A Detailed Study on Cost Audit and its Report
- Blog|Account & Audit|Company Law|
- 14 Min Read
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- Last Updated on 25 October, 2023
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Table of Content
- Cost Audit
- Applicability of Maintenance of Cost Records
- Threshold limits for maintenance of cost records
- Companies not covered under Cost Audit
- Turnover Criteria for Cost Audit
- Appointment of Cost Auditor
- Can Statutory Auditor be a cost auditor?
- Method of appointment of cost auditor/fixation of remuneration
- Rule 4 of the Companies (Cost Audit Report) Rules, 2011
- Compliance of Cost Accounting Standards
- Contravention of Rule 4 and 5 of Companies (Cost Audit Report) Rules 2011
1. What is 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.
A cost audit comprises of:-
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- Verification of the cost accounting records such as the accuracy of the cost accounts, cost data, cost reports, cost statements and costing techniques adopted by a company.
- Examination of these records to ensure that they adhere to the cost accounting principles, plans, procedures and objectives.
- To report to the Government on optimum utilization of national resources.
2. Cost Audit Applicability
The Companies (Cost Records and Audit) Rules, 2014 are applicable to every company registered under the Companies Act which are engaged in production of goods or providing of services listed in Table-A or Table-B of Rule 3.
The rule 3 has classified sectors/industries under Regulated and Non-Regulated sectors.
6 sectors / industries covered under item A of the rules are ‘regulated sector’ and 33 sectors / industries covered under item B are ‘non-regulated sector’. For providing further clarity, Central Excise Tariff Act (CFTA) headings are given against the respective industries. For maintenance of cost records, no distinction is made between companies falling in item A and B
3. Threshold limits for maintenance of cost records
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.
4. Companies not covered under Cost Audit
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.
5. Turnover Criteria for Cost Audit
The criteria for applicability of cost audit are different for companies in regulated and non-regulated sector:
| For companies under item A | For companies under item B |
| Every company having annual turnover from all its products and services in the immediately preceding financial year of Rs. 50 crore or more and the aggregate turnover of the individual product or products or service or services of Rs. 25 crore or more | Every company having annual turnover from all its products and services in the immediately preceding financial year of Rs. 100 crore or more and the aggregate turnover of the individual product or products or service or services of Rs. 35 crore or more |
| The term ‘turnover’ is defined in clause (91) of section 2 of the Act. The criterion is two pronged: (a) overall and product-specific turnover. Both criteria are required to be fulfilled. | |
6. Appointment of Cost Auditor
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.
7. Can Statutory Auditor be a cost auditor?
A statutory auditor appointed under Section 139 of the Act cannot be appointed as cost auditor of the company.
8. Method of appointment of cost auditor / fixation of remuneration
Rule 14 of the Companies (Audit and Auditors) Rules, 2014 provides the method of appointment and fixation of remuneration of cost auditors which are as under:-
| In the case of companies which are required to constitute an audit committee. | In the case of other companies, |
| (a) The appointment and remuneration of cost auditor is recommended by the audit committee. | (a) The board shall appoint an individual qualified to become a cost auditor and the remuneration of such cost auditor shall be ratified by shareholders subsequently. |
| (b) The board is required to make the appointment and approve the remuneration of cost auditor. | (b) Ratification of remuneration of cost auditor is a special business and can be so ratified in any meeting of shareholders. |
| (b) The remuneration of cost auditor is required to be ratified subsequently by the shareholders | (c) Rule 6 (3) provides that the cost auditor so appointed for a financial year shall continue till 180 days from the closure of financial year or till submission of cost audit report for that year. |
| Provided that the cost auditor appointed under these rules may be removed from his office before the expiry of his term, through a board resolution after giving a reasonable opportunity of being heard to the Cost Auditor and recording the reasons for such removal in writing. | |
