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Government needs authentic and reliable data of cost for various purposes like price fixation of controlled commodities. The information is also useful in various decisions like fixation of duty drawback, export incentives; amount of excise duty the product can bear, deciding whether special incentives are required to a particular industry etc.


Realizing the importance of proper [1] cost record and control, section 148(1) provides that Central Government can direct that particulars relating to the utilization of material or labour or to other item of cost as may be prescribed shall also be included in the books of account kept by that class of Companies.


Who can be appointing as cost auditor:

  • A cost Accountant in practice or a firm of cost accountants can be appointed as a cost auditor.
  • A cost accountant holding certificate of practiced on part time basis is not entitled to conduct cost audit. Thus, only a cost accountant in whole-time practice can conduct cost audit.

Who can’t appoint as cost auditor:

Process for appointment of Cost Auditor:

  • Consent of Auditor: Before appointment is made, the written consent of the cost auditor to such appointment, and a certificate from him or it, as provided in sub-rule (1A), shall be obtained
  • If Company has Audit Committee: Appointment and remuneration will be recommended by audit committee and approved by Board.
  • If Company doesn’t have Audit Committee: If there is not audit committee, appointment and remuneration fixation will be done by Board. Later, this remuneration shall be ratified by Shareholders.

Content of the Certificate of cost Auditor:

  • The individual or the firm, as the case may be, is eligible for appointment and is not disqualified for appointment under the Act, the Cost and Works Accountants Act, 1959 (23 of 1959) and the rules or regulations made thereunder
  • The individual or the firm, as the case may be, satisfies the criteria provided in section 141 of the Act, so far as may be applicable
  • The proposed appointment is within the limits laid down by or under the authority of the Act; and
  • The list of proceedings against the cost auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct

Information for appointment Cost Auditor:

a. Information to Cost Auditor: Every Company which requires appointment of Cost Auditor shall inform the Cost auditor of his appointment within 30 days of Board Meeting in which resolution for appointment has passed.

b. Information to ROC:  Company will file form CRA-2 with ROC:

  • Within 30 days of passing of Resolution in Board Meeting, OR
  • Within 180 days of the commencement of financial year.

Whichever is earlier.

Removal of Cost Auditor:

The cost auditor appointed may be removed from his office before the expiry of his term, through a board resolution after giving a reasonable opportunity of being heard to the Cost Auditor and recording the reasons for such removal in writing

Appointment of Cost Auditor in case of Casual Vacancy:

  • Any casual vacancy in the office of a cost auditor whether due to resignation, death or removal, shall be filed by the Board of Directors within 30 days of such Vacancy.
  • Company will file form CRA-2 with ROC within said 30 days.

Period by which appointment to be made-Rule 6(1): The concerned companies shall appoint the Cost Auditor within 180 days of the commencement of every financial year.

Limit of number of Cost Auditor: Limit of number of audit per person, as are applicable to Statutory Auditors are applicable to Cost Auditors.

Qualifications, Rights, Duties and obligations of Cost Auditor: The qualification, disqualification, rights, duties and obligations of Cost Auditor/firm of Cost Auditor are same as applicable to Statutory Auditors.

Note: The auditor conducting the cost audit shall comply with the cost auditing standards


Applicability of Cost Audit: Out of the companies required to maintain cost records as per Rule 3, the following companies shall have its records audited annually:

Item A   

i. Every company having annual [2]turnover from all its products and services in the immediately preceding financial year of Rs. 50 crore or more and
ii. The aggregate turnover of the individual product or products or service or services of Rs. 25 crore or more.

Item B  

i. Every company having annual turnover from all its products and services in the immediately preceding financial year of Rs. 100 crore or more and
ii. The aggregate turnover of the individual product or products or service or services of Rs. 35 crore or more.

Inapplicability of Cost Audit-Rule 4(3)

The requirement of Cost Audit shall not apply to a company covered by Rule 3 in the following circumstances:-

  • Whole revenue from exports, in foreign exchange, exceeds 75% of its total revenue; or
  • Which is operating from a special economic zone.
  • [3]which is engaged in generation of electricity for captive consumption through Captive Generating Plant. For this purpose, the term "Captive Generating Plant" shall have the same meaning as assigned in rule 3 of the Electricity Rules, 2005";

Nature of cost records to be kept-Rule 5

  • Every company, which comes under the Rules, including all units and branches, shall, in each financial year from 1-4-2014, maintain cost records in Form [4]CRA-1.
  • In the case of company covered in serial number 12 (coffee and tea) and serial numbers 24 to 32 of item B of Rule 3, the requirement of Rule 5 shall apply in respect of each of its financial year on or after 1-4-2015.
  •  The above cost records shall be maintained on regular basis so as to help calculation of per unit cost of production or cost of operations, cost of sales and margin for each product and activities for every financial year on monthly, quarterly, half-yearly or annual basis.
  • The cost records shall be maintained in such manner as to enable the company to have control over various operations and costs to achieve optimum economies in utilization.

