Section 148 of the Companies Act 2013 specifies the procedure regarding cost audit of specific companies.

Inclusion of Cost records

Central Government (CG) has the power to direct inclusion of cost records in the books of account of specified class of companies by a written order. Such order by the CG is to be issued notwithstanding anything contained in Chapter-X (Sections 139-148) of the CA 2013.

However, the order by CG should be passed after consulting the regulatory body of special Act companies. That means CG has the power to make rules regarding the maintenance of cost records of the companies engaged in specified industries, manufacturing of goods or providing services.

Application of Cost Records (Rule 3)

The class of companies even if they’re foreign companies are required to include cost records in their books of account as per Rule 3 of the Companies (Cost Records and Audit) Rules, 2014. Such classes of companies are classified mainly into two sectors viz. regulated and non-regulated sectors.

Thus, such class of companies engaged in the production of the goods or providing services, having at least ₹35 crore turnover in preceding financial year is supposed to include cost records in their books of account. Rule 3 isn’t applicable to a company which is classified as a micro enterprise or a small enterprise including prescribed turnover criteria u/s 7(9) of the Micro, Small and Medium Enterprises Development Act, 2006.

Section 8 Companies and One Person Company (OPC) in the Companies Act, 2013 are required to maintain cost records if they fall under the above criteria.

Note that nothing that is mentioned aforesaid is supposed to apply to foreign companies only having liaison offices. Foreign companies have been defined in the act as any company or body corporate incorporated outside India which:

(a) is located for business in India either by itself or through an agent, physically or through e-mode; and

(b) is conducting any business activity in India in any other manner.

Maintenance and Audit of Cost Records

As per Rule 5 of the Companies (cost records and audit) Rules, 2014 the cost records shall be maintained in Form No. CRA-1 for each financial year.

The CG may order that the audit of cost records has to be conducted in a specified manner if having prescribed net worth or prescribed turnover. Such net worth or turnover is prescribed in the Rule 4 of the Companies (Cost Records and Audit) Rules, 2014.

For Companies in Regulated Sectors are required to get its cost records audited only if:

1) ₹50 crore or more Turnover of Company during the immediately preceding financial year; and

2) ₹25 crore or more aggregate Turnover of Products or Services.

For Companies specified in Non-Regulated Sectors are required to get its cost records audited only if:

1) ₹100 crore or more Turnover of Companies during the immediately preceding financial year; and

2) ₹35 crore aggregate Turnover of individual Products or Services.

However, the requirement for cost audit isn’t applicable to a company which is covered in rule 3 the Companies (Cost Records and Audit) Rules, 2014; and

(i) Foreign Exchange whose revenue from exports, in foreign exchange, exceeds 75% of its total revenue; or

(ii) Company which is operating from a Special Economic Zone.

(iii) Company which is engaged in generation of electricity for captive consumption through Captive Generating Plant.

Cost Audit

The Board of Director appoints a Cost Accountant for conducting the audit of cost records. Cost auditor has to comply with the cost auditing standards while auditing as are issued by the Institute of Cost Accountants of India (ICAI) with the approval of the Central Government.

Statutory Audit (Section 143)

An audit conducted u/s 148 is in addition to the statutory audit conducted under section 143 of the CA 2013.

Qualification of Cost Auditor

The qualifications, disqualifications, rights, duties and obligations that are applicable to auditors under Chapter-X (Sections 139-148) are applicable to a cost auditor. The report on such audit of cost records is to be submitted by the cost accountant to the Board of Directors of the company.

Cost Audit Report to CG

The company has to submit the copy of the audit within 30 days from the date of receipt of a copy of the cost audit report furnishing the CG with such report along with a statement containing full information and explanation on every reservation or qualification contained therein.

Additional Information to CG

The CG after considering the cost audit report and the information and explanation furnished can call for further information and explanation.

Penalty for Contravention

In case of any default regarding complying with the provisions of section 148, the company, officer and auditoris punished in accordance with section 147.

The company is punished with fine between ₹25,000 to ₹5,00,000; and every officer is punishable with-

i) Imprisonment for a term of maximum 1 year; or

ii) Fine between ₹10,000 to ₹1,00,000; or

iii) With both i.e. imprisonment and fine.

The cost auditor is punishable with-

Fine between ₹25,000 to ₹5,00,000 or 4 times the remuneration, whichever is less.

If contravened such provisions knowingly or wilfully then imprisonment for 1 year and with fine between ₹50,000 to ₹25,00,000 or 8 times the remuneration, whichever is less.

refunding the remuneration and pay for damages if received.

Section 148 of the Companies Act 2013

[Central Government to specify audit of items of cost in respect of certain companies]

(1) Notwithstanding anything contained in this Chapter, the Central Government may, by order, in respect of such class of companies engaged in the production of such goods or providing such services as may be prescribed, direct that particulars relating to the utilisation of material or labour or to other items of cost as may be prescribed shall also be included in the books of account kept by that class of companies:

Author Note: Class of companies which shall be required to include cost records in their books of account has now been prescribed in Rule 3 of the Companies (cost records and audit) Rules, 2014.

Provided that the Central Government shall, before issuing such order in respect of any class of companies regulated under a special Act, consult the regulatory body constituted or established under such special Act.

(2) If the Central Government is of the opinion, that it is necessary to do so, it may, by order, direct that the audit of cost records of class of companies, which are covered under sub-section (1) and which have a net worth of such amount as may be prescribed or a turnover of such amount as may be prescribed, shall be conducted in the manner specified in the order.

(3) The audit under sub-section (2) shall be conducted by a Cost Accountant who shall be appointed by the Board on such remuneration as may be determined by the members in such manner as may be prescribed:

Provided that no person appointed under section 139 as an auditor of the company shall be appointed for conducting the audit of cost records:

Provided further that the auditor conducting the cost audit shall comply with the cost auditing standards.

Explanation: For the purposes of this sub-section, the expression “cost auditing standards” mean such standards as are issued by the Institute of Cost Accountants of India, constituted under the Cost and Works Accountants Act, 1959, with the approval of the Central Government.

(4) An audit conducted under this section shall be in addition to the audit conducted under section 143.

(5) The qualifications, disqualifications, rights, duties and obligations applicable to auditors under this Chapter shall, so far as may be applicable, apply to a cost auditor appointed under this section and it shall be the duty of the company to give all assistance and facilities to the cost auditor appointed under this section for auditing the cost records of the company:

Provided that the report on the audit of cost records shall be submitted by the cost accountant to the Board of Directors of the company.

(6) A company shall within thirty days from the date of receipt of a copy of the cost audit report prepared in pursuance of a direction under sub-section (2) furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained therein.

(7) If, after considering the cost audit report referred to under this section and the information and explanation furnished by the company under sub-section (6), the Central Government is of the opinion that any further information or explanation is necessary, it may call for such further information and explanation and the company shall furnish the same within such time as may be specified by that Government.

(8) If any default is made in complying with the provisions of this section, —

(a) 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;

(b) the cost auditor of the company who is in default shall be punishable in the manner as provided in sub-sections (2) to (4) of section 147.

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Cost Audit Provisions Under Companies Act 2013 (Section 148)

Tanish Karuia

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