A cost audit is the verification of cost accounts and the monitoring of a company’s adherence to its cost accounting plan. Cost auditing determines the correctness of cost accounting records to verify that they are in accordance with cost accounting principles, plans, processes, and objectives.
- Verification of cost accounting records, such as the correctness of a company’s cost accounts, cost data, cost reports, cost statements, and costing procedures.
- Examination of these data to assure compliance with cost accounting principles, plans, methods, and objectives.
- Report to the government on the best use of national resources.
Cost Record Maintenance
The Companies (Cost Records and Audit) Rules, 2014 apply to all companies established under the Companies Act that manufacture items or provide services indicated in Tables A and B of Rule 3.
- Sectors/industries are categorised as Regulated or Non-Regulated under Rule 3.
- Six sectors/industries are covered under item A of the regulations and 33 sectors/industries are covered under item B of the rules. Central Excise Tariff Act (CFTA) titles are provided against the individual sectors to provide more clarification. There is no differentiation between firms in item A and B for the purposes of cost record maintenance.
Limits on the number of expense records that can be kept
The Rules provide several threshold limitations for the applicability of cost accounting records maintenance and coverage under cost audit applicability. Cost records are defined as “books of account pertaining to the usage of materials, labour, and other items of cost as relevant to the production of goods or supply of services as stipulated in Section 148 of the Companies Act 2013 and these Rules” in Rule 2(e). Any transaction – statistical, quantitative, or other facts – that has an impact on the cost of a product or activity is significant and must be recorded in cost accounting records.
Companies that are not covered by Cost Audit
This criterion, however, does not apply to international firms with simply a liaison office in India that are involved in the manufacturing, import, supply, or selling of medical equipment specified in entry 33 of item B. Companies categorised as a micro enterprise or a small enterprise, as defined in sub-section (9) of Section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006), are likewise exempt from the rules’ application. Furthermore, because the turnover of the ‘immediately previous financial year’ must be examined, the firm must review the turnover of the preceding financial year every year for the preservation of expense records.
Enterprises whose income from foreign exchange exports exceeds 75% of total sales or companies operating in special economic zones are excluded from the cost audit obligation.
Turnover Criteria for Cost Audit
The criteria for cost audit application differ for enterprises in the regulated and non-regulated sectors:
- Every firm has an annual revenue of Rs. 50 crore or more from all of its goods and services in the immediately preceding fiscal year and an aggregate turnover of Rs. 25 crore or more from the particular product or products or service or services.
- Every firm has an annual revenue of Rs. 100 crore or more from all of its goods and services in the immediately preceding fiscal year and an aggregate turnover of Rs. 35 crore or more from the particular product or products or service or services.