COST AUDIT

1. DEFINITIONS
a) Cost Accountant means a cost accountant as defined in clause (b) of sub-
section (1) of section 2 of the Cost and Works Accountants Act, 1959 and who
holds a valid certificate of practice under sub-section (1) of section 6 of that Act;
b) Cost Accountant in practice means 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), who holds a valid certificate of practice under sub-section (1) of section 6 of
that Act and who is deemed to be in practice under sub-section (2) of section 2
thereof, and includes a firm or limited liability partnership of cost accountants;
c) cost auditor means a Cost Accountant in practice, as defined in clause (b), who
is appointed by the Board;
d) cost audit report means the duly signed cost auditor’s report on the cost records
examined and cost statements which are prepared as per these rules, including
attachment, annexure, qualifications or observations attached with or included in
such report
e) 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;
f) Cost Audit: 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.
g) Cost  Records: 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 utilisation 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
2. PROVISIONS RELATING TO COST RECORDS
a) Every company shall maintain cost records in form CRA-1.
b) The cost records 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.
c) The cost records shall be maintained 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.
Applicability: The Company is engaged in the production of the goods or providing
services, specified in the tables and have 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 account.
Exception: Nothing contained in this rule shall apply to a company which is
classified as a micro enterprise or a small enterprise including as per the turnover
criteria under sub-section (9) of section 7 of the Micro. Small and Medium
Enterprises Development Act, 2006 (27 of 2006)].
3. PROVISIONS RELATING TO COST AUDIT
a) Cost Audit shall be done by a Cost Accountant
b) Consent Letter and Eligibility Certificate shall be taken  from the Cost Auditor
c) No person appointed under section 139 as an auditor of the company shall be
appointed for conducting the audit of cost records:
d) Cost Auditor shall be appointed by the Board within 180 days from the
commencement of financial year.
e) Every company file a notice of such appointment within a period of 30 days of the
Board meeting in which such appointment is made or within a period of 180 days of
the commencement of the financial year, whichever is earlier, through electronic
mode, in #Form CRA-2
f) Remuneration of Cost Accountant shall be determined by the Members
g) 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 authorized by the Board, for submission to the
cost auditor to report thereon”.
h) The report on the audit of cost records shall be submitted by the cost accountant
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.
i) A company shall within thirty days from the date of receipt of a copy of the cost
audit report shall furnish the Central Government with such report along with full
information and explanation on every reservation or qualification contained therein.
j) Every cost auditor appointed as such shall continue in such capacity till the expiry
of 180 days from the closure of the financial year or submission of cost audit report,
for the financial year for which he has been appointed.
Applicability.
4. Applicability for Cost Audit:-
(1) Every company specified in item (A) of rule 3 shall get its cost records audited 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 services for which cost
records are required to be maintained under rule 3 is rupees twenty five crore or
more.
(2) 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.
Exception: The requirement for cost audit under these rules shall not apply to a
company which is covered in rule 3, and-
(i) whose revenue from exports, in foreign exchange, exceeds seventy five per cent
of its total revenue;
(ii) which is operating from a special economic Zone.
(iii) 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″;
5.  GENERAL STEPS TO BE TAKEN
1) Within 180 days of starting of Financial Year appoint a Cost Auditor
2) Intimate within 30 days of appointment to ROC in CRA-2
3) Preparation of Cost Audit Report in Format CRA-3
4) Submission of the Cost Audit Report to the Board of Directors within 180 days of
the closure of financial year
5) Within 30 days of receipt submit it the ROC in form in CRA-4 XBRL Mode.
6. FORMS

Form Details Time Limit

CRA-1 Format of Cost Audit Records Not Applicable

CRA-2 Appointment of Cost Auditor 30 days of the Board meeting in

which such appointment is made
or within a period of 180 days of
the commencement of the
financial year

