Cost Audit Report Rules, 2001 (With Author’s Comments)
The Cost Audit Report Rules, 2001 as notified vide G.S.R. 924(E) dated 27th December 2001 along with
author’s comments (in italics) are explained as under
MINISTRY OF LAW, JUSTICE AND COMPANY AFFAIRS
(DEPARTMENT OF COMPANY AFFAIRS)
NOTIFICATION
New Delhi, the 27th December, 2001
G.S.R. 924(E).- In exercise of the powers conferred by sub-section (4) of section 233B, read with
sub-section (1) of section 227 and clause (b) of sub-section (1) of section 642, of the Companies Act, 1956
(1 of 1956), and in supersession of the Cost Audit (Report) Rules, 1996, except as respect things done or
omitted to be done, before such supersession, the Central Government hereby makes the following rules,
namely:-
1. Short title and commencement . –
(1) These rules may be called the Cost Audit Report Rules, 2001.
(2) They shall come into force on the date of their publication in the Official Gazette.
(Comments: Rule 1: The Cost Audit Report Rules, 2001 were published in the Official Gazette vide GSR 924(E) dated 27 December 2001. These rules have superceeded the Cost Audit (Report) Rules, 1996 and came into force on the date of publication in the Official Gazette i.e., 27th December 2001. The application clause (rule 3) clarifies that all the cost audit reports submitted on or after 1st October 2002, shall be in the form prescribed irrespective of the financial year to which it relates.)
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 directed to conduct an audit under sub-section (1) of section
233B of the Act;
(c) “Form” means the Form of the Cost Audit Report and includes auditor’s observations and
suggestions, Annexure and Proforma to the Cost Audit Report;
(Comments: Rule 2(c) - This rule clearly states that the auditor’s observation and suggestions, Annexure and
Proforma to the Cost Audit Report are included in the prescribed form of Cost Audit Report to be submitted to the Central Government under rules.
(d) “Report” means Cost Audit Report duly audited and signed by the Cost Auditor in the prescribed
form of Cost Audit Report;
(e) “Product under reference” means the product or activity to which the Report relates;
((Comments: Rule 2(e) -The term “product under reference” was defined to include “product” as well as
“activities” (in service sector). This explanation was followed by notification of Cost Accounting Records
(Electricity) Rules, 2001 and Cost Accounting Records (Telecommunication) Rules 2001.This clarification
brought paradigm change in the applicability of Cost Audit as the various “services” are also produced, processed and sold like “products” now a days and in any case the term “processing” always meant to include “services” as well. In any case, the fast pace of technology development and opening up of economy for international competition has brought services at par with other products as today services are also being brought and sold just like any other product or commodity.
(f) All other words and expressions used in these rules but not defined, and defined in the Act
and rules made under clause (d) of sub-section (1) of section 209 of the Act shall have the same
meanings as 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. The Cost Audit Report submitted on or after 1st October, 2002, irrespective of the financial year of the company to which it relates, shall be in the form prescribed under these rules. (Comments: Rule 3 : The rules clearly provide that all the cost audit reports submitted on or after 1st October, 2002 shall be submitted in the form prescribed under the Cost Audit Report Rules, 2001 irrespective of the financial year, it belongs to.
4. Form of The Cost Audit Report (1) Every Cost Auditor, who conducts an audit of the cost accounting records of the company shall submit the report (a hard copy and a soft copy) along with auditor’s observations and suggestions, Annexure and Proforma to the Central Government in the prescribed form 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 the receipt of the communication addressed to him calling for such clarifications.
(3) The Forms prescribed in these rules may be filed through electronic media or through any
other computer readable media as referred under section 610A of the Companies Act, 1956 (1 of
1956).**
(4) The electronic-form shall be authenticated by the authorized signatories using digital signatures,
as defined under the Information Technology Act, 2000 (21 of 2000).**
(5) The Forms prescribed in these rules, when filed in physical form, may be authenticated by
authorized signatory by affixing his signature manually.