9. Rule 4 of the Companies (Cost Audit Report) Rules, 2011
The following are the provisions under Rule 4 of the Companies (Cost Audit Report) Rules, 2011 relating to the cost auditor, his responsibilities and the submission of the cost report:
| (1) | Every cost auditor, who conducts an audit of the cost records of the company, shall submit the report along with auditor’s observations and suggestions, and Annexure to the Central Government in the prescribed form and at the same time forward a copy of such report to the company. | |
| (2) | The cost audit report submitted on or after 1st day of April, 2012, irrespective of the financial year of the company to which it relates, shall be in the form prescribed under these rules, | |
| (3) | Every company as specified in sub-rule(1) of rule 3 shall, keep and maintain cost details, statements, schedules, etc. for each unit and each product or activity comprised in each product group, duly, authenticated by atleast two Directors of the company and the cost auditor. | |
| (4) | The cost details, statements, schedules, etc. of every company, as specified in sub-rule (3), relating to a period of not less than eight financial years immediately preceding a financial year, or where the company had been in existence for a period less than eight years, in respect of all the preceding years shall be kept in good order: | |
| (5) | Every cost auditor, who submits a report under sub-rule (1), shall also furnish performance appraisal report, duly authenticated by the cost auditor, to the Board/Audit Committee of the company in the prescribed form. | |
| (6) | Every cost auditor, who submits a report under sub-rule(1), shall also give clarifications, if any, required by the Central Government on the cost audit report submitted by him, within thirty days of the receipt of the communication addressed to him calling for such clarification. |
10. Compliance of Cost Accounting Standards
Second proviso of sub-section (3) of section 148 provides that the cost auditor should comply with cost auditing standards issued by the Institute of Cost Accountants of India, with the approval of Central Government Central Government vide their letter no. 52/33/CAB/2013 [Dated 10.09.2015] has, under section 148(3) of the Act, granted Central Government’s approval to the following Cost Auditing Standards:
| (i) | Cost Auditing Standard-101 on Planning an audit of Cost Statements; | |
| (ii) | Cost Auditing Standard-102 on Cost Audit Documentation; | |
| (iii) | Cost Auditing Standard-103 on Overall objectives of the independent cost auditor; and | |
| (iv) | Cost Auditing Standard-104 on Knowledge of business, its processes and the business environment. |
These Standards have been notified by the Government and these are all in force with immediate effect on the date of its notification.
11. Contravention of Rule 4 and 5 of Companies (Cost Audit Report) Rules 2011
An interesting question arises at this juncture, whether the Registrar of Companies can file a case of criminal complaint against the cost auditor for for the contravention of Rule 4 & Rule 5 of Companies (Cost Audit Report) Rules 2011 read with section 148(8)(b) of Companies Act, 2013 which is punishable Under Rule 8(1) of Companies (Cost Audit Report) Rules 2011, for non-submission of cost audit report with the Central Government within stipulated time limit.
11.1 Case Law
To answer this question, let us look into one of the case law decided by the Honourable Delhi District Court on 31st October 2019, by the Additional Chief Metropolitan Magistrate (Special Accounts) by the Central Tiz-Hazari Courts of Delhi in the case of Registrar of Companies V/s M/s Jatin Sharma & Co Cost Accountants. [Criminal complaint no 536494/16, dated 31-10-2019]
The following are the details relating to a company where cost audit is required to be done and action taken by the regulators.
Details of the Company
BLP Wind Project (AMBERI) Pvt. Ltd is a company incorporated on 23rd December 2011 having its registered office at Mayur Vihar Phase II at New Delhi. The company falls under the jurisdiction of Registrar of Companies, Delhi & Haryana and the Registrar of Company is situated at New Delhi. The company is in the power sector and the company build, own and operate utility scale renewable energy power plants to generate clean energy through wind and solar technologies and also provide distributed solar solutions to large corporates, industries and institutions in India. The company is covered under the provisions of the Companies Act, for maintaining the cost accounts records and also covered by cost audit.
