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Cost Audit Applicability: Meaning and Provisions

Cost Audit Applicability

Cost Audit Applicability is issued by the Central government in Companies (Cost Records and Audit) Rules, 2014. A cost audit means the verification of cost accounts and checking on adherence to the cost accounting plan. Cost audits calculate the accuracy of cost accounting records to ensure that they are in conformity with the principles, plans, procedures, and objectives of cost accounting.

A cost audit comprises verification of the cost accounting records such as the accuracy of the cost accounts, cost reports, cost statements, cost data, and cost technique. In this article, we will discuss the Applicability of Cost Audit in Companies Act, 2013, and what are the types of companies that are a mandatory requirement to conduct cost audits.

How to Determine the Cost Audit Applicability Companies Act, 2013?

The applicability of Cost audit as per the Companies Act, 2013 as provided in section 148 applies to the production of goods or provision of services for the following companies are given below:

  • Every company mentioned in item (A) of rule 3 whose yearly turnover during the immediately preceding financial year is Rs. 50 crores or more.
  • Every company mentioned in item (A) of rule 3 whose total turnover of individual products or services for which cost records are mandated to be administrated under Rule 3 is Rs. 25 crores or more.
  • Every company mentioned in item (B) of rule 3 whose yearly turnover during the immediately preceding financial year is Rs. 100 crores or more.
  • Every company mentioned in item (B) of rule 3 of cost audit applicability turnover limit of individual products or services for which cost records are mandated to be administrated under Rule 3 is Rs. 35 crores or more.

What are Cost Records?

Cost records is definition that been provided under Rule 2 of the Companies (Cost records and audit) Rules, 2014 which means books of account relating to the utilization of materials, labor, and other items of cost audit and cost applicability to the production of the goods and services as provided in section 148 of the Act and the Companies Rules of Cost records and audit.

Cost Audit is Compulsory for Which type of Companies?

It is important to note that the turnover of the immediately preceding financial year is considered. The company specified in Table A & B shall include maintenance of cost records in their books of accounts.

The companies that are exempt from the cost audit are-

  • Whose revenue in foreign exchange from exporting activities surpasses 75% of its aggregate revenue are not included in Cost Audit Applicability;
  • Which is functional in SEZ; or
  • Which is serving the power sector and generates electricity through the captive generating plant.

What are the Key Objectives of Cost Auditing?

  • The cost audit helps in recognizing undue losses or wastage and ensures that the costing system determines the realistic and correct cost of production.
  • The primary objective is to ensure that the cost relating to production and sales encompasses only those factors which are imperative and that those factors are utilized most effectively.
  • To identify errors in cost accounts
  • To determine that the company has proper cost books and records either required by legislation or otherwise as the managerial decision in Cost audit applicability limit.

What are the Types of Cost Auditing?

There are different types of cost audit processes as given below:

1. Auditing on behalf of the Indian government

2. Auditing on behalf of the Tribunal

3. Cost audit on behalf of Assist management

4. Cost audit for the trade association

5. Auditing under the company’s statute

6. Trade bargains and dispute

7. Cost variation within the industry

8. Statutory cost audit

Who can be a Cost Auditor?

Only a cost accountant can be appointed as Cost Auditor for conducting a cost audit. A cost accountant is defined under the section of Cost and Works Accountants Act, 1959 in conducting Cost audit applicability and who holds a valid certificate of practice under the provided section of the Act.

It is also provided that no person appointed as statutory auditor shall be appointed for conducting the audit of cost records.

What is the Procedure for the Appointment of Cost Auditor?

The process of appointing a cost auditor is given as follows:

1. First you have to obtain recommendations from the audit committee:

2. the Second step is to receive written consent and a certificate from the proposed auditor as per the rules of the companies act

3. the Third step is to convene a meeting of the board of directors

4. the Fourth step is to file Form CRA-2 for Cost audit applicability

5. the Fifth step is to ratify the remuneration of the cost auditor

6. In case of any casual vacancy refer to the detailed procedure related to that.

7. the Seventh step is to submit and approval of cost audit report of the companies

8. Eight steps is to furnish the cost audit report to the central government

There are two E-forms required i.e., MGT-14 and CRA-2 both forms have to be filled out within thirty days from the date of the meeting. The appointment shall be made within 180 days from the start of the financial year by every company to whom these provisions are applicable.

What are the Functions of a Cost Auditor?

A cost auditor is a person who has been appointed under the cost audit applicability provisions for the execution of a cost audit by the company. A cost auditor has to perform various types of functions. A few functions are mentioned below:

  • To make clear cost audit records with all the facts and data intact
  • A cost auditor shall always make reports that are of the required quality and can qualify as an authentic record-based document.
  • To help the central government with the cost auditing report in case of any pending investigation
  • The cost auditor and financial audit have a vital connection to removing the drawbacks and wrong implementations.

Closure Now...

Cost auditing gives productive detail to the management relating to production, efficient method of operation, minimizing overhead cost in operation, and reformulating plans for cost accounting. In this article, we have discussed the cost audit applicability as per the Companies Act, 2013. The meaning of cost audit and which types of company are mandatorily required to conduct cost audit. The types of cost auditing and appointment of cost auditor with the procedure of appointment of the cost auditor.


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