An Internal Audit Used for Enterprise Governance to Assess Operational Efficiencies and Resource Management

7/29/2019 An Internal Audit Used for Enterprise Governance to Assess Operational Efficiencies and Resource Management

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Definition, purpose and importance of cost audit

Definition

According to the Institute of Cost and Management Accountants of England, Cost Audit is

defined as the verification of Cost Accounts and a check on the adherence to the Cost

Accounting plan. The cost audit, therefore comprises:

(a) the verification of the cost accounting records such as the accuracy of the cost accounts, cost

reports, cost statements, cost data, costing techniques and

(b) examining these records to ensure that they adhere to the cost accounting principle, plans,

procedures and objectives.

In other words, the Cost Auditor ensures that the cost accounting plan is in accordance

with the objectives established by the management and in conformity with the appropriate

system of cost accounting.

Purposes

Broadly, the purposes of cost audit can be classified as

(I) Protective, and

(II)Constructive.

I. Protective purpose : In examines that there is no undue wastage or losses and the costing

system brings out the correct and realistic cost of production or processing.

II. Constructive purpose: It provides management with information useful in regulating

production, choosing economical methods of operation, reducing operations costs and

reformulating plans etc.

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Important aspects of Cost Audit:

Cost audit offers valuable assistance to the management in its decision-making process

by examining the reliability of cost accounting data and information. Due to the assistance

provided by cost audit, management is in a position to know what price is to be fixed for a

product, whether the wastages are avoidable, whether to re-organise sales or inventory system, to

make the work more efficient and so on. Also cost audit is of great help in maintaining internal

control and internal check and can be of advantage even to the statutory financial auditor. Cost

audit, apart from having all the normal ingredient of audit. I.e., vouching, verification etc., has

within its domain elements of efficiency audit propriety audit as well.

Efficiency audit is directed towards the measurement of whether corporate plans have been

effectively executed. It is concerned with the utilisation of the resources in economic and most

remunerative manner to achieve the objectives of the concern. It comprises of studying the plans

of organisation, comparing actual performance with plans and investigating the reasons for

variances to take remedial action. For example, the effective utilisation of capital in an

organisation can be guaged by determining the return on capital employed.

Propriety audit is concerned with the executive actions and plans bearing on the finances and

expenditure of the company. The cost auditor has to judge:

(a) Whether the planned expenditure is designed to give optimum results.

(b) Whether the size and channels of expenditure were designed to produce the best results.

(c) Whether the return from expenditure on capital as well as current operations could be

bettered by some other alternative plan of action.

Provisions of section 233B of the Companies Act, 1956 for cost audit

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In exercise of the powers conferred by sub-section (1) of section 233B of the Companies Act,

1956 (1 of 1956), the Central Government, being of the opinion that it is necessary to do so,

hereby directs that all companies to which any of the following rules apply, and wherein, the

aggregate value of net worth as on the last date of the immediately preceding financial year

exceeds five crores of rupees; or wherein the aggregate value of the turnover made by the

company from sale or supply of all products or activities during the immediately preceding

financial year exceeds twenty crores of rupees; or wherein the company's equity or debt

securities are listed or are in the process of listing on any stock exchange, whether in India or

outside India, shall get its cost accounting records, in respect of each of its financial year

commencing on or after the 1st day of April, 2011, audited by a cost auditor who shall be, either

a cost accountant or a firm of cost accountants, holding valid certificate of practice under the

provisions of Cost and Works Accountants Act, 1959 (23 of 1959). (a) Cost Accounting Records

(Bulk Drugs) Rules, 1974 (b) Cost Accounting Records (Formulations) Rules, 1988 (c) Cost

Accounting Records (Fertilizers) Rules, 1993 (d) Cost Accounting Records (Sugar) Rules, 1997

(e) Cost Accounting Records (Industrial Alcohol) Rules, 1997 (f) Cost Accounting Records

(Electricity Industry) Rules, 2001 (g) Cost Accounting Records (Petroleum Industry) Rules,

2002 (h) Cost Accounting Records (Telecommunications) Rules, 2002 2. Every company to

which these orders apply shall follow the revised procedure for appointment of cost auditor as

laid down vide Ministry of Corporate Affairs' General Circular No. 15/2011 [52/5/CAB-2011],

dated 11th April, 2011. 3. The audit shall be conducted in such manner as will enable the cost

auditor to prepare the report in accordance with the Cost Audit (Report) Rules, 2001 as amended

from time to time. The report of the cost auditor shall be forwarded to the Central Government in

the prescribed format within the time stipulated under the said Rules. 4. These orders do not

