Cost Audit

Cost audit represents the verification of cost accounts and checking on the adherence to cost accounting plan of a company. 

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Techniques and Procedures of Cost Audit

Cost audit represents the verification of cost accounts and checking on the adherence to cost accounting plan of a company. Cost audit ascertains the accuracy of cost accounting records to ensure that the cost accounting records maintained are in conformity with cost accounting principles, plans, procedures and objectives.

Different threshold limits have been prescribed in the Rules for applicability of maintenance of cost accounting records and coverage under cost audit. Rule 2(e) defines “cost records” as ‘books of account relating to utilization 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 Companies Act 2013 and these Rules’. Any transaction – statistical, quantitative or other details – that has a bearing on the cost of the product or activity is important and forms part of the cost accounting records Every company, including foreign companies defined in clause (42) of Section 2 of the Companies Act 2013, engaged in the production of the goods or providing services, specified in Items A and B, having an overall turnover from all its products and services of Rs. 35 crore or more during the immediately preceding financial year, shall be required to maintain cost accounting record.

However, this requirement does not apply to foreign companies having only liaison office in India which are engaged in production, import and supply or trading of medical devices listed in entry 33 of item B. Companies which are 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) are also excluded from the purview of the rules. Further, as turnover of ‘immediately preceding financial year’ is required to be checked, every year company has to check the turnover of preceding financial year for maintenance of cost records. Companies whose revenue from exports in foreign exchange exceeds 75% of its total revenues or companies operating from special economic zones are exempt from the requirement of cost audit.

The companies falling in rule 3 and fulfilling the criteria in rule 4 are required to appoint a cost auditor within 180 days of the commencement of every financial year. Cost auditor, as combined reading of rule 2 (b) and (c) reveals, can be: a cost accountant in practice or a firm of cost accountants or a limited liability partnership of cost accountants A cost accountant holding certificate of practice on part time basis is not entitled to conduct cost audit. Thus, only a cost accountant in whole-time practice can conduct cost audit.

A statutory auditor appointed under Section 139 of the Act cannot be appointed as cost auditor of the company.

Cost auditor after the notification of The Companies (Cost Records & Audit) Rules, 2014, replacing the earlier rule of 2011, is no more required to submit the cost audit reports directly to the Central Government and he is only required to forward his duly signed report to the board of directors of a company within 180 days of the close of financial year with his remarks. It is the responsibility of the company to file the cost audit report with the Central Government through the online MCA portal. Moreover, when the company has already compounded the offence (for the non-submission of the cost audit reports), which is in this case, the offence has been made good and hence no criminal complaint could be filed against the company or other person.