A Complete Guide To Cost Audit

A Complete Guide To Cost Audit

A cost audit is important to assess a company's cost accounting records. Cost audits are required by businesses to guarantee the reliability of their financial records. 

The requirement for businesses to perform cost audits based on their turnover and certain other factors is known as cost audit applicability. 

In this article; we will discuss how cost audits apply and why businesses must follow the rules. 

What is a cost audit?

A cost audit looks at a company's cost documents and other related data, including that of a non-profit organization. 

This method's main goal is to reassure interested parties, including shareholders, management, and regulatory authorities, that the cost data reported by a business is accurate and complies with applicable laws and standards.

Companies that fit certain requirements, such as those related to turnover, industry, or company structure, are subject to cost audits. 

Cost audits are required by the Companies Act of 2013 for certain sectors, including communications, pharmaceuticals, and energy.   

An impartial auditor examines the company's financial statements, cost accounts, and other financial records as part of the cost audit procedure. 

After that, the auditor creates a thorough report that identifies any errors in the company's expense accounting system. This report can be used by management to make wise cost-control choices.

What are the objectives of cost audits?

  1. Verify the accuracy and dependability of cost accounting data to ensure the financial statements are consistent.  
  2. Find any cost accounting inefficiencies that have an impact on the company's financial success.  
  3. Make sure the business complies with all relevant cost accounting laws and regulations. 
  4. Provide information and insights to help the management make educated choices about cost-control strategies and financial planning. 
  5. Find opportunities for expense reduction that could boost the company's profitability.  
  6. Finding inefficiencies and implementing solutions will help the company's earnings.  
  7. Assure all parties involved, such as creditors, shareholders, and regulatory bodies, that the company's cost accounting method is precise and dependable.  

Who is applicable for Cost audit?

Depending on their turnover and other factors, some Indian businesses are required to conduct cost audits. 

The Companies Act of 2013 and the Cost Accounting Records Rules of 2011 govern how cost audits are used.   

  1. Companies that produced products or services and had a prior fiscal year revenue of at least Rs. 50 crores. 
  2. Regardless of their annual revenue, businesses that produce specified products under the 2011 Cost Accounting Records Rules. Drugs and pharmaceuticals, fertilizers, sugar, industrial alcohol, electricity, and many other items are among these goods.   
  3. The government of India may also notify certain businesses on a case-by-case basis.   
  4. Foreign businesses that produce goods and services in India. These companies are required to do a cost audit irrespective of their turnover.

Non-applicability of cost audit.

The following circumstances exempt the businesses covered by Rule 3 from having their expense records audited: 

More than 75% of the company's overall income comes from exports. The export income must be received in foreign currency. 

The business must be in a special economic zone. 

The business is producing energy for captive use through a captive generating plant. 

Cost audit under the companies act

Under Section 148 of the Companies Act 2013, provisions are given which are related to cost audit applicability. 

The features of section 148 are – 

Section 148 (1) gives the Central Government the authority to order the companies that produce goods or services to include information about the use of material, labour, and other expenses in their books of accounts. 

Under Table A and Table B of Rule 3 of the Companies (Cost Records and Audit) Rules, 2014, provide a list of specified companies required to maintain cost records. 

Section 148 (2) gives the Central Government the authority to order, based on the net worth or turnover of the company, an audit of cost records of the specified class of companies. 

The provisions of the companies that are required to have their cost records audited are contained in Rule 4 of the Companies (Cost Records and Audit) Rules, 2014; 

The cost accountant that the Board has designated is responsible for conducting the cost audit; 

Any failure on the part of the business to comply with the law will result in a fine that cannot be less than INR 25,000 or greater than INR 5 lakhs. Additionally, any company official who violates the law will be subject to a fine of up to INR 1,00,000 or a period of imprisonment of up to 1 year; however, neither punishment shall be less than INR 10,000; 

If the cost inspector commits a mistake, he will be held accountable according to section 147 (2) to section 147. (4) 

The Companies (Cost Records and Audit) Rules of 2014 include provisions regarding the applicability of cost audits in rule 4. The cost audit is relevant in the following circumstances, per Rule 4: 

Table A specifies the goods and services.  

The company's yearly total turnover from all its goods and services is INR 50 crore or more. 

The total annual revenue from the good or service for which expense records must be kept is INR 25 crore or more. 

Table B lists the products and services - 

The aggregate yearly turnover of each product or service for which cost records are to be kept must be INR 35 Crore or more, and the overall annual total turnover of all products and services must be INR 100 Crore or more. 

What is the process of cost auditing?

