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What is Cost Audit?, Features of Cost Audit, Cost Audit Applicability, and Types of Cost Audit

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Ishita Ramani Ishita Ramani
Answered on May 13,2022

A cost audit entails verifying cost accounts and ensuring that the cost accounting plan is followed. Cost audits check the correctness of cost accounting records to make sure they are in line with cost accounting principles, procedures, plans, and goals.

Features of Cost Audit Applicability

 

Section 148 (1) enables the Central Government to direct companies involved in the production of goods or the supply of services to include information about the use of materials, labor, and other cost items in their books of accounts.

Table A and Table B of Rule 3 of the Organizations (Cost Records and Audit) Rules, 2014 contain a list of defined companies that must keep cost records.

Section 148 (2) authorizes the Central Government to order an audit of cost records of a designated class of enterprises based on the company’s net worth or turnover.

Organizations (Cost Records and Audit) Rules, 2014, Rule 4 contains requirements for companies that are required to have their cost records audited.

The cost accountant selected by the Board will undertake the cost audit.

Any default on the part of the corporation will be punished with a fine of not less than INR 25,000, but not more than INR 5 lakhs. Furthermore, any company executive who fails to comply with the law is subject to imprisonment for up to one year or a fine of not less than INR 10,000 but not more than INR 1,00,000.

 

Advantages of Cost Audit

 

It aids in the detection of fraud and errors.

Accounting work is smoothed out in a systematic way.

Reduces the product’s cost to the bare minimum.

Aids in the maintenance of the typical budgetary cost.

Allows management to make the best decision possible.

Keep management informed about whether or not the accounts are produced according to Cost Accounting Standards.

 

Information on Cost Audit Applicability

 

The Companies Cost Records and Audit Rules, 2014, contain requirements for cost audit application. The cost audit is appropriate in the following situations, according to rule 4 (Rule 4 is divided in two parts Table A and Table B):

Table A specified goods/services: The company’s overall annual total turnover from all products/services is INR 50 crore or more and the aggregate turnover from each product/service for which cost records must be kept is INR 25 crore or more.

Table B specifies goods/services: Overall annual total turnover of all products/services should be INR 100 crore or more and aggregate turnover from each product/service for which cost records must be kept should be INR 35 crore or higher.

It should be noted that the previous financial year’s turnover is taken into account while determining the application of cost audit.

Companies that are exempted from Cost Audit Applicability

 

Cost audits are not necessary in India for the following companies:

Export revenue accounts for more than 75% of the total revenue for the company.

Working out of a Special Economic Zone ( SEZ).

A captive Generating Plant is involved in the generation of electricity for captive use.

 

Types of Cost Audit

Cost Auditing on behalf of the Indian government.

Performing audits on behalf of tribunals.

The trade association’s cost audit.

Auditing in accordance with the Company’s law.

Statutory Cost Audit.

Trade negotiations and disagreements.

Cost differences within the industry.

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