Comprehending Cost Audit Requirements: Applicability and Compliance


In the realm of Corporate Governance and financial transparency, cost audit stands as a critical mechanism for ensuring compliance and efficiency in business operations. In India, the Companies Act and associated regulations mandate certain companies to undergo cost audits, aimed at enhancing accountability, cost-effectiveness, and regulatory adherence. This article provides an in-depth exploration of cost audit requirements in India, elucidating its significance, applicability, and implications for businesses operating within the country’s regulatory framework.

What is Cost Audit?

Cost Audit entails conducting an impartial evaluation of cost statements, cost records, and associated data of an organization, aiming to provide an opinion on them. Standards governing Cost Auditing offer direction to the auditor at every stage of the auditing process concerning the procedures to be adhered to, the duties of the auditor, and the reporting of costs.

Objective of Cost Audit

  • Verifying the cost accounts to make sure they’re correctly organized and maintained based on the company’s cost accounting system.
  • Making sure that the required procedures outlined in the rules for cost accounting records are followed properly.
  • Identifying mistakes and fraud.
  • Checking the cost of each item and department to ensure accuracy.
  • Deciding on the value of inventory.
  • Helping set prices for products and services.
  • Regularly comparing cost accounts with financial accounts.
  • Making sure the company’s resources are used effectively.
  • Finding and fixing unusual losses of material and time.
  • Encouraging awareness of costs.
  • Giving advice to management based on comparing the company’s costs with others to suggest areas for improvement.
  • Encouraging transparency in operations by providing detailed information to the directors for better corporate governance.


Cost Audit made its debut in India in 1965 with the implementation of Section 233B of the Companies Act 1956 for Cost Audit and Section 209 (1) (d) for the maintainance of Cost Records. From 1965 to 2008, maintenance of cost records encompassed 44 industries, and cost audit was conducted on a company-specific basis. In 2011, the compulsory implementation of Cost Audit for Cost Records upheld by companies under the Companies Act 1956 for manufacturing, mining, and processing operations was introduced, contingent upon turnover and net worth thresholds, along with the issuance of Compliance Certificates by Cost Accountants. In 2014, the Companies Act of 2013 led to the issuance of the New Companies (Cost Records and Audit Rules), 2014.

Applicability of Cost Audit

The Companies (Cost Records and Audit) Rules of 2014 apply to all companies registered under the Companies Act that are involved in either the manufacturing of goods or the provision of services outlined in Table-A or Table-B of Rule 3. Rule 3 categorizes sectors/industries into Regulated and Non-Regulated sectors. Item A of the rules covers six sectors/industries classified as the ‘regulated sector’, while item B includes 33 sectors/industries classified as the ‘non-regulated sector’. When it comes to maintaining cost records, there is no differentiation made between companies falling under item A or B.

For companies falling under category A:

  • Any company with an annual turnover from all its products and services in the preceding financial year of Rs. 50 crore or more, and the combined turnover of individual products or services of Rs. 25 crore or more.

For companies in category B:

  • Any company with an annual turnover from all its products and services in the preceding financial year of Rs. 100 crore or more, and the combined turnover of individual products or services of Rs. 35 crore or more.

The Act defines ‘turnover’ in clause (91) of section 2 and sets criteria based on two aspects: overall turnover and turnover specific to products or services, both of which must be fulfilled. Companies with more than 75% of their revenue generated from exports in foreign exchange or those operating from special economic zones are exempt from the requirement of cost audit.

Appointment of Cost Auditor

Companies falling under Rule 3 and meeting the criteria outlined in Rule 4 must appoint a cost auditor within 180 days from the start of each financial year. The definition of a cost auditor, as inferred from the combined reading of Rule 2(b) and (c), includes:

  • a cost accountant in practice or
  • a firm of cost accountants or
  • a limited liability partnership of cost accountants

A part-time cost accountant with a certificate of practice is not eligible to conduct cost audits.

As per Rule 6(2), each company that appoints a cost auditor must notify the appointed cost auditor of their designation. Additionally, the company must submit form CRA-2 to the Central Government within 30 days of the board meeting’s resolution or within 180 days from the beginning of the financial year, whichever occurs earlier.

Following the audit of the company’s cost records, the cost auditor is obligated to submit a report to the Board containing any reservations, qualifications, observations, or suggestions. This report, in Form CRA-3, must be dispatched within 180 days from the conclusion of the financial year.

The second proviso of subsection (3) of Section 148 stipulates that the cost auditor must adhere to the cost auditing standards established by the Institute of Cost Accountants of India, subject to approval from the Central Government.

Obligation of a company

Every company mandated to undergo cost audit as per Section 148(2) of the Act must:

    1. Maintain cost records in Form CRA-1
    2. Appoint a cost auditor within 180 days from the start of each financial year
    3. Submit a notification of this appointment to the Central Government within 30 days of the Board meeting where the appointment occurred, or within 180 days from the start of the financial year, whichever comes first. This submission should be done electronically using Form CRA-2, accompanied by the specified fee as outlined in the Companies (Registration Offices and Fees) Rules, 2014.
    4. Within 30 days from receiving a copy of the cost audit report, provide the Central Government with the said report, including comprehensive information and explanations regarding any reservations or qualifications it contains. This submission should be made in Form CRA-4, along with the fees specified in the Companies (Registration Offices and Fees) Rules, 2014.

Punishment and Compoundability

In case of contravention the company shall face imprisonment for a period of up to two years, or a fine, or both.

Cost audit compliance involves intricate knowledge of regulatory requirements, accounting principles, and industry-specific nuances. BCL India gives an expert consultancy services in this area, ensuring accurate interpretation and application of relevant laws and standards. We provide ongoing support and guidance, keeping companies updated on evolving regulatory changes, best practices, and industry trends. Our proactive assistance ensures sustained compliance and facilitates long-term success.


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