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apply to a company which is a body corporate governed by any special Act. 5. All companies

covered by these orders and wherein cost audit orders have been issued so far in respect of

products/activities covered by the above mentioned rules shall continue to comply with the said

orders until these orders become applicable on them. 6. If a company contravenes any provisions

of these orders, the company and every officer thereof who is in default, including the persons

referred to in sub-section (6) of section 209 of the Companies Act, 1956, shall be punishable as

provided under sub-section (2) of section 642 read with sub-section (11) of section 233B of the

Companies Act, 1956 (1 of 1956). ORDER [F. NO. 52/26/CAB-2010], DATED 3-5-2011 In

exercise of the powers conferred by sub-section (1) of section 233B of the Companies Act, 1956

(1 of 1956), the Central Government, being of the opinion that it is necessary to do so, hereby

directs that all companies to which any of the following rules apply, and wherein the aggregate

value of the turnover made by the company from sale or supply of all products or activities

during the immediately preceding financial year exceeds hundred crores of rupees; or wherein

the company's equity or debt securities are listed or are in the process of listing on any stock

exchange, whether in India or outside India, shall get its cost accounting records, in respect of

each of its financial year commencing on or after the 1st day of April, 2011, audited by a cost

auditor who shall be, either a cost accountant or a firm of cost accountants, holding valid

certificate of practice under the provisions of Cost and Works Accountants Act, 1959 (23 of

1959). (a) Cost Accounting Records (Cement) Rules, 1997 (b) Cost Accounting Records (Tyres

& Tubes) Rules, 1967 (c) Cost Accounting Records (Steel Plant) Rules, 1990 (d) Cost

Accounting Records (Steel Tubes and Pipes) Rules, 1984 (e) Cost Accounting Records (Paper)

Rules, 1975 (f) Cost Accounting Records (Insecticides) Rules, 1993 2. Every company to which

these orders apply shall follow the revised procedure for appointment of cost auditor as laid

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down vide Ministry of Corporate Affairs' General Circular No. 15/2011 [52/5/CAB-2011], dated

11th April, 2011. 3. The audit shall be conducted in such manner as will enable the cost auditor

to prepare the report in accordance with the Cost Audit (Report) Rules, 2001 as amended from

time to time. The report of the cost auditor shall be forwarded to the Central Government in the

prescribed format within the time stipulated under the said Rules. 4. These orders do not apply to

a company which is a body corporate governed by any special Act. 5. All companies covered by

these orders and wherein cost audit orders have been issued so far in respect of

products/activities covered by the above mentioned rules shall continue to comply with the said

orders until these orders become applicable on them. 6. If a company contravenes any provisions

of these orders, the company and every officer thereof who is in default, including the persons

referred to in sub-section (6) of section 209 of the Companies Act, 1956, shall be punishable as

provided under sub-section (2) of section 642 read with sub-section (11) of section 233B of the

companies.

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QUALIFICATION, DISQUALIFICATION OF COST AUDITOR

Qualifications:

1.C.A.:

a. The person proposed to be appointed as an auditor should be a qualified Chartered accountant

as per the Chartered Accountants Act, 1949.

b. If a partnership firm is proposed to be appointed as an auditor then all the partners practicing

in India shall be qualified chartered accountants as per the chartered accountants act, 1949.

c. In case a partnership firm is appointed any partner may act in the name of the firm.

2. Restricted state auditors: The holder of a certificate in previous PartB states entitling him to

act as an auditor of companies.

Disqualifications:

1. Sec.226(3): The following persons are disqualified for appointment as auditors of a company:

a. A body corporate.

b. An officer or an employee of the company.

c. A partner or an employee of an officer or employee of the company.

d. Indebtedness:

i. A person who is indebted to the company for more than Rs.1,000 Or

ii. Who has given any guarantee or provided any security in connection with the indebtedness of

any third person to the company for more than Rs. 1000.

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iii. When a firm is indebted to the company, each partner of the firm also is deemed to have been

indebted to the company and vice versa is also correct.

e. Security: A person holding any security of that company. (For the purposes of this Sec.,

security means an instrument which carries voting rights).