(Comments: Rule 4 : The Cost Auditor shall submit Cost Audit Report containing:
(a) Auditors’ observations and suggestions (as included in the Form of the Cost Audit Report); and
(b) Annexure to the Cost Audit Report (Para 1 to Para 28); and
(c) Proforma (product-wise cost, sales and margin)
The Cost Auditor has to submit the said Cost Audit Report to the Central Government and at the same time
send a copy of the Cost Audit Report to the company. However, the Cost Audit Report (Amendment) Rules, 2006 provide for e-filing of Cost Audit Reports and have also prescribed Form – I for filing cost audit report and other documents with the Central Government.
** The Cost Audit Report (Amendment) Rules, 2006 issued vide notification no GSR 148(E) have inserted the aforesaid sub-rule (3), (4) and (5). These amendments allow the cost auditor to submit cost audit reports through electronic media or through any other computer readable media as referred under section 610A of the Companies Act, 1956. The electronic form of the cost audit report shall be authenticated by the authorized signatories using digital signatures. Even though, the rules (5) regarding provision for submission of Cost Audit Report in Physical Form still theoretically remain in the rules, no cost audit report is being submitted in the physical form.
5. Time Limit For Submission Of Report
The Cost Auditor shall forward his report referred to in sub-rule (1) of rule 4 to the Central Government
and to the concerned company within one hundred and eighty days from the close of the company’s
financial year to which the report relates.
(Comments: Rule 5 : Even though, there is no provision for extension of time for the submission of the Cost
Audit Report, extension of time can be granted by the Ministry for any valid reason like loss or damage of
records under fire or floods etc.)
6. Cost Auditor to Be Furnished with the Cost Accounting Records etc.
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 to in
sub-section (6) of section 209 of the Act, shall make available to the Cost Auditor within one hundred
and thirty five days from the close of the financial year of the company, such cost accounting records,
cost statements, other books and documents, Annexure and Proforma to the Report, duly completed,
as 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 submit his report within the time limit
specified in rule 5.
(Comments: Rule 6 - Rule 6(2) of the earlier Cost Audit (Report) Rules, 1996 provided that “ if the cost
accounting records, cost statements, other books and papers are not made available by the company within the
time limit specified, [i.e. within 90 days from the end of the financial year of the company], the cost auditor
shall intimate the facts of not having made available to him such records, statements, books and papers to the
Central Government within 10 days after expiry of said time limit of 90 days. However, the corresponding rule
is not appearing in Cost Audit Report Rules 2001. Moreover, the number of days allowed to the company for
making available cost records etc. have been increased from 90 days earlier to 135 days under the new rules. It
is probably due to the following reasons:
(a) The existing rule clearly place the specific responsibility for duly complete cost accounting records, cost
statements, Annexure and Proforma to the Report on the company, which was not there in the earlier
rules.
(b) Companies were earlier finding it difficult to complete the accounting records within 90 days as financial
figures would often change due to financial audit. Therefore, Cost Auditors would initially submit the
provisional report followed by the supplementary report. Therefore, it was requested that if 135 days are
allowed to companies, there may be no need to submit supplementary report as first report itself would be
based on the audited figures.
(c) Rule 7 of the Cost Audit Report Rules 2001 further provides that the Annexure and Proforma prescribed
with the Cost Audit Report shall be approved by the Board of Directors before submitting the same to the
Central Government by the Cost Auditor. Since, the Board would approve the audited Annexure and
Proforma only, the additional 45 days were allowed to the company enable them to complete their documents in all respects. This would also ensure that there is no difference in figures adopted in financial accounts
and those in cost accounts as any changes in financial figures due to audit of financial accounts shall also
reflected in cost accounts; and
(d) Rule 7 of the Cost Audit Report Rules 2001 provides that the Annexure and Proforma, duly audited
by the Cost Auditor, shall also be signed by the Company Secretary and at least one Director on behalf
of the company. In absence of Company Secretary in the Company, the same shall be signed by at least
two Directors. With independent Directors, Audit Committes and strict penalties for not complying with
corporate governance requirements, it was felt that this type of issues regarding not providing of cost
records etc. may not arise
(e) A clarification was also issued that the Cost Auditor shall attend the Audit Committee meetings held by the company. The issues of delays and non availability of cost statements etc. can always be discussed in such Audit Committee meetings. A better understanding and coordination was thus contemplated between the company management and the cost auditor.
