Introduction to Cost Audit

Cost audit is the audit of cost records. According to Chartered Institute of Management Accountants, London (CIMA), cost audit is the verification of the correctness of cost accounts and of the adherence to the cost accounting plan. In other words, cost audit is the verification of the cost of production of any product, service or activity on the basis of accounts maintained by an enterprise in accordance with the accepted principles of cost accounting. This definition of Cost Audit is relevant to the voluntary Cost Audit without any statutory backing The Institute of Cost and Works Accountants of India on the other hand, defines cost audit 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. Thus the concept and scope of cost audit as defined in India is more specific and lays emphasis on the evaluation of the efficiency of operations and the propriety of management actions as introduced by the Government of India for specified industries. In this sense, cost audit in India appears to be synonymous with efficiency audit mainly as a guide for management policy and decision making besides being a barometer of actual performance. The justification for mandatory Cost Accounting and Cost Audit provisions has been very well explained in the Parliamentary Debate that led to the adoption of Companies Amendment Bill, 1965 incorporating the provisions related to Sections 209 (1) (d) and 233B. Smt. Tara Ramchandra Sathe (MP for Maharashtra) stated during the relevant Rajya Sabha Debate as under: What is Cost Audit? The Cost Audit is quite different from the Financial Audit. It is to see whether the labour is efficient or not, whether the industry has provided efficient labour or the labour which is required by that industry is less than what is required, whether every material and every part of the machinery is used to the optimum, whether any material is wasted, etc. As we all know, we are short of material, there is so much material which is imported, when we are short of foreign exchange. In these circumstances, it is very essential that there should be cost audit. In fact, it should be introduced in almost all the industries, but the Government is trying this in certain cases only. So by this we will know whether there is a proper utilization of the material or not. It is very essential, no doubt, and in factories and industries, everywhere, this cost audit should be emphasized. (Proceedings of Rajya Sabha, 14th September, 1965: Columns 3944 and 3945). Thus Cost Audit in India refers to the statutory Cost Audit of the selected companies covered under the relevant provisions of the Companies Act, 1956. These requirements are mandatory and non-compliance may invite penal provisions also.

Origin of Cost Audit

Methods and techniques of cost accounting and audit of cost accounts in India can be traced back to the year 1925, when large number of firms were given contracts by the Government of India on cost plus basis and the Government started verifying and investigating the cost structure of such firm Need for large scale industrialization immediately after the independence required lot of concessions and facilities to the entrepreneurs to establish industrial undertakings for production of common mans goods and essential services. Power, electricity and other inputs were provided at concessional rates. Liberal finances were provided by the banks and other financial institutions. Land was made available with all infrastructures. Transport facilities were also provided. However, there were only very few industrial groups and it was a suppliers market in almost all the areas. There were many bureaucratic hurdles in opening of new industries along with need for licenses and permits. Imports were mostly prohibitive due to scarce foreign exchange and very high rate of custom duties on imports. Therefore, consumers had very few choices and there were often complaints of excessive pricing, which encouraged smuggling and other malpractices like under invoicing of imports to save custom duties or overinvoicing of exports to get higher export benefits. The high prices were often justified on the basis of higher indigenous cost of production. Thus the government felt the need for price controls. The investigations of Dalmia-Jain group of companies further brought out the need for more effective audit. Thus cost audit gained recognition, both as an effective tool of cost-control in the hands of management to control costs and produce at competitive rates and also as a monitoring mechanism on behalf of other stakeholders including the consumer and the government. Cost Audit as a tool in the hands of Management enabled them to identify the inefficiencies. It acts as a review of the activities of the various cost centres of the company and points out the avoidable wastages and losses. The expertise and experience of the Cost Auditor helps them in knowing the exact areas having the scope for cost control and cost reduction through inter-fi rm comparison with standard industrial norms or peers in the industry. Government in turn ensured that the consumers are able to obtain their requirements at a fair price and do not pay for the inefficiency of manufacturers. Consequently, the Companies Act, 1956 was amended in the year 1965 to incorporate the provisions relating to the maintenance of Cost Accounting Records and Cost Audit. These amendments were made on the basis of recommendations from the Vivian Bose Commission, Dutta Commission and the Shastry Committee.

