Cost Audit under the Companies Act, 2013

Cost Audit under the Companies Act, 2013

For companies engaged in manufacturing and specified service sectors, the Companies Act, 2013 requires more than just financial audit — it requires a cost audit, a specialised examination of cost records that helps regulators and management assess cost efficiency, pricing, and resource utilisation. This is a niche but important compliance area, particularly for companies in regulated industries like telecom, electricity, and pharmaceuticals.

Companies engaged in the production of goods or providing services specified in Table A (regulated sectors such as telecommunications, petroleum, electricity, drugs and pharmaceuticals) and Table B (non-regulated sectors such as steel, cement, paper) of the Companies (Cost Records and Audit) Rules, 2014 must maintain cost records if their overall annual turnover from all products/services is ₹35 crore or more in the preceding financial year.

•      Regulated sectors (Table A): cost audit is required if overall annual turnover is ₹50 crore or more and the aggregate turnover of individual product(s)/service(s) covered under the rules is ₹25 crore or more.

•      Non-regulated sectors (Table B): cost audit is required if overall annual turnover is ₹100 crore or more and the aggregate turnover of individual product(s)/service(s) covered under the rules is ₹35 crore or more.

•      Certain exemptions apply — for example, companies whose revenue from exports in foreign exchange exceeds 75% of total revenue, or companies operating in a Special Economic Zone, are generally excluded.

The cost auditor, who must be a Cost Accountant in practice (or a firm of cost accountants), is appointed by the Board of Directors within 180 days of the commencement of the financial year, and the appointment is intimated to the Central Government in Form CRA-2 within 30 days of the Board meeting (or 180 days of the start of the financial year, whichever is earlier).

The cost auditor submits the cost audit report to the Board in Form CRA-3. The company must then file this report with the Central Government in Form CRA-4 within 30 days of receiving a copy of the report.

•      Assuming cost audit doesn't apply because overall turnover is below the sector threshold, without checking product-wise turnover separately.

•      Missing the CRA-2 appointment deadline of 180 days from the start of the financial year.

•      Failing to maintain cost records throughout the year, leading to a rushed and error-prone audit at year-end.

•      Overlooking export-revenue or SEZ-based exemptions that could have reduced compliance burden.

Q1. Is cost audit applicable to service companies?

Yes, several services are specifically listed in Table A and Table B of the Cost Records and Audit Rules — for example, telecommunication services and port services — and companies providing them are covered if turnover thresholds are met.

Q2. Can the statutory auditor also be appointed as the cost auditor?

No, the statutory auditor of a company cannot be appointed as its cost auditor, to preserve independence between the two audit functions.

Q3. Is cost audit mandatory for every manufacturing company?

No, only manufacturing companies engaged in products specifically listed under Table A or Table B, and crossing the prescribed turnover thresholds, are covered; general manufacturing outside these lists is not subject to cost audit.

Q4. What is Form CRA-1?

Form CRA-1 prescribes the particulars relating to items of cost that companies covered under the Rules must include while maintaining their cost records.

Q5. Is cost audit applicable to a newly incorporated manufacturing company in its first year?

Applicability depends on meeting the turnover thresholds for the relevant financial year; a newly incorporated company would need to assess this once it has a full financial year's turnover data, generally from its second year of assessment onward.

Q6. Can the same cost accountant firm be reappointed indefinitely?

Unlike the statutory auditor rotation regime under Section 139(2), there is no mandatory rotation requirement specifically for cost auditors under the Cost Records and Audit Rules.

Q7. What is the consequence of not maintaining cost records when required?

Failure to maintain the prescribed cost records is itself a contravention attracting penalty, independent of whether a cost audit was separately triggered.

Cost audit is a specialised, sector-specific compliance that many general businesses never encounter, but for companies in regulated or high-turnover manufacturing sectors, it is a significant annual obligation. Early identification of applicability — based on both overall and product-wise turnover — is essential to avoid missing the CRA-2 appointment deadline.