The following stages are included in the cost audit process:  

  1. A qualified cost accountant or a firm of cost accountants registered with the Institute of Cost Accountants of India is appointed as a cost auditor by the business. 
  2.  The cost auditor creates a checklist of things and plans the assessment. They also examine the cost accounting strategies and practices used by the business.  
  3. The cost auditor compiles information on the cost accounts, cost locations, and statements of the business. They also examine the company's financial documents and statements.  
  4. The cost inspector checks the authenticity of the information gathered. They also examine the organization's bookkeeping system to look for errors or inefficiencies. 
  5. The cost auditor compiles a thorough report that contains their conclusions, suggestions, and notes. The executive team and the board of directors receives the report.  
  6. To make sure the management implements their suggestions, the cost auditor follows up with them. Additionally, they guarantee that the discovered inefficiencies are resolved.  
  7. The cost auditor makes sure that the business adheres to all relevant cost accounting laws and regulations.  
  8. The cost inspector offers suggestions for improving the company's cost accounting system and procedures.   

Cost audit can be an ordeal and a long process. If the cost auditor is not competent enough, it can become a headache for the business owner. 

If you need accurate accounting services involving cost auditing, you don't need to look further than Especia. 

Especia employs professionals that will handle the cost audit process for you. 

We would be involved from the start to the end and would work to improve the accounting health of your company. 

Difficulties in the Cost audit process

There are several problems that companies can face with cost audits, including: 

  1. Conducting a cost audit can be costly and time-consuming, particularly for smaller businesses with fewer resources.  
  2. Businesses might not have the knowledge or resources necessary to complete a comprehensive cost audit, which could produce inaccurate or insufficient results.  
  3. Employee resistance to change could make executing the changes the cost auditor recommends difficult.  
  4. Inadequate record-keeping can make it challenging to perform a cost audit and lead to incomplete or inaccurate data.  
  5. The cost audit may not fully represent the company's expenses if the cost accounting system is inaccurate or incomplete.  
  6. Businesses may find it difficult to follow all relevant laws and regulations regarding cost audits.

Companies need to be aware of these potential problems and take relevant steps to mitigate these issues. 

Hiring a qualified cost auditor and ensuring accurate record-keeping is the answer to all these problems. 

Especia provides both record-keeping and cost-audit services. Addressing these issues can help companies get the most out of the cost audit process and drive improvements in their cost management practices. 

How to ensure a perfect Cost audit?

  1. Selecting an experienced and knowledgeable cost auditor is the most important stage. The auditing process will likely go smoothly if you can find a good cost auditor. 
  2. Companies should make sure that the cost auditor receives accurate and full data, including details on all cost centres and allocation strategies. 
  3. Businesses should regularly perform internal audits to find potential problems with their cost accounting procedures and fix them before the cost auditor shows up.   
  4. To guarantee the precision and dependability of their cost accounting data, businesses should put in place quality control measures.  
  5. Companies must adhere to all relevant laws and regulations and keep up with the most recent cost audit regulations.  
  6. Companies must act to address any problems found during the cost audit, including adopting any changes suggested by the auditor.

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To conclude, the cost auditing process is incredibly important for businesses and can reap a lot of benefits if done correctly. 

The applicability depends on many of the factors that have been listed in this article. 

If you need accounting services and want to know more about cost auditing, you can contact us at Especia. 

Especia would further help you get the best cost auditors, making the process incredibly easy for you.

FAQ’s Cost audit

1. What are the major benefits of cost audits for a company?  

Improved profitability, regulatory compliance, better decision-making, greater transparency, and ongoing improvement are all advantages of cost auditing.   

2. What is the difference between a cost audit and a financial audit?  

The financial audit focuses on confirming the veracity and accuracy of financial accounts, while the cost audit focuses on confirming the veracity and accuracy of cost accounting records.   

3. Can companies conduct a voluntary cost audit?  

Yes, businesses can perform a voluntary cost assessment to pinpoint potential cost-cutting opportunities and enhance their cost management procedures.

4. How often should a company conduct a cost audit?  

In India, cost audits are generally done on an annual basis. A company can opt for a different number of cost audits depending on the nature and size of the company. 

5. Can cost audits help companies improve their environmental sustainability?  

A cost audit helps the company to reduce costs and waste of resources. When the company reduces the use of unwanted resources, it is ultimately good for the environment.

Contact Us for Startup Valuation Services ,Business Valuation Services ,ESOP Valuation Consultants,Fund Raising Valuation , Valuation Services , Internal Audits Services  in Delhi, Noida, Gurgaon, and all across India: write to us at accounts@especia.co.in. Or Call On :(+91)-9711021268 +91-9310165114

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