(f) The provisions regarding approval by Board of Directors or signing of Annexure and Proforma by Company Secretary and one director etc. were not there earlier in the Cost Audit (Report) Rules, 1996 and therefore, these documents were often signed by the very low officials, who were often responsible for complying with the lawful requirements. Hence the need for intervention by the Central Government at higher levels under those earlier rules.
(g) The responsibility for the compliance of these provisions has been placed on the company and every officer thereof including the persons referred to in sub section 209 (6), i.e. Managing Director, Manager, all
officers and employees of the company, and if there is neither a Managing Director nor Manager, every
Director of the Company. The company has also to render necessary assistance to the Cost Auditor in and
through out the assignment. Therefore, it can be concluded that chances of non-compliance of the rules shall
be almost nil.
(h) However in case of delay in furnishing the Cost Accounting Records, etc by the Company, the Cost Auditor may still be advised to write a letter within 10 days from the expiry of 135 days from the close of the financial year to the company for non-receipt of Cost Accounting Records / Statements, Annexure / Proforma to the
Cost Audit Report, as the case may be, and get it acknowledged by the Company.
Authentication of Annexure to the Cost Audit Report
The Annexure and Proforma prescribed with the Cost Audit Report shall be approved by the Board of
Directors before submitting the same to the Central Government by the Cost Auditor. The Annexure
and Proforma, duly audited by the Cost Auditor, shall also be signed by the Company Secretary and
at least one Director on behalf of the company. In the absence of Company Secretary in the company,
the same shall be signed by at least two Directors.
The Cost Audit Report Rules, 2001 as notified vide G.S.R. 924(E) dated 27th December 2001 along with
author’s comments (in italics) are explained as under
MINISTRY OF LAW, JUSTICE AND COMPANY AFFAIRS
(DEPARTMENT OF COMPANY AFFAIRS)
NOTIFICATION
New Delhi, the 27th December, 2001
G.S.R. 924(E).- In exercise of the powers conferred by sub-section (4) of section 233B, read with
sub-section (1) of section 227 and clause (b) of sub-section (1) of section 642, of the Companies Act, 1956
(1 of 1956), and in supersession of the Cost Audit (Report) Rules, 1996, except as respect things done or
omitted to be done, before such supersession, the Central Government hereby makes the following rules,
namely:-
1. Short title and commencement . –
(1) These rules may be called the Cost Audit Report Rules, 2001.
(2) They shall come into force on the date of their publication in the Official Gazette.
(Comments: Rule 1: The Cost Audit Report Rules, 2001 were published in the Official Gazette vide GSR 924(E) dated 27 December 2001. These rules have superceeded the Cost Audit (Report) Rules, 1996 and came into force on the date of publication in the Official Gazette i.e., 27th December 2001. The application clause (rule 3) clarifies that all the cost audit reports submitted on or after 1st October 2002, shall be in the form prescribed irrespective of the financial year to which it relates.)
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 directed to conduct an audit under sub-section (1) of section
233B of the Act;
(c) “Form” means the Form of the Cost Audit Report and includes auditor’s observations and
suggestions, Annexure and Proforma to the Cost Audit Report;
(Comments: Rule 2(c) - This rule clearly states that the auditor’s observation and suggestions, Annexure and
Proforma to the Cost Audit Report are included in the prescribed form of Cost Audit Report to be submitted to the Central Government under rules.
