CMA Final · Cost and Management Audit

Cost Auditor: formula sheet

Full chapter guide

Key formulas

Who conducts the audit: Cost audit under S.148(2) is conducted by a cost accountant appointed by the Board; Section 148(3). The Board appoints; members determine the remuneration in the prescribed manner.
Statutory auditor bar: Auditor appointed under S.139 cannot be appointed as cost auditor of the same company; First proviso to Section 148(3). Protects independence.
Cost auditing standards: Cost auditor must comply with cost auditing standards issued by the Institute of Cost Accountants of India with Central Government approval; Second proviso and Explanation to Section 148(3).
Relation to financial audit: Cost audit is in addition to audit under Section 143; Section 148(4).
Report recipient: Cost auditor submits the report to the Board of Directors; Proviso to Section 148(5).
Company's filing after report: Furnish report to Central Government within 30 days of receiving a copy, with explanation on every reservation or qualification; Section 148(6). This is the company's duty after the audit, not the appointment filing.
Form CRA-2 timeline: Earlier of: 30 days from the Board meeting appointing the cost auditor, or 180 days from the start of the financial year; Stated in the Cost Records and Audit Rules. Calculate both dates and take the earlier.
Audit Committee role: Board appoints on the recommendation of the Audit Committee, where one exists; From the Rules. Remuneration is then ratified by members.
Who audits cost records: Cost accountant appointed by the Board (section 148(3)); Remuneration is determined by the members in the prescribed manner.
Statutory auditor bar: Person appointed under section 139 as auditor ⇒ cannot be appointed for cost audit; First proviso to section 148(3). Cost auditor and statutory auditor must be different persons.
Standards to follow: Cost auditor must comply with the cost auditing standards; Standards are issued by the Institute of Cost Accountants of India with Central Government approval (Explanation to section 148(3)).
Borrowed auditor provisions: Section 148(5): qualifications, disqualifications, rights, duties and obligations of auditors apply to cost auditor so far as applicable; This is the route by which section 141(3) disqualifications reach the cost auditor.
Relation to statutory audit: Cost audit is in addition to audit under section 143; Section 148(4).
Disqualification arising after appointment: Vacate office; deemed casual vacancy (section 141(4)); Applies if a disqualification under section 141(3) is incurred after appointment.
Report recipient: Cost audit report is submitted to the Board of Directors; Proviso to section 148(5).
Source of power: Section 148(1): cost records; Section 148(2): cost audit; Central Government acts by order, for a class of companies, based on prescribed net worth or turnover.
Cost records test (Rules): Company in a listed regulated or non-regulated industry AND overall turnover of preceding year ≥ ₹35 crore; Covers all products and services of the company, including units and branches. Check the exemptions.
Cost audit test: regulated sector (Rules): Overall turnover ≥ ₹50 crore OR aggregate turnover of an individual product or service > ₹25 crore; Applies to companies already covered for cost records. Confirm limits against the current Rules text.
Cost audit test: non-regulated sector (Rules): Overall turnover ≥ ₹100 crore OR aggregate turnover of an individual product or service > ₹35 crore; Applies to companies already covered for cost records. Note ≥ for overall and > for individual product, as in the Rules.
Cost auditor and statutory auditor: Cost auditor = cost accountant appointed by the Board; the Section 139 auditor cannot be appointed; Section 148(3). The report goes to the Board (Section 148(5) proviso).
Report to Government: Company furnishes cost audit report to the Central Government within 30 days of receiving a copy; Section 148(6), with full information and explanation on every reservation or qualification.
Rights and duties of a cost auditor: Section 148(5): auditor's qualifications, disqualifications, rights, duties and obligations apply to a cost auditor, so far as applicable; This is how a cost auditor gets rights such as access to records. Say 'so far as may be applicable' in your answer.
Company's duty to the cost auditor: Company must give all assistance and facilities to the cost auditor (Section 148(5)); Use this to answer questions on obstruction or non-cooperation.
Whom the cost auditor reports to: Cost auditor → Board of Directors (proviso to Section 148(5)); The report goes to the Board, not directly to the Central Government.
Company's filing duty: Within 30 days of receiving the cost audit report: furnish to Central Government with full information and explanation on every reservation or qualification (Section 148(6)); The 30 days run from the company's receipt of the report. The duty is on the company.
Further information: Central Government may call for further information; company furnishes within time specified (Section 148(7)); Applies after the Government has considered the report and the company's explanation.
Relation to financial audit: Cost audit is in addition to the section 143 audit (Section 148(4)); The cost auditor must not be the company's section 139 auditor (first proviso to Section 148(3)).
Standards: Cost auditor must comply with the cost auditing standards (second proviso to Section 148(3)); These standards are issued by the Institute of Cost Accountants of India with Central Government approval.
Penalty for default: Company and officers in default: as in section 147(1). Cost auditor in default: as in section 147(2) to (4) (Section 148(8)); Do not quote amounts unless the question gives them.
Appointment and remuneration: Cost auditor appointed by the Board; remuneration determined by the members in the prescribed manner; Section 148(3). Do not say the Board fixes the fee.
Who cannot be cost auditor: Person appointed under Section 139 as company auditor cannot be appointed for the cost audit; First proviso to Section 148(3). The cost auditor must be a cost accountant.
Standards to follow: Cost auditor must comply with the cost auditing standards; Second proviso to Section 148(3). Standards are issued by the Institute with Central Government approval.
Report submission: Cost audit report goes to the Board; company furnishes it to the Central Government within 30 days of receiving a copy; Section 148(5) proviso and Section 148(6), with full information and explanation on every reservation or qualification.
Penalty on default: Company and officers in default: as per Section 147(1). Cost auditor in default: as per Section 147(2) to (4); Section 148(8).
Lesser penalty: Not more than one-half of the penalty, subject to a maximum of ₹2,00,000 for a company and ₹1,00,000 for an officer in default or other person; Section 446B. Applies to One Person Company, small company, start-up company and Producer Company.
Resignation statement (by analogy): Auditor who resigns files a statement in the prescribed form with the company and the Registrar within 30 days of resignation; Section 140(2) for the Section 139 auditor. Apply to the cost auditor only so far as applicable under Section 148(5).

