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1. Introduction:

The Significance of Cost Audit and Cost Records in Modern Businesses:

In today’s competitive business environment, effective cost management is pivotal for ensuring profitability and sustainability. Cost audit and cost records serve as essential tools for achieving these objectives, enabling companies to monitor, control, and optimize their expenses.

Cost audit and cost records play a crucial role in the financial and operational management of companies. Their importance can be categorized into several key areas:

• Cost Control and Reduction;
• Regulatory Compliance;
• Profitability Analysis;
• Improved Decision-Making;
• Transparency and Accountability;
• Investor and Stakeholder Confidence;
• Support for Internal and External Reporting;
• Enhanced Operational Efficiency;
• Alignment with Corporate Objectives;
• Detection of Fraud and Errors

Section 148 of the Companies Act, 2013, plays a crucial role in ensuring transparency and accountability in cost management for certain class of companies. It governs the maintenance of cost records and the requirement of cost audits, providing a framework for systematic and accurate cost reporting.

This article delves into the key provisions of Section 148 read with, including the rules made thereunder for maintaining cost records, the categories of companies required to comply, and the applicability of cost audits.

2. Applicability and Applicable provisions:

Cost records and cost audits are generally applicable to companies operating in specified industries, such as manufacturing, healthcare, energy, and telecommunications. Their applicability depends on factors like turnover thresholds, industry type, and statutory requirements. For instance, in India, the Companies Act, 2013, and the Cost Records and Audit Rules, 2014, govern these requirements.

1. Section 148 of the Companies Act, 2013.
2. The Companies (Cost Records and Audit) Rules, 2014
3. The Companies (Audit and Auditors) Rules, 2014
4. The Companies (Accounts) Rules, 2014
5. Section 143(12) of the Companies Act, 2013.

3. Key Terms:
   a. Cost Auditor:
   Cost Auditor is a Cost Accountant in practice, who is appointed by the Board of Director of the Company.

• Cost Accountant means a person who is member of the Institute of Cost Accountants of India and who holds a valid certificate of practice under sub-section (1) of section 6 of the Cost and Works Accountants Act, 1959.

2. Cost Records:
   Cost records refer to systematic documentation of cost-related data for a company’s operations. These records include details of material, labor, overheads, and other expenses related to production and services. By maintaining cost records, businesses gain comprehensive insights into their cost structures, facilitating better decision-making and strategic planning.

Also Read: IPO Process: Guide to Successfully Taking Your Company Public

3. Cost Audit:
   A cost audit involves an independent verification of a company’s cost records to ensure accuracy and compliance with regulatory standards. It validates the efficiency and economy of operations, identifies cost-saving opportunities, and enhances overall transparency. Cost audits also help ensure that the cost accounting systems align with prescribed cost accounting standards.

4. Cost Audit Report:
   Cost Audit Report means the duly signed cost auditor’s report on the cost records examined and cost statements which are prepared as per The Companies (Cost Records and Audit) Rules, 2014, including attachment, annexure, qualifications, or observations attached with or included in such report.

4. Benefits of Cost Audit and Cost Records:
   1. Cost Control and Efficiency: They help identify inefficiencies, enabling better control over expenses.
   2. Regulatory Compliance: Ensures adherence to statutory requirements and avoids penalties.
   3. Profitability Analysis: Provides insights into the profitability of individual products or services.
   4. Transparency and Accountability: Enhances trust among stakeholders by promoting financial transparency.
   5. Informed Decision-Making: Supports strategic decisions by providing accurate cost data.

5. Application of Cost Records:

Every Company, including foreign companies defined in clause (42) of section 2 of the Companies Act, engaged in the production of such goods or providing services, as specified in the Table as mentioned in Rule 3 of The Companies (Cost Records and Audit) Rules, 2014], [Annexure 1] having an overall turnover from all its products and services of Rs. 35 Crore or more during the immediately preceding financial year, shall maintain cost records for such products or services.

6. Exemption from Maintaining Cost Records:
   1. Foreign companies having only liaison offices;
   2. Company which is classified as a micro enterprise or a small enterprise including as per the turnover criteria under sub-section (9) of section 7 of the Micro. Small and Medium Enterprises Development Act, 2006.

7. Maintenance of Cost Records:

Applicable Companies shall maintain cost records in the Form [CRA-1.] in respect of each of its financial years.

8. Purpose of Maintaining Cost Records:

To enable the company to exercise, as far as possible, control over the various operations and costs to achieve optimum economies in utilization of resources and these records shall also provide necessary data which is required to be furnished under Cost Records and Audit) Rules, 2014.

9. Applicability of Cost Audit:
   1. Every company specified in item (A) of Annexure 1 shall get its cost records audited in accordance with The Companies (Cost Records and Audit) Rules, 2014 if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is Rs. 50 crore or more and the aggregate turnover of the individual product or products or services for which cost records are required to be maintained is Rs. 25 crore or more.
   2. Every company specified in item (B) of Annexure 1 shall get its cost records audited in accordance with The Companies (Cost Records and Audit) Rules, 2014 if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is Rs. 100 crore or more and the aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained is Rs. 35 crore or more.