Compliance done by company relating to cost accounting rules
The company appointed a cost accountants firm as its cost auditors for the year 2012-13 and 2013-14 under the provision of section 233B of the Companies Act 1956 read with Companies (Cost Audit Report) Rules 2011 and the cost accountants were responsible, for the compliance of the provisions of the Act and the Rules made thereunder. As per the provisions of the Companies Act, the company i.e. BLP Wind Project (AMBERI) Pvt. Ltdand its directors are under the statutory obligation to maintain cost accounting records, get the same audited and to file the Cost Audit Report with the Central Government through the Cost Auditor.
Contravention in non-filing the cost audit report
Upon the year ended, the company had filed form 23C for appointment of the Cost Auditor but failed to file cost audit report with the Central Government within the stipulated time as required.
Regulatory action
Issue of show cause notice: –The Registrar of Companies upon scrutiny issued a show cause notice dated 30th April 2015 to the company and later on 6th October 2015 issued show cause notice to the cost auditor, asking to show cause as why penal action cannot be taken since they have failed to file the cost audit report.
Non- reply of the show cause notice: – The cost auditor have neither replied nor complied with the provisions of section 233B of the Companies Act 1956 read with Rules made thereunder.
Filing of Criminal complaint by ROC
Thereafter, the Cost Audit Branch of Ministry of Corporate Affairs vide its letter dated 08.01.2016 directed the Registrar of Companies to initiate appropriate penal action against the cost auditor for the contravention.
As per the directions received from the Ministry of Corporate Affairs, the Registrar of Companies filed a criminal complaint at the Honourable Delhi District Court with the Additional Chief Metropolitan Magistrate (Special Accounts) by the Central Tiz-Hazari Courts of Delhi on 23rd March 2016 bearing criminal complaint No.516284/2016. The Registrar of Companies Delhi filed the complaint against the cost auditor for the contravention of Rule 4 & Rule 5 of Companies (Cost Audit Report) Rules 2011 read with section 148(8) (b)of the Companies Act, 2013 which is punishable Under Rule 8(1) of Companies (Cost Audit Report) Rules 2011, for non-submission of cost audit report with respect to M/s BLP Wind Project (AMBERI) Pvt. Ltd. with the Central Government within stipulated time limit.
Court proceedings
The Trial court issued summons to the cost accountant to appear before the court.
| (i) | Both parties appeared at the court | Upon service of summons, the cost accountant appeared | ||||||||||||||||||
| (ii) | Hearing took place | Upon hearing the arguments from both parties i.e. from the Registrar of Companies and the cost auditor | ||||||||||||||||||
| (iii) | Notice under section 251 of Cr.PC issued | Thereafter notice under section 251 of Criminal Procedure Code 1973 was served for contravention of Rule 4 & Rule 5 of Companies (Cost Audit Report) Rules 2011 read with section 148(8)(b) of Companies Act, 2013 which is punishable Under Rule 8(1) of Companies (Cost Audit Report) Rules 2011 | ||||||||||||||||||
| (iv) | Cost auditor pleaded not guilty as asked for trial | The cost auditor pleaded not guilty and claimed trial from the Court. Accordingly, the Trail of the case started at the Court by summoning each party / cross examination etc. | ||||||||||||||||||
| (v) | Stand taken by the ROC | During cross-examination the Registrar of Companies stated that
|
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| (vi) | Deposition by the cost auditor | The cost auditor stated:-
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| (vii) | Explanation provided by cost auditor for non-submission of cost audit report at the MCA portal |
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| (viii) | Amendment to cost records and audit rule | The cost auditor brought to the notice of the Honourable Court that with the notification of new Rules i.e. The Companies (Cost Records & Audit) Rules, 2014, it is no more the responsibility of the Cost Auditor to submit the Cost Audit Reports to the Central Government. | ||||||||||||||||||
| (ix) | The gist of the amendment of cost audit report rules | The details of amendment referred above:
This implies that the cost auditor after the notification of The Companies (Cost Records & Audit) Rules, 2014, the cost auditor 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.
|
Subsequent developments
The cost auditor in his defence has filed copy of letter issued by the company to the cost auditor acknowledging the receipt of cost audit report before the due date of submission to the same to the Central Government. In the said letter, the company has specifically mentioned that due to some technical issues the reports could not be provided to the cost auditor in the required XBRL form.