(d) “Report” means Cost Audit Report duly audited and signed by the Cost Auditor in the prescribed
form of Cost Audit Report;
(e) “Product under reference” means the product or activity to which the Report relates;
((Comments: Rule 2(e) -The term “product under reference” was defined to include “product” as well as
“activities” (in service sector). This explanation was followed by notification of Cost Accounting Records
(Electricity) Rules, 2001 and Cost Accounting Records (Telecommunication) Rules 2001.This clarification
brought paradigm change in the applicability of Cost Audit as the various “services” are also produced, processed and sold like “products” now a days and in any case the term “processing” always meant to include “services” as well. In any case, the fast pace of technology development and opening up of economy for international competition has brought services at par with other products as today services are also being brought and sold just like any other product or commodity.
(f) All other words and expressions used in these rules but not defined, and defined in the Act
and rules made under clause (d) of sub-section (1) of section 209 of the Act shall have the same
meanings as 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. The Cost Audit Report submitted on or after 1st October, 2002, irrespective of the financial year of the company to which it relates, shall be in the form prescribed under these rules. (Comments: Rule 3 : The rules clearly provide that all the cost audit reports submitted on or after 1st October, 2002 shall be submitted in the form prescribed under the Cost Audit Report Rules, 2001 irrespective of the financial year, it belongs to.
4. Form of The Cost Audit Report (1) Every Cost Auditor, who conducts an audit of the cost accounting records of the company shall submit the report (a hard copy and a soft copy) along with auditor’s observations and suggestions, Annexure and Proforma to the Central Government in the prescribed form 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 the receipt of the communication addressed to him calling for such clarifications.
(3) The Forms prescribed in these rules may be filed through electronic media or through any
other computer readable media as referred under section 610A of the Companies Act, 1956 (1 of
1956).**
(4) The electronic-form shall be authenticated by the authorized signatories using digital signatures,
as defined under the Information Technology Act, 2000 (21 of 2000).**
(5) The Forms prescribed in these rules, when filed in physical form, may be authenticated by
authorized signatory by affixing his signature manually.
(Comments: Rule 4 : The Cost Auditor shall submit Cost Audit Report containing:
(a) Auditors’ observations and suggestions (as included in the Form of the Cost Audit Report); and
(b) Annexure to the Cost Audit Report (Para 1 to Para 28); and
(c) Proforma (product-wise cost, sales and margin)
The Cost Auditor has to submit the said Cost Audit Report to the Central Government and at the same time
send a copy of the Cost Audit Report to the company. However, the Cost Audit Report (Amendment) Rules, 2006 provide for e-filing of Cost Audit Reports and have also prescribed Form – I for filing cost audit report and other documents with the Central Government.
** The Cost Audit Report (Amendment) Rules, 2006 issued vide notification no GSR 148(E) have inserted the aforesaid sub-rule (3), (4) and (5). These amendments allow the cost auditor to submit cost audit reports through electronic media or through any other computer readable media as referred under section 610A of the Companies Act, 1956. The electronic form of the cost audit report shall be authenticated by the authorized signatories using digital signatures. Even though, the rules (5) regarding provision for submission of Cost Audit Report in Physical Form still theoretically remain in the rules, no cost audit report is being submitted in the physical form.
5. Time Limit For Submission Of Report
The Cost Auditor shall forward his report referred to in sub-rule (1) of rule 4 to the Central Government
and to the concerned company within one hundred and eighty days from the close of the company’s
financial year to which the report relates.
(Comments: Rule 5 : Even though, there is no provision for extension of time for the submission of the Cost
Audit Report, extension of time can be granted by the Ministry for any valid reason like loss or damage of
records under fire or floods etc.)
6. Cost Auditor to Be Furnished with the Cost Accounting Records etc.
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 to in
sub-section (6) of section 209 of the Act, shall make available to the Cost Auditor within one hundred
and thirty five days from the close of the financial year of the company, such cost accounting records,
cost statements, other books and documents, Annexure and Proforma to the Report, duly completed,
as 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 submit his report within the time limit
specified in rule 5.