2. Subsidiary/Holding: A person is not eligible for appointment as auditor of any company, if

he is disqualified from acting as auditor of that companys subsidiary or holding company or

of any other subsidiary of the same holding company. (Sec.226(4)).

3. Vacation: If an auditor, after his appointment, become subject to any of the disqualification

specified in 1 & 2 points, he shall be deemed to have automatically vacated his office.

4. Partnership firm: If any of the partners in a partnership firm is subject to any of the above

disqualifications then that partnership firm will be disqualified from being appointed as an

auditor of that particular company.

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RIGHTS AND DUTIES OF COST AUDITOR

Rights

1. Right to receive information and explanations:

a. According to Sec.227(3), the company auditor has to state in his report, whether he has

received necessary information and explanations for the purpose of audit.

b. It is not possible for the auditor to draw conclusions without obtaining proper explanations

and information.

c. It is for the auditor to decide the matters in respect of which information and explanations are

required by him.

d. When the auditor is not given/provided the information required by him his only remedy

would be to report the same to the shareholders through qualification in the auditors report.

2. Right of accessibility to the books and records:

a. The auditor enjoys the right of accessibility to books and records because he has to mention in

his report whether proper books and records are maintained.

b. It is logical that this right is available to the auditor because the books and records form part of

the evidences on the basis of which the auditor draws his conclusion.

c. The books will include:

i. Books of accounts (Financial & Costing).

ii. Vouchers & supporting evidences or documents &

iii. Statutory books.

iv. Quantitative records like production, sales, stock records etc.

v. Branch books, vouchers etc.

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d. It is for the auditor to determine what record or document is necessary for the purpose of

the audit.

e. This right can be exercised by the auditor at all times mean that Normal business

hours on a working day & during the period of his office.

3. Right to visit branches:

a. Since the auditor has to report on the consolidated financial statements which also include the

results of the branch operations, he has the right to visit the branches to obtain information.

b. Even if the branch accounts are audited by another auditor, this right is still available because

it is possible that the auditor may not be getting full information from the branch auditor

regarding the branch accounts.

4. Right of lien: The term lien refers to the right of possession. The auditor enjoys this right over

the books of the clients if there is a fees due. The guidelines to be followed while exercising this

right is:

a. Documents retained must belong to the client who owes the money.

b. Documents must have come into possession of the auditor on the authority of the client. They

must not have been received through irregular or illegal means. In case of a company client, they

must be received on the authority of the board of directors.

c. Such of the documents can be retained which are connected with the work on which fees

have not been paid.

5. Right to attend G.M.:

a. The auditor enjoys the right to receive notice of GM and attend GM.

b. However, he cannot participate in the discussions of the G.M.

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c. The purpose is to clarify the doubts raised by the shareholders.

d. It is not his duty to attend, but it is only a right.

e. Further such a right extends only to G.M.s and not to the board meetings.

f. It may be advisable for the auditor to attend the meeting when any important matter has come

to his knowledge subsequent to his signing the audit report, so as to bring this matter to the

notice of the shareholders.

Duties

A. Statutory & Non statutory audit: In the case of non statutory audits, the auditors duties

would depend upon the agreement between the auditor & the client. On the other hand in case of

statutory audit the duties of a company auditor are given in the Companies Act itself.

B. Duties of company auditor as given under companies act are as below:

1. Sec.227(1A): Under this Sec. it is the duty of the auditor to enquire:

a. Whether loans and advances given on security have been properly secured and the terms &

conditions on which they have been made are harmful to the interest of the company.

b. Whether transactions which are represented merely by book entries in fact have taken place

and are harmful/prejudicial to the interest of the company. (E.g. In books purchases were

recorded for. In reality no such transaction has taken place. The auditors report should mention

this fact).

c. Whether any of the assets of the company consisting of shares, debentures etc. have been sold

at a price less than the cost of such shares etc. (This is not applicable to an investment company

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or a banking company). (This doesnt prohibit the sale below cost. If the sale is bonafide and the

price is reasonable having regard to the circumstances of the case, need not be reported.)

d. Whether loans and advances made by the company have been shown as deposits.

e. Whether personal expenses have been charged as business expenses.

f. Where it is stated in the books of accounts that any shares have been allotted for cash, then the

cash has been actually so received. (DCA notification Shares allotted against a debt payable by

the company shall be taken as shares allotted for cash).

