Procedure for Appointment of Cost Auditor in a Company

Aakanksha Singhal

Aakanksha Singhal

Published on: May 21, 2022

Khushboo Sharma

Updated on: Jan 3, 2024

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Introduction:

The Central Government may by order, require the entities involved in the production of goods or catering services as per the table of Regulated Sectors provided in Rule 3 of the Companies (Cost Records and Audit) Rules, 2014, and has an overall turnover from all its products and services of Rs. 35 crores or more during the immediately preceding financial year to include the cost records for such products or services in their books of accounts. The Central Government shall, before issuing such order in respect of any class of companies regulated under a special Act, consult the regulatory body constituted or established under such special Act. [Section 148(1) and Rule 3 of the Companies (Cost Records and Audit) Rules, 2014]

The Central Government, if feels it necessary, then may by order direct the audit of cost records such class of companies as are covered u/s 148(1) of the Act which shall be conducted by a Cost Accountant. [Section 148(2) & 148(3) of the Companies Act, 2013]

Applicable Provisions:

1. Section 137,148 & 177 of Companies Act, 2013
2. Rule 3, 4 & 14 of the Companies (Cost Records and Audit) Rules, 2014

Cost Audit shall be applicable to the following class of companies:

• Every company stated in item (A) of rule 3 which has an overall annual turnover of Rs. 50 crores or more from all of its products/services during the immediately preceding financial year and the aggregate turnover of individual products/services for which cost records are required to be maintained is Rs. 25 crores or more [Rule 4(1) of the Companies (Cost Records and Audit) Rules, 2014]
• Every company stated in item (B) of rule 3 which has an overall annual turnover of Rs. 100 crores or more from all of its products/services during the immediately preceding financial year and the aggregate turnover of individual products/services for which cost records are required to be maintained is Rs. 35 crores or more [Rule 4 (2) of the Companies (Cost Records and Audit) Rules, 2014]

Such a cost audit conducted in terms of Section 148 of the Act shall be in addition to the audit conducted under section 143 of the Act [Section 148(4) of the Act]

Note:

1. Foreign companies having only liaison offices shall be exempted from the applicability of serial number 33 i.e., Production, import, and supply or trading of the specified medical devices, under Rule 3 of the Companies (Cost Records and Audit) Rules, 2014. [Proviso 1 of the Companies (Cost Records and Audit) Rules, 2014]
2. The provisions of Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 shall not be applicable to a company that is classified as a micro-enterprise or a small enterprise including as per the turnover criteria under section 7(9) of the Micro Small and Medium Enterprises Development Act, 2006. [Proviso 2 of the Companies (Cost Records and Audit) Rules, 2014]
3. Company covered under rule 3 of the Companies (Cost Records and Audit) Rules, 2014 and has having revenue from exports in foreign currency exceeding 75% of its total revenue or is operating from a special economic Zone or is engaged in generation of electricity for captive consumption through Captive Generating Plant shall be exempted from the requirement of cost audit. [Rule 4(3) of the Companies (Cost Records and Audit) Rules, 2014]

Mandatory Requirements:

1. Mandatory appointment of a cost auditor within 180 days of the commencement of every financial year by the class of companies as specified in Rule 3 and contingent on the threshold limits laid down in Rule 4 of the Companies (Cost Records and Audit) Rules, 2014 [Rule 6(1) of the Companies (Cost Records and Audit) Rules, 2014]
2. Obtain written consent of the cost auditor pertaining to such appointment [Proviso 1 to Rule 6(1) of the Companies (Cost Records and Audit) Rules, 2014]
3. Certificate from the cost auditor indicating the following [Proviso 1 to Rule 6(1) & 6(1A) of the Companies (Cost Records and Audit) Rules, 2014]:
   • The individual or firm so appointed is eligible for appointment and is not disqualified under the Act, Cost and Works Accountant Act, 1959 and the related rules
   • The individual or firm so appointed satisfies the criteria of eligibility, qualifications, and disqualifications of auditors as per the provisions of Section 141 of the Act
   • The proposed appointment is within the limits laid down in terms of the provisions of the Act and/or rules made thereunder
   • The list of proceedings against the cost auditor or audit firm or any partner of the audit firm pertaining to professional matters of conduct, as disclosed in the certificate is true and correct.
4. Every cost auditor appointed as such shall continue in such capacity till the expiry of 180 days from the closure of the financial year or till, he submits the cost audit report, for the financial year for which he has been appointed. [Rule 6(3) of the Companies (Cost Records and Audit) Rules, 2014]
5. Any person appointed as the auditor of a company in terms of Section 139 of the Act shall be abstained from being appointed to conduct the audit of cost records[Proviso 1 to Rule 6(3) of the Companies (Cost Records and Audit) Rules, 2014]
6. Due compliance with the cost auditing standards by the auditor conducting cost audit [Proviso 2 to Rule 6(3) of the Companies (Cost Records and Audit) Rules, 2014]

