Concept of Cost Audit in India – Why is it Important?

Narendra Kumar

05 Sep, 2022

Cost Audit is the process for verifying the cost allocation of each product or Services comprising of labor cost, manufacturing cost or any other item of cost as applicable. Cost Audit is a methodical and reliable verification of the accounts and records, to maintain the accounts according to the Cost Accounting Standards.

Definition of Cost Audit

The ICWAI (The Institute of Cost Accountant of India) defines Cost Audit as a

“system of audit introduced by the government of India for the review, examination, and appraisal of the cost accounting records and attendant information required to be maintained by specified industries.”

Types of Cost Audit

1. To Assist Management:

The main purpose of this audit is to give proper, relevant and accurate information to the Management to assist in taking the important decision. In this Audit, a report is submitted suggesting certain ways to reduce the cost of production, guidance to the management for increasing the efficiency in the manufacturing unit, any loss making unit and to make the improvement in the accounting plan.

2. On behalf of Government:

Government may appoint the cost auditor to conduct audit wherever required:

a. If the Government feels to carry out the audit as per the Companies Act, 2013

b. To analyses the certain amount of cost if the government is approaching certain financial help.

c. To fix a certain amount of cost while preparing for the tender.

3. On behalf of Tribunals:

Sometimes, Labor Tribunals may direct the cost auditor to settle the disputes for more wages, bonuses, shares in profit, etc. The Income tax department may direct the audit of cost account to get the correct profit.

4. Cost Audit under Statute:

As per the Companies Act, 2013 there are certain classes of Companies that need to carry the audit to get the accounts audited.

5. Statutory Cost Audit:

As per the statutory rules and Act it is mandatory for the Company to carry out the Audit.

Benefits of Cost Audit in India

• It helps in the detection of errors and fraud.
• Systematically smoothens the work of accounting.
• Brings the Cost of product at the minimum level.
• Helps to maintain the standard budgetary cost.
• Enables the management to take the decision accurately.
• Keep the management aware that the Accounts are prepared according to Cost Accounting standards or not.

Applicability of Cost Audit under the Companies Act, 2013

Under the Companies Act, 2013, it has categorized the Company industrial activity into two parts i.e.

1. Regulated Sector (Table A): It covers the industry like Petroleum products, Drugs and Pharmaceuticals, Fertilisers, Sugar and Industrial alcohol, etc.
2. Non-Regulated Sector (Table B): It covers the Industry like Turbo Jets and turbo propellers, Arms and Ammunitions, Cement, coffee and tea, Ores and Mineral products, Milk Powder, tyres and tubes, etc.

For the readers reference the link has been mentioned for detailed industry specification, if company fulfill the criteria which are mentioned below need to appoint the Cost Auditor of the Company.

Non Applicability of Cost Audit

The following Companies are not required to conduct the cost audit in India:

1. The Company whose revenue from exports are in Foreign Exchange exceeds 75% of its total revenue.
2. Operating from Special Economic Zone( SEZ).
3. Engaged in the generation of electricity for captive consumption through Captive Generating Plant.

The term “Captive Generating Plant” shall have the same meaning as mentioned in rule 3 of the Electricity Rules, 2005.”

Who can be appointed as a Cost auditor?

• An Individual (who can be a Cost Accountant)
• A Firm of cost Accountant in practice

Within what period Cost Audit Report should be submitted?

A cost auditor is required to submit his audit report along with his/ her qualifications, reservations, observations or suggestions if any, in form CRA-3 to Board of Directors of the Company within 180 days from the closure of financial year to which the report relates.

The Audit Report shall be filed with the Central Government within 30 days from the date of receipt of the Audit Report.

Penalty for Non-Compliance

Any non- compliance made under this Audit, the Company and every officer of the Company who is in default shall be punishable as mentioned under:

1. Company shall be punishable with fine which shall not be less than Rs. 25,000 but it may extend to Rs. 5 Lakh and
2. 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 Rs. 10,000 but it may extend to Rs. 1 Lakh or both
3. If the Cost Auditor has contravened the provisions, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than Rs. 50,000 but it may extend to Rs. 25 Lakh or eight times the remuneration of the Cost Auditor, whichever is less.

Suggested Reads:

• Roles and Responsibilities of Statutory Auditor
• Appointment, Removal & Role of an Auditor of a Private Limited Company
• An Internal Auditor: Why are they important in a Company?