Detail guide on cost audit of companies under Companies Act 2013

INTRODUCTION: A mechanism to maintain cost records and cost audit leads to fulfil the objectives of improving public distribution system, health care system, infrastructure, transforming Indian industry into a globally competitive manufacturing hub. The main idea to maintain cost records and its audit is to establish a link between all input factors such as raw materials, labor, or other item of cost and the product price to find out the gross margins. The primary benefit to the government is to find out correct profit margin of product and thereby curb profiteering. The Government time to time formulates statutory guidelines for industry to maintain the records of cost and ensure their audit by cost accountants. The Statutory requirement to maintain cost records was contemplated in clause(d) of sub-section 1 of section 209 of the Companies Act 1956(“the previous act”) which has been substituted by section 148 of the Companies Act 2013 (“the act”)  on 01^st April 2014.

STATUTORY FRAMEWORK: As already discussed, the provisions governing cost records and cost audit are enshrined in section 148 of the Companies Act 2013 which came into effect on 01^st April 2014 and the Companies (Cost records and Audit) Rules 2014 which came into effect on 30^th June 2013 which were further amended by the Companies (Cost records and Audit) amendment Rules 2014 on 31^st December 2014. The substantial provisions of section 148 of the act have been implemented through rules framed by the Central Government.  The Central Government in exercise of power vested by sub section 1 of section 148 of the act may prescribe such class of companies engaged in the production of goods or providing services to include in the books of accounts, the particulars relating to the utilization of material or labor or of other item of cost as may be prescribed. The major change has been made to stipulate service sector which had not been specifically mentioned in the previous act. The Central Government in addition to stipulate type of Companies which are required to maintain cost records may also by its order direct to get the audit of such records.

TYPE OF COMPANIES REQUIRED TO KEEP COST RECORDS: The Central Government has prescribed pursuant to rule 3 of the Companies (Cost records and Audit) amendment Rules 2014 the class of Companies (including foreign Companies defined in clause (42) of section 2 of the act) engaged in production of the goods or providing services which have been segregated on basis of regulated and non regulated sector(provided in tabular form hereinafter) having an aggregate turnover from all its product and services of rupees thirty five crore or more during immediately preceding financial year, shall include cost records for such products and services in their books of account.

(A)  Regulated Sectors

(B) Non Regulated Sectors

Exemption to maintain cost records: Even so, the following Companies even fall in above categories are exempted to maintain cost records;

1. Foreign Companies having only liaison offices in India if fall in serial no. 33 of Non regulated sector.
2. Companies classified as a micro enterprises or a small enterprises as per the turnover criteria specified relevant section of the Micro, Small and Medium Enterprises Development Act 2006.

TYPE OF COMPANIES REQUIRED TO GET AUDIT OF ITS COST RECORDS:

Regulated Sector: Pursuant to sub rule 1 of rule 4 of the Companies (Cost records and Audit) amendment Rules 2014, every Company which is covered under regulated sector having aggregate annual turnover from all its products and services during immediately preceding financial year is rupees fifty crore or more and the aggregate turnover of the Individual product or products or service or services is rupees twenty five crore or more shall get audit of its cost records.

Non Regulated Sector: Pursuant to sub rule 2 of rule 4 of the Companies (Cost records and Audit) amendment Rules 2014, Every Company which is covered under non regulated sector having aggregate annual turnover from all its products and services during immediately preceding financial year is rupees one hundred crore or more and the aggregate turnover of the Individual product or products or service or services is rupees thirty five crore or more shall get audit of its cost records.

Exemption to get cost audit:  Even so, the following Companies even fall in above categories are exempted to get cost audit of its records;

1. Companies whose revenue from exports exceed seventy five percent of its total revenue or
2. Companies operating in Special Economic Zone

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PARTICULARS OF COST RECORDS: Every Company which is required to maintain cost records pursuant to rule 3 of the Companies (Cost records and Audit) amendment rules 2014 shall in respect of each of its financial year commencing on or after the 01st April 2014 maintain cost records in Form CRA-1. The Cost records shall be maintained on regular basis in such manner as to facilitate calculation of per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities for every financial year on monthly or quarterly or half yearly or annual basis. The Cost records shall be maintained in such manner so as to enable the Company to exercise as far as possible, control over various operations and costs to achieve optimum economies in utilization of resources. These records shall also provide data which is required to be furnished under these rules.

