Cost Audit | Appointment of Auditor | Powers | Report

Concepts of Cost Audit

Concepts of Cost Audit

Concepts of Cost Audit

The Companies Act empowers the Government to direct specified class of companies to maintain records relating to cost. The cost records of such companies include records relating to cost of production, cost of sales, and details about various elements of cost such as materials, wages, stores, overheads, etc.

The form in which the cost records are to be maintained differs from industry to industry. Companies manufacturing the products covered by the Cost Accounting Record Rules are required to maintain the cost records. However smaller companies are exempted from maintenance of cost accounting records.

What does a cost audit consists of?

Cost audit includes—

1. Checking of cost records.

2. Verification of the cost statements prepared by the management and ensuring that it gives a true and fair view of the cost of production and cost of sales relating to the various products.

Central Government may, by a notification require audit of the cost records maintained by specified class of companies. Section 233B of the Companies Act empowers the Central Government to give such direction. The Cost Audit is to be conducted by a Cost Accountant within the provisions of the Cost and Works Accountants Act 1959. Cost Audit is conducted in addition to the normal audit.

Appointment of Cost Auditor

The Board of Directors of the company, with the prior approval of the Central Government appoints the Cost Auditor.

Ceiling on Number of Cost Audits

Section 224 (1B) prescribes the ceiling on the number of Cost Audits a cost auditor can undertake.

1. For an individual Cost Accountant who is not in full time employment: There is no limit to number of companies such a person can undertake to do cost audit.

2. For an individual Cost Accountant who is in full time employment: He can audit to a maximum of 20 companies and out of which not more than 10 companies shall have a paid up capital of Rs. 25 lakhs or more. However, appointment of a full-time employed Cost Accountant as a Cost Auditor is not approved by the Institute of Cost and Works Accountants of India (ICWAI).

3. A firm of Cost Accountants: Each partner who is not is full time employment is eligible to audit to a maximum of twenty companies, out of which not more than 10 companies should have a paid up share capital of Rs. 25 lakhs or more.

Disqualification of Appointment as Cost Auditor

The following persons are disqualified from being appointed as cost auditor:

1. An auditor of a company appointed u/s 224 of the Companies Act.

2. An officer of the company.

3. A body corporate.

4. A person who is indebted to the company for an amount exceeding Rs. 1,000.

5. A person who is disqualified to be the cost auditor of the holding company or of the subsidiary company or of another subsidiary company of the holding company.

Further, ICSAI disqualifies the following persons

1. A person who is a partner or employee of the Company Auditor appointed u/s 224 of the Companies Act.

2. A person who is an employee of the firm of Chartered Accountants appointed as the auditor of the company u/s 224 of the Companies Act.

Powers of Cost Auditor

1. The Cost accounting records and other relevant papers are to be made available to Cost Auditor, within 90 days from the end of the financial year of the company.

2. If the company fails to make available the relevant documents and books within the specified period, the cost auditor shall intimate the same to the Central Government.

3. The company and its officers are required to extend necessary assistance to the cost auditor to enable him to conduct the audit.

4. The cost auditor is endowed with all the powers of the auditor of a company who is appointed u/s 224 of the Companies Act.

5. The duties of the cost auditors are similar to the auditor of the company appointed u/s 224. The auditor of the company reports to the shareholders whereas, a cost auditor reports to the Central Government. However, a copy of the Cost Audit report made in the prescribed form shall be forwarded to the company.

6. The Cost Audit report is to be submitted to the Central Government within 180 days from the end of the financial year.

Cost Audit Report

The Cost auditor shall report to the Central Government whether

1. He has obtained all the necessary explanations and information.

2. The Cost accounting records are kept properly.

3. Returns are received from the branches not visited by the Cost auditor.

4. The books and records provide the information required by the Companies Act in the manner so required.

5. The required Cost Statements are kept by the company and

6. The Cost Accounting records maintained by the company give a true and fair view of the cost of production / processing / manufacturing / money and marketing activities of the product referred.

On receiving the report, the Central Government shall seek further information and explanation from the company, if required.

The Central Government, if found necessary shall require the company to circulate whole or a part of the Cost report to the shareholders along with the notice to the AGM to be held immediately after the submission the Cost audit report.

Since Cost audit is not conducted every year, the Cost auditor must obtain a certificate from the management while taking into account the details relating to unaudited previous years.

Manufactures of electric motors, tractors, vanaspati, milk food, diesel engines, drugs, motor vehicles, room air conditioners, cement, cycles etc., are some of the Industries that are covered by the Cost (Records) Rules.

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