Cost audit: meaning, objectives, the law under section 148, the cost auditor, audit programme and cost audit report

1. Meaning

Cost audit is the verification of the correctness of cost accounts and of the adherence to the cost accounting plan. CIMA defines it as “the verification of cost records and accounts, and a check on adherence to prescribed cost accounting procedures and their continuing relevance.” It is wider than arithmetic checking: the cost auditor also reports whether the cost records give a true and fair view of the cost of production and points out wasteful practices. It may be statutory (ordered under the Companies Act), or done on behalf of management, a customer under a cost-plus contract, or a trade association.

2. Objectives and advantages

• Verify that cost accounts are arithmetically correct and kept as the prescribed rules require.
• Check that the cost of production, of each product and process, is correctly ascertained.
• Detect errors and fraud, and prevent them by a continuous check.
• Point out wastage, idle capacity and inefficiency, and so help cost reduction.
• To management: reliable data for pricing and decisions, and a check on the costing department. To shareholders: assurance that the business is run efficiently. To government: reliable cost data for price fixation, tariffs, and for regulated sectors. To consumers: prices based on verified cost.

3. The law: from 1956 to section 148

Under the Companies Act 1956, section 209(1)(d) (inserted in 1965) allowed the Central Government to require companies in specified industries to keep cost records, and section 233B allowed it to order an audit of those records; cost audit report rules made under the Act (the syllabus names them as of 1963) prescribed the form of the report. These provisions were replaced by section 148 of the Companies Act 2013 and the Companies (Cost Records and Audit) Rules, 2014.

• s.148(1): the Central Government may direct a specified class of companies engaged in production of goods or providing services to include cost records in their books.
• s.148(2): it may order an audit of those cost records for companies above a net worth or turnover threshold.
• The Rules list the industries in a regulated sector (Table A, such as telecommunications, electricity, petroleum, drugs, fertilisers) and a non-regulated sector (Table B). Cost records are required where overall turnover is Rs. 35 crore or more; cost audit applies to regulated sectors with overall turnover of Rs. 50 crore and product turnover of Rs. 25 crore or more, and to non-regulated sectors at Rs. 100 crore and Rs. 35 crore.
• s.148(4): the cost audit is in addition to the statutory audit under s.143.

4. Appointment of the cost auditor

1. Only a cost accountant in practice, a member of the Institute of Cost Accountants of India, or a firm of cost accountants (s.148(3)).
2. The company’s statutory auditor under s.139 cannot be appointed as cost auditor (proviso to s.148(3)).
3. Appointed by the Board of Directors, on the recommendation of the audit committee where one exists; the remuneration is ratified by the shareholders.
4. Appointment within 180 days of the start of the financial year; the company informs the Central Government in Form CRA-2.
5. The qualifications, disqualifications, rights, duties and obligations of company auditors apply to the cost auditor (s.148(5)), so the disqualifications in s.141 apply.

5. Functions and duties of the cost auditor

• Examine the cost records maintained under the Rules and verify that they are kept as prescribed (Form CRA-1 lays down the particulars).
• Verify the cost of production and cost of sales of each product, and the reconciliation of cost and financial accounts.
• Check the records of materials (purchase, receipt, issue, pricing, wastage, stock verification), labour (attendance, wages, idle time, overtime, incentive), overheads (collection, apportionment, absorption, under- or over-recovery), depreciation, stores and spare parts, work-in-progress and incomplete contracts, and capacity utilisation.
• Follow the Cost Auditing Standards issued by the Institute of Cost Accountants of India and approved by the Central Government.
• Report fraud noticed in the course of audit, since the duties of an auditor under s.143(12) extend to the cost auditor through s.148(5) and s.143(14).
• Submit the report in Form CRA-3 to the Board within 180 days from the close of the financial year.

6. Cost audit programme

The audit programme is the written plan of the audit: the scope, records to be checked, extent of test checks, staff assigned and time schedule. It covers, in order: the company’s costing system and manual; material records; labour records; overheads; depreciation; stores and spares; work-in-progress and incomplete contracts; finished stock; reconciliation with financial accounts; and the cost statements to be certified. The programme is flexible: the auditor extends checks where weaknesses appear.

7. Cost audit report

The report in Form CRA-3 contains the auditor’s opinion whether the cost records are adequate and give a true and fair view of the cost of production, processing, selling and distribution, with an annexure of product-wise cost details, capacity, material and labour consumption, reconciliation with financial accounts, and any qualifications or observations. The company, within 30 days of receiving it, files it with the Central Government in Form CRA-4 with its full explanation of every reservation or qualification (s.148(6)). Defaults are punishable under s.147 (s.148(8)).

How this is examined

Define cost audit, list objectives, then appointment (five points) and functions (the records checked). Cite section 148 and the 2014 Rules with the CRA forms; one line on sections 209(1)(d) and 233B shows the examiner you know the syllabus wording. The report is a 6-mark note.