2. Sec.227(2): Under this sec. it is the duty of the auditor to make a report whether, in his

opinion the financial statements give a true & fair view:

a. In the case of the B/s of the financial position of the company at the end of the financial year

&

b. In the case of the profit and loss account of the profit or loss for the year.

3. Sec.227(3): Under this sec. it is the duty of the auditor to state the following in his audit

report:

a. Whether he has obtained all the information and explanations which were necessary for the

purposes of his audit.

b. Whether the audit report on the financial statements of any branch office audited by a person

other than the companys auditor has been forwarded to him and how he has dealt with the same

in preparing the auditors report.

c. Whether the companys balance sheet and profit and loss account are in agreement with the

books of accounts and branch returns.

d. Whether any director is disqualified under Sec.274 (1) (g). (Sec.274(1)(g) A person is

disqualified from being appointed as a director, if the company in which he is a director has not

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filed the annual returns for any continuous 3 financial years Or has failed to repay its deposit or

interest thereon on due date Or redeem its debentures on due date Or pay dividend and such

failure continues for 1 year.)

e. In bold or in italics the observations of the auditors which have any adverse effect on the

functioning of the company.

f. Whether the cess payable under Sec. 441A has been paid and if not, the details of amount of

cess not so paid.

g. Whether, in his opinion, proper books of accounts, as required by law, have been kept by the

company and proper returns adequate for the purposes of his audit have been received from the

branches. Remember that the cost records prescribed under Sec.209(1)(d) also from part of

books of accounts.

h. Whether accounts give the information required by the act in the manner so required.

i. Whether in his opinion, the balance sheet and the profit and loss account comply with the

accounting standards referred to in Sec.211 (3C) of the Companies Act.

4. Sec.227 (4): Where any matters referred in Sec.s 227(2) and 227(3) are answered in negative,

it is the duty of the auditor to state the reasons for such answers in his audit report.

5. Sec.227(4A): It is the duty of the auditor to include in his report a statement on such matters

as may be specified by the C.G.Called CARO, 2003 (Companies auditors report order).

6. Other duties:

a. Duty to sign the auditors report.

b. Duty to certify the prospectus & Duty to certify the statutory report.

c. Duty to attend audit committee meetings.

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COST AUDIT PROGRAMME AND SCOPE OF COST AUDIT

Section 227(2) of the Companies Act, 1956, requires the auditor of a company to state whether

the accounts in his opinion give a true and fair view of the state of the companys affairs in the

case of the balance sheet and of the profit or loss for its financial year in the case of the profit

and loss account. Therefore, statutory financial audit of a company conducted by the Chartered

Accountant is an essential annual feature of all the companies registered under the provisions of

Companies Act, 1956. The Board of Directors of every company has a statutory obligation to

place its audited annual accounts viz. Profit and Loss Account and Balance Sheet before the

shareholders in the Annual General Meeting, duly certified by a Chartered Accountant appointed

as an Auditor under the provisions of Section 224 of the Act. However, there is no

corresponding statutory provision for compulsory annual audit of cost accounts of a company

covered under Section 209(1)(d) of the Companies Act or under relevant Cost Accounting

Records Rules.

One of the pre-requisites of cost audit is the maintenance of cost accounting records by the

company. Section 209(1)(d) makes it obligatory for a company pertaining to any class of

companies engaged in production, processing, manufacturing or mining to maintain such

particulars relating to utilization of material or labour or to other items of cost as may be

prescribed, if such class of companies is required by the Central Government to include such

particulars in the books of accounts. The rules provide that only those companies, which are

covered under Section 209(1)(d) of the Companies Act and a specific Cost Audit Order has been

issued with reference to a specified product by the Cost Audit Branch of Ministry of Corporate

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Affairs are required to get their cost accounts audited with respect to that specific product.

Moreover, Cost Audit Report is not placed before the shareholders during the Annual General

Meeting.

The Central Government prescribes the separate cost accounting records for each class of

companies i.e. companies manufacturing a particular class of product or activity like Cement,

Steel, Chemicals and Electricity etc. and these are called the Cost Accounting Records Rules for

that specific industry or class of companies. When cost accounting records/formats are

prescribed, they apply to those companies engaged in the manufacture of a particular product or

activity. In the case of companies engaged in production or processing of other products or

activities also in addition to production, processing or manufacture of the specifi ed product, the

records will have to be maintained only for the manufacture of particular product for which rules

are issued and not necessary for other products. A company manufacturing bulk drugs,

formulation and watches need not necessarily maintain cost accounting records in respect of

watch making activity if no statutory rules are prescribed for watch making activity. The detailed

provisions relating to the manner of prescription of cost accounting records, selection of the

product, the contents of the rules and the list of products industries covered by the statutory rules

under Section 209(1)(d) of the Companies Act have also been explained in Study Notes 2 and 3.