Quick revision

Section 148 lets the Central Government direct that cost records be kept by specified classes of companies.
Under Section 148(2) the Government may direct a cost audit for covered companies above prescribed net worth or turnover.
The cost auditor is a cost accountant appointed by the Board, with remuneration determined by the members in the prescribed manner.
A person appointed as company auditor under Section 139 cannot be appointed for the cost audit.
The cost auditor must comply with the cost auditing standards issued by the Institute of Cost Accountants of India with Central Government approval.
The cost audit is in addition to the audit under Section 143.
The cost auditor reports to the Board of Directors, not directly to the Central Government.
The company must furnish the cost audit report to the Central Government within thirty days of receiving a copy, with full explanation of every reservation or qualification.
The Central Government may call for further information and the company must furnish it within the specified time.
Qualifications, disqualifications, rights, duties and obligations of auditors under the Chapter apply to the cost auditor so far as applicable.
The company must give the cost auditor all assistance and facilities for auditing cost records.
Default: the company and officers in default are punishable under Section 147(1); the cost auditor under Section 147(2) to (4).

Common mistakes

Saying members appoint the cost auditor at the AGM. Fix: Remember Section 148(3): the Board appoints. Members only determine or ratify the remuneration.
Allowing the statutory auditor to also do the cost audit. Fix: The first proviso to Section 148(3) bars a person appointed under Section 139 from the cost audit of the same company.
Saying the cost auditor must be a chartered accountant. Fix: Section 148(3) requires a cost accountant. Section 141(1) is the statutory auditor's qualification.
Believing the statutory auditor can also do the cost audit if he is qualified. Fix: The proviso to section 148(3) bars a section 139 auditor from being appointed for cost audit. Different persons are needed.
Treating cost records and cost audit as the same requirement. Fix: Always answer both. Records come from Section 148(1) and audit from Section 148(2), with different thresholds.
Using the current year's turnover instead of the immediately preceding financial year. Fix: Underline the year of the turnover. The Rules test the preceding year.
Saying the cost auditor submits the report to the Central Government. Fix: Write the chain: cost auditor to Board, then company to Central Government within thirty days of receipt.
Counting the thirty days from the balance sheet date or the end of the audit. Fix: Section 148(6) counts from the date the company receives a copy of the cost audit report.
Writing that the Board fixes the cost auditor's remuneration. Fix: Write the two parts separately: Board appoints, members determine the remuneration in the prescribed manner.
Saying the statutory auditor can also be the cost auditor. Fix: Recall the first proviso to Section 148(3). A person appointed under Section 139 cannot be appointed for the cost audit.

Exam tips

Write the section number with the rule. 'Board appoints under Section 148(3)' scores better than a general statement.
In a case question, check independence first. A link to the Section 139 statutory auditor is usually the planted issue.
For CRA-2 date questions, show both calculations and then say 'whichever is earlier'. Marks go for the method.
Keep three reports apart in your answer: appointment (CRA-2), the report to the Board, and the company's filing with the Central Government.
In a short note, mention that the cost auditor must follow cost auditing standards and that the company must give all assistance and facilities.
Quote section 148(3) and its first proviso word for word in spirit. Examiners look for the statutory auditor bar.
In case scenarios, scan the facts for relatives, shareholdings, loans and services other than audit. These usually point to a section 141(3) disqualification.
For a cost auditor versus statutory auditor comparison, cover qualification, appointing authority, standards followed, whom the report goes to, and that the cost audit is additional.