CRA-3 Format of Cost Audit Report Not Applicable

CRA-4 Submission of Cost Audit Report 30 days of receipt

A cost audit represents the verification of cost accounts and checking on the
adherence to cost accounting plan. Cost audit ascertains the accuracy of cost
accounting records to ensure that they are in conformity with cost accounting
principles, plans, procedures and objectives. A cost audit comprises the following;
-Verification of the cost accounting records such as the accuracy of the cost
accounts, cost reports, cost statements, cost data and costing technique
-Examination of these records to ensure that they adhere to the cost accounting
principles, plans, procedures and objective
-To report to the government on optimum utilisation of national resources
The Companies in India are regulated under The Companies Act, 2013 and let us
explore the provisions in depth.
What is cost records?
The definition of the word ‘cost records’ has been provided under rule 2 (e) of
the Companies (Cost Records and Audit) Rules, 2014 which means books of
account relating to the utilization of materials, labour 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 the Companies (Cost Records and Audit)
Rules.
Which companies are required to maintain cost records?
The class of companies, including foreign companies, engaged in the production of
the goods or providing services, specified in the Annexure A below, 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 account.
Which provision governs the cost audit?
The Section 148 of The Companies Act, 2013 read with The Companies (Cost
Records and Audit) Rules, 2014 and Cost and Works Accountants Act, 1959.

What is cost audit?

There is no definition given in The Companies Act, 2013 or in any other Law.
However, as per general definition “the verification of cost records and accounts and
a check on the adherence to the prescribed cost accounting procedures and the
continuing relevance of such procedures may be termed as cost audit.
Which companies are required to do cost audit?
Every company specified in (A) regulated Sector as given under Annexure A, shall
get its cost records audited 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
services for which cost records are required to be maintain is rupees twenty five
crore or more.
Every company specified in (B) Non-regulated Sector as given under Annexure A
shall get its cost records audited 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
maintain is rupees thirty five crore or more.
The requirement for cost audit under these rules shall not apply to a company which
is required to maintain cost records and-
(i) whose revenue from exports, in foreign exchange, exceeds seventy five (75) per
cent of its total revenue; or
(ii) Which is operating from a special economic Zone.
(iii) which is engaged in generation of electricity for captive consumption through
Captive Generating Plant.
Who can be a Cost Auditor?
Only a Cost Accountant can be appointed as Cost Auditor for conducting cost audit.
Cost Accountant” means a cost accountant as defined in clause (b) of sub-section
(1) of section 2 of the Cost and Works Accountants Act, 1959 and who holds a valid
certificate of practice under sub-section (1) of section 6 of that Act.
Provided that no person appointed statutory auditor of the company shall be
appointed for conducting the audit of cost records.
Here as per my interpretation, only a Chartered Accountant can be appointed as
Statutory Auditor of the company, he cannot be cost auditor of same company even
though he is cost accountant also. This clarification is given so that while conducting
audit, cost auditor furnishes unbiased audit report.
When to appoint a Cost auditor?
A Cost auditor has to be appointed within one hundred and eighty (180) days from
the starting of Financial Year by every company on whom these provisions are
applicable.
What is the procedure to appoint a Cost Auditor?
The companies which are required to appoint an Internal Auditor have to follow the
below given procedure: –
1. Prepare notice of board meeting along with draft resolution(s) to be passed in the
board meeting for candidate consideration for appointment as Cost Auditor and
sending engagement letter or consent letter from the proposed Cost Auditor.
2. Obtaining engagement letter or consent letter.
3. Sending of Notice along with Agenda of Board meeting to all the Directors of
company and finalising general meeting notice for ratification of appointment of cost
auditor by shareholder of company.
4. Convene board meeting and pass the following Board Resolution.
5. Sending of Outcome of Board Meeting to Stock exchange wherever company’s
securities are listed within 30 minutes from the conclusion of meeting. (this point is
applicable for listed companies only)
6. Sending of Appointment letter to Appointed Cost Auditor.
7. File e-Form returns along with attachments with the Registrar of Companies
regarding appointment of Cost Auditor within thirty (30) days from date of Board
Meeting.
8. Convening of General Meeting and passing of Ordinary resolution by
shareholders.
9. Intimation to stock exchange wherever company’s securities are listed within 30
minutes from the conclusion of meeting. (this point is applicable for listed
companies only)
10. Filing of E-form for passing of ordinary resolution in general meeting within thirty
(30) das from the general meeting.
11. Making entry in register, minute books, etc of company.
What forms are required to appoint a Cost Auditor?
For appointment of cost auditor, only two E-form is required i.e. MGT-14 and CRA-2
both forms have to be filled within thirty days (30) from date of respective meetings.
What are other important aspects of cost audit?
The report on the audit of cost records shall be submitted by the cost accountant to
the Board of Directors of the company. A company shall within thirty days from the
date of receipt of a copy of the cost audit report prepared furnish the Central
Government with such report along with full information and explanation on every
reservation or qualification contained therein in E-form CRA-4 to department.
What is penalty for complying with provisions?
1. If any of the provisions of 148 is contravened, the company shall be punishable
with fine which shall not be less than twenty-five thousand rupees but which may
extend to five lakh rupees and every officer of the company who is in default shall be
punishable with fine which shall not be less than ten thousand rupees but which may
extend to one lakh rupees
2. If an auditor of a company contravenes any of the provisions of cost audit, the
auditor shall be punishable with fine which shall not be less than twenty-five
thousand rupees but which may extend to five lakh rupees or four times the
remuneration of the auditor, whichever is less. Provided that if an auditor has
contravened such provisions knowingly or wilfully with the intention to deceive the
company or its shareholders or creditors or tax authorities, he shall be punishable
with imprisonment for a term which may extend to one year and with fine which shall
not be less than fifty thousand rupees but which may extend to twenty-five lakh
rupees or eight times the remuneration of the auditor, whichever is less
3. Where, in case of audit of a company being conducted by an audit firm, it is
proved that the partner or partners of the audit firm has or have acted in a fraudulent
manner or abetted or colluded in any fraud by, or in relation to or by, the company or
 its directors or officers, the liability, whether civil or criminal as provided in this Act or
in any other law for the time being in force, for such act shall be of the partner or
partners concerned of the audit firm and of the firm jointly and severally
4. Provided that in case of criminal liability of an audit firm, in respect of liability other
than fine, the concerned partner or partners, who acted in a fraudulent manner or
abetted or, as the case may be, colluded in any fraud shall only be liable
Annexure A
The companies, including foreign companies, engaged in the production of the
goods or providing services, specified in the table below, 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 account, namely:-

