Cost Compliance Vs Cost Audit

COST COMPLIANCE-AUDIT


S.No.
Subject
Cost Compliance
Cost Audit
1.
Applicable Rule
The Companies (Cost Accounting Records)Rules,2011.
The Companies (Cost Audit Report)Rules,2011.
2.
Applicable financial year
1st April 2011
Separate financial year applicable for separate industries. (copy enclosed as annexure 1).
{Cost Audit Reports submitted on or after 1st day of April, 2012, irrespective of the financial year for which the cost audit report is submitted, shall be governed by the above mentioned Rules.}
3.
Applicability
Shall apply to every company, (including a foreign company) which is engaged in the production, processing, manufacturing, or mining activities.
And
The aggregate value of net worth exceeds Rs.5 Crore(as on last date of immediately preceding financial year.)
OR
The aggregate value of turnover exceeds Rs. 20 Crores(as on last date of immediately preceding financial year.)
OR
The Company’s equity/debt instruments are listed or in the process of listing on any stock exchange in India or outside India.
(List of applicable industries and other details attached as Annexure 1)
4.
Non-Applicabilty
These rules shall not apply to:
1.       A company governed by any special Act.
2.       Wholesale or retail trading activities.
3.       Banking, financial, leasing,  investment, Insurance, education, healthcare,  tourism, travel, hospitality,  recreation, transport services, business/ professional consultancy,
I T & I T  enabled services,  research & development,  postal/ courier services, etc.
4.       Companies engaged in rendering job work operations or contracting /sub-contracting activities.
5.       Companies engaged  In the  production,  processing,  manufacturing or mining  activities till  such  time  they  commences  their  commercial Operations.
6.       Ancillary products/ activities of companies identical to their main operations and wherein the  total turnover from the sale of each such  ancillary products/ activities  do  not  exceed 2%  of  the  total turnover  of   the  company  or  Rs.20  crores,  whichever  Is  lower.
Companies engaged in product/activity not listed above (in annexure 1)will be outside the purview of cost audit after 1st April 2012 even if the company was earlier under company specific cost audit.
These rules shall also not apply to:
1.       Generation of electricity for captive consumption.
2.       Own  manufactured  products  that  are  consumed  exclusively  by  the company  for  the  sole  purpose  of  production,  processing, manufacturing,  or  mining  of  its  other  product or  activities that  are subject to cost audit.
3.       Hundred percent Export Oriented Units
5.
Procedure of Appointment
1.       Pass a resolution in the Board                Meeting for the appointment of Cost Accountant.(draft resolution attached as annexure 4-a)
Cost Accountant should be either a permanent employee of the Company or should hold a valid certificate of practice.
1.       Audit Committee to obtain the following Certificates  from the auditor:
§  Certificate for his/ her independence and arm lengths relationship* with the Company. (Copy of the draft model of the certificate is enclosed as annexure 2).
§  Certificate regarding compliance of section 224(1-B) of the Companies Act, 1956. (Copy of the draft model of the certificate is enclosed as annexure 3).
2.       Audit committee to recommend appointment of the cost auditor to the Board of Directors.( draft resolution attached as annexure 4-b)
3.       Pass a resolution in the Board                Meeting proposing appointment of Cost Auditor. (draft resolution attached as annexure 4-c)
4.       The Company shall file form 23 C with the Central Government on www.mca.gov.in within 90 days from the commencement of financial year along with
·      Certified copy of the           Board Resolution proposing appointment of Cost Auditor.
·       Copy of certificate obtained from Cost Auditor regarding compliance of Section 224(1-B) of the Companies Act 1956.
(in case the Company is covered for the first time under cost audit via order dated 30.06.2011 then 90 days period will be calculated from the date of the order.)
5.       The application shall be deemed to be approved unless the contrary is heard from the Central Government within 30 days.
6.       After 30 days the Company shall issue a formal letter of appointment to the Auditor as approved by the Board.
7.       Within 30 days of receipt of appointment letter from the Company the Cost Auditor shall inform the Central Government in Form 23 D along with the copy of such appointment.
                
(*In order that ‘arm’s  length relationship’ is ensured, the cost auditor(s)  appointed [whether for one or all of  the company’s products covered under cost audit],shall not provide any  other services to  the  company relating to:
(i) design and implementation  of  cost accounting system; 
or 
(ii)  the maintenance of
cost  accounting  records,
 or 
(iii) act  as  internal  auditor, whether acting Individually,  or through the same  firm or  through other group firms where
he or any partner has any common interest.)
(However, they can certify the compliance report or provide any other services as may be assigned by the Company, apart from the above mentioned services.)
6.
Records to be maintained
The Company has to keep cost records and maintain books of accounts in such a manner so as to enable the company to exercise control over the various operations and costs with a view to achieve optimum economies in utilization of resources.
The annexure to the report would require the following information:
1.       Quantitative information of production & sales of the products.
2.       Profit Reconciliation Statement.
The Statements to be prepared should reflect the following:
1.       Cost of utilities like water/steam/power.
2.       Cost of Raw material.
3.       Cost of final product produced/sold.
4.       Cost of transmission/ distribution etc.
5.       Cost of processing/ supply.
6.       Activity wise capital cost
7.       Allocation & appointment of total expenses & income of the company (including overheads).
8.       Profit Reconciliation.
Cost Accounting records, Cost Statements, other books and documents, as would be required for conducting the cost audit.
Books of Accounts and other Records should be maintained in such a way that
It reflects utilization of materials, labour and other items of cost that provides data/information to compute the cost of production, cost of sales and margin of each of the products/activities of the company on monthly/ quarterly/ half yearly/ annual basis.
The annexure to the report would require the following information:
1.       Cost Accounting policies followed.
2.       Net Sales of all the product group(s).
3.       Quantitative information of available capacity/actual production/actual sales etc.
4.        “Abridged Cost statement” prescribed in the Companies (Cost Audit Report) Rules, 2011 can be considered as a sample cost statement.
5.       Operating Ratio Analysis.
6.       Profit Reconciliation.
7.       Value addition & Distribution of earnings.
·         To be authenticated by 2 directors & a cost accountant.
·         Such records to be maintained in good order for 8 yrs.
7.
Returns to be submitted to the Company/ filed with the Central Government.
Cost Accountant has to forward to the Central Government and to the concerned Company the following forms:
1.       Compliance report, duly certified by a cost accountant, in Form A.( in XBRL format as per General Circular no.8/2012 dated 10.05.2012)
2.       Annexure to the Compliance Report in form B.
Form A in XBRL format will be available soon on www.mca.gov.in and has to be filed after 30th June 2012. It should be filed within 180 days from the close of the company’s financial year.
*(current form A enclosed as annexure 5)
Cost Auditor has to forward to the Central Government and to the concerned Company the following forms:
3.       Cost Audit Report and other documents in Form I.(in XBRL format as per General Circular no.8/2012 dated 10.05.2012)
1.       Cost Audit report along with auditor’s observations & suggestions along with the annexure to the cost audit report in Form II.
2.       Performance Appraisal Report in Form III.
Form I in XBRL format will be available soon on www.mca.gov.in and has to be filed after 30th June 2012. It should be filed within 180 days from the close of the company’s financial year.
*(current Form I enclosed as annexure 6)
8.
Authentication
Compliance Report along with the Annexure to the Central Government to be duly certified by a Cost Accountant.
Annexure to the compliance report shall be approved by the Board of Directors before submission to the Central Government.
To be approved by the Board of Directors before submission to the Central Government.
The Annexure, duly audited by the Cost Auditor shall also be signed by the Company Secretary and 1 director & in the absence of Company Secretary by 2 directors.

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