The following procedure is to be followed:

1. Obtain recommendations from the Audit Committee:
   Where a Company is required to constitute an Audit Committee under section 177, it shall receive recommendations from the committee for the appointment and remuneration of the Cost Auditor. However, in case of other companies that are not required to constitute an audit committee, Board shall endeavour to appoint the cost auditor viz individual/firm of cost accountants. Refer to the Procedure for Conducting Audit Committee Meeting for a detailed procedure.
2. Obtain written Consent and Certificate from the Proposed Auditor [Rule 6(1) & 6(1A) of the Companies (Cost Audit and Auditors) Rules, 2014] Company shall obtain the following from the cost auditor so appointed prior to such appointment:
   • Written consent of the cost auditor to such appointment and
   • Certificate from the cost auditor comprising the following:
     • The individual or firm so appointed is eligible for appointment and is not disqualified under the Act, Cost and Works Accountant Act, 1959 and the related rules
     • The individual or firm so appointed satisfies the criteria of eligibility, qualifications, and disqualifications of auditors as per the provisions of Section 141 of the Act
     • The proposed appointment is within the limits laid down by or under the authority of the Act
     • The list of proceedings against the cost auditor or audit firm or any partner of the audit firm pertaining to professional matters of conduct, as disclosed in the certificate is true and correct
3. Convene a Meeting of the Board of Directors [As per Section 173 & Secretarial Standard-1 (SS-1)]
   The Cost Auditor shall be appointed within 180 days of the commencement of every Financial Year through passing a resolution in the Board Meeting. Refer to the Procedure for Conducting Board Meeting for a detailed procedure.
4. File Form CRA-2 [Rule 6(2) of the Companies (Cost Audit and Auditors) Rules, 2014]
   • Every company shall inform the cost auditor concerned of his or its appointment and file a notice in Form CRA-2 through electronic mode related to such appointment with the Central Government from earlier of the following timelines
     • 30 days of the Board meeting in which such appointment is made or
     • 180 days of the commencement of the financial year
   • Such notice in Form CRA-2 shall be accompanied with the fees stipulated in Companies (Registration Offices and Fees) Rules, 2014 and the following documents
     • Copy of Board Resolution where such appointment had been ratified
     • Any other attachment (if any)
5. Ratification of the Remuneration of Cost Auditor
   • In case there is an Audit Committee in the company, the remuneration of the Cost Auditor as recommended by the Audit Committee shall be considered and approved by the Board of Directors and ratified subsequently by the shareholders. [Rule 14(a)(ii) of the Companies (Audit and Auditors) Rules
   • In the absence of any Audit Committee the Board shall appoint the Cost Auditor and remuneration of such cost auditor shall be subsequently ratified by the shareholders. [Rule 14(b) of the Companies (Audit and Auditors) Rules] Refer to the Procedure for Conducting Annual General Meeting for detailed information
6. Filing the Casual Vacancy
   Refer to the Procedure for Filing Casual Vacancy of Cost Auditor in a Company for the detailed procedure
7. Submission and Approval of Cost Audit Report [Rule 6(3B), 6(4) & 6(5) of the Companies (Cost Audit and Auditors) Rules, 2014]:
   
   • Every cost auditor who conducts an audit shall submit the duly signed cost audit report along with his or its reservations or qualifications or observations or suggestions, if any, in Form CRA-3 within 180 days from the closure of the financial year to which the report relates to the Board of Directors
   • The Board of Directors shall approve the cost statements, including other statements as are annexed to the cost audit report, before they are signed on behalf of the Board by any of the director authorized by the Board, for submission to the cost auditor to report thereon
   • The Board of Directors shall consider and examine such cost audit report submitted by the Cost Auditor, specifically related to any reservation or qualification contained therein
8. Furnish the Cost Audit Report to the Central Government [Rule 6(6) of the Companies (Cost Audit and Auditors) Rules, 2014]:
   
