
We would like to further inform you that the appointment, if made, will be within the
limits prescribed under Section 224(1B) read with sub-section (2) of Section 233B of
the Companies Act, 1956.
We would also like to inform you that the Partners are holding Certificate of Practice
issued by the Institute of Cost and Works Accountants of India and are in whole time
practice.
We request you to please send us the formal appointment letter as per clause (i) of
General Circular No. 15/2011 [52/5/CAB-2011] dated April 11, 2011 issued by the
Ministry of Corporate Affairs, Cost Audit Branch to enable us to do the needful at our
end.
We would like draw your attention towards clause (k) of the above circular, wherein it
is obligatory on the part of the Company to disclose full particulars of cost auditor,
alongwith the due date and actual date of filing of the Cost Audit Report by the cost
auditor, in your Annual Report for each relevant financial year.
Thanking you,
Yours faithfully,
(_____________)DRAFT Letter
Annexure-2
Ref. No. ___________
Date: ____________
To
The Chairman
Audit Committee of Board of Directors
______ Limited,
Dear Sir,
Sub: Certificate of Independence – Cost Audit of your Company for the year
ending 31st
March 201_ reg.
With reference to para (e) of the General Circular No. 15/2011 dated 11.04.2011
issued by the Cost Audit Branch of the Ministry of Corporate Affairs, Government of
India, we hereby certify that we are an independent firm of Cost Accountants and are
at arm’s length relationship with your Company.
Thanking you,
Yours faithfully,
(_____________)
CAclubindia