Relevance of Cost Audit

In the initial years, Cost Audit was taken merely as a tool for price control mechanism for consumer and infrastructure industries in India. The main objective of Cost Audit when statutorily introduced under the provisions of Companies Act, 1956 was to meet the Government requirements for regulating the price mechanism in core industries like Cement, Sugar, Textiles and consumer industries like Vanaspati, Formulations and Automobiles. The objective was to provide an authentic data to the Government to regulate the demand and supply in the country through a price control mechanism. The liberalization of the economy and consequential globalization has further enhanced the need for authentic data. Therefore, the Cost Audit Report Rules have been amended from time to time to ensure that the comprehensive authentic information is available in the format required. The basic structure of the cost audit was laid down by the Cost Audit (Report) Rules, 1968 as prescribed under the relevant provisions of Companies Act, 1956. They were superceded by the Cost Audit (Report) Rules 1996, which were notified vide GSR 511(E) dated 5.1.1996. These Cost Audit (Report) Rules 1996 were also subsequently superseded by the Cost Audit Report Rules 2001, which were notified vide GSR 294(E) dated 27.12.2001. The necessity for and utility of properly documented information is more keenly felt now than ever before. In most parts of the world, free competition co-exists with appropriate rules and regulations to ensure free trade and absence of unfair practices. Therefore, in the present competitive scenario of globalization, the Cost Audit Reports have assumed greater importance and significance being the important source of reliable and authentic feedback to the government and its various departments and agencies. It may be clarified here that the Cost Audit Reports do not only contain merely the cost details, but are full of information related to all aspects of business organization which, if harnessed properly can provide a comprehensive analysis about the company, the industry and the economy as a whole. The Cost Audit Report serves as an effective tool of information in the hands of directors on the Board ensuring good corporate governance. In an environment of increasing foreign trade under WTO regime, dumping of products at very low prices have become a serious issue in the international trade. This dumping of products, often well below the cost price, if not properly countered may harm the indigenous industry. The cost records and the cost audit report play a very critical role in defense of local industry to substantiate their fair approach against any allegation of dumping. Similarly, when dumping allegations are levied against the exports by the Indian companies to any foreign company, the Cost Audit Reports can provide the valuable feedback to protect the interest of Indian companies. The practice of selling below cost to ward off competition attracts the penal provisions of the Competition Law. This necessitates the availability of authentic cost details of the products marketed by industry and business houses to determine normative pricing or fair pricing. In fact, Competition Law to be effective against any anti-competition activity presupposes the availability of reliable and authentic cost data. The transfer pricing issue has gained considerable momentum in international scenario. Cost Audit Report Rules 2001 include the provisions to take care of this aspect in right perspective. The fundamentals of transfer pricing are based on arms length throughout the world. The cost details form the very basis of determining arms length transfer pricing policy of any country. An audited cost records and the resultant Cost Audit Report becomes a major source of information, which can be effectively used by both Indirect and Direct Tax Authorities. The Central

