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Table of Contents
- 1 COST
- 1.1 Get Cost Audit done without tedious paperworks and legal hassles.
- 1.2 Watch Our Video to know more about us...
- 1.3 Cost Audit
- 1.3.1 1. Introduction to Cost Audit in India
- 1.3.2 2. Importance of Cost Audit for Companies
- 1.3.3 3. Applicability of Cost Audit under Companies Act 2013
- 1.3.4 4. Benefits of Conducting Cost Audit
- 1.3.5 5. Cost Audit Report: Submission and Timeline
- 1.3.6 6. Non-Applicability of Cost Audit in India
- 1.3.7 7. Appointment of Cost Auditor: Who can be Appointed?
- 1.3.8 8. Concept of Cost Records Applicability
- 1.3.9 9. Leniency in Cost Records Maintenance Risks
- 1.3.10 10. General Steps to Check Cost Records Applicability
- 1.3.11 11. Documents required for Cost Audit in India
- 1.3.12 12. Process of Performing Cost Audit in India
- 1.3.13 13. Frequently Asked Questions about Cost Audit in India
- 1.4 Frequently asked questions
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Cost audit is a crucial process that helps companies maintain accurate cost accounting records and improve their decision-making capabilities. In India, cost audit involves verifying the cost allocation of labor, manufacturing, and other expenses. It is mandatory for certain classes of companies to carry out cost audits, and the audit report must be submitted within a specific time frame. In this blog post, we will explore the concept, benefits, and applicability of cost audit in India and provide a step-by-step guide on how it is performed with the help of legal experts. So, let’s dive in and learn more about cost audit in India.
1. Introduction to Cost Audit in India
Cost is a systematic process of verifying the cost allocation of each product or service in an organization. As per the Institute of Cost Accountants of India, Cost Audit is defined as “a system of audit introduced by the Government of India for the review, examination, and appraisal of the cost accounting records and attendant information required to be maintained by specified industries.” The main objective of Cost Audit is to provide proper, relevant, and accurate information to the management that can assist in making important decisions. It is also mandatory for certain class of companies under the Companies Act 2013 to maintain cost records and conduct cost audit as required. Cost Audit is important for detection of errors and fraud, bringing costs of products to a minimum level, maintaining standard budgetary costs, and enabling accurate decision-making by the management. Cost Audit Standards have been introduced to achieve uniformity and consistency in cost accounting principles and practices. By conducting a Cost Audit, organizations can achieve greater efficiency and profitability.
2. Importance of Cost Audit for Companies
Cost is an essential process that helps companies manage their costs and streamline their operations. The importance of cost audit for companies cannot be overstated. By conducting regular cost audits, businesses can ensure that their cost accounting records are accurate, and there is no wastage of resources. Cost audit enables businesses to optimize their manufacturing processes, reduce costs, and improve their profitability. According to the Institute of Cost Accountant of India, cost audit helps “in giving proper, relevant, and accurate information to the Management to assist in taking the important decision.”
Companies that implement cost audit practices benefit from detecting errors and frauds, ensuring adherence to cost accounting principles, and improving management decisions. The cost audit process also identifies areas where the company’s costs can be minimized, leading to increased profitability. As a result, cost audit reports help companies measure their performance and identify areas for improvement. By regularly conducting cost audits, companies can make informed decisions that will enhance their efficiency and increase their profitability. Overall, the importance of cost audit for companies lies in its ability to help them better understand their cost structure and manage their resources effectively.
3. Applicability of Cost Audit under Companies Act 2013
Cost Audit under Companies Act 2013 is governed by the Section 148 of the Companies Act 2013 read with The Companies (Cost Records and Audit) Rules 2014 and Cost and Works Accountants Act 1959. Companies that fall under regulated or non-regulated sectors, as specified in Table A and B of the Companies (Cost Records and Audit) Rules 2014, are required to maintain cost records if their overall annual turnover from all their products and services during the immediately preceding financial year is rupees thirty-five crore or more, respectively. Companies falling under both regulated and non-regulated sectors need to get their cost records audited by a Cost Accountant if their overall annual turnover from all their products and services during the immediately preceding financial year is rupees fifty crore or more or rupees one hundred crore or more, respectively.
“The cost records and audit help the company to track the accuracy of cost accounts and cost statements. Apart from it, these records help in conducting internal audits and identifying areas of improvement in the company’s cost control system,” says Pioneer One Consulting LLP.