Thus Cost Audit u/s 233B does not embrace a particular activity of the company unless a

separate cost accounting record rule is already notified for that particular activity under Section

209(1)(d) detailing the nature of cost accounting records to be maintained.

The legal provisions relating to statutory cost audit are applicable only to companies registered

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under the provisions of Companies Act, 1956. Therefore, cost audit is not applicable to other

enterprises like partnership, cooperative societies, etc. The Cost Audit is conducted by a Cost

Accountant in practice within the meaning of the Cost and Works Accountants Act, 1959. The

cost auditor is appointed by the Board of Directors of the company with the previous approval of

the Central Government. The report of cost auditor is to rendered to the Central Government

with a copy to the Company.

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DISTINCTION BETWEEN COST AUDIT AND STATUTORY

AUDIT

I. Compulsory nature

Statutory audit is compulsory for all the companies registered under companies act, 1956.

Cost audit is not compulsory for all the companies. Only in the case of manufacturing or

mining companies they have been specifically asked by the central government to

maintain cost accounts under section 209 and get those accounts audited under section

233b.

II. Purpose

The purpose of the Statutory audit is to report on the profit and loss account and balance

sheet as to whether they show true and fair view of the business or not.

The purpose of the cost audit is to certify that whether the expenditure incurred on the

production of items has been incurred prudently or not.

III. Expression of opinion

The financial auditor has to comment upon the accuracy of the transactions recorded and

the cost auditor has to comment upon the correctness and wise ness of the decisions taken

in production of items.

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IV. Instance

Statutory audit is conducted at the instance of the shareholders.

Cost audit is done at the requirement of third parties like government, industrial

organizations etc.

V. Appointment

Statutory audit is appointed normally by the shareholders in the general meeting whereas

the board of directors with the previous approval of the central government appoints a

cost auditor.

VI. Recurrence

Financial audit is conducted every year whereas a cost audit may be done in the year in

which it is required by the government or any other agency.

VII. Stock

In financial audit auditor has to check the exact value of closing stock for the purpose of

balance sheet, whereas in the cost audit the auditor has to check the adequacy of the stock

keeping in view of the needs of the concern.

VIII. Report

In the financial audit the report is submitted to the management to be laid in the general

meeting of the shareholders, the report of the cost auditor is submitted to the company

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and also to the central government within 180 days from the end of the company

financial year to which the cost audit

SOCIAL BENEFITS OF COST AUDIT

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Cost audit will prove to be useful to the management, society, shareholders and the government

because of the following:

I. Usefulness to the management

a) The management will get reliable data for its day to day operations like price fixing,

control, decision making, etc

b) A close and continuous check on all wastes will be kept through a proper system of

reporting to the management.

c) Inefficiencies in the working of the company will be brought to the notice of the

management to take corrective action.

d) Management by exception becomes possible through allocation of responsibilities to

individual managers.

e) The system of budgetary control and standard costing will be greatly facilitated.

f) A reliable check in the valuation of costing stock and work-in-progress can be

established.

g) It helps in the detection of errors and fraud.

II. Usefulness to the society

a) Cost audit is often introduced for the purpose of fixation of price. The prices so fixed are

based on the correct costing data and so the consumers are saved from exploitation.

b) Price increase by the industry is not allowed without proper justification as to increase in

cost of production, consumers are saved from unreasonable price hike.

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c) Cost audit is also useful for the purpose of cost control; cost reduction and proper

utilization of scarce resources.

III. Usefulness to the shareholders

Cost audit ensures that proper records are kept as to purchases and utilization of

material and expenses incurred on wages, overheads, etc. It also ensures that the

unit has been run economically and efficiently. It also makes sure that the

valuation of closing stocks and work-in-progress is on a fair basis. Thus, the

shareholders are assured of a fair return on their investment.