Excise Authorities also use Cost Audit Reports for verifying claim of the companies relating to ex-factory prices of the excisable goods especially in the case of inter-unit transfers. The Tariff Commission relies on authenticity of the cost audit reports and makes use of these reports extensively in fixation of tariffs for the products covered under Cost Accounting Records Rules. The Cost Audit Reports are also made use of by the respective administrative Ministries of Government of India for fixation of administrative prices and working out subsidy, etc. Fertilizer Industry Coordination Committee (FICC) under the Department of Fertilizers and the Directorate of Sugar under Ministry of Food use Cost Audit Reports extensively in taking decision with respect to the Industries under their purview. The Cost Audit Reports relating to Bulk Drugs and Formulations are used by the National Pharmaceutical Pricing Authority for fixation of prices of various drugs and formulations covered under the Drug Price Control Order, 1995. The Cost Audit Reports have great potential in government procurements especially in case of non-competitive procurements. There are no effective anti-trust laws in India. This always leaves a scope for the traders/suppliers to charge exorbitant prices from the government supplies. For example, Clayton Act in USA clearly provides that any discrimination in price, services or facilities shall be unlawful in USA. It also prohibits the discrimination in rebates, discounts or underselling in particular localities. This Act further provides that any differential in prices etc., shall have to be justified on the grounds of differences in the cost of manufacture, sale or delivery resulting from the differing methods or quantities in which such commodities are sold or delivered and the burden of rebutting the prima-facie case shall be upon the person charged with a violation of this act. The Clayton Act also provides that it shall be unlawful for any person to induce or receive a discrimination in price, which is prohibited under the act. In other words, each seller of product or service can charge a uniform price only in the USA. However, this is not the case in India, where each purchaser may be charged a differential price by the supplier or the trader. A significant portion of the government budget is spent every year on procurements, where reasonability of purchase price is always an issue. Therefore, Cost Audit Reports can always fill the vacuum in government procurements ensuring reasonability of prices. Similarly in USA, an Incurred Cost statement is made with respect to major projects funded out of Government budgets. This incurred cost is nothing but Cost Audit Report. In addition to above, Government has been giving various incentives for exports by the Indian Industries. These incentives are mainly to refund the taxes paid in the country to provide level playing field to the Indian Industry. Similarly many of the exporters import duty - free material for exports after further processing, where actual productivity is a major issue. Cost Audit Reports provide not only the actual amount of various taxes paid by any unit but also provide the actual productivity and wastage. Thus Cost Audit Reports can benefit the Indian Industry to get at par with global competitors.

Features of Cost Audit

The cost audit of the companies under the relevant provisions of the Companies Act, 1956 has the following features: (i) Assessing compliance of the relevant cost accounting records rules as applicable to the product under review; (ii) Study of the costing system to assess whether it is adequate for the cost ascertainment of the product under review; (iii) Evaluation of the operating and other efficiencies of the organization under audit with special reference to the product under review; to ensure the submission of necessary details required under the Cost Audit Report Rules, 2001 as amended from time to time. (iv) Submission of Cost Audit Report in the format prescribed. Since cost audit is carried out under the various provisions of the Companies Act, 1956, a thorough and comprehensive knowledge of the Indian Companies Act including various rules prescribed there under and the circulars issued by the Ministry of Corporate Affairs is essential for conducting an effective Cost Audit.

Objectives of Cost Audit

Cost Audit has both general and social objectives. The general objectives can be described to include the following : Verification of cost accounts with a view to ascertaining that these have been properly maintained and compiled according to the cost accounting system followed by the enterprise Ensuring that the prescribed procedures of cost accounting records rules are duly adhered to. Detection of errors and fraud. Verification of the cost of each cost unit and cost center to ensure that these have been properly ascertained. Determination of inventory valuation. Facilitating the fixation of prices of goods and services. Periodical reconciliation between cost accounts and financial accounts. Ensuring optimum utilization of human, physical and financial resources of the enterprise. Detection and correction of abnormal loss of material and time.

 Inculcation of cost consciousness. Advising management, on the basis of inter-firm comparison of cost records, as regards the areas where performance calls for improvement. Promoting corporate governance through various operational disclosures to the directors.

Among the social objectives of cost audit, the following deserve special mention :
Facilitation in fixation of reasonable prices of goods and services produced by the enterprise. Improvement in productivity of human, physical and financial resources of the enterprise. Channelizing of the enterprise resources to most optimum, productive and profitable areas. Availability of audited cost data as regards contracts containing escalation clauses. Facilitation in settlement of bills in the case of cost-plus contracts entered into by the Government. Pinpointing areas of inefficiency and mismanagement, if any for the benefit of shareholders, consumers, etc., such that necessary corrective action could be taken in time.