Furthermore, companies classified as micro or small enterprises, as per the Micro Small and Medium Enterprises Development Act 2006, are exempted from complying with Rule 3 of Companies (Cost Records and Audit) Rules 2014. However, “the same shall apply to a medium enterprise,” as per Section 7(9) of the Micro Small and Medium Enterprises Development Act 2006.
4. Benefits of Conducting Cost Audit
Conducting a cost audit in India offers several advantages to businesses, stakeholders, and the government. Here are some of the benefits:
– Reliable data: Management gets reliable cost data for day-to-day operations, such as price fixing and decision-making.
– Cost savings: A cost audit can identify areas where a company can improve its cost control processes, resulting in cost savings and improved profitability.
– Identifies inefficiencies: A cost audit helps identify areas where a company may be incurring unnecessary costs or where it can improve its production processes to reduce costs.
– Compliance: A cost audit ensures compliance with relevant regulations and guidelines, such as those laid down by governmental agencies or professional bodies.
– Improved decision making: Management can gain a better understanding of the company’s cost structure, enabling them to make more informed decisions about cost-related matters.
– Protection for consumers: A cost audit helps protect consumers from exploitation by fixing prices and limiting price hikes.
Overall, a cost audit is an effective tool for businesses to detect errors and fraud, improve cost control, and make informed decisions about costs. It also benefits society, shareholders, and the government while ensuring compliance with regulations and standards.
5. Cost Audit Report: Submission and Timeline
The deadline for filing the Cost Audit Report in e-form CRA-4 has been extended by the Ministry of Corporate Affairs to the Board of Directors to 30th November 2021, due to the continued disruptions caused by the Covid-19 pandemic. Companies are required to file the report within 30 days from the date of receipt of the copy of the Cost Audit Report. It is important to note that the extension is applicable only to Companies which have got an extension of time for holding the Annual General Meeting under section 96(1) of the Companies Act 2013. The filing of the Cost Audit Report and Compliance Report has been mandatory by all cost auditors and companies concerned using the XBRL taxonomy since the financial year 2011-12 onwards. The Cost Audit Report for the year 2011-12 must be filed within 180 days of the close of the financial year or by December 31, 2012, whichever is later. The lead Cost Auditor is responsible for ensuring the correctness of data and other information contained in the XBRL Instance Document. The company must create the Cost Audit Report in XBRL format as approved by the Board and certified by the Cost Auditor.
6. Non-Applicability of Cost Audit in India
One of the crucial aspects of cost audit in India is its applicability, which is set forth in Section 148 of the Companies Act 2013. While several types of companies are required to maintain cost records and undergo cost audits, there are certain situations where such requirements do not apply. Let’s take a closer look at the non-applicability of cost audit in India:
– Companies with export revenue that exceeds 75% of their total revenue are not required to undergo cost audits.
– Micro and small enterprises are exempt from cost audit requirements as per Section 7(9) of the Micro Small and Medium Enterprises Development Act 2006.
– Companies listed under Table B of Rule 3 of the Companies (Cost Records and Audit) Rules 2014, relating to non-regulated sectors, may not require cost audits. These sectors include machinery and mechanical appliances used in defense, space, and atomic energy sectors, loading and unloading services rendered for a port in relation to a vessel or goods, and rare-earth metals of radioactive elements or isotopes, among others.
It’s important to note that complying with the cost audit requirements is crucial to avoid penalties. Companies that fail to do so may face fines and imprisonment.
7. Appointment of Cost Auditor: Who can be Appointed?
According to Section 148(3) of the Companies Act 2013, a cost auditor shall be appointed by the Board of Directors for conducting the audit of cost records. The cost auditor shall be a cost accountant in practice, or a firm of cost accountants in practice appointed by the Audit Committee on the recommendation of the Board. The remuneration of the cost auditor shall be determined by the Board and later ratified by the members.
To conduct the cost audit, the person should be a member of the Institute of Cost Accountants of India and hold a valid membership and certificate of practice. Only a cost accountant can conduct the cost audit, which means a cost accountant as defined in clause (b) of the sub-section (1) of Section 2 of the Cost and Works Accountants Act 1959.
The company shall inform the cost auditor about his appointment and file a notice of appointment with the Central Government within a period of 30 days of the Board Meeting in which such appointment is made or within a period of 180 days of the commencement of the financial year, whichever is earlier. Before the appointment of the cost auditor, it is mandatory to obtain from him or her a written consent and a certificate as provided under Rule 6(1A).
