Basic Concepts of Cost Audit

Nature of Cost Audit 

Cost Audit involves an examination of cost books, cost accounts, cost statements and subsidiary and prime

documents with a view to satisfying the auditor that these represent true and fair view of the cost of production.

This includes the examination of the appropriateness of Cost Accounting system.

 

According to Chartered Institute of Management Accountants, London (CIMA), cost audit is “the verification of the correctness of cost accounts and of the adherence to the cost accounting plan”. In other words, cost audit is the verification of the cost of production of any product, service or activity on the basis of accounts maintained by an enterprise in accordance with the accepted principles of cost accounting. 

This definition of Cost Audit is relevant to the voluntary Cost Audit without any statutory backing.

    The Institute of Cost Accountants of India on the other hand, 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.”

 

Objectives of Cost Audit

Cost Audit has both general and social objectives. The general objectives can be described to include

the following :

 Verification of cost accounts with a view to ascertaining that these have been properly maintained and

compiled according to the cost accounting system followed by the enterprise.

 Ensuring that the prescribed procedures of cost accounting records rules are duly adhered to.

 Detection of errors and fraud.

 Verification of the cost of each “cost unit” and “cost center” to ensure that these have been properly

ascertained.

 Determination of inventory valuation.

 Facilitating the fixation of prices of goods and services.

 Periodical reconciliation between cost accounts and financial accounts.

 Ensuring optimum utilization of human, physical and financial resources of the enterprise.

 Detection and correction of abnormal loss of material and time.

 Inculcation of cost consciousness.

 Advising management, on the basis of inter-firm comparison of cost records, as regards the areas where

performance calls for improvement.

 Promoting corporate governance through various operational disclosures to the directors.

 

Among the social objectives of cost audit, the following deserve special mention:

 Facilitation in fixation of reasonable prices of goods and services produced by the enterprise.

 Improvement in productivity of human, physical and financial resources of the enterprise.

 Channelizing of the enterprise resources to most optimum, productive and profitable areas.

 Availability of audited cost data as regards contracts containing escalation clauses.

 Facilitation in settlement of bills in the case of cost-plus contracts entered into by the Government.

 Pinpointing areas of inefficiency and mismanagement, if any for the benefit of shareholders, consumers, etc.,

such that necessary corrective action could be taken in time.

 

Legal Framework of Maintenance of Cost Records and Cost Audit

Maintenance of Cost Records and Cost Audit are governed by the provisions of Companies Act, 2013.

 Section 2(13) of Companies Act, 2013, defines the ‘books of accounts’ to be maintained by the Companies.

It includes “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 ;”

 Section 128 of Companies Act, 2013, talks about the “Books of account, etc., to be kept by company”,

 Section 148 of Companies Act, 2013, empowers the “Central Government to specify audit of items of cost in

respect of certain companies” and

 Sub-Sections (2) to (5) of section 147 of Companies Act, 2013 contain the provision of “Punishment for

contravention”

 Section 469 which empowers Central Government to make Rules.

  

Companies (Cost Records and Audit) Rules, 2014

The salient features of these provisions, as they were amended from time to time and stand at this point of time (As amended up to 15th July 2016), are as follows:

 The Companies (Cost Records and Audit) Rules, 2014 has categorized the Companies into Regulated and

Non-regulated Sectors, based on the product(s) / service(s) manufactured / provided by them;

 A Company engaged in manufacture / provision of any specified product(s)/service(s) is required to maintain

Cost Records if its overall turnover exceeds ` 35 crores during immediately preceding Financial Year from all its  products and services;

 The cost records have to be maintained as specified in CRA-1

 The companies, falling under the Regulated sectors having overall annual turnover of ` 50 crores or more and

the aggregate turnover of the individual product(s) or service(s) specified of ` 25 crores or more, have to get

their Cost Records Audited;

 S ix sectors are brought under the Regulated category, namely, Telecommunication services, Power

generation, Transmission, Distribution and Supply; Petroleum products; Drugs and Pharmaceuticals; Fertilizers;

Sugar and Industrial alcohol;

 The companies, falling under the Unregulated category viz. Business of plastics and polymers, glass,

electrical, textiles, milk powder businesses, etc., having overall annual turnover of ` 100 crores or more and

the aggregate turnover of the individual products or services specified of ` 35 crores or more, have to get

their Cost Records Audited;

 Exemptions are provided to Companies whose revenue from exports, in foreign exchange, exceeds 75% of

total revenue and Companies operating from Special Economic Zones.

 Provisions not applicable to companies classified as Micro enterprise and small enterprise as per MSME

Development Act, 2006.

 Appointment of the Cost auditors has to be made as per the procedure laid down in the rules and Form-

CRA-2 has to be electronically filed with MCA, intimating the appointment to the Central Government

 T he Cost Auditor appointed has to render the cost audit report to the board of directors of the Company, as

per the specified time limit, in Form-CRA-3

 The Company has to upload the report electronically to the MCA, along with explanations to the qualifications,

if any, made by the Cost Auditor, in his report, through Form-CRA-4, within one month of its receipt by the

Company.