Scope of Cost Audit

Section 227(2) of the Companies Act, 1956, requires the auditor of a company to state whether the accounts in his opinion give a true and fair view of the state of the companys affairs in the case of the balance sheet and of the profit or loss for its financial year in the case of the profit and loss account. Therefore, statutory financial audit of a company conducted by the Chartered Accountant is an essential annual feature of all the companies registered under the provisions of Companies Act, 1956. The Board of Directors of every company has a statutory obligation to place its audited annual accounts viz. Profit and Loss Account and Balance Sheet before the shareholders in the Annual General Meeting, duly certified by a Chartered Accountant appointed as an Auditor under the provisions of Section 224 of the Act. However, there is no corresponding statutory provision for compulsory annual audit of cost accounts of a company covered under Section 209(1)(d) of the Companies Act or under relevant Cost Accounting Records Rules One of the pre-requisites of cost audit is the maintenance of cost accounting records by the company. Section 209(1)(d) makes it obligatory for a company pertaining to any class of companies engaged in production, processing, manufacturing or mining to maintain such particulars relating to utilization of material or labour or to other items of cost as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books of accounts. The rules provide that only those companies, which are covered under Section 209(1)(d) of the Companies Act and a specific Cost Audit Order has been issued with reference to a specified product by the Cost Audit Branch of Ministry of Corporate Affairs are required to get their cost accounts audited with respect to that specific product. Moreover, Cost Audit Report is not placed before the shareholders during the Annual General Meeting. The Central Government prescribes the separate cost accounting records for each class of companies i.e. companies manufacturing a particular class of product or activity like Cement, Steel, Chemicals and Electricity etc. and these are called the Cost Accounting Records Rules for that specific industry or class of companies. When cost accounting records/formats are prescribed, they apply to those companies engaged in the manufacture of a particular product or activity. In the case of companies engaged in production or processing of other products or activities also in addition to production, processing or manufacture of the specified product, the records will have to be maintained only for the manufacture of particular product for which rules are issued and not necessary for other products. A company manufacturing bulk drugs, formulation and watches need not necessarily maintain cost accounting records in respect of watch making activity if no statutory rules are prescribed for watch making activity. The detailed provisions relating to the manner of prescription of cost accounting records, selection of the product, the contents of the rules and the list of products/industries covered by the statutory rules under Section 209(1)(d) of the Companies Act have also been explained in Study Notes 2 and 3. Thus Cost Audit u/s 233B does not embrace a particular activity of the company unless a separate cost accounting record rule is already notified for that particular activity under Section 209(1)(d) detailing the nature of cost accounting records to be maintained. The legal provisions relating to statutory cost audit are applicable only to companies registered under the provisions of Companies Act, 1956. Therefore, cost audit is not applicable to other enterprises like partnership, cooperative societies, etc. The Cost Audit is conducted by a Cost Accountant in practice within the meaning of the Cost and Works Accountants Act, 1959. The cost auditor is appointed by the Board of Directors of the company with the previous approval of the Central Government. The report of cost auditor is to rendered to the Central Government with a copy to the Company
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Planning and Structuring of Cost Audit

The Cost Auditor should always plan to conduct an effective cost audit in an efficient and timely manner. This is very necessary to attain objectives of the cost audit. Audit plan for new client will be generally more detailed than in case of a repeat audit. In case of new audit, the cost auditor has to collect all information about the company like nature of business, organization structure, key personnel, accounting system etc. Similarly, he has to also collect information about other peers in the industry, nature of problems etc. The details required shall be much less in case of a repeat audit. The proper planning helps in: (a) appropriate attention to all the areas for comprehensive audit; (b) identification of key areas needing more attention; (c) timely completion of work; (d) optimum utilization of assistants; (e) no overlapping and proper co-ordination between the works done by different assistants, other auditors and experts

Planning of cost audit involves:

(a) Familiarization about the company and applicable cost accounting record rules; (b) Collection of all relevant information; (c) Evaluation of internal control procedures and the system; (d) Preparation of appropriate cost audit programme; and (e) Audit of working papers and cost sheets