Requirements to be complied with by a company to which Cost Audit is applicable-Rule 6

Pursuant to the rules 3 and 4, it is clear which are the companies to whom Cost Audit shall be applicable in every financial year and therefore there is no need for the Central Government to issue order directing Cost Audit.

Cost Audit Report-Rule 6(4) as amended on 31-12-2014

The Cost Auditor shall submit the Cost Audit Report along with his or its reservations or qualifications, if any, in Form CRA-3 to the Board of Directors of the company within a period of 180 days from the closure of the financial year.

The Board of Directors shall consider and examine such report, particularly any reservation or qualification contained therein.

The cost statements, including other statements to be annexed to the cost audit report, shall be approved by the Board of Directors before they are signed on behalf of the Board by any of the director authorised by the Board, for submission to the cost auditor to report thereon";

Copy of the Cost Audit Report to be furnished to the Central Government:      

Every Company shall forward a copy of Audit Report to the Registrar of Companies within 30 days of receipt of the Audit Report along with the full information and explanation on every qualification or reservation, if any, in Form CRA-4 with fees specified in Companies (Registration Offices and Fees) Rules, 2014.

Duty of the Cost Auditor to report on commission of offence found during the Audit-Rule 6(7)

In terms of Section 143(12) of the Act, if the Cost Auditor, in the course of his duties as Cost Auditor, has reason to believe that an offence involving fraud has been or is being committed against the Company by its officers or employees, he shall immediately report the manner to the Central Government.

Punishment on contravention of this Section:

To the company:

The company shall be punishable with a fine which shall not be less than Rs. 250,00.00 but which may extend to Rs. 5,00,000.00. Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 1 year or fine which shall not be less than Rs. 10,000.00 but which may extend to Rs. 1,00,000.00 or with both.

To the auditor

He shall be punishable with a fine which shall not be less than Rs. 25000.00 but which may extend to Rs. 5,00,000.00. However if the auditor has contravened such provisions willfully with the intention to deceive the company or its shareholders or creditors or tax authorities , he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than Rs. 1,00,000.00 but which may extend to Rs. 25,00,000.00.

In case the criminal liability of an audit firm, the liability other than fine shall devolve only on the concerned partner who acted in fraudulent manner.


The class of Companies, including Foreign Companies defined in clause (42) of Section 2 of the Act, engaged in the production of the goods or providing services, specified in the Table below, having an overall turnover from all its products and services of Rupees 50 Crore or more during the immediately preceding financial year, shall include cost records for such products or services in their books of account, namely:-

Regulated Sectors

Sl. No.


Central Excise Tariff Act(CETA) Heading (wherever applicable)


Telecommunication services made available to users by means of any transmission or reception of signs, signals, writing, images and sounds or intelligence of any nature and regulated by the Telecom Regulatory Authority of India under the Telecom Regulatory Authority of India Act, 1997 (24 of 1997); including activities that requires authorization or license issued by the Department of Telecommunications, Government of India under Indian Telegraph Act, 1885 (13 of 1885);

Not applicable


Generation, transmission, distribution and supply of electricity regulated by the relevant regulatory body or authority under the Electricity Act, 2003 (36 of 2003);

Generation- 2716; Other Activity-Not Applicable


Petroleum products; including activities regulated by the Petroleum and Natural Gas Regulatory Board under the Petroleum and Natural Gas Regulatory Board Act, 2006 (19 of 2006)

2709 to 2715;

Other Activity-Not Applicable


Drugs and pharmaceuticals

2901 to 2942; 3001 to 3006



3102 to 3105


Sugar and industrial alcohol

1701; 1703; 2207

Non-Regulated Sectors


SI. No.

Industry/ Sector/ Product/ Service

Central Excise Tariff Act Heading (wherever applicable)



Machinery and mechanical appliances used in defence, space and atomic energy sectors excluding any ancillary item or items;

Explanation. - For the purposes of this sub-clause, any company which is engaged in any item or items supplied exclusively for use under this clause, shall be deemed to be covered under these rules

8401; 8801 to 8805; 8901 to 8908



Turbo jets and turbo propellers;




Arms, ammunitions and Explosives;

3601 to 3603; 9301 to 9306.



