Comprehensive Guide to Cost Audit: Applicability, Exemptions, and Compliance under Section 148 of the Companies Act, 2013

Cost Audit is a critical aspect of corporate governance, designed to ensure that companies maintain and report accurate cost records. The Companies Act, 2013, under Section 148, along with the Companies (Cost Records and Audit) Rules, 2014, governs the requirements related to cost audits in India. This guide provides a detailed overview of the applicability, exemptions, and compliance obligations related to cost audits.

1. Overview of Cost Audit

Cost Audit involves verifying the cost records maintained by a company to ascertain that they represent a true and fair view of its cost of production, operations, processing, or manufacturing of goods and services. It is conducted by a Cost Accountant in practice and is mandated by the Central Government for certain classes of companies to ensure transparency and accuracy in cost accounting.

2. Statutory Provisions for Cost Audit

Section 148 of the Companies Act, 2013 empowers the Central Government to mandate the maintenance of cost records and the submission of cost audit reports by specific classes of companies. The key requirements under this section are:

• The Central Government may direct certain classes of companies to conduct a cost audit.
• Cost audit must be performed by a Cost Accountant in practice, appointed by the Board of Directors.
• The appointment of the cost auditor must be done within 180 days from the commencement of the financial year, using Form CRA-2.
• The cost auditor's remuneration shall be fixed by the Board of Directors.
• The Cost Audit Report should be submitted in Form CRA-3.
• Companies under the purview of cost audit rules must maintain cost records in Form CRA-1 for each financial year.
• The Cost Audit Report must be filed with the Central Government in Form CRA-4.

3. Forms Related to Cost Audit

The following forms are used for compliance with cost audit requirements:

1. CRA-1: Form for maintaining Cost Records.
2. CRA-2: Notice of Appointment of Cost Auditor.
3. CRA-3: Form of the Cost Audit Report.
4. CRA-4: Filing of the Cost Audit Report with the Central Government.
5. CRA-5: Form for Change in Cost Auditor.

4. Applicability of Cost Records

Cost records must be maintained by companies that are engaged in specific regulated and non-regulated sectors if their turnover exceeds ?35 crores in the preceding financial year. The sectors are categorized as follows:

A. Regulated Sectors:

Companies in the following regulated sectors are required to maintain cost records:

1. Telecommunications
2. Petroleum Products
3. Electricity
4. Drugs and Pharmaceuticals
5. Fertilizers
6. Sugar
7. Railways (Goods and Passenger)

Threshold for Applicability:

• If the overall turnover exceeds ?50 crores, and the aggregate turnover of products/services under cost records is ?25 crores or more.

B. Non-Regulated Sectors:

Companies in the following non-regulated sectors are required to maintain cost records:

1. Automobiles
2. Cement
3. Chemicals
4. Construction
5. Textiles
6. Glass
7. Metals (Aluminium, Copper, Zinc, Steel, etc.)
8. Paper
9. Mining and Minerals

Threshold for Applicability:

• If the overall turnover exceeds ?100 crores, and the aggregate turnover of products/services under cost records is ?35 crores or more.

5. Exemptions from Cost Audit

The Companies (Cost Records and Audit) Rules, 2014 provide specific exemptions from the requirement to conduct a cost audit:

1. Companies in Regulated Sectors like Banking, Insurance, and NBFCs:

   • Companies operating in banking, insurance, and Non-Banking Financial Companies (NBFCs) sectors are exempt from cost audit requirements. These sectors are regulated by their respective sectoral regulators and are subject to stringent financial oversight and audit requirements, making additional cost audits unnecessary.

2. Micro, Small, and Medium Enterprises (MSMEs):

   • Companies classified as MSMEs, including those meeting the turnover criteria specified under Section 7(9) of the MSME Development Act, 2006, are exempt from maintaining cost records and conducting cost audits.

3. Companies Generating Electricity for Captive Consumption:

   • Companies that generate electricity exclusively for captive consumption are exempt from cost audit. These operations are typically small-scale and focused on internal use, and a detailed cost audit is considered unnecessary.

4. Companies with Export Revenue or Operating from Special Economic Zones (SEZs):

   • Companies covered under the rules are exempt from the cost audit requirement if their revenue from exports (in foreign exchange) exceeds 75% of their total revenue or if they are operating from a Special Economic Zone (SEZ).

6. Compliance Requirements

To ensure compliance with cost audit requirements, companies must adhere to the following:

• Appointment of Cost Auditor: Must be completed within 180 days from the commencement of the financial year. The appointment should be notified to the Central Government in Form CRA-2.
• Maintenance of Cost Records: Companies covered under the rules must maintain detailed cost records in Form CRA-1 for each financial year.
• Cost Audit Report: Must be prepared by the appointed cost auditor in Form CRA-3.
• Filing of Cost Audit Report: The cost audit report, once finalized, must be submitted to the Central Government in Form CRA-4.

7. Conclusion

Cost audits play a vital role in promoting transparency, accountability, and accuracy in financial reporting for companies in specific sectors. By understanding the applicability, exemptions, and compliance requirements, companies can ensure they meet all statutory obligations and contribute to a fair and transparent business environment. Ensuring timely compliance with these rules helps companies avoid penalties and maintain a strong reputation in the market.

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Article Compiled by:-

~Neel Lakhtariya

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.