Familiarization about the Company and Applicable Record Rules

It is very necessary for the cost auditor to familiarize himself with the requirements of 27 Cost Accounting Records Rules for the class of the companies to which the company under audit belongs. Similarly, the disclosure requirements as contemplated under the Cost Audit Report Rules 2001 should also be seen before actually designing the cost audit programme. This is necessary to ensure that the audit programme includes the examination of all the relevant records required to be maintained. In addition to these, the cost auditor should also familiarize himself with the company especially with respect to its organization, organization structure, product range, market share, major inputs, profitability, financial status, marketing set-up, method of inventory valuation and detailed cost accounting system etc.

Collection of All Relevant Information

(a) The following records, explanations and information may also need to be collected before finalization of audit programme and actual commencement of audit: (a) A brief history of the company and its business activities; (b) Memorandum of Association and Articles of Association; (c) Annual reports and accounts for the last three to five years; (d) A list including addresses of all factories, branch offices and depots with the names of managers-in-charge; (e) Organization chart with details of key personnel; (f) Collaboration agreements, if any, including agreements for payment of royalty;
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(g) Details of manufacturing capacity installed, licensed and utilization installed capacity for the last three years; (h) A detailed note indicating the system and procedure followed in (i) Cost department (ii) Financial accounting department (iii) Purchase, raw materials/packing materials stores, etc. (iv) Time office (v) Production department (vi) Sales department (vii) Management Information System (viii) Personnel Department (ix) Internal audit department (i) Copies of budget manual; (j) Flow charts and description of manufacturing process; (k) Major raw materials with quantitative details for each unit of fi nished output; (l) Labor incentive schemes, if any; (m) Details of important contracts/agreements regarding purchases, sales and services; (n) Details of budgetary control and standard costing procedures with treatment for variances; (o) Copies of industrial licenses if any, issued from time to time; (p) Periodical reports submitted to Excise and other Govt. authorities; (q) Details of price control orders/distribution control orders, if any by the Regulatory body; (r) A broad idea of the cost structure of the industry or other benchmarks in the industry; (s) Special features of the industry including economic environment in respect of the industry such as capacity, production, demand, prices, markets, international scenario; (t) Systems and procedures of the organization and accepted cost accounting principles; (u) The different types of government levies such as excise duty, sales tax, cess, royalty and freight equalization etc; and (v) Follow-up based on earlier cost audit reports if any.

Evaluation of Internal Control Procedures and System

The evaluation of internal control procedures and systems provides a reasonable assurance to the cost auditor. This evaluation helps in identifying the strong points as well as the weak points of the internal control system. This will facilitate setting up of materiality levels and designing of audit programme accordingly. The cost auditor may confine his checks and audit procedures to a representative sample, if these internal control procedures are effective. This will help in reducing the avoidable verification of each and every transaction, which will be not only very time consuming but costly as well.

Preparation of Cost Audit Programme

A cost audit programme is the cost auditors plan of action indicating the tests and procedures to be followed to implement the cost audit plan. The programme should be comprehensive and detailed to serve as a manual to the assistants and as a means to effi ciently and effectively execute the audit of each of the element of cost of sales prescribed in the cost accounting records rules. The cost audit programme should then be discussed with the management to ensure that the programme does not clash with other audits as far as possible. This will also reveal the preparedness of the company for cost audit and any arrears in the
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compilation of cost accounting records could be taken care of well in advance before the actual commencement of cost audit. The planning the cost audit would inter-alia include : (a) Deciding on the audit team of persons having adequate training, experience and competence in cost auditing (b) Briefing the personnel on the requirements, coverage and documentation of audit evidence (c) Deciding on areas of cost audit, quantum to be covered, types of checks and techniques to be used, methodology of collection of facts and on recording the progress of cost audit (d) Laying down time targets for completion of different segments of cost audit. A cost audit programme is usually subdivided in the following stages : (a) Review of cost accounting records (b) Verification of cost statements, preformed and annexure (c) Preparation of cost audit report. The cost auditor prepares the cost audit report under the Cost Audit Report Rules, 2001 after reviewing the cost accounting records and detailed verification of the cost preformed, annexure, cost statements and other financial data submitted by the company to the cost auditor