 Regulated Sectors

No. Industry/ Sector/ Product/ Service Customs Tariff Act

Heading”(wherever
applicable

1 Telecommunication services made available to users by means of Not applicable.

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 under the Telecom
Regulatory Authority of India Act, 1997 (24 of 1997); including
activities that requires authorisation or license issued by the
Department of Telecommunications, Government of India under
Indian Telegraph Act, 1885

2 Generation, transmission, distribution and supply of electricity Generation- 2716;

regulated by the relevant regulatory body or authority under the Other Activity-  Not
Electricity Act, 2003 (36 of 2003); Applicable

3 Petroleum products; including activities regulated by the 2709 to 2715;

Petroleum and Natural Gas Regulatory Board under the Other Activity-  Not
Petroleum and Natural Gas Regulatory Board Act, 2006 (19 of Applicable
2006);

4 Drugs and pharmaceuticals; 2901 to 2942; 3001

to 3006.

5 Fertilisers 3102 to 3105

6 Sugar and industrial alcohol; 1701; 1703; 2207.

 Non-Regulated Sectors
No. Industry/ Sector/ Product/ Service Customs Tariff Act
Heading” (wherever
applicable)

1. Machinery and mechanical appliances used in defence, 8401; 8801 to 8805; 8901 to
space and atomic energy sectors excluding any ancillary 8908.
item or items;
Explanation. – For the purposes 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.