10. Exemption from Cost Audit:
    1. The Company whose revenue from exports, in foreign exchange, exceeds seventy-five percent of its total revenue; or
    2. Which is operating from a special economic Zone.

11. Cost Audit:
    1. Appointment of Cost Auditor:
       Applicable Companies shall within a period of 180 Days from the date of commencement of every financial year, appoint a cost auditor.

• Before making the appointment, the following must be ensured:
  • Written Consent: The cost auditor must provide written consent to the appointment.
  • Submission of Certificate: The cost auditor must submit a certificate confirming:
• The Individual (or the firm) as the case may be, is eligible and not disqualified under the Companies Act, the Cost and Works Accountants Act, 1959, and rules or regulations made thereunder.
• The Individual (or the firm) meets the criteria as mentioned in Section 141 of the Companies Act so far as may be applicable.
• The proposed appointment complies with the limits set by the Act.
• Any pending proceedings related to professional conduct, as disclosed in the certificate, are true and correct.”

2. Notice of Appointment of Cost Auditor:
   Every company required to appoint a cost auditor must:

• Inform the cost auditor of their appointment.
• File a notice of the appointment with the Central Government within 30 days of the Board meeting where the appointment was made, or within 180 days from the commencement of the financial year, whichever is earlier in Form [CRA-2].

3. Duration of Appointment:
   The appointed cost auditor will continue in their role until:

• The Expiry of 180 days from the closure of the financial year, or
• The submission of the cost audit report for the financial year for which he has been appointed.

4. Removal or Resignation of Cost Auditor:
   • A cost auditor may be removed before the expiry of his term through a Board resolution, provided:
     • He has been given a reasonable opportunity of being heard;
     • And the reasons for removal are recorded in writing.
   • If another cost auditor is appointed, the company must file the [Form CRA-2] with the relevant Board resolution attached.
   • A cost auditor has the right to resign, which must also be notified to the Central Government.

5. Filling Casual Vacancies:
   If a cost auditor’s position becomes vacant due to resignation, death, or removal, the Board of Directors must fill the vacancy within 30 days of the occurrence of such vacancy and the Company shall inform the Central Government in the Form [CRA-2] within 30 days of such appointment of Cost Auditor.

6. Approval of Cost Statements:
   The Company’s cost statements and related documents to be annexed to the Cost Audit Report must be:
   • Approved by the Board of Directors;
   • Signed by an authorized director before being submitted to the cost auditor for their report.

12. Submission of Cost Audit Report by the Cost Auditor:

Every cost auditor, who conducts an audit of the cost records of a company, shall submit the cost audit report along with his or its reservations or qualifications or observations or suggestions, if any, in the Form [CRA-3] to the Board of Directors of the company within a period of 180 days from the closure of the financial year.

13. Reporting of the Cost Audit Report with the Central Government:

Applicable Companies within a period of 30 Days from the date of receipt of a copy of the cost audit report Furnish the said Cost Audit Report to the CG along with full information and explanation on every reservation or qualification contained therein, if any in the Form [CRA-4] in Extensible Business Reporting Language format in the manner as specified in the Companies (Filing of Documents and Forms in Extensible Business Reporting Language) Rules, 2015 along with fees specified in the Companies (Registration Offices and Fees) Rules, 2014.”

14. Penal Provisions for non-compliance:
    If any default is made in complying with the provisions of section 148:

1. The company and every officer of the Company who is in default shall be punishable in the manner as provided in sub-section (1) of section 147;
   
   Section 147(1) states that the Company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees. 

2. The Cost Auditor of the Company who is in default shall be punishable in the manner as provided in sub-section (2) to (4) of section 147.
   
   Section 147(2) states that the Cost Auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees or four times the remuneration of the auditor, whichever is less.
   
   Provided that if an auditor has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees or eight times the remuneration of the auditor, whichever is less.

Section 147 (3) states that where an auditor has been convicted under sub-section (2) of section 147, he shall be liable to—

1. refund the remuneration received by him to the company; and
2. Pay for damages to the company, statutory bodies or authorities 3 or to members or creditors of the company for loss arising out of incorrect or misleading statements of particulars made in his audit report.
   
   Section 147 (4) states that The Central Government shall, by notification, specify any statutory body or authority or an officer for ensuring prompt payment of damages to the company or the persons under clause (ii) of sub-section (3) of section 147 and such body, authority or officer shall after payment of damages to such company or persons file a report with the Central Government in respect of making such damages in such manner as may be specified in the said notification.

15. Conclusion:

Cost audit and cost records are indispensable for companies aiming to maintain financial discipline and operational excellence. By fostering transparency, compliance, and efficiency, these tools empower businesses to thrive in an increasingly competitive global market. Organizations should prioritize their implementation to unlock significant cost advantages and build stakeholder confidence.

16. Forms with respect to Cost Records and Cost Audit:
    a. CRA-1: Cost Records
    b. CRA-2: Notice of Appointment of Cost Auditor
    c. CRA-3: Cost Audit Report
    d. CRA-4: Filing of Cost Audit Report with the Central Government.

Annexure I:

Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.

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