IV. Usefulness to the government

a) Where the government enters into a cost plus contract, cost audit helps the government to

fix the price of the contract.

b) Cost audit helps the fixation of selling prices of essential commodities and thus undue

profiteering is checked.

c) Cost audit enables the government to focus its attention to inefficient units.

d) Cost audit enables the government to decide in favour of giving protection in certain

industries.

e) Cost audit facilitates settlement of trade disputes brought to the government.

f) Since cost audit ensures efficient running of the business and correct and accurate use of

cost data, a healthy competition is generated among the various units in an industry. Thus

it imposes an automatic check on inflation.

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FORMAT OF COST AUDIT REPORT ALONG WITH

ANNEXURES

1. Short title and commencement-

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(1)These rules may be called the Cost Audit (Report) Rules, 1996.

(2)They shall come into force on the date of their publication in the Official Gazette.

2. Definitions-

In these rules, unless the context otherwise requires,

(a) "Act" means the Companies Act, 1956 (1 of 1956) ;

(b) "Cost Auditor" means an auditor appointed under sub-section (1) of section 233B of the Act ;

(c) "Form" means the Form of Cost Audit Report specified in the Schedule ; and includes

Annexure to the Cost Audit Report and Proforma specified in the Schedule.

(d) "Product under reference" means the product to which the rules made under clause (d) of sub-

section (1) of section 209 of the Companies Act, 1956 (1 of 1956) apply;

(e) "Schedule" means Schedule annexed to these rules ;

(f) All other words and expressions used in these rules but not defined, and defined in the Act

and rules made under section 209 of the Act shall have the same meanings respectively assigned

to them in the Act or rules, as the case may be.

3. Application

These rules shall apply to every company in respect of which an audit of the cost accounting

records has been ordered by the Central Government under sub-section (1) of section 233B of

the Act.

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4. Form of Report-

(1) Every Cost Auditor who conducts an audit of the cost accounting records of the company

shall submit a report in triplicate to the Central Government in the Form (including Annexures

and proforma) in accordance with the procedure specified in the Schedule annexed to these rules

and at the same time forward a copy of the report to the company.

(2) Every Cost Auditor, who submits a report under sub-rule (1), shall also give clarifications, if

any, required by the Central Government on the Cost Audit Report submitted by him, within

thirty days of receipt of the communication addressed to him calling for such clarifications.

5.Time limit for submission of report

The Cost Auditor shall send his report referred in sub-rule (1) of rule 4 to the Central

Government and to the concerned company within one hundred and eighty days from the end of

the company's financial year to which the Cost Audit Report relates.

6. Cost auditor to be furnished with the cost accounting records, etc.

(1)Without prejudice to the powers and duties the Cost Auditor shall have under sub-section (4)

of section 233B of the Act, the company and every officer thereof, including the persons referred

in sub-section (6) of section 209 of the Act, shall make available to the Cost Auditor within

ninety days from the end of the financial year of the company such cost accounting records, cost

statements, other books and papers that would be required for conducting the cost audit, and

shall render necessary assistance to the Cost Auditor so as to enable him to complete the cost

audit and sent his report within the time limit specified in rule 5.

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(2) If the cost accounting records, cost statements, other books and papers are not made available

by the company within the time limit specified in sub-rule (1), the Cost Auditor shall intimate the

fact of not having made available to him such records, statements, books and papers to the

Central Government within ten days after expiry of time limit of ninety days specified in sub-

rule (1).

7. Penalties -

(1)If default is made by any Cost Auditor in complying with the provisions of rule 4 or rule 5, he

shall be punishable with fine which may extend to five hundred rupees.

(2)If a company contravenes the provisions of rule 6, the company and every officer of the

company including the persons referred to in sub-section (6) of section 209 of the Act, who is in

default, shall, subject to the provisions of section 233B of the Act, be punishable with fine which

may extend to five hundred rupees and where the contravention is a continuing one, with a

further fine which may extend to fifty rupees for every day after the first day during which

period such contravention continues.

8. Saving-

Saving of action taken or that may be taken for contravention of the Cost Audit (Report) Rules,

1968- It is hereby clarified that the supersession the Cost Audit (Report) Rules, 1968, as

amended from time to time, shall not in any way affect-

(i)any right, obligation or liability acquired, accrued or incurred there under ;

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(ii)any penalty, forfeiture or punishment incurred in respect of any contravention committed

there under ;

(iii)any investigation, legal proceeding or remedy in respect of any such right, privilege,

obligation, liability, penalty, forfeiture or punishment as aforesaid, and ; any such investigation,

legal proceeding or remedy may be instituted, continued or enforced and any such penalty,

forfeiture or punishment may be imposed as if those rules had not been superseded.