2. Turbo jets and turbo propellers; 8411

3. Arms and ammunitions and Explosives; 3601 to 3603; 9301 to 9306.

4. Propellant powders; prepared explosives (other than 3601 to 3603

propellant powders); safety fuses detonating fuses;
percussion or detonating caps; igniters; electric
detonators ;

5. Radar apparatus, radio navigational aid apparatus and  8526

radio remote control apparatus;

6. Tanks and other armoured fighting vehicles, motorised, 8710

whether or not fitted with weapons and parts of such
vehicles, that are funded (investment made in the
company) to the extent of ninety per cent, or more by the
Government or Government agencies;

7. Port services of stevedoring, pilotage, hauling, mooring, Not applicable.

re-mooring, hooking, measuring, loading and unloading
services rendered for a Port in relation to a vessel or
goods regulated by the Tariff Authority for Major Ports
under the Major Port Trusts Act, 1963 (38 of 1963);

8. Aeronautical services of air traffic management, aircraft Not applicable.

operations, ground safety services, ground handling,
cargo facilities and supplying fuel rendered at the airports
and regulated by the Airports Economic Regulatory
Authority under the Airports Economic Regulatory
Authority of India Act, 2008 (27 of 2008);

9. lron and Steel; 7201 to 7229; 7301 to 7326

10. Roads and other infrastructure projects corresponding to Not applicable.

para No. (1) (a) as specified in Schedule VI of the
Companies Act, 2013 (18 of 2013);

11. Rubber and allied products; including products regulated 4001 to 4017
by the Rubber Board constituted under the Rubber Act,
1947 (XXIV of 1947);

12. Coffee and tea; 0901 to 0902

13. Railway or tramway locomotives, rolling stock, railway or 8601 to 8608,8609
tramway fixtures and fittings, mechanical (including electro
mechanical) traffic signalling equipment’s of all kind;

14. Cement; 2523; 6811 to 6812

15. Ores and Mineral products; 2502 to 2522; 2524 to 2526;

2528 to 2530; 2601 to 2617

16. Mineral fuels (other than Petroleum), mineral | oils etc.; 2701 to 2708

17. Base metals; 7401 to 7403; 7405 to 7413;

7419; 7501 to 7508; 7601 to
7614; 7801 to 7802; 7804;
7806; 7901 to 7905; 7907;
8001; 8003; 8007; 8101 to
8113.

18. Inorganic chemicals, organic or inorganic compounds of 2801 to 2853; 2901 to 2942;
precious metals, rare-earth metals of radioactive elements 3801 to 3807; 3402 to 3403;
or isotopes, and Organic Chemicals; 3809 to 3824.

19. Jute and Jute Products; 5303, 5307,5310

20. Edible Oil; 1507 to 1518

21. Construction Industry as per para No. (5) (a) as specified Not applicable.
in Schedule VI of the Companies Act 2013 (18 of 2013);

22. Health services, namely functioning as or running Not applicable.

hospitals, diagnostic centres, clinical centres or test
laboratories;

23. Education services, other than such similar services falling Not applicable.
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. Pulp and Paper; 4701 to 4704,4801 to 4802.

29. Textiles; 5004 to 5007; 5106 to 5113;

5205 to 5212; 5303;5307
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 9018 to 9022

medical devices, namely:-
i. Cardiac stents;
ii. Drug eluting stents;
iii. Catheters;
iv. Intra ocular lenses;
v. Bone cements;
vi. Heart valves;
vii. Orthopaedic implants;
viii. Internal prosthetic replacements;
ix. Scalp vein set;
x. Deep brain stimulator;
xi. Ventricular peripheral shud;
xii. Spinal implants;
xiii. Automatic impalpable cardiac defibrillators,
xiv. Pacemaker (temporary and permanent);
xv. Patent ductus arteriosus, atrial septal defect and
ventricular septal defect closure device;
xvi. Cardiac re-synchronize therapy ;
xvii. Urethra spinicture devices;
xviii. Sling male or female;
xix. Prostate occlusion device; and
xx. Urethral stents: