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CMA Harshad Deshpande, Practicing Cost AccountantM.com, ACMA, CS, CISA(USA),CIMA(UK)

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Companies (Cost Records & Audit) Rules

Important Provisions in The Companies Act 2013 w.r.t.Cost Records & Audit Rules 2014

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• Procedure for Appointment of Cost Auditors

• Qualifications & Disqualifications of Cost Auditor

• Auditor Not to Render Certain Services

• Related Party w.r.t. Cost Auditor or Firm of Cost Auditor

• Rotation of Cost Auditors

• Procedure for Filing of Cost Audit Report

• Penal Provisions

KEY DEFINITIONS

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Companies Act 2013 Companies Act 1956

Comments – New Definition.

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Books of Accounts – “books of account” includes records maintained in respect of—(i) all sums of money received and expended by a company and matters in relation to which the receipts andexpenditure take place;

(ii) all sales and purchases of goods and services by the company;(iii) the assets and liabilities of thecompany; and

(iv) the items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section;

No Definition prescribed.


Comments – Definition is not specified in Companies Act, 1956. Chartered Accountant gets defined under Sec. 10GD.

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Cost Accountant – “cost accountant” means a cost accountant as defined in clause (b) of subsection (1) of section 2 of the Cost and Works Accountants Act,1959



family ; or

manner indicated in Schedule IA.

Comments – No change.

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Relative – ‘‘relative’’, with reference to any person, means any one who is related to another, if—(i) they are members of a Hindu UndividedFamily;

(ii) they are husband and wife; or(iii) one person is related to the other in suchmanner as may be prescribed;

Relative – "RELATIVE“, A person shall be deemed to be a relative of another, if, and only if,(a)they are members of a Hindu undivided

(b) they are husband and wife ; or(c) the one is related to the other in the


Comments – New Definition.

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Turnover – “turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year;


IMPORTANT PROVISIONS W.R.T.COST RECORDS & AUDIT RULES 2014

8By: CMA Harshad Deshpande, M.com, ACMA, CS, CISA(USA),CIMA(UK)

Procedure for Appointment of Cost Auditors

Companies Act 2013 : Sec. 148 (3)

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The audit under sub-section (2) shall be conducted by a Cost Accountant in

practice who shall be appointed by the Board on such remuneration as may be

determined by the members in such manner as may be prescribed:

Provided that no person appointed under section 139 as an auditor of the

company shall be appointed for conducting the audit of cost records:

Provided further that the auditor conducting the cost audit shall comply with the

cost auditing standards.


Companies Act 2013 : The Companies (Audit and Auditors) Rules, 2014 : Rule 14

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For the purpose of sub-section (3) of section 148 –

(a) in the case of companies which are required to constitute an audit committee-

(i) the Board shall appoint an individual, who is a cost accountant in practice, or a firm of cost accountants in practice, as cost auditor on the recommendations ofthe Audit committee, which shall also recommend remuneration for such costauditor;

(ii) the remuneration recommended by the Audit Committee under (i) shall be considered and approved by the Board of Directors and ratified subsequently by the shareholders;

(b) in the case of other companies which are not required to constitute an audit committee, the Board shall appoint an individual who is a cost accountant in practice or a firm of cost accountants in practice as cost auditor and the remuneration of such cost auditor shall be ratified by shareholders subsequently.


Companies Act 2013 : The Companies (Cost Records &) Rules, 2014 : Rule 6 (2)

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Every company referred to in sub-rule (1) shall inform the cost auditor concerned

of his or its appointment as such and file a notice of such appointment with the

Central Government within a period of thirty days of the Board meeting in which

such appointment is made or within a period of one hundred and eighty days of

the commencement of the financial year, whichever is earlier, through electronic

mode, in form CRA-2, alongwith the fee as specified in Companies (Registration

Offices and Fees) Rules, 2014.


The Companies (Cost Records & Audit Cost Audit Mechanism 2011Rules 2014 as Amended on 31st December2014

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The Remuneration is to be Ratified by theMembers.

Ratification of the Cost Auditor’sRemuneration will be done subsequently atthe AGM.

As the Remuneration will be ratified by the AGM, gives a better visibility to the Profession and will create some public awareness about the Mechanism of Cost Records & Cost Audit.

Company to File Form CRA-2 (Notice of Appointment of Cost Auditor) with Central Govt.

CRA-2 to be filed within 30 Days from date of BOD Meeting or 180 Days from beginning of FY, whichever is earlier.

The Remuneration of the Cost Auditor wasApproved and Finalized by BOD.

No requirement for any Ratification byMembers.

Company to get approval from Central Govt. for Appointment of Cost Auditor vide Form 23C.

Upon approval Cost Auditor to inform about his appointment & acceptance to the Central Government vide Form 23D.



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No requirement of Prior Approval from Central Government for Appointment of Cost Auditor.

No onus on Cost Auditor to inform Govt. about his appointment

Stricter Time Line for Notice to the Central Government about Appointment of Cost Auditor.

Prior Approval was required for appointment of Cost Auditor

Cost Auditor was cast a responsibility to inform Govt. his acceptance of Cost Audit Assignment.

Overall time line of 180 days was stipulated.

Qualifications & Disqualifications of Cost Auditor

Companies Act 2013 : Sec. 148 (5)

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The qualifications, disqualifications, rights, duties and obligations applicable to

auditors under this Chapter shall, so far as may be applicable, apply to a cost

auditor appointed under this section and it shall be the duty of the company to

give all assistance and facilities to the cost auditor appointed under this section for

auditing the cost records of the company:

Provided that the report on the audit of cost records shall be submitted by the cost

accountant in practice to the Board of Directors of the company.


Companies Act 2013 : Sec. 141 – Eligibility, Qualifications, Disqualifications of Auditors

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(1)A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant:Provided that a firm whereof majority of partners practicing in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company.(2) Where a firm including a limited liability partnership is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm.(3) The following persons shall not be eligible for appointment as an auditor of a company, namely:—(a) a body corporate other than a limited liability partnership registered under the LimitedLiability Partnership Act, 2008;

(b) an officer or employee of company;(c) a person who is a partner, or who is in the employment, of an officer or employee of the company;(d) a person who, or his relative or partner—(i) is holding any security of or interest in the company or its subsidiary, or of its holding orassociate company or a subsidiary of such holding company:

Provided that the relative may hold security or interest in the company of face value not exceeding one thousand rupees or such sum as may be prescribed;


Companies Act 2013 : Sec. 141 – Eligibility, Qualifications, Disqualifications of Auditors

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(ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of such amount as may be prescribed; or(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, for such amount as may be prescribed;(e) a person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed;(f) a person whose relative is a director or is in the employment of the company as a director or key managerial personnel;(g) a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies;(h) a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction;(i) any person whose subsidiary or associate company or any other form of entity, is engaged ason the date of appointment in consulting and specialised services as provided in section 144.

(4) Where a person appointed as an auditor of a company incurs any of the disqualifications mentioned in sub-section (3) after his appointment, he shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor.


Companies Act 2013 : Sec. 144 – Auditor Not to Render Certain Services

An auditor appointed under this Act shall provide to the company only such other services as are approved by the Board of Directors or the audit committee, as the case may be, but which shall not include any of the following services (whether such services are rendered directly or indirectly to the company or its holding company or subsidiary company, namely:—(a) accounting and book keeping services; (b) internal audit; (c) design and implementation of any financial information system; (d) actuarial services; (e) investment advisory services; (f) investment banking services; (g) rendering of outsourced financial services; (h) management services; and (i) any other kind of services as may be prescribed:Provided that an auditor or audit firm who or which has been performing any non audit services on or before the commencement of this Act shall comply with the provisions of this section before the closure of the first financial year after the date of such commencement.Explanation —For the purposes of this sub-section, the term “directly or indirectly” shall includerendering of services by the auditor,—

(i) in case of auditor being an individual, either himself or through his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual;(ii) in case of auditor being a firm, either itself or through any of its partners or through its parent, subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any partner of the firm has significant influence or control, or whose name or trade mark or brand is used by the firm or any of its partners. 17

Clause 141 : Eligibility, Qualifications and disqualifications of Auditors (Section 224, 226)

The Companies Act 2013 Companies Act 1956

A Firm where Majority of Partners are qualified to be appointed as Auditors can now be appointed as Auditor.

New Disqualifications are listed in this clause.

Limit for max. number of Auditappointments is fixed to 20 companies.

Auditor can not provided below mentionedservices to the company (Clause 144) –(a) accounting and book keeping services (b)internal audit (c) design and implementationof any financial information system (d)actuarial services (e) investment advisoryservices (f) investment banking services (g)rendering of outsourced financial services(h) management services and (i) any otherkind of services as may be prescribed.

A Firm where All the Partners are qualified to be appointed as Auditors can be appointed as Auditor.

Limit for max. number of Audit appointments is – 20 companies out of which only 10 can have paid-up share capital of more than Rs. 25 Lakhs.

The provision was not applicable to private companies.

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Clause 144 : Auditors not to render certain services (New Section)

The Companies Act 2013 Companies Act 1956

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A prohibitive list of Services other thanAuditing service is prescribed.

Transition period is provided to comply with the provisions of this section.

Definition for Directly or Indirectly is a very comprehensive definition and thus merits enough care while determining whether the auditor is in fact providing such prohibited service.

Both Auditor and Company to exercise this care.