The appointment of cost auditor shall remain in force either till he or she submits the cost audit report or till the expiry of 180 days from the closure of the financial year. The cost auditor can be removed from their office before the expiry of their term, but before effecting removal, the cost auditor must be given an opportunity to be heard.
8. Concept of Cost Records Applicability
The concept of cost records applicability is integral to understanding the need for cost audit in India. According to Section 148 of the Companies Act 2013, the Central Government can direct companies engaged in the production of goods or provision of services to maintain cost records in their books of accounts. The Companies (Cost Records and Audit) Rules 2014 further provide a list of specified companies that need to maintain cost records, with Table A and B containing regulated and non-regulated sectors, respectively. The total turnover from all production or service must exceed INR 35 crore in the preceding financial year for cost records to be mandatory. The cost audit is applicable if the overall annual total turnover of all products/services is INR 50 crores or more, or if the aggregate turnover from the individual product/service for which cost records are maintained is INR 25 crores or more. Cost records are not necessary for micro and small enterprises, but the same applies to medium enterprises. Companies failing to maintain cost records could be fined, and officers in default could face imprisonment. By maintaining cost records, companies can benefit from a better understanding of their production costs, which can help with decision-making and cost efficiency.
9. Leniency in Cost Records Maintenance Risks
While cost records and getting cost audits done may seem like an additional burden for companies, leniency in the maintenance of these records can lead to some serious risks. One of the biggest risks of not maintaining proper cost records is non-compliance with the regulations set by the government. This can lead to hefty fines and penalties, which can be detrimental to the financial health of the organization.
Moreover, when it comes to inter-unit transfers, it becomes even more crucial to maintain proper cost records, as failure to do so can lead to transfer pricing issues. This can lead to disputes with taxation authorities and can become a costly affair for companies.
Companies that do not maintain proper records or fail to get a cost audit conducted can face reputational risks as well. Not having proper records can cast a shadow of doubt on the company’s financial statements, which can shake the trust of shareholders and stakeholders.
In the words of Richard Branson, “If you don’t look after your customers, someone else will,” the same goes for cost records and audits. Failure to maintain proper records can give an edge to competitors who have their financial records in order.
In conclusion, while it may seem like a burden, maintaining proper cost records and getting audits done is crucial for the financial health and compliance of a company, not doing so can lead to various risks and issues.
10. General Steps to Check Cost Records Applicability
Companies in India are required to maintain Cost Records and conduct a Cost Audit under Section 148 of the Companies Act, 2013. But before we delve into the process of performing a Cost Audit, it’s crucial to determine whether Cost Records and Cost Audit are applicable to your company or not. Here are some general steps to check cost records applicability:
– Compile HSN codewise turnover of the company or activity-wise turnover as per the activity mentioned in Table A or Table B.
– Check for the HSN codes/activity in the notification issued by the Ministry of Corporate Affairs.
– Apply the rules for determination of applicability.
– Check whether the company falls under the regulated sectors or non-regulated sectors specified in Table A and B.
– Review other regulatory authorities’ rules that require maintenance of cost records or conduct of cost audit.
One important point to note is that the cost audit applicability is based on the turnover of the previous year. Practicing Cost Accountants can give clarification on whether the company falls within the ambit of Section 148. It is also crucial to file Form CRA-2 for appointment of cost auditor within 180 days of the beginning of the year. Being proactive and seeking expert advice can save your company from hefty penalties later.
11. Documents required for Cost Audit in India
Performing a cost audit in India requires certain documents to be in place. According to the Cost Audit Report Rules 2001, every company for which an audit of cost accounting records has been ordered under sub-section (1) of section 233B of the Companies Act, 1956, must submit the Cost Audit Report in a prescribed form. The following are the documents required for Cost Audit in India:
– Cost accounting records
– Cost statements
– Other books and documents
– Annexure (auditor’s observations and suggestions)
– Proforma to the Cost Audit Report
Additionally, the company and its officers, as per section 209 of the Act, must assist the Cost Auditor in completing the audit. As per rule 6 of the Cost Audit Report Rules, the Cost Auditor shall have access to all the documents required for conducting the audit. The authentication of Annexure to the Cost Audit Report is also essential.
“Maintaining cost records is an essential requirement as per the Companies Act, 2013, and companies should be aware of the same to avoid any non-compliance issues. It is advisable for the company to get the clarification of the applicability at the beginning of each financial year and file the form CRA-2 for appointment of cost auditor within 180 days.”