FORM OF COST AUDIT REPORT

I/We ................................................. having been appointed as Cost Auditor(s), under section

233-B of the Companies Act, 1956, (1 of 1956) of ................................................ (mention name

of the company) having its registered office at ..................................... (mention registered office

address of the company) (hereinafter referred to as the company), have examined the books of

accounts prescribed under clause (d) of sub-section (1) of section 209 of the said Act, and other

relevant records for the year ended ........................................................ (mention the financial

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year) relating to ...................................................... (mention name of the product) maintained by

the company and report, subject to my/our comments under the heading 'Auditor's Observations

and Conclusions' contained in the Annexure to this report, that-

(a)I/We have/have not obtained all the information and explanations which to the best of my/our

knowledge and belief were necessary for the purpose of this audit ;

(b)proper cost accounting records as required under clause (d) of sub-section (1) of section 209

of the Companies Act, 1956 have/have not been kept by the company ;

(c)proper returns adequate for the purpose of my/our Cost Audit have/have not been received

from branches not visited by me/us ;

(d)the said books and records give/do not give the information required by the Companies Act,

1956 (1 of 1956) in the manner so required ;

(e)in my/our opinion, the company's cost accounting records have/have not been properly kept so

as to give a true and fair view of the cost of production processing, manufacturing or mining

activities, as the case may be, and marketing of the product under reference ; and

(f)the cost statements in respect ofproduct under reference as specified in the

Annexures/Proformae of Schedules I and II of the Cost Accounting Records (............................ )

Rules duly audited by me/us are/are not kept in the company.

The matters contained in the Annexure and Proforma to this report form part of this report,

which is also subject to my/our observations made therein.

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Dated this............................. date of...................................2000.....................at.................

(Mention name of place of signing this report).

Cost auditor (s)

Note:

(1) Delete inapplicable words.

(2) Specify the title of Cost Accounting Records Rules made under clause (d) of sub-section (1)

of section 209 of the Companies Act, 1956 which are applicable to the product of the company.

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Annexure of Cost audit report

General

(1) (a) Name and address of the registered office of the company whose accounts are audited.

(b) Name and address of the place where the cost accounting records are maintained viz.

registered office, head office or factory.

(2) Name of the product and location of the unit to which the Annexure pertains.

(3) The Companys financial year to which the Cost Audit Report relates.

(4) Date of first commencement of commercial production of the product under reference.

(5) Location of other sites manufacturing or producing or processing or mining the product or

carrying out the activity under reference.

(6) Name and address of the Cost Auditor.

(7) Membership number of the Cost Accountant. In case of firm of Cost Accountants, name and

membership number of all the partners.

(8) Reference number and date of Government Order under which the Audit is conducted.

(9) Reference number and date of the Government letter approving the appointment of the Cost

Auditor.

(10) Date of Board of Directors meeting wherein the Annexure and Proforma to the cost audit

report were approved.

(11) The number of Audit Committee meetings held by the company, and attended by the Cost

Auditor during the year under reference.

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(12) Name, qualification and designation of the officer heading the cost accounting section or

department of the company.

(13) In case of loan license/ job work arrangement by the company, mention the name of the

third party and location of the factory, where the product has been produced/manufactured.

(14) If there is any foreign technical collaboration for the product under reference, the following

details shall be given:

(a) name and address of the foreign collaborators;

(b) main terms of agreement ;

(c) amount of royalty, lump sum payment, technical aid fee payable and the basis of calculating

the same;

(d) whether the technical collaborator has contributed to the share capital. If so, the paid up share

capital so held.

(15) If the company is engaged in other activities besides the manufacture of the product under

reference,the following details in respect of each such product or activity shall be given:

(a) list of the products or activities;

(b) list of the products or activities for which Cost Accounting Record Rules have been

prescribed under section 209(1)(d) of the Act.;

(c) whether Cost Audit Order has been issued by the government in respect of any of the

products or activities. If so, number and date of the order.

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(16) A printed copy of the Annual Report, containing audited Profit and Loss Account, Balance

Sheet and Auditors Report in respect of the companys financial year for which the report is

rendered, shall be enclosed with the Cost Audit Report.

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OUTLINE OF COMPLIANCE REPORT

1) Short title and commencement:

These rules may be called the Companies (Cost Accounting Records) rules,2011

They shall come into force on the date of their publication in the official Gazette.