For Individual as Cost Auditor : Himself, Relative, Associate, Significant Influence or Control, name or trademark or brand

For Firm as Cost Auditor : Firm, Partners, Parent, Subsidiary or Associate Entity, Firm or Partner has Significant Influence, name or trademark or brand

Rotation of Cost Auditors

Companies Act 2013 : Sec. 139

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Section 139 of The Companies Act 2013 does not apply to the Cost Auditors and

hence Provisions under these section will not be applicable to Cost Auditors.

Hence Rotation of the Auditors will not be applicable to Cost Auditors.

By: CMA Harshad Deshpande, M.com, ACMA, CS, CISA(USA),CIMA(UK)

Procedure for Filing of Cost Audit Report

Companies Act 2013 : Sec. 148 (6) & (7)

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(6) A company shall within thirty days from the date of receipt of a copy of the

cost audit report prepared in pursuance of a direction under sub-section (2)

furnish the Central Government with such report along with full information and

explanation on every reservation or qualification contained therein.

(7) If, after considering the cost audit report referred to under this section and the

information and explanation furnished by the company under sub-section (6), the

Central Government is of the opinion that any further information or explanation

is necessary, it may call for such further information and explanation and the

company shall furnish the same within such time as may be specified by that

Government.


The Companies (Cost Records & Audit) Rules 2014 : Rule 6 (4)

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(4) Every cost auditor, who conducts an audit of the cost records of a company,

shall submit the cost audit report along with his or its reservations or

qualifications or observations or suggestions, if any, in form CRA-3.

(5) Every cost auditor shall forward his report 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.


The Companies (Cost Records & Audit) Rules 2014 : Rule 6 (4)

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(6) Every company covered under these rules shall, within a period of thirty days

from the date of receipt of a copy of the cost audit report, furnish the Central

Government with such report alongwith full information and explanation on

every reservation or qualification contained therein, in form CRA-4 alongwith fees

specified in the Companies (Registration Offices and Fees) Rules, 2014.

Procedure for Filling of Cost Auditor Report


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Cost Auditor to submit Cost Audit Report to the BOD within 180 days from the end of the Financial Year.

Company to submit the report to Central Government within 30 days from receipt of the report.

Cost Auditor to submit Cost Audit Report in form CRA-3

Company to submit Cost Audit Report along with full explanation & information on every reservation or qualification in form CRA-4.

Onus for submission of Cost Audit Report toGovernment is on Company.

Effective Time Available for submission ofCost Audit Report to Govt. is 210 Days.

Cost Auditor to submit the Cost Audit Report to the Central Government with 180 days from the end of the Financial Year

Cost Auditor to send a Copy of the CostAudit Report to the BOD.

Cost Audit Report Form defined for submission of report to Central Govt.

No such provision in earlier mechanism.

Onus for submission of Cost Audit Report to Government is on Cost Auditor.

Effective Time Available for submission ofCost Audit Report to Govt. is 180 Days.

Penal Provisions

Companies Act, 2013 : Sec 148 (8)

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If any default is made in complying with the provisions of this section,—

(a) the company and every officer of the company who is in default shall be

punishable in the manner as provided in sub-section (1) of section 147;

(b) the cost auditor of the company who is in default shall be punishable in the

manner as provided in sub-sections (2) to (4) of section 147.

Penal Provisions

Companies Act, 2013 : Sec 1487 (1)

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Company & Every Officer of Company

(1) If any of the provisions of sections 139 to 146 (both inclusive) 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 imprisonment for a

term which may extend to one year or with fine which shall not be less than ten

thousand rupees but which may extend to one lakh rupees, or with both.

Penal Provisions

Companies Act, 2013 : Sec 1487 (2), (3) & (4)

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Cost Auditor of the Company

(2) If an auditor of a company contravenes any of the provisions of section 139,

section 143, section 144 or section 145, 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:

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 one lakh rupees but

which may extend to twenty-five lakh rupees.

Penal Provisions


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(3) Where an auditor has been convicted under sub-section (2), he shall be liable

to—

(i) refund the remuneration received by him to the company; and

(ii) pay for damages to the company, statutory bodies or authorities or to any

other persons for loss arising out of incorrect or misleading statements of

particulars made in his audit report.

Penal Provisions


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(4) The Central Government shall, by notification, specify any statutory body or

authority or an officer for ensuring prompt payment of damages to the company

or the persons under clause (ii) of sub-section (3) and such body, authority or

officer shall after payment of damages to such company or persons file a report

with the Central Government in respect of making such damages in such manner

as may be specified in the said notification.

THANK YOU !

Contact : CMA Harshad Deshpande, Practicing Cost AccountantHarshad S Deshpande & Associates

Email : [email protected]: harshadde

mailto:[email protected]

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