A cost audit is a type of audit that involves the verification of the cost records and accounts of a company and the adherence to the prescribed cost accounting standards and rules. Cost audit is mandated by the government of India for certain classes of companies under Section 148 of the Companies Act, 2013 and the Companies (Cost Records and Audit) Rules, 2014.
The purpose of a cost audit is to ensure that the cost records and accounts of the company are accurate, reliable, and transparent. Cost audit also helps in assessing the efficiency and effectiveness of the company’s operations, management, and control. Cost audit also provides useful information to stakeholders, regulators, and policymakers for decision-making and policy formulation.
In this blog post, we will discuss the meaning, scope, applicability, and procedure of cost audit in India. We will also explain the benefits and challenges of cost audits for the companies and the auditors.
Meaning and Scope of Cost Audit
As per Rule 2(d) of the Companies (Cost Records and Audit) Rules, 2014, cost audit means “An audit of cost records, conducted in such manner as may be specified by the Central Government, by a Cost Accountant in practice who is appointed by the Board of Directors of the company by the provisions of sub-section (5) of section 148 of the Act and the relevant rules”.
Cost records, as per Rule 2(e) of the same rules, mean “books of account relating to the utilization of materials, labor and other items of cost as applicable to the production of the goods or provision of services as provided in Section 148 of the Act and these rules”.
Cost audit covers the verification of the cost records and accounts of the company and the checking of compliance with the cost accounting standards and rules issued by the Institute of Cost Accountants of India (ICAI) and the Central Government. Cost audit also covers the examination of the cost statements, reports, and data prepared by the company and the expression of an opinion on the same by the cost auditor.
Applicability of Cost Audit
Cost audit applies to every company, including a foreign company, that is engaged in the production of goods or the provision of services specified in Table A or Table B of the Companies (Cost Records and Audit) Rules, 2014.
Table A covers the companies in the regulated sectors, such as electricity, petroleum, drugs, fertilizers, sugar, etc. Table B covers the companies in the non-regulated sectors, such as automobiles, cement, steel, paper, textiles, etc.
The applicability of cost audit is based on the following criteria:
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The overall annual turnover of the company from all its products and services during the immediately preceding financial year should be Rs. 50 crore or more for the companies in the regulated sectors and Rs. 100 crore or more for the companies in the non-regulated sectors.
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The aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained should be Rs. 25 crores or more for the companies in the regulated sectors and Rs. 35 crores or more for the companies in the non-regulated sectors.
If the company satisfies both criteria, then it has to get its cost records audited by a cost auditor. If the company does not satisfy either of the criteria, then it does not have to get its cost records audited. However, the company still has to maintain the cost records as per the rules.
Procedure of Cost Audit
The procedure of cost audit involves the following steps:
Appointment of Cost Auditor
The company has to appoint a cost auditor who is a cost accountant in practice and who is not disqualified under the Companies Act, 2013 or the Cost and Works Accountants Act, 1959. The appointment of the cost auditor has to be made by the Board of Directors of the company within 180 days of the commencement of the financial year.
The appointment of the cost auditor has to be ratified by the shareholders of the company in the general meeting. The company has to inform the Central Government about the appointment of the cost auditor in Form CRA-2 within 30 days of the Board’s resolution or the general meeting, whichever is earlier.
Conduct of Cost Audit
The cost auditor has to conduct the cost audit under the cost auditing standards and rules issued by the ICAI and the Central Government. The cost auditor has to verify the cost records and accounts of the company and the compliance with the cost accounting standards and rules.
The cost auditor has to examine the cost statements, reports, and data prepared by the company and express an opinion on the same. The cost auditor has to report any material observations, qualifications, reservations, or adverse remarks in the cost audit report.
Submission of Cost Audit Report
The cost auditor has to submit the cost audit report to the Board of Directors of the company within 180 days of the closure of the financial year. The cost audit report has to be in the form prescribed by the Central Government in Form CRA-3.
The cost audit report has to be accompanied by the annexures and documents specified in the rules. The cost auditor has to also submit a copy of the cost audit report to the Central Government in electronic form within 30 days of the receipt of the cost audit report by the Board of Directors of the company.
Benefits and Challenges of Cost Audit
Cost audit has several benefits and challenges for the companies and the auditors.
Some of the Benefits are:
- It ensures the accuracy, reliability, and transparency of the cost records and accounts of the company.
- It helps in assessing the efficiency and effectiveness of the company’s operations, management, and control.
- It provides useful information to stakeholders, regulators, and policymakers for decision-making and policy formulation.
- It helps in improving the cost competitiveness and profitability of the company.
- It helps in complying with legal and regulatory requirements and avoiding penalties or legal actions.
Some of the Challenges are:
- It involves a lot of paperwork and documentation for the company and the auditor.
- It requires a lot of coordination and communication between the company and the auditor.
- It imposes a lot of responsibility and liability on the auditor for conducting and reporting the cost audit correctly and timely.
- It exposes the company and the auditor to the risk of errors, defaults, penalties, and notices from the government or other authorities.
Drawing Conclusions
A cost audit is a mandated examination of a company's cost records and adherence to prescribed accounting standards, governed by Section 148 of the Companies Act, 2013, and the Companies (Cost Records and Audit) Rules, 2014 in India.
It involves verifying cost records, ensuring compliance with cost accounting standards, and assessing reports prepared by the company. Applicability depends on company turnover and the product/service categories listed in the rules.
The process involves appointing a cost auditor, conducting audits, and submitting reports in Form CRA-3 to the Central Government.
While cost audits enhance accuracy, transparency, and operational assessment for companies and stakeholders, they also entail significant paperwork, coordination, and potential risks of errors, penalties, and liabilities for both companies and auditors.