   • Every company covered under these rules shall within 30 days from the date of receipt of a copy of the cost audit report, furnish the Central Government with such report comprising of full information and explanation on every reservation or qualification contained therein, in Form CRA-4 in Extensible Business Reporting Language (XBRL) format as specified in the Companies (Filing of Documents and Forms in Extensible Business Reporting Language) Rules, 2015 along with fees provided in the Companies (Registration Offices and Fees) Rules, 2014 and the following documents
     • Cost Audit Report
     • Optional attachments (if any).
   • In case the companies have got a time extension for holding the Annual General Meeting under Section 96(1) of the Act, then the Form CRA-4 may be filed within such resultant extended period of filing financial statements under section 137 of the Act.
Procedure for Appointment of Cost Auditor in a Company Introduction: The Central Government may by order, require the entities involved in the production of goods or catering services as per the table of Regulated Sectors provided in Rule 3 of the Companies (Cost Records and Audit) Rules, 2014, and has an overall turnover from all its products and services of Rs. 35 crores or more during the immediately preceding financial year to include the cost records for such products or services in their books of accounts. The Central Government shall, before issuing such order in respect of any class of companies regulated under a special Act, consult the regulatory body constituted or established under such special Act. [Section 148(1) and Rule 3 of the Companies (Cost Records and Audit) Rules, 2014] The Central Government, if feels it necessary, then may by order direct the audit of cost records such class of companies as are covered u/s 148(1) of the Act which shall be conducted by a Cost Accountant. [Section 148(2) & 148(3) of the Companies Act, 2013] Applicable Provisions: Section 137,148 & 177 of Companies Act, 2013 Rule 3, 4 & 14 of the Companies (Cost Records and Audit) Rules, 2014 Cost Audit shall be applicable to the following class of companies: Every company stated in item (A) of rule 3 which has an overall annual turnover of Rs. 50 crores or more from all of its products/services during the immediately preceding financial year and the aggregate turnover of individual products/services for which cost records are required to be maintained is Rs. 25 crores or more [Rule 4(1) of the Companies (Cost Records and Audit) Rules, 2014] Every company stated in item (B) of rule 3 which has an overall annual turnover of Rs. 100 crores or more from all of its products/services during the immediately preceding financial year and the aggregate turnover of individual products/services for which cost records are required to be maintained is Rs. 35 crores or more [Rule 4 (2) of the Companies (Cost Records and Audit) Rules, 2014] Such a cost audit conducted in terms of Section 148 of the Act shall be in addition to the audit conducted under section 143 of the Act [Section 148(4) of the Act] Note: Foreign companies having only liaison offices shall be exempted from the applicability of serial number 33 i.e., Production, import, and supply or trading of the specified medical devices, under Rule 3 of the Companies (Cost Records and Audit) Rules, 2014. [Proviso 1 of the Companies (Cost Records and Audit) Rules, 2014] The provisions of Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 shall not be applicable to a company that is classified as a micro-enterprise or a small enterprise including as per the turnover criteria under section 7(9) of the Micro Small and Medium Enterprises Development Act, 2006. [Proviso 2 of the Companies (Cost Records and Audit) Rules, 2014] Company covered under rule 3 of the Companies (Cost Records and Audit) Rules, 2014 and has having revenue from exports in foreign currency exceeding 75% of its total revenue or is operating from a special economic Zone or is engaged in generation of electricity for captive consumption through Captive Generating Plant shall be exempted from the requirement of cost audit. [Rule 4(3) of the Companies (Cost Records and Audit) Rules, 2014] Mandatory Requirements: Mandatory appointment of a cost auditor within 180 days of the commencement of every financial year by the class of companies as specified in Rule 3 and contingent on the threshold limits laid down in Rule 4 of the Companies (Cost Records and Audit) Rules, 2014 [Rule 6(1) of the Companies (Cost Records and Audit) Rules, 2014] Obtain written consent of the cost auditor pertaining to such appointment [Proviso 1 to Rule 6(1) of the Companies (Cost Records and Audit) Rules, 2014] Certificate from the cost auditor indicating the following [Proviso 1 to Rule 6(1) & 6(1A) of the Companies (Cost Records and Audit) Rules, 2014]: The individual or firm so appointed is eligible for appointment and is not disqualified under the Act, Cost and Works Accountant Act, 1959 and the related rules The individual or firm so appointed satisfies the criteria of eligibility, qualifications, and disqualifications of auditors as per the provisions of Section 141 of the Act The proposed appointment is within the limits laid down in terms of the provisions of the Act and/or rules made thereunder The list of proceedings against the cost auditor or audit firm or any partner of the audit firm pertaining to professional matters of conduct, as disclosed in the certificate is true and correct. Every cost auditor appointed as such shall continue in such capacity till the expiry of 180 days from the closure of the financial year or till, he submits the cost audit report, for