Scope of Cost Audit

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 company’s affairs in the case
of the balance sheet and of the profi t or loss for its fi nancial year in the case of the profi t and lossaccount. Therefore, statutory fi nancial 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. Profi t and Loss Account and Balance Sheet before the shareholders in the
Annual General Meeting, duly certifi ed 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 specifi c Cost Audit Order has been issued with reference to a specifi ed
product by the Cost Audit Branch of Ministry of Corporate Affairs are required to get their cost
accounts audited with respect to that specifi c 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 specifi c 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 notifi ed 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
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.