(Comments: Rule 6 - Rule 6(2) of the earlier Cost Audit (Report) Rules, 1996 provided that “ if the cost
accounting records, cost statements, other books and papers are not made available by the company within the
time limit specified, [i.e. within 90 days from the end of the financial year of the company], the cost auditor
shall intimate the facts of not having made available to him such records, statements, books and papers to the
Central Government within 10 days after expiry of said time limit of 90 days. However, the corresponding rule
is not appearing in Cost Audit Report Rules 2001. Moreover, the number of days allowed to the company for
making available cost records etc. have been increased from 90 days earlier to 135 days under the new rules. It
is probably due to the following reasons:
(a) The existing rule clearly place the specific responsibility for duly complete cost accounting records, cost
statements, Annexure and Proforma to the Report on the company, which was not there in the earlier
rules.
(b) Companies were earlier finding it difficult to complete the accounting records within 90 days as financial
figures would often change due to financial audit. Therefore, Cost Auditors would initially submit the
provisional report followed by the supplementary report. Therefore, it was requested that if 135 days are
allowed to companies, there may be no need to submit supplementary report as first report itself would be
based on the audited figures.
(c) Rule 7 of the Cost Audit Report Rules 2001 further provides that the Annexure and Proforma prescribed
with the Cost Audit Report shall be approved by the Board of Directors before submitting the same to the
Central Government by the Cost Auditor. Since, the Board would approve the audited Annexure and
Proforma only, the additional 45 days were allowed to the company enable them to complete their documents in all respects. This would also ensure that there is no difference in figures adopted in financial accounts
and those in cost accounts as any changes in financial figures due to audit of financial accounts shall also
reflected in cost accounts; and
(d) Rule 7 of the Cost Audit Report Rules 2001 provides that the Annexure and Proforma, duly audited
by the Cost Auditor, shall also be signed by the Company Secretary and at least one Director on behalf
of the company. In absence of Company Secretary in the Company, the same shall be signed by at least
two Directors. With independent Directors, Audit Committes and strict penalties for not complying with
corporate governance requirements, it was felt that this type of issues regarding not providing of cost
records etc. may not arise
(e) A clarification was also issued that the Cost Auditor shall attend the Audit Committee meetings held by the company. The issues of delays and non availability of cost statements etc. can always be discussed in such Audit Committee meetings. A better understanding and coordination was thus contemplated between the company management and the cost auditor.
(f) The provisions regarding approval by Board of Directors or signing of Annexure and Proforma by Company Secretary and one director etc. were not there earlier in the Cost Audit (Report) Rules, 1996 and therefore, these documents were often signed by the very low officials, who were often responsible for complying with the lawful requirements. Hence the need for intervention by the Central Government at higher levels under those earlier rules.
(g) The responsibility for the compliance of these provisions has been placed on the company and every officer thereof including the persons referred to in sub section 209 (6), i.e. Managing Director, Manager, all
officers and employees of the company, and if there is neither a Managing Director nor Manager, every
Director of the Company. The company has also to render necessary assistance to the Cost Auditor in and
through out the assignment. Therefore, it can be concluded that chances of non-compliance of the rules shall
be almost nil.
(h) However in case of delay in furnishing the Cost Accounting Records, etc by the Company, the Cost Auditor may still be advised to write a letter within 10 days from the expiry of 135 days from the close of the financial year to the company for non-receipt of Cost Accounting Records / Statements, Annexure / Proforma to the
Cost Audit Report, as the case may be, and get it acknowledged by the Company.
Authentication of Annexure to the Cost Audit Report
The Annexure and Proforma prescribed with the Cost Audit Report shall be approved by the Board of
Directors before submitting the same to the Central Government by the Cost Auditor. The Annexure
and Proforma, duly audited by the Cost Auditor, shall also be signed by the Company Secretary and
at least one Director on behalf of the company. In the absence of Company Secretary in the company,
the same shall be signed by at least two Directors.
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