Cost Audit for Companies in India: Frequently Asked Questions

Posted by Written by Nishtha Yadav Reading Time: 3 minutes
  • Businesses in the manufacturing, mining, and service sectors in India are mandated to carry out cost audits.
  • A cost audit provides the government with a clear picture of the company’s production costs and profit margins.
  • Through the cost audit companies can check the accuracy of their cost accounts, helping to preventing errors and limit fraud exposure.

Companies in India that are operating in certain industries, such as manufacturing, mining, and services are required to undergo a cost audit.

A cost audit is the verification of the cost account, and functions as a check on the company’s adherence to cost accounting standards. Cost accounting is used to understand the company’s total cost of production by assessing its variable and fixed costs.

Cost audits are regulated under the Companies Act, 2013, and the Companies (Cost Records and Audit) Rules, 2014.

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Under the Companies Act, 2013, the government can make rules regarding the maintenance of cost records by companies engaged in manufacturing goods or providing services in specified industries, and for getting such records audited. The government can appoint a cost auditor for a company – at a time of its choosing.

According to the Companies (Cost Records and Audit) Rules, 2014, cost records are defined as “books of account relating to the utilization of materials, labor, and other items of cost as applicable to the production of the goods or provision of services.”

What is the relevance of a cost audit?

Through a cost audit, the company can take a closer look at their cost of production and find effective ways to reduce their cost on labor, 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. Malpractice and unethical practices can be easily detected through a cost audit.

Meanwhile, findings from the cost audit enables the management to take timely decisions to help the company financially.

Who should maintain cost records?

Maintenance of cost records apply to a company in the following cases:

  • If the company is engaged in the production of goods, or providing services, as prescribed under the law; or
  • If the company’s overall turnover from all its products and/or services is INR 350 million (US$4.9 million) or more during the immediately preceding financial year.

Who is mandated to get their cost records audited?

Companies in India should get cost records audited in the following cases:

  • The overall annual turnover of the company from all its products and services during the immediately preceding financial year is INR 500 million or INR 1 billion (US$7 million or US $14 million) or more depending on whether the company’s sector is regulated or unregulated; and
  • The aggregate turnover of the products and services for which cost records are required to be maintained is INR 250 million or INR 350 million (US$3.5 million or US$4.9 million) depending on whether the company’s sector is regulated or unregulated.

Under the Companies Act, 2013, company industrial activity has been classified under two categories – regulated and unregulated sectors.

Regulated sectors include industries like petroleum products, drugs and pharmaceuticals, fertilizers, and sugar to name a few. While, the unregulated sectors cover industries, such as arms and ammunitions, cement, tea and coffee, milk products, and turbo jets and propellers, among others.

Are there any exemptions?

The cost audit requirement does not apply to the companies that meet the following criteria:

  • Companies covered in Rule 3 of the Companies (Cost Records and Audit) Rules, 2014;
  • Companies that earn revenue from exports in foreign exchange that exceeds 75 percent of its total revenue; or
  • Companies that operate in a special economic zone (SEZ).

Is there a penalty for non-compliance?

Cost audits must comply with the auditing standards set by the Institute of Cost and Works Accountant of India, and the audit must be conducted by a practicing cost accountant.

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The cost auditor must submit the audit report to the board of directors of the company within 180 days from the financial year closure. Then, this audit report must be filed with the central government within 30 days of receiving the report.

In case a company is found not in compliance with the cost audit provisions under the under the Companies Act, 2013 and the Companies (Cost Records and Audit) Rules, 2014 – the following penalty can be levied:

  • Fines that range from INR 25,000 (US$351) to INR 500,000 (US$7017), depending on the level of non-compliance;
  • For every office in default, imprisonment of up to one year, or fine of INR 10,000 (US$140) to INR 100,000 (US$1403), or both.

India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to india@dezshira.com for business support in India.