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Cost Audit

The Institute of Cost and Work Accountants of India or the ICWAI has defined a set process to verify the allocated cost of any service or product. This cost is inclusive of manufacturing cot, labour cost and cost of any other entity incorporated while producing the product or rendering the service. It is a definitive method to verify accounts, maintain records to the cost accounting standards of the country. As per definition from the ICWAI cost audit is “system of audit by the government of India for the review, examination, and appraisal of the cost accounting records and attendant information required to be maintained by the specified industries”.

Therefore it has been stated that cost audit is the process to verify the fairness of the cost accounts and the compliance with the cost accounting plan. It depicts the real and correct picture of the cost of production, processing, manufacturing and marketing of any given service or product.

The main objectives of Cost audit can be stated as

  1. Assuring compliance with cost accounting plan
  2. Institute the fairness of cost records as well as accounts
  • Recognition of any frauds or mistakes
  1. Keeping a check on any sorts of wastage like manpower or material
  2. To determine the presence of a fair cost statement with reference to cost information
  3. To safeguard the utilization of resources which may either be financial, human or physical
  • Defining and rectifying any absurd losses

To obtain the prescribed objectives the cost audit may be of the following categories

  1. Cost audit to assist management
  2. Cost audit on behalf of the government
  3. Cost audit on the statutory cost
  4. Cost audit under statute
  5. Cost audit on behalf of tribunals
  6. Cost audit by trade associations
  7. Cost audit on behalf of a customer
  8. Cost audit due to inefficient management
  9. Cost audit for tax assessment
  10. Cost audit due to variation in cost within the industry

COST AUDIT TO ASSIST MANAGEMENT

This audit is solely objectified by providing apt information to the management for the ease of critical decision making. The report defines many ideas and plans to increase efficiency, improve accounting plans and reduce production cost. This is responsible for maximising the profits for any company by reducing loses at ends which are ignored under general functioning.

COST AUDIT ON BEHALF OF THE GOVERNMENT

A cost auditor might be appointed and consulted by the government if they feel the need to carry an audit under the requirements of the Companies Act 2013 or if the government is planning to approach for financial help then it requires to analyse the cost it would require to ask for a certain need or even in case where the government needs to file a tender and wants to get the amount of cost fixed.

COST AUDIT ON THE STATUTORY COST

Any company would require a cost audit when it falls in a situation where the Companies Act and Rules has made it mandatory to carry out the Audit.

COST AUDIT UNDER STATUTE

The Companies Act in India ha made it compulsory for certain companies to comply with cost audit. Therefore these companies do so.

COST AUDIT ON BEHALF OF TRIBUNALS

In situations where the labour Tribunals require the exact information of profit made to settle disputes related to increase in wages, granting bonuses or even sharing profits the Income Tax department directs companies to undergo audit to get the accurate values required to resolve issues.

Companies Exempted From Cost Audits

The government of India has exempted certain companies from conducting cost audits these are

  1. The companies operating in SEZ or Special Economic Zone
  2. The companies who work in generation of electricity via Captive Generating Plant
  3. Company’s export revenue is more than 75% of its total revenue. The export revenue should be in foreign exchange only.

Companies who comply with Cost Audit

As per rules there are 2 set of companies who need to comply with the Cost Audit

CATEGORY A CATEGORY B
REGULATED SECTOR NON REGULATED SECTOR
·         Petroleum industry

·         Drugs and pharmaceutical industry

·         Fertiliser industry

·         Sugar industry

·         Industrial alcohol sector

·         Telecommunication Industry

·

·         Tyres and tubes

·         Milk powder

·         Minerals and ores

·         Arms and ammunitions

·         Cement

·         Tea and coffee

·         Turbo jets and turbo propellers

·         Port services

·         Electrical or electronic machinery

·         Glass

·         Railway or tram way locomotives

·         **

 

The Cost Audit can be conducted by the companies who have been mandated to do so by a cost auditor certain companies need to appoint cost auditor mandatorily which are

                                                                TYPE A (for all regulated companies)

  1. Having an overall annual turnover of a minimum of Rs 50 Cr in the immediately previous Financial Year
  2. Having aggregate turnover, of individual product or service, of a minimum value of Rs 25cr

                 TYPE B (for all unregulated companies)

  1. Having over all annual turnover of a minimum of Rs 100 cr in the immediately previous Financial Year
  2. Having aggregate turnover, of individual product or service, of a minimum value of Rs 35cr

Penalties for noncompliance with cost audit

If a company does not comply to cost audit if it falls under the category to get the audit report submitted then the company and all the officers who are at default shall face penalties as guided by the authorities which are

  1. The company shall face penalty which may range from Rs 25000 to Rs 5 lakh
  2. The concerned officer shall face penalty which may range from Rs 10000 to Rs 1 lakh and in severe cases imprisonment up to 1 year or even both.
  3. If the default is at the end of the cost auditor he shall be penalised with a penalty which may range between Rs 50000 up to Rs 25 lakh or 8 times the fee charged which ever has a lesser value. In sever conditions he/she may also face imprisonment up to 1 year.

 

Frequently Asked Questions (FAQ)

 What does the term Cost Audit mean?

Cost audit means the procedure for the verification of the cost allocated to any product or service which is inclusive of all the cost incurred while proving the service or the product like manufacturing, processing, marketing, labour cost etc.

Who is a cost auditor?

A cost accountant as per section 2 (28) of the Companies Act holding a valid certificate of practice and is capable to perform cost audits is a cost auditor.

What are the main objectives of cost audit in India?

The main objectives of cost audit in India are

  1. Assuring compliance with cost accounting plan
  2. Institute the fairness of cost records as well as accounts
  • Recognition of any frauds or mistakes
  1. Keeping a check on any sorts of wastage like manpower or material
  2. To determine the presence of a fair cost statement with reference to cost information
  3. To safeguard the utilization of resources which may either be financial, human or physical
  • Defining and rectifying any absurd losses

Who is the regulatory authority of cost auditing?

The ICWAI or the Institute of Cost and Work Accountants of India takes responsibility of directing cost audits in the country.

What are the types of cost audits?

The types of cost audits in India are

  1. Cost audit to assist management
  2. Cost audit on behalf of the Government
  3. Cost Audit on Behalf of tribunals
  4. Cost audit under statute
  5. Statutory cost audit

When is cost audit on behalf of the government performed?

A cost auditor might be appointed and consulted by the government if they feel the need to carry an audit under the requirements of the Companies Act 2013 or if the government is planning to approach for financial help then it requires to analyse the cost it would require to ask for a certain need or even in case where the government needs to file a tender and wants to get the amount of cost fixed.

When does a company need to appoint a cost auditor?

As per the guidelines in the companies act coat auditor is to be appointed by

  1. A regulated company
  2. has an overall annual turnover of a minimum of Rs 50 Cr in the immediately previous Financial Year
  3. has an aggregate turnover, of individual product or service, of a minimum value of Rs 25cr
  4. A unregulated company
  5. has an overall annual turnover of a minimum of Rs 50 Cr in the immediately previous Financial Year
  6. has an aggregate turnover, of individual product or service, of a minimum value of Rs 35cr

When does Labour Tribunal direct for a cost audit?

In situations where the labour Tribunals require the exact information of profit made to settle disputes related to increase in wages, granting bonuses or even sharing profits the Income Tax department directs companies to undergo audit to get the accurate values required to resolve issues.

What are the steps involved in Cost Auditing?

Cost auditing in performed in three simple steps by a certified cost auditor

  1. review
  2. verify
  3. report

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