COST AUDIT

CONCEPT It is an audit process for verifying the cost of manufacture or production of any article, on the basis of accounts as regards utilisation of material or labour or other items of costs, maintained by the company.

LEGAL PROVISIONS Cost Audit is covered by Section 148 of the Companies Act, 2013. The audit conducted under this section shall be in addition to the audit conducted under section 143. As per the section 148 the Central Government may by order specify audit of items of cost in respect of certain companies. Further, 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: Provided that the Central Government shall, before issuing such order in respect of any class of companies regulated under a special Act, consult the regulatory body constituted or established under such special Act. 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.

WHO CAN BE COST AUDITOR

The audit shall be conducted by a Cost Accountant in Practice who shall be appointed by the Board of 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: (Statutory Auditor & Cost Auditor cannot be same person) Provided further that the auditor conducting the cost audit shall comply with the cost auditing standards ("cost auditing standards" mean such standards as are issued by the Institute of Cost and Works Accountants of India, constituted under the Cost and Works Accountants Act, 1959, with the approval of the Central Government).

APPOINTMENT OF COST AUDITOR

As per rule 14 of the Companies (Audit and Auditors) Rules, 2014 (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 of the Audit committee, which shall also recommend remuneration for such cost auditor; (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.

QUALIFICATION, DISQUALIFICATION, RIGHTS, DUTIES AND OBLIGATIONS OF COST AUDITOR

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.

SUBMISSION OF COST AUDIT REPORT

A company shall within 30 days from the date of receipt of a copy of the cost audit report prepared (in pursuance of a direction issued by Central Government) furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained therein. If, after considering the cost audit report referred to under this section and the, information and explanation furnished by the company as above, 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.

Cost Audit will be advantageous to the stockholders in the following manner:(1) To Management(i) Reliability of data for price fixing, control and decision making.(ii) Waste control and consequently cost reduction.(iii) Through the system of budgetary control and standard costing, cost control is established.(iv) Proper valuation of closing stock, work in progress.(2) To Society(i) Cost Audit is often introduced for the purpose of price fixation. Customers are saved from exploitation through proper costing of products and services.(ii) Since price increase by some industries is not allowed without proper justification as to increase in cost of production, inflation through price hikes can be controlled and consumers can maintain their standard of living.(3) To Shareholders Cost Audit ensures that proper records are kept as to purchases and utilization of materials and expenses incurred on wages etc. It also makes sure that the valuation of closing stock and work-in-progress is on a fair basis. The shareholders are assured about the calculation of the profitability and thus return on their investments.(4) To Government(i) In a cost plus contract, price fixation is properly calculated.(ii) Price ceiling for essential commodities and thus undue profiteering is checked.(iii) Able to monitor inefficient units(iv) Decision support on Government protection to certain industries.(v) Settlement of trade disputes.(vi) Cost audit and consequent management action can create a healthy competition among the various units in an Industry. This imposes an automatic check on inflation.

Application Of Cost Records ( First) Companies Engaged In The Production Of Following Goods In Strategic Sectors,

Such As:- Machinery And Mechanical Appliances Used In Defence, Space

And Atomic Energy Sectors Excluding Any Ancillary Item Or Items. Turbo Jets And Turbo Propellers Arms And Ammunitions Propellant Powders; Prepared Explosives, (Other Than Propellant

Powders); Safety Fuses; Detonating Fuses; Percussion Or Detonating Caps; Igniters; Electric Detonators; Radar Apparatus, Radio Navigational Aid Apparatus And Radio Remote Control Apparatus Tanks And Other Armoured Fighting Vehicles, Motorised, Whether Or Not Fitted With Weapons And Parts Of Such Vehicles, That Are Funded

Above clause shall be applicable only if if the net worth of the company is rupees five hundred crore or more or the turnover is rupees five hundred crore or more

(Second) Companies Engaged In An Industry Regulated By A Sectoral Regulator Or A Ministry Or Department Of Central Government:

Port services Aeronautical services Telecommunication services Generation, transmission, distribution and supply of electricity Roads and other infrastructure projects Drugs and Pharmaceuticals Fertilisers Sugar and industrial alcohol Petroleum products regulated by the Petroleum and Natural Gas

Regulatory Board Rubber and allied products being regulated by the Rubber Board

For the purposes of above clause, the thresholds limit shall be as under:-

(i) in the case of a multi-product or a multi services company, any product or a service for which the individual turnover is rupees fifty crore or more;

(ii) in the case of a company, producing any one specific product or service, if the net worth of the company is rupees one hundred and fifty crore or more or the turnover is rupees twenty five crore or more.

In the case of companies engaged in an industry regulated by a sectoral regulator, the requirements of sectoral regulator regarding cost records shall be taken into account.

(Second) Companies operating in areas involving public interest such as:

Railway or tramway locomotives, rolling stock, railway or tramway fixtures and fittings, mechanical traffic signalling equipment’s of all kind

Mineral products including cement Ores Mineral fuels (other than Petroleum), mineral oils etc Base metals Inorganic chemicals, organic or inorganic compounds of precious

metals, rare-earth metals of radioactive elements or isotopes, and Organic Chemicals

Jute and Jute Products Edible Oil under Administrative Price Mechanism Construction Industry Companies engaged in health services viz. functioning as or running

hospitals, diagnostic centres, clinical centres or test laboratories Companies engaged in education services, other than such similar

services falling under philanthropy or as part of social spend which do not form part of any business.

For the purposes of above clause the thresholds limit shall be as under:-

(i) In the case of a multi-product or a multi services company any product or a service for which the individual turnover (from such specific product or such specific service) is rupees fifty crore or more;

(ii) In the case of a company producing any one specific product or service, if the net worth of the company is rupees one hundred and fifty crore or more or the turnover is rupees twenty five crore or more.

(Others) Companies (including foreign companies other than those having only liaison offices) engaged in the production, import and supply or trading of following medical devices, namely:-

Cardiac Stents Drug Eluting Stents Catheters Intra Ocular Lenses Bone Cements Heart Valves Orthopaedic Implants Internal Prosthetic Replacements Scalp Vein Set Deep Brain Stimulator Ventricular peripheral Shud Spinal Implants Automatic Impalpable Cardiac Deflobillator

Pacemaker (temporary and permanent) patent ductus arteriosus, atrial septal defect and ventricular septal

defect closure device Cardiac Re-synchronize Therapy Urethra Spinicture Devices Sling male or female Prostate occlusion device Urethral Stents

For the purposes of above clause the thresholds limit shall be as under:-

(i) in the case of a company engaged in multiple products, any product or device for which the individual turnover (from such specific product or device) is rupees ten crore or more, or one third of the turnover, whichever is less.

(ii) (ii) in the case of a company engaged in one specific product or device, if it has net worth of rupees one hundred and fifty crore or more or the turnover is rupees twenty five crores or more;

Applicability for cost audit

Every company engaged in a strategic industry and covered under (First) shall be required to get its cost records audited in accordance with these rules.

In the case of a multi-product or a multi services company specified in(Second) , the requirement for cost audit shall apply to a product or a service for which the individual turnover (from such specific product or such specific service) is rupees one hundred crore or more;

In the case of a company producing any one specific product or service specified in (Second), the requirement for cost audit shall apply if the net worth of the company is rupees five hundred crore or more or the turnover from such product or such service is rupees one hundred crore or more.

In the case of a company engaged in medical products or devices referred to in (Others)

which has multiple products or devices (i.e. a company producing, importing and supplying or trading in more than one medical device or product), the requirement for cost audit shall apply to a medical device or product for which the individual turnover (from such specific medical device or product) is rupees ten crore or more, or one third of the turnover, whichever is less

which has only one product or device (i.e. a company producing, importing and supplying or trading one medical device or product), the requirement for cost audit shall apply if the net worth of the company is rupees one hundred fifty crores or more or the turnover is rupees twenty five crores or more.