Propellant powders; prepared explosives (other than propellant powders); safety fuses; detonating fuses; percussion or detonating caps; igniters; electric detonators"

3601 to 3603



Radar apparatus, radio navigational aid apparatus and radio remote control apparatus;




Tanks and other armored fighting vehicles, motorized, whether or not fitted with weapons and parts of such vehicles, that are funded (investment made in the company) to the extent of ninety per cent or more by the Government or Government agencies;




Port services of stevedoring, pilotage, hauling, mooring, re-mooring, hooking, measuring, loading and unloading services rendered by a Port in relation to a vessel or goods regulated by the Tariff Authority for Major Ports;

Not applicable.



Aeronautical services of air traffic management, aircraft operations, ground safety services, ground handling, cargo facilities and supplying fuel rendered by airports and regulated by the Airports Economic Regulatory Authority under the Airports Economic Regulatory Authority of India Act, 2008 (27 of 2008);

Not applicable



Iron and Steel;

7201 to 7229; 7301 to 7326



Roads and other infrastructure projects corresponding to para No. (1) (a) as specified in Schedule VI of the Companies Act, 2013 (18 of 2013);

Not applicable.



Rubber and allied products; including products regulated by the Rubber Board constituted under the Rubber Act, 1947 (XXIV of 1947);

4001 to 4017



Coffee and tea;

0901 to 0902



Railway or tramway locomotives, rolling stock, railway or tramway fixtures and fittings, mechanical (including electro mechanical) traffic signaling equipment's of all kind;

8601 to 8608.




2523; 6811 to 6812



Ores and Mineral products;

2502 to 2522; 2524 to 2526; 2528 to 2530; 2601 to 2617



Mineral fuels (other than Petroleum), mineral oils etc.;

2701 to 2708



Base metals;

7401 to 7403; 7405 to 7413; 7419; 7501 to 7508; 7601 to 7614; 7801 to 7802; 7804; 7806; 7901 to 7905; 7907; 8001; 8003; 8007; 8101 to 8113.



Inorganic chemicals, organic or inorganic compounds of precious metals, rare-earth metals of radioactive elements or isotopes, and organic chemicals;

2801 to 2853; 2901 to 2942; 3801 to 3807; 3402 to 3403; 3809 to 3824.



Jute and Jute Products;




Edible Oil;

1507 to 1518



Construction Industry as per para No. (5) (a) as specified in Schedule VI of the Companies Act, 2013 (18 of 2013);

Not applicable.



Health services, namely functioning as or running hospitals, diagnostic centres, clinical centres or test laboratories;

Not applicable.



Education services, other than such similar services falling under philanthropy or as part of social spend which do not form part of any business;

Not applicable.



Milk powder;








Plastics and polymers;

3901 to 3914; 3916 to 3921; 3925



Tyres and tubes;

4011 to 4013




4801 to 4802.




5004 to 5007; 5106 to 5113; 5205 to 5212; 5303; 5310; 5401 to 5408; 5501 to 5516




7003 to 7008; 7011; 7016



Other machinery and Mechanical Appliances;

8402 to 8487



Electricals or electronic machinery;

8501 to 8507; 8511 to 8512; 8514 to 8515; 8517; 8525 to 8536; 8538 to 8547.



Production, import and supply or trading of following

medical devices, namely:—

(i) Cardiac stents;

(ii) Drug eluting stents;

(iii) Catheters;

(iv) Intra ocular lenses;

(v) Bone cements;

(vi) Heart valves;

(vii) Orthopedic implants;

(viii) Internal prosthetic replacements;

(ix) Scalp vein set;

(x) Deep brain stimulator;

(xi) Ventricular peripheral;

(xii) Spinal implants;

(xiii) Automatic impalpable cardiac defibrillator;

(xiv) Pacemaker (temporary and permanent);

(xv) Patent ductus arteriosus, atrial septal defect and ventricular septal defect closure device;

(xvi) Cardiac re-synchronize therapy;

(xvii) Urethra Spinicture devices;

(xviii) Sling male or female;

(xix) Prostate occlusion device; and

(xx) Urethral stents:

9018 to 9022

[1] As per Rule 2(e) the Companies (Cost Records and Audit) Rules, 2014, “cost records” means ‘books of account relating to utilization of materials, labour and other items of cost as applicable to the production of goods or provision of services as provided in section 148 of the Act and these Rules’.

[2] “Turnover” means gross turnover made by the company from the sale or supply of all products or services during the financial year. It includes any turnover from job work or loan license operations but exclude duties and taxes. Export benefit received should be treated as a part of sales

[3] Added by Companies (cost records and audit) Amendment Rules, 2016.

[4] CRA-1 does not prescribe any format but only provides principles to be followed for different cost elements. The principles are in sync with the cost accounting standards.


Published by

CS Divesh Goyal
(Practicing Compnay Secretary)
Category Audit   Report

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