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Cost Audit for Companies in India
Businesses in the manufacturing, mining, and service sectors in India are mandated to carry out cost audits.
A cost audit provides the government with a clear picture of the company’s production costs and profit margins.
Through the cost audit companies can check the accuracy of their cost accounts, helping to preventing errors and limit fraud exposure.
Companies in India that are operating in certain industries, such as manufacturing, mining, and services are required to undergo a cost audit.
A cost audit is the verification of the cost account, and functions as a check on the company’s adherence to cost accounting standards. Cost accounting is used to understand the company’s total cost of production by assessing its variable and fixed costs.
Cost audits are regulated under the Companies Act, 2013, and the Companies (Cost Records and Audit) Rules, 2014.
Under the Companies Act, 2013, the government can make rules regarding the maintenance of cost records by companies engaged in manufacturing goods or providing services in specified industries, and for getting such records audited. The government can appoint a cost auditor for a company – at a time of its choosing.
According to the Companies (Cost Records and Audit) Rules, 2014, cost records are defined as “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.”
What is the relevance of a cost audit?
Through a cost audit, the company can take a closer look at their cost of production and find effective ways to reduce their cost on labor, materials, and overheads.
It is a great tool for organizations to examine their earning and efficiency and optimize the use of resources that might be untapped – for better productivity. Malpractice and unethical practices can be easily detected through a cost audit.
Meanwhile, findings from the cost audit enables the management to take timely decisions to help the company financially.
Who should maintain cost records?
Maintenance of cost records apply to a company in the following cases:
If the company is engaged in the production of goods, or providing services, as prescribed under the law; or
If the company’s overall turnover from all its products and/or services is INR 350 million (US$4.9 million) or more during the immediately preceding financial year.
Who is mandated to get their cost records audited?
Companies in India should get cost records audited in the following cases:
The overall annual turnover of the company from all its products and services during the immediately preceding financial year is INR 500 million or INR 1 billion (US$7 million or US $14 million) or more depending on whether the company’s sector is regulated or unregulated; and
The aggregate turnover of the products and services for which cost records are required to be maintained is INR 250 million or INR 350 million (US$3.5 million or US$4.9 million) depending on whether the company’s sector is regulated or unregulated.
Under the Companies Act, 2013, company industrial activity has been classified under two categories – regulated and unregulated sectors.
Regulated sectors include industries like petroleum products, drugs and pharmaceuticals, fertilizers, and sugar to name a few. While, the unregulated sectors cover industries, such as arms and ammunitions, cement, tea and coffee, milk products, and turbo jets and propellers, among others.
Is there a penalty for non-compliance?
Cost audits must comply with the auditing standards set by the Institute of Cost and Works Accountant of India, and the audit must be conducted by a practicing cost accountant.
The cost auditor must submit the audit report to the board of directors of the company within 180 days from the financial year closure. Then, this audit report must be filed with the central government within 30 days of receiving the report.
In case a company is found not in compliance with the cost audit provisions under the under the Companies Act, 2013 and the Companies (Cost Records and Audit) Rules, 2014 – the following penalty can be levied:
Fines that range from INR 25,000 (US$351) to INR 500,000 (US$7017), depending on the level of non-compliance;
For every office in default, imprisonment of up to one year, or fine of INR 10,000 (US$140) to INR 100,000 (US$1403), or both.
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(1) Material Cost,
(2) Employee Cost,
(3) Utilities,
(4) Direct Expenses,
(5) Repair and Maintenance,
(6) Fixed Assets and Depreciation,
(7) Overheads,
(8) Administrative Overheads,
(9) Transportation Cost,
(10) Royalty and Technical Know-how,
(11) Research and Development expenses,
(12) Quality Control Expenses,
(13) Pollution Control Expenses,
(14) Service Department Expenses,
(15) Packing Expenses,
(16) Interest and Financing Charges,
(17) Any other item of Cost,
(18) Capacity Determination,
(19) Work-in-progress and finished stock,
(20) Captive Consumption,
(21) By-Products and Joint Products,
(22) Adjustment of Cost Variances,
(23) Reconciliation of Cost and Financial Accounts,
(24) Related Party Transactions,
(25) Expenses or Incentives on Exports,
(26) Production records,
(27) Sales records,
(28) Cost Statements,
(29) Statistical Records,
(30) Records of Physical Verification.
These are primarily focused on giving a true and fair view of cost of production and cost of sales and different overheads incurred
A company that 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) is exempted from the applicability of cost records.
Every company specified in Table – 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 Rs 50 crores 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 Rs 25 crores or more.
Every company specified in Table – 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 Rs 100 crores 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 RS 35 crores or more.
The audit report must be attached to form AOC-4 (financial statement) and filed with the ROC within 30 days of the AGM
The form MGT-7 (annual return of the company) must be filed within 60 days of the AGM
The due date for holding AGM is before or on 30 September every year
Internal Audit: There is no due date for conducting the internal audit. The internal auditor is required to submit a report to the board before the AGM.
Cost Audit: The cost audit report is to be submitted to the board within 30 September every year in form CRA-3. After receiving the cost audit report, the board will consider and examine the cost report. The board must submit the cost report with relevant information to the Central Government within 30 days of receiving the cost audit report in form CRA-4.
Forms Purpose of the Form
Form ADT-1 Appointment of company auditor
Form AOC-4 Annual filing of company financial statements
Form MGT-7 Filing of company annual return
Form CRA-2 Appointment of cost auditor
Form CRA-3 Submission of cost audit records to the board
Form CRA-4 Filing of cost audit report
Non-filing of the above forms with the ROC and non-submission of the statutory audit report and cost audit report will attract a penalty. Thus, a private limited company must mandatorily conduct the statutory audit. They also need to conduct the internal audit and cost audit when they fulfil the requirements mentioned in the respective rules.
Every private limited company must appoint an auditor to conduct the statutory audit of the company within 30 days from its registration date. At the company’s first Annual General Meeting (AGM), the shareholders will confirm the appointment of the first auditor who will hold the office of auditor for a term of five years. The company can appoint only an independent practising Chartered Accountant (CA), CA firm or LLP with the majority of partners practising in India as its auditor.
Internal Auditor
The company’s internal audit can be performed by the company’s internal staff or an independent party. The internal auditor must either be a CA, cost accountant, or such other professional as the board decides. The internal auditor can even be the company employee.
Cost Auditor
The private limited companies that must conduct the cost audit as per the Companies (Cost Records and Audit) Rules, 2014 must appoint a cost auditor within 180 of the commencement of the financial year. The company can appoint only a person who is a cost accountant in practice to conduct the cost audit. A cost accountant in practice means a person who fits the definition provided in Section 2(1)(b) of the Cost and Works Accountants Act, 1959 and includes a firm or LLP of cost accountants.
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