Working Papers
The Audit working papers contain the basic records including audit programme, nature of queries raised in course of audit, important information about the business of the company and audit findings. Such audit working papers help to locate audit fi ndings. The working papers are the important aid in planning and performance of the cost audit. It facilitates the supervision and review of the audit work. It also provides supporting evidence of the audit work performed. Audit of working papers usually consist of: (a) evidence obtained during the audit exercise; (b) details of methods and procedures followed during such exercise; and (c) conclusions derived by the cost auditor as regards objectives of the cost audit. The working papers should record the cost audit plan, the timing, nature and extent of the audit procedures performed and the conclusions derived from the evidence obtained. The working papers serve as an important proof regarding the way evidence was found, analyzed and verifiable conclusion drawn. Whenever any question is raised or a clarification is desired by the Central Government regarding any point, the cost auditor can reply properly if the audit working papers are properly kept. Such working papers will help the cost auditor in cost audit of that company during subsequent years also. The working papers should be crossindexed in such a manner that required information could be obtained with minimum delay. The working papers may be arranged properly according to Para numbers of the Annexure to the Cost Audit Report Rules. The audit working paper may be kept in two files a permanent fi le for all the years and a variable file for each year of audit. Thus copies of
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Memorandum of Association, Articles of Association, collaboration agreement, process flow chart, cost manual etc. may belong to the permanent file. It is advisable that detailed comments on verification of supporting statement are kept attached to that statement. This would enable the cost auditor to know at any time how a figure was arrived at, what examination he made to satisfy himself, what queries he raised, what replies were received and what comments he finally decided to put in his report

Issue of Cost Audit Order

Issue of Cost Audit Order is the first step in Cost Audit of any company. The Central Government issues a specific order under Section 233(B)(1) of the Companies Act, 1956 on a particular company directing it to get its cost records audited by a practicing Cost Accountant indicating the product for which the order is issued and the period for which it is ordered. Therefore, the starting point for the cost audit exercise is the receipt of cost audit order by the company, specifying the year and the product for which such cost audit is to be conducted. However, the Cost Audit Branch has now been issuing Cost Audit Orders on regular basis to all the companies covered (i.e. every financial year thereafter continuously until further orders.) This amounts to saying that once an order is issued, the cost audit is required to be done every year unless it is specifically withdrawn. It may be clarified here that since the cost audit order issued by the Cost Audit Branch specifies the product, the Company need not have a cost audit for the product not specified in that order. Thus, if the company producing Sugar, Cement and Steel receives an order relating to Sugar for the year ending 31st March, 2009, then it need not get the cost records for products Cement and Steel audited under Sec. 233B for the year ending 31st March, 2009. Similarly for subsequent years also, it needs to get its cost records for Sugar only cost audited unless it gets a specific order on other products also.

Number of Copies of Cost Audit Report

The Cost Audit Report is electronically filed with the Central Government and is physically submitted as was done previously. However, Cost Auditor may sign at least five physical reports also as per following usage :e-filing for Cost Audit Branch One copy to the cost auditor himself One copy for the company One copy for the Central Excise One copy for Income Tax authority (One copy extra for future cost audit) In view of e-filing, no hard copy is required to be submitted to the Cost Audit Branch