COST AUDITOR SHOULD BE COST ACCOUNTANT AND SHOULD FOLLOW COST AUDITING STANDARDS: Pursuant to sub section 3 of section 148 of the Companies Act 2013, the cost audit shall be conducted by a cost accountant in practice and first proviso of that sub section states that statutory auditor of the Company shall not be appointed as cost auditor of the Company. It is responsibility of cost auditor to comply the cost auditing standards specified by the Institute of Cost Accountants of India and approved by the Central Government.

APPOINTMENT, TENURE, CASUAL VACANCY AND REMUNERATION OF COST AUDITOR:

Appointment of Cost Auditor: Pursuant to sub rule 1 of rule 6 of the Companies (Cost records and Audit) Rules 2014, every Company which is required to maintain cost records and appoint cost auditor shall within one hundred and eighty days of the commencement of every financial year appoint a cost auditor. The Company shall inform the auditor of his or its appointment and file a notice of such appointment with the Central Government within a period of thirty days from the date of the Board Meeting in which such appointment is made or within period of one hundred and eighty days of the commencement of the financial year whichever earlier in e-form CRA-2 alongwith the fee as specified in Companies (Registration Offices and Fees) Rules 2014.

Tenure of Cost Auditor: Pursuant to sub rule 3 of rule 6 of the Companies (Cost records and Audit) Rules 2014, every cost auditor appointed as such shall continue in such capacity till the expiry of one hundred and eighty days from the closure of financial year or till he submits the cost audit report for the financial year for which he has been appointed.

Casual Vacancy of Cost Auditor: Pursuant to sub rule 3A of rule 6 of the Companies (Cost records and Audit) Rules 2014, which has been inserted by the Companies (Cost records and Audit) amendment Rules 2014 any casual vacancy in the office of cost auditor whether due to resignation, death or removal shall be filled by the Board of directors within thirty days of occurrence of such vacancy and the Company shall inform to Central Government in e-form CRA-2 within 30 days of such appointment of auditor.

Remuneration of Cost Auditor: Sub section 3 of Section 148 of the Companies Act 2013 and rule 14 of the Companies (Audit and Auditors) Rules 2014, contain the provisions of remuneration of Cost Auditor of the Company. According to rule 14

1. In the case of Companies which are required to constitute an audit Committee the board shall appoint an individual who is a cost accountant in practice or 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. The remuneration shall also be considered and approved by the Board of directors and ratified by the shareholders subsequently.

1. 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 the shareholders subsequently.

SUBMISSION OF COST AUDIT REPORT WITH CENTTRAL GOVERNMENT: Every Cost auditor who conducted an audit of the cost records of a company shall submit the cost audit report alongwith his or its reservations or qualifications or observations or suggestions if any in Form CRA-3. The 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 years to which the report relates and the Board of directors shall consider and examine such report particularly any reservation or qualification contained therein. The Company shall within a period of thirty days from the date of receipt of copy of the cost audit report furnish with Central Government with such report alongwith full information and explanation on every reservation or qualification in form CRA-4 alongwith the fee as specified in Companies (Registration Offices and Fees) Rules 2014.

RESPONSIBILITY OF COST AUDITOR TO REPORT FRAUD TO THE CENTRAL GOVERNMENT

Pursuant to sub section 12 of section 143 of the Companies Act 2013 (Substituted by the Companies (Amendment) Act 2015 and date of enforcement is not notified) read with sub section 15 of section 143 of the Companies Act 2013, it is responsibility of cost accountant in practice that if in course of the performance of his duties as auditor, has reason to believe that an  offence of fraud involving such amount or amounts as may be prescribed is being or has been committed in the Company by its officers or employees  then the cost auditor  shall report the matter to the Central Government with such time and in such manner as may be prescribed. However in case of a fraud involving lesser than the specified amount the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as may be prescribed.  Thus, the cost auditor shall have same responsibility which shall be casted on statutory auditor and secretarial auditor of the Company on the commencement of sub-section 12 of section 143 of the Companies Act 2013.

CONCLUSION

There are several provisions which are essential to consider by cost auditor as well as the Company while appointment of cost auditor. The major provisions are procedural in nature and check list on crucial matters can help the Company from any non-compliance. It is now very essential for the Company to comply with provisions without any delay as punishment for contravention is very severe. This article is an attempt to understand the basic and essential provisions related to cost records and its audit.