The company also further stated in the same letter that the company has applied for compounding of the offence as default has been made good for the year in question and the company was issued the compounding order by the Court on 4th May 2017.
The Honourable Court’s findings before passing the order
The Honourable Court has taken note of the following before passing the order on this matter:
| (i) | The Honourable Court that the Companies Cost Audit Report Rules, 2011 have been suppressed by notifying The Companies (Cost Records & Audit) Rules, 2014 vide gazette notification no. GSR425(E) dated 30th June 2014 published in Gazette of India Extraordinary, Part-II, Section 3(i), no. 340 dated 1st July 2014. | |
| (ii) | The notification of new Rules have removed the exclusive responsibility of Cost Auditor to submit the report to Central Government and now it is the responsibility of the company and board of directors to submit the same. | |
| (iii) | The cost auditor. after the notification of The Companies (Cost Records & Audit) Rules, 2014, the Cost Auditor 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. | |
| (iv) | The cost auditor has submitted the report in time to the company and accordingly discharged burden of bringing a probable defence by placing of required records and his genuineness has not been disputed | |
| (v) | In view of the aforesaid discussions and evidence on record, the Honourable Court was satisfied that the defence raised by the cost auditor is probable that only due to technical problems in generation of Form XBRL, the reports could not be filed in time. | |
| (vi) | Moreover, with the notification of new Rules i.e. The Companies (Cost Records & Audit) Rules, 2014, it is no more the responsibility of the Cost Auditor to submit the Cost Audit Reports to the Central Government. | |
| (vii) | Therefore the Honourable Court has come to the conclusion that the benefit of doubt must go to the cost auditor and the Registrar of Companies has failed to prove its case beyond reasonable doubt against the cost auditor for the contravention of Rule 4 & Rule 5 of Companies (Cost Audit Report) Rules 2011 read with Section 148(8) (b) of Companies Act, 2013 which is punishable Under Rule 8(1) of Companies (Cost Audit Report) Rules 2011. | |
| (viii) | Further to the above, the Honourable Court also taken note that the company has already compounded the offence vide order dated 4th May 2017. | |
| (ix) | The Honourable Court has come to the conclusion that the cost auditor is required to be acquitted in this case. |
Order of the Honourable Court
The Honourable Court giving thebenefit in favour the cost auditor came to the conclusion that the Registrar of Companies has failed to prove its case beyond reasonable doubt against the cost auditor. Accordingly, the cost auditor has been acquitted for the contravention of Rule 4 & Rule 5 of Companies (Cost Audit Report) Rules 2011 read with section 148 (80(b) of the Companies Act, 2013 which is punishable Under Rule 8(1) of Companies (Cost Audit Report) Rules 2011.
The judgement passed by the Honourable Court
Readers interested in going through the complete judgement of this case could visit the website https://indiankanoon.org/doc/32716100/ and go through the complete details of the case.
Conclusion
From the above case, it is clear that 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.
Reference
| (a) | Companies Act 1956 / 2013 | |
| (b) | Companies (Cost Audit Report) Rules 2011 / 2014 | |
| (c) | Cost Accounting Standard issued by the Institute of Cost and Management Accountants of India | |
| (d) | The Criminal Procedure Code 1973 | |
| (e) | Case law decided by the Honourable Delhi District Court on 31st October 2019, by the Additional Chief Metropolitan Magistrate (Special Accounts) by the Central Tiz-Hazari Courts of Delhi in the case of Registrar of Companies v. Jatin Sharma & Co Cost Accountants. (Criminal complaint no 536494/16) |
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Dear Team Taxmann,
Thank you for detailed overview of Cost Audit. Request you to also provide the detailed analysis of Cost Accounting Standard, Cost Audit Standard this issued by the Institute of Cost Accountants of India.
Hope for the best.
Thanks,
CMA Utpal Kumar Saha