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Cost Auditor
Qualification of Cost Auditor Section 233(B) of the Companies Act, 1956 provides that the Central Government may, if it considers necessary, direct that the audit of cost accounts kept by a company for a specified product or activity under Section 209(1)(d) shall be conducted by an auditor who shall be a cost accountant within the meaning of the Cost and Works Accountants Act, 1959. In other words, the Sec. 233B(1), in so far as it relates to qualifications of cost auditor provides that a person holding certificate of practice from the Institute of Cost and Works Accountants of India only can be appointed as a cost auditor. The cost auditor may be an individual cost accountant or a firm of cost accountants with at least two partners. A firm of cost accountants can be constituted with the previous approval of the Central Government/Institute as required under the regulation 113 of the Cost and Works Accountants Act, 1959 as amended from time to time and in which all the partners are cost accountants holding certificate of practice issued by the Institute of Cost and Works Accountants of India. Section 224 (1-B) of the Companies Act, 1956 further provides that a person can be appointed as a cost auditor only if he is not in full time employment elsewhere. A proviso to Section 233B(1) lays down that if the Central Government is of opinion that sufficient number of cost accountants within the meaning of the Cost and Works Accountants Act, 1959 are not available for conducting the audit of the cost accounts of companies generally, the Government may, by notification in the Official Gazette, direct that, for such period as may be specified in the said notification, such Chartered Accountant within the meaning of the Chartered Accountants Act, 1949, as possesses the prescribed qualifications, may also conduct the audit of the cost accounts of companies. It may be clarified here that the Central Government has not so far issued any notification under the above proviso. There are several members of the Institute of Cost and Works Accountants of India (ICWAI), who have qualified the examination of both the Institutes namely ICWAI and the Institute of Chartered Accountants of India and thus are eligible for membership as well as certificate of practice from both the Institutes. However, none of the members can hold certificate of practice in more than one Institute under the provisions of both the Institutes. Therefore, practically there is no possibility of any financial auditor to practice as cost auditor or vice versa .However, it is only in the background of the aforesaid proviso that Section 233B(5)(b) provides that a person appointed under Section 224 as an auditor of the company (financial auditor) shall not be appointed or re-appointed for conducting the audit of the cost accounts of a company (cost auditor of the same company).

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Duties of the Cost Auditor

The duties of the cost auditor are also similar to those of the (financial) auditor of the company has under sub-Section (1) of Section 227 (Section 223B(4)).The duties of the cost auditor inter-alia include: (a) To ensure that the proper books of accounts as required by Cost Accounting Records Rules have been kept by the company so far as it appears from the examination of those books and proper returns for the purpose of his audit have been received from branches not visited by him; (b) To ensure that the Cost Audit Report and the detailed cost statements are in the form prescribed by the Cost Audit Report Rules by following sound professional practices i.e. the report should be based on verified data and observations may be framed after the company has been afforded an opportunity to comment on them; (c) The underline assumptions and basis for allocation and absorption of indirect expenses are reasonable and are as per the established accounting principles; (d) If the auditor is not satisfied in any of the aforesaid matters, he may give a qualified report along with the reasons for the same; (e) Sending the Report to the Cost Audit Branch within 180 days from the end of the financial year with one copy to the company; (f) Sending his replies to any clarification, that may be sought by the Cost Audit Branch on his report. Sending such replies within 30 days from the date of receipt of communication calling for such clarification.

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Ceiling on Number of Cost Audits