12. Process of Performing Cost Audit in India
Performing a cost audit in India involves a step-by-step process. First, a company needs to appoint a cost auditor and obtain their written consent. The appointment should be made within 180 days from the beginning of every financial year. After the appointment, the company should report it to the Central Government within 30 days in Form CRA-2, along with the fee. Once the audit is done, the cost auditor should submit the signed Cost Audit Report with observations in Form CRA-3 to the company’s Board of Directors within 180 days from the end of the relevant financial year.
After receiving the audit report, the company’s Board of Directors should deliver the Cost Audit report to the Central Government in Form CRA-4 within 30 days. The applicability of cost audit is for companies involved in manufacturing goods or providing services listed in Table A or Table B with a total turnover of more than INR 35 crores during the previous financial year.
“The aim of cost audit is to make sure that the cost records of a company are accurate and complete. The objective of a cost audit is to verify both the cost data and cost accounting records to determine whether they are reasonable and accurate,” suggests a legal expert. “The auditor also examines the consistency of books and vouchers of various accounts with the cost accounting plan.”
Overall, a cost audit helps companies measure their operational efficiency and identify areas where cost reduction could be made.
13. Frequently Asked Questions about Cost Audit in India
Cost Audit in India – Frequently Asked Questions
Q.1-What is cost audit in India and who needs to undergo it?
Cost audit is the verification of cost accounts and is mandatory for companies in the manufacturing, mining, and service sectors in India. The Companies Act 2013 requires companies engaged in these sectors to maintain cost records and get them audited.
Q.2- Why is cost audit important for companies in India?
A cost audit is an excellent tool to reduce materials and overheads, detect malpractices and unethical practices, and optimize the use of resources to improve productivity. It also helps companies enhance their earning and efficiency, make timely decisions, and limit fraud exposure.
Q.3- Who is mandated to get their cost records audited in India?
Companies in India are required to get their cost records audited if their annual turnover from all products and services is INR 500 million or INR 1 billion depending on whether the sector is regulated or unregulated, and the aggregate turnover of goods and services is INR 250 million or INR 350 million, respectively.
Q.4- Is there a penalty for non-compliance in cost audit in India?
Companies found not complying with cost audit provisions may face fines ranging from INR 25,000 to INR 500,000 and may also face imprisonment up to one year.
Q.5- How can companies create the instance document required for cost audits in India using XBRL technology?
Companies can adopt various methods, including using XBRL-enabled software packages, special XBRL software tools, integrating third-party packages, or web-based applications to create instance documents. The Institute of Cost Accountants of India has been organizing XBRL training programs to help professionals familiarize themselves with the Costing Taxonomy.
Q.6- Is validating the instance document a pre-requisite before filing the Cost Audit Report and Compliance Report on the MCA portal in India?
Yes, validating the instance document using the MCA XBRL validation tool is mandatory before filing the Cost Audit Report and Compliance Report on the MCA portal.
Q.7- Can extensions be allowed in the Costing Taxonomy in India?
No, extensions are not allowed in the Costing Taxonomy. Companies must tag elements already defined in the Taxonomy.
Q.8- What is the relevance of cost audit for companies in India?
“Through a cost audit, companies can take a closer look at their cost of production and find effective ways to reduce their materials and overheads. It is a great tool for organizations to examine their earning and efficiency, and optimize the use of resources that might be untapped – for better productivity.”
Frequently asked questions
These are the sections under the Income Tax Act that provide for the registration of a trust or society seeking tax exemption. Section 12A is for registration, while Section 12AA is for online registration of the trust.
Section 80G provides tax benefits to the donor of an NGO. It also helps the organization to get an exemption from income tax.
The process involves drafting an application for a Section 80G exemption certificate, approval from the Income tax commissioner, and end-to-end follow-up with tax authorities. You can also seek assistance from a CA/CS/CMA registered with the government.
Only NGOs and charitable organizations can apply for 80G registration.
Once you receive the 80G registration certificate, it is valid for the next five years.
After five years, the NGO needs to provide evidence of activities undertaken during this period to renew its registration.
If your NGO is already registered under Section 12A or 12AA, you must apply for migration to Section 12AB by April 2021, i.e., up to 3 years from the introduction of Section 12AB.
Maintain complete records of your donors, as donation benefits provided under Section 80G are available to donors for exempt NGOs on a stable basis. Keep yourself updated with the latest legal updates in India to make informed decisions.
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