2) Definitions and interpretations: In these rules, unless otherwise so provided,

Act means the Companies Act, 1956 (1 of 1956)

Compliance Report means compliance report duly authenticated and signed by a

cost accountant in a prescribed form of compliance report;

Cost accountant for the purpose of these rules means a cost accountant as

defined in clause (b) of sub section (1) of section 2 of the Cost and Works

Accountant Act,1959 (23 of 1959) and who is either a permanent employee of the

company or holds a valid certificate of practice under sub section (1) of section 6

and who is deemed to be in practice under sub-section (2) of section 2 of that act

and includes a firm of cost accountants.

Cost Accounting standards means standards of cost accounting, issued by the

Institute;

Cost Records means books of account relating to utilization of materials, labour

and other items of cost as applicable to the production, processing, manufacturing

or mining activities of the company;

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Form A means the form prescribed in these rules for filing compliance report

and other documents with the Central Government in the electronic mode;

Form B means the form of the compliance report and includes Annexure to the

compliance report.

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PROVISIONS ABOUT XBRL- COST COMPLIANCE REPORT

AND COST AUDIT REPORT

The Ministry of Corporate Affairs (MCA) has already made it mandatory for select group of

companies to file their Cost Audit Report (Form-II) and Compliance Report (Form-A) in the

extensible Business Reporting Language (XBRL) mode vide MCAs General Circular No.

8/2012 dated 10th May, 2012.

The above circular was amended on 29th June, 2012 to allow Cost Auditors and concerned

companies to file Form-II and Form-A with Central Government (CG) in XBRL mode after 31st

July, 2012 and The Institute of Cost Accountants of India (ICAI) was requested to circulate that

for the information of all concerned.

Now, the said circular has further been amended on 26th July, 2012 for giving relaxation and

therefore all cost auditors and concerned companies will be allowed to file their Cost Audit

Reports and Compliance Reports for the year 2011-12 with the CG in XBRL mode without any

penalty, upto 31st December, 2012.

ICAIs views on MCAs Circular

Following are the observations of the Institute of Cost Accountants of India (ICAI) on MCAs

circular for filing Cost Audit Reports and Compliance Reports with CG in XBRL mode in

connection with the provisions contained in the relevant Rules read with the aforesaid further

amended Circular dated 26th July, 2012:

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A) Approval and submission of Cost Audit Report: Rule 5 of the Companies (Cost Audit Report)

Rules, 2011 says that the Cost Auditor shall forward his cost audit report to the Central

Government

within 180 days from the close of the companys financial year to which the report relates. Rule

7 prescribes that the Annexure to the cost audit report shall be approved by the Board of

Directors.

B) Approval and submission of Compliance Report: Rule 6 of the Companies (Cost Accounting

Records) Rules, 2011 says that every company shall submit compliance report to the Central

Government within 180 days from the close of the companys financial year to which the report

relates. Rule 7 prescribes that the Annexure to the compliance report shall be approved by the

Board of Directors.

C) Extended Time Limit: The above time limit of 180 days has been prescribed for submission

of the cost audit report by the cost auditor and for submission of the compliance report by the

company, with the Central Government. For filing such reports for the financial year 2011-12

[including the overdue reports relating to any previous year(s)], MCA vide their General Circular

No. 18/2012 dated 26th July, 2012 has extended this period of 180 days to 31st December 2012.

D) XBRL Taxonomy: MCA is yet to notify the applicable XBRL taxonomy, business rules,

validation tools, etc. and also the Product Group classification required for preparing the cost

audit reports and compliance reports.

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Thus, in view of above, audit of cost records, approval by the Board, and filing of cost audit

report & compliance report with the Central Government should be completed by 31st December

2012.

XBRL, an open standard and free of licence fees, is being developed by XBRL international

non-profit consortium of over 600 major companies, organisations and government agencies

which is promoting its worldwide use. It is already being put to practical use in a number of

countries and implementations of XBRL are growing rapidly around the world.

Till now, XBRL International Members includes only three members from India viz. a) Aptara

and b) IRIS Business Services Ltd. and both are XII Direct Member and third member is the

Institute of Chartered Accountants of India (ICAI) which is under the jurisdiction of XBRL

India.

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BIBLIOGRAPHY

www. google.com

www.yahoo.com

Books

Advanced Cost Accounting

By Dr Varsha M Ainapure
http://www.yahoo.com/http://www.yahoo.com/