The sub-Section (2) of Section 233B inter-alia provides that before the appointment of any auditor is made by the Board, a written certificate shall be obtained by the Board from the auditor proposed to be so appointed to the effect that the appointment, if made, will be in accordance with the provisions of sub-Section (1B) of Section 224. Section 224(1)(B) provides that no company or its Board of directors shall appoint or reappoint any person who is in full time employment elsewhere or firm as its auditor if such person or firm is, at the date of such appointment or re-appointment, holding appointment as auditor of the specified number of companies or more than the specified number of companies. The proviso to Section 224(1B) further provides that the provisions of this subSection shall not apply, on and after the commencement of the Companies (Amendment) Act, 2000, to a private company Explanation I to the Section 224 provides that for the purposes of sub-Sections (1B) and (1C), specified numbers means : (a) in case of a person or firm holding appointment as auditor of a number of companies each of which has a paid-up share capital of less than rupees twenty-five lakhs, twenty such companies; (b) in any other case, twenty companies, out of which not more than ten shall be companies each of which has a paid-up share capital of rupees twenty-five lakhs or more. Explanation II to the Section 224 provides that in computing the specified number, the number of companies in respect of which or any part of which any person or firm has been appointed as an auditor, whether singly or in combination with any other person or firm shall be taken into account. In view of aforesaid provisions, the ceilings on the number of cost audits can be clarified as under: (a) In the case of firm of cost accountants: Twenty companies for each such partner of the firm who is not in full time employment. However, not more than ten such companies should have a paid up share capital of Rs. 25 lakhs or more; (b) In the case of an individual cost accountant, who is not in full time employment: Twenty companies, out of which not more than ten should have a paid-up share capital of Rs. 25 lakhs or more. It can be seen from above that Section 224(1B) and Explanation I to Section 224 refers to the ceilings for the number of companies and not to the number of cost audit orders or products. Therefore, if more than one products of a particular company are covered under cost audit for the same year, a cost auditor should count their number as one company only, since the audits for all the products relate to the same company despite the fact that separate cost audit orders have been issued with respect to each such product. Similarly, if that company appoints different cost auditors for different products, each auditor shall count the company as one company for counting their individual quota for number of audits. It should be noted that the Companies (Amendment) Act, 2000 has inserted a provision (Explanation II) to Section 224, whereby the provisions of sub-section 1-B shall not apply to a Private Company. It means that for computing the limit on number of companies for audit, Private Companies should not be counted.
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Appendix I - A Specimen of Cost Audit Order REGISTERED A/D 52/645/CAB\-2009 Ministry of Corporate Affairs Cost Audit Branch Dated ............. ORDER Whereas in the opinion of the Central Government, it is necessary to conduct an audit of the cost accounts M/s...........................LTD. (hereinafter referred to as the Company) required under clause (d) of sub-Section (1) of Section 209 of the Companies Act, 1956 (1 of 1956) so as to include in its books of accounts the particulars referred to therein, now in exercise of the powers conferred by sub-Section (1) of Section 233 B of the Companies Act,1956 (1 of 1956), the (Central Government hereby directs that an audit of the cost accounts maintained by the Company in respect of ............................(Name of the Product) for the year ending .......... and also for every financial year thereafter continuously be conducted by an auditor with the qualifications prescribed in Section 233B(1) aforesaid, until further orders. 2. The application in the prescribed Form No. 23-C proposing for appointment of Cost Auditor for ONE TERM should be e-filed to this Department Within forty five days of the date of this order and thereafter within forty five days of the commencement of every financial year. It may be noted that the Cost Auditor proposed shall be an individual or a partnership firm of Cost Accountants, provided the firm is constituted with the previous approval of the Council of the Institute of Cost and Works Accountants of India under Regulation 113 of the Cost and Works Accountants Regulations,1959. The application fee of Rs. 500, Rs. 1000 or Rs. 2000 if the nominal share capital of your company is less than Rs. 25 Lakh, Rs. 25 Lakh or more but less than Rs. 5 crores and Rs. 5 crores or more respectively should be remitted in the manner mentioned hereunder (a) Remittances may be made by means of challan which must be on authorised branches of PUNJAB NATIONAL BANK only and not on any other bank. The head of account to be indicated is 104 -other General Economic Service, Regulation of Joint Stock Companies Fees realised by the Central Government on application made to it under the Companies Act, 1956 adjustable by the Pay & Accounts Officer, Department of Company Affairs, New Delhi. The original copy of challan shall be sent along with the application (b) Remittance can also be made by means of demand draft drawn in favour of the Pay & Accounts Officer. Department of Company Affairs, New Delhi on any nationalised bank in Delhi (preferably on the Punjab National Bank, Barakhamba Road, New Delhi) and demand draft should be sent to this Department along with the prescribed documents. 3. The audit shall be conducted in such a manner as will enable the Auditor to prepare the report in accordance with the Cost Audit (Report) Rules, 2001 as amended from time to time. The report of the Cost Auditor shall be forwarded to the Central Government in the prescribed format within the time stipulated under the said Rules. 4. The receipt of this order may please be acknowledged. ( ) Director ( Cost) (Phone No. 011)
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