the financial year for which he has been appointed. [Rule 6(3) of the Companies (Cost Records and Audit) Rules, 2014] Any person appointed as the auditor of a company in terms of Section 139 of the Act shall be abstained from being appointed to conduct the audit of cost records[Proviso 1 to Rule 6(3) of the Companies (Cost Records and Audit) Rules, 2014] Due compliance with the cost auditing standards by the auditor conducting cost audit [Proviso 2 to Rule 6(3) of the Companies (Cost Records and Audit) Rules, 2014] The following procedure is to be followed: Obtain recommendations from the Audit Committee: Where a Company is required to constitute an Audit Committee under section 177, it shall receive recommendations from the committee for the appointment and remuneration of the Cost Auditor. However, in case of other companies that are not required to constitute an audit committee, Board shall endeavour to appoint the cost auditor viz individual/firm of cost accountants. Refer to the Procedure for Conducting Audit Committee Meeting for a detailed procedure. Obtain written Consent and Certificate from the Proposed Auditor [Rule 6(1) & 6(1A) of the Companies (Cost Audit and Auditors) Rules, 2014] Company shall obtain the following from the cost auditor so appointed prior to such appointment: Written consent of the cost auditor to such appointment and Certificate from the cost auditor comprising the following: The individual or firm so appointed is eligible for appointment and is not disqualified under the Act, Cost and Works Accountant Act, 1959 and the related rules The individual or firm so appointed satisfies the criteria of eligibility, qualifications, and disqualifications of auditors as per the provisions of Section 141 of the Act The proposed appointment is within the limits laid down by or under the authority of the Act The list of proceedings against the cost auditor or audit firm or any partner of the audit firm pertaining to professional matters of conduct, as disclosed in the certificate is true and correct Convene a Meeting of the Board of Directors [As per Section 173 & Secretarial Standard-1 (SS-1)] The Cost Auditor shall be appointed within 180 days of the commencement of every Financial Year through passing a resolution in the Board Meeting. Refer to the Procedure for Conducting Board Meeting for a detailed procedure. File Form CRA-2 [Rule 6(2) of the Companies (Cost Audit and Auditors) Rules, 2014] Every company shall inform the cost auditor concerned of his or its appointment and file a notice in Form CRA-2 through electronic mode related to such appointment with the Central Government from earlier of the following timelines 30 days of the Board meeting in which such appointment is made or 180 days of the commencement of the financial year Such notice in Form CRA-2 shall be accompanied with the fees stipulated in Companies (Registration Offices and Fees) Rules, 2014 and the following documents Copy of Board Resolution where such appointment had been ratified Any other attachment (if any) Ratification of the Remuneration of Cost Auditor In case there is an Audit Committee in the company, the remuneration of the Cost Auditor as recommended by the Audit Committee shall be considered and approved by the Board of Directors and ratified subsequently by the shareholders. [Rule 14(a)(ii) of the Companies (Audit and Auditors) Rules In the absence of any Audit Committee the Board shall appoint the Cost Auditor and remuneration of such cost auditor shall be subsequently ratified by the shareholders. [Rule 14(b) of the Companies (Audit and Auditors) Rules] Refer to the Procedure for Conducting Annual General Meeting for detailed information Filing the Casual Vacancy Refer to the Procedure for Filing Casual Vacancy of Cost Auditor in a Company for the detailed procedure Submission and Approval of Cost Audit Report [Rule 6(3B), 6(4) & 6(5) of the Companies (Cost Audit and Auditors) Rules, 2014]: Every cost auditor who conducts an audit shall submit the duly signed cost audit report along with his or its reservations or qualifications or observations or suggestions, if any, in Form CRA-3 within 180 days from the closure of the financial year to which the report relates to the Board of Directors The Board of Directors shall approve the cost statements, including other statements as are annexed to the cost audit report, before they are signed on behalf of the Board by any of the director authorized by the Board, for submission to the cost auditor to report thereon The Board of Directors shall consider and examine such cost audit report submitted by the Cost Auditor, specifically related to any reservation or qualification contained therein Furnish the Cost Audit Report to the Central Government [Rule 6(6) of the Companies (Cost Audit and Auditors) Rules, 2014]: Every company covered under these rules shall within 30 days from the date of receipt of a copy of the cost audit report, furnish the Central Government with such report comprising of full information and explanation on every reservation or qualification contained therein, in Form CRA-4 in Extensible Business Reporting Language (XBRL) format as specified in the Companies (Filing of Documents and Forms in Extensible Business Reporting Language) Rules, 2015 along with fees provided in the Companies (Registration Offices and Fees) Rules, 2014 and the following documents Cost Audit Report Optional attachments (if any). In case the companies have got a time extension for holding the Annual General Meeting under Section 96(1) of the Act, then the Form CRA-4 may be filed within such resultant extended period of filing financial statements under section 137 of the Act.