Guide to new structure of cost audit and cost accounting to the manufacturing concern

[ajay singh]

Recently issued notification and circulars:- 

Dated:- 11-04-2011 – Simplified procedure for appointment of cost auditor 

Dated:- 02-05-2011 – Cost Audit order on every company engaged in bulk drugs, formulation, fertilizers, sugar, industrial alcohol, electricity, petroleum, telecommunications where:- i) networth is more than 5 crore, or ii) turnover is more than 20 crore, or iii) where company equity or debt is listed or proposed to be listed in any stock 

Dated:- 03-05-2011 – amended on 30-06-2011 – in cement, tyres and tubes, steel, insecticides, paper, glass, paints and varnishes and aluminum where:- i) turnover is 100 crore. ii) equity or debt is listed or proposed to be listed in any stock exchange. 

Dated:- 03-06-2011 – Cost Accounting Record Rules 2011. 

Dated:- 03-06-2011 – Cost Audit Report Rules 2011. 

Dated:- 24-01-2012 – Cost Audit order  Jute, cotton, silk, woolen or blended fibers/textiles (Chapters 50 to 63),  Edible oil seeds and Oils (incl. vanaspati), Chapters 12 and 15,  Packaged food products Chapters 2 to 25 (except Chapters 5,6, 14, 23 and 24),  Organic & Inorganic Chemicals Chapters 28, 29,32,38 and 39,  Coal & Lignite Chapter 27,  Mining & Metallurgy of ferrous & non‐ferrous metals Chapters 26 and 74 to 83 (except Chapters 76 and 77),  Tractors & other motor vehicles (incl. automotive components) Chapters 84, 85 and 87  Plantation Products Chapters 8, 9, 21 and 40,  Engineering machinery (incl. electrical & electronic products) Chapters 84 and 85 Wherein total turnover exceed Rs. 100 Cr. Rupees in immediately preceding financial year, Company is listed in any recognized stock exchange and company is proposed to be listed. Clarification regarding applicability and compliance requirements:- 

Dated: - 11-11-2011 – Master circular n0. 02/2011. 

Dated:- 30-11-2011 – General Circular no. 67/2011. 

Dated:- 30-11-2011 – General Circular no. 68/2011.

Salient features of new structure:- Audit committee is to ensure that cost auditor is free from any disqualification under section 233B(5), 226(4), 226(5). Company to file application for approval of appointment in Form 23C along with- - copy of board resolution. - copy of consent letter from cost auditor. Letter of acceptance is given by the cost auditor in Form 23D.

Cost Accounting Record Rules 2011:- Applicability:- These rules shall apply to every company, including a foreign company as defined under section 591 of the Act, which is engaged in the production, processing, manufacturing, or mining activities 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. Provided that these rules shall not apply to a company which is a body corporate governed by any special Act; Provided further that these rules shall not apply to the activities or products covered in any of the following rules,- (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 Form of the Compliance Report:- Every company to which these rules apply shall submit a compliance report in Form B, in respect of each of its financial year commencing on or after the 1st day of April, 2011, duly certified by a cost accountant, along with the Annexure to the Central Government, in the prescribed form. Time limit for submission of Compliance Report – Every company shall submit the compliance report referred to in rule 5 to the Central Government within one hundred and eighty days from the close of the company’s financial year to which the compliance report relates. Authentication of Annexure to the Compliance Report The Annexure prescribed with the compliance report, as certified by the cost accountant, shall be approved by the Board of Directors before submitting the same to the Central Government by the company. Penalties – (1) If default is made by the cost accountant in complying with the provisions of these rules, he shall be punishable with fine, which may extend to five thousand rupees. (2) If a company contravenes any provisions of these rules, the company and every officer thereof who is in default, including the persons referred to in sub-section (6) of section 209 of the Act, shall be punishable as provided under sub-section (2) of section 642 read with sub-sections (5) and (7) of section 209 of Companies Act, 1956 (1 of 1956).

Cost Audit Report Rule 2011:- Different Forms:- (a) Form-I means the Form prescribed in these rules for filing cost audit report and other documents with the Central Government in the electronic mode; (d) Form-II means the Form of the cost auditor’s report and includes auditor's observations and suggestions, and Annexure to the cost audit report (e) Form-III means the Form of the performance appraisal report. Applicability:- (1) These rules shall apply to every company in respect of which an audit of the cost records has been ordered by the Central Government under sub-section (1) of section 233B of the Act. (2) Every company as specified in sub-rule (1) shall, within ninety days of the commencement of every financial year, file an application with the Central Government seeking prior approval for appointment of the cost auditor, through electronic mode, in the prescribed form, alongwith the prescribed fee as per the Companies (Fees on Applications) Rules, 1999, and requisite enclosures. (3) Every cost auditor appointed under sub-rule (2) shall, within thirty days of receipt of letter of appointment, inform his appointment to the Central Government through electronic mode, in the prescribed form, alongwith the requisite enclosures. (4) Notwithstanding anything contained in sub-rule (2) and (3) above, every company and every cost auditor shall follow the procedure prescribed vide Ministry of Corporate Affairs’ General Circular No. 15/2011 [File No. 52/5/CAB-2011] dated April 11, 2011. Form of the Report:- (1) Every cost auditor, who conducts an audit of the cost records of the company, shall submit the report along with auditor's observations and suggestions, and Annexure to the Central Government in the prescribed form and at the same time forward a copy of such report to the company. (2) The cost audit report submitted on or after 1st day of April, 2012, irrespective of the financial year of the company to which it relates, shall be in the form prescribed under these rules. (3) Every company as specified in sub-rule (1) of rule 3 shall, keep and maintain cost details, statements, schedules, etc. for each unit and each product or activity comprised in each product group, duly authenticated by atleast two Directors of the company and the cost auditor. (4) The cost details, statements, schedules, etc. of every company, as specified in sub-rule (3), relating to a period of not less than eight financial years immediately preceding a financial year, or where the company had been in existence for a period less than eight years, in respect of all the preceding years shall be kept in good order: (5) Every cost auditor, who submits a report under sub-rule (1), shall also furnish performance appraisal report, duly authenticated by the cost auditor, to the Board/Audit Committee of the company in the prescribed form. (6) 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.

Time limit for submission of Report:-  Every 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.  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, such cost accounting records, cost statements, other books and documents, and Annexure 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. Authentication of Annexure to the Cost Audit Report – The Annexure 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, 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 twoDirectors. Penalty:-  If default is made by the cost auditor in complying with the provisions of rule 4 or rule 5, he/she shall be punishable with fine, which may extend to five thousand rupees.  If a company contravenes any provisions of these rules, the company and every officer thereof who is in default, including the persons referred to in sub-section (6) of section 209 of the Act, shall be punishable as provided under sub-section (2) of section 642 read with sub-sections (5) and (7) of section 209 and sub-section (11) of section 233B of Companies Act, 1956 (1 of 1956).