Corporate and Other Laws · Audit and Auditors

Cost Audit, Secretarial Audit and Internal Audit under the Companies Act, 2013

Updated 4 October 2026 · Fact-checked

These are three audits beyond the statutory audit. Cost audit (section 148) checks cost records and is done by a cost accountant. Secretarial audit (section 204) checks secretarial records and is done by a company secretary in practice. Internal audit (section 138) is done by a CA, cost accountant or other professional. Applicability depends on the prescribed classes.

Understand Cost Audit, Secretarial Audit and Internal Audit

A statutory audit under section 143 checks whether the financial statements give a true and fair view. The Act adds three more audits, each with a different purpose, a different professional and a different report.

Cost audit (section 148) is about cost records. The Central Government may direct certain classes of companies, engaged in producing prescribed goods or services, to include particulars of material, labour or other cost items in their books. It may then order an audit of those cost records for companies with a prescribed net worth or turnover. The audit is in addition to the section 143 audit.

Secretarial audit (section 204) is about compliance records. Every listed company, and other prescribed classes of companies, must annex a secretarial audit report to the Board's report. The report is given by a company secretary in practice, in the prescribed form.

Internal audit (section 138) is about the company's own functions and activities. Prescribed classes of companies must appoint an internal auditor. He is a chartered accountant, a cost accountant or another professional decided by the Board. The Central Government prescribes by rules how often the audit is done and how it is reported to the Board.

The exam asks you to separate the three. Ask four questions each time: who needs it, who does it, who appoints, and to whom is the report given. For the prescribed thresholds (net worth, turnover, paid-up capital), the Act only says "as may be prescribed". Use the Rules figures from your study material.

Key rules to remember

Cost audit: direction and scope (s.148(1)-(2)): Cost records (s.148(1)) → cost audit (s.148(2)) only if net worth or turnover meets the prescribed limit; Both steps are by Central Government order, for prescribed classes of companies. The thresholds are in the Rules, not in the section.
Cost auditor: who and how appointed (s.148(3)): Cost accountant appointed by the Board; remuneration determined by members in the prescribed manner; The company's section 139 statutory auditor cannot be appointed as cost auditor. The cost auditor must follow cost auditing standards.
Cost audit report (s.148(3) proviso, (6)): Report goes to the Board; company sends it to the Central Government within 30 days of receiving it, with full information and explanation on every reservation or qualification; The Central Government may call for more information, to be given within the time it specifies (s.148(7)).
Cost audit vs statutory audit (s.148(4)): Cost audit is in addition to the audit under section 143; Rights, duties and obligations of auditors apply to the cost auditor so far as applicable (s.148(5)).
Secretarial audit (s.204(1)-(3)): Listed company + prescribed classes → secretarial audit report by company secretary in practice, annexed to the Board's report under s.134(3); The Board must explain in full every qualification, observation or remark in its report (s.204(3)). The company must give all assistance and facilities (s.204(2)).
Secretarial audit penalty (s.204(4)): Company, every officer in default, or the company secretary in practice in default: penalty of ₹2,00,000; The section says "liable to a penalty of two lakh rupees".
Internal audit (s.138): Prescribed classes of companies → internal auditor (CA, cost accountant or other professional decided by the Board) audits functions and activities of the company; Manner and intervals of audit and reporting to the Board are prescribed by the Central Government by rules.
Fines for cost audit default (s.148(8)): Company and officers in default: as per s.147(1). Cost auditor in default: as per s.147(2) to (4); Quote the s.147 link only; do not state amounts unless your study material gives them.

How to solve Cost Audit, Secretarial Audit and Internal Audit questions

Use the same method for any question on these three audits. It keeps your answer in the provision-facts-conclusion format.

1Identify which audit the question is about: cost records, secretarial records, or internal functions and activities.
2State the section: 148 for cost audit, 204 for secretarial audit, 138 for internal audit.
3Check applicability. Cost audit needs a Government order for the class of company, plus the prescribed net worth or turnover. Secretarial audit applies to every listed company and prescribed classes. Internal audit applies to prescribed classes.
4Match the professional: cost accountant, company secretary in practice, or CA / cost accountant / other professional decided by the Board.
5Check appointment and any bar. For cost audit, the Board appoints and the statutory auditor cannot be appointed.
6State to whom the report goes and what happens next: the Board for cost audit (then the Central Government within 30 days); the Board's report for secretarial audit; the Board for internal audit.
7Apply the facts given. If a threshold figure is needed, take it from the Rules in your study material and say so.
8Write a one-line conclusion that answers the question asked.

Quickest way: Three-audit grid for MCQs and written answers

When to use it: Use it when you must pick between the audits in an MCQ, or when you have only a few minutes for a 4-5 mark written answer.

Memorise the grid: Cost = s.148 = cost accountant = report to Board. Secretarial = s.204 = company secretary in practice = annexed to Board's report. Internal = s.138 = CA / cost accountant / other professional = reports to Board as prescribed.
In MCQs, eliminate any option that gives the statutory auditor the cost audit. The proviso bars it.
Eliminate any option that says a cost audit replaces the section 143 audit. It is in addition.
For secretarial audit, look for the word "listed". Every listed company is covered.
In written answers, write the section, the rule, then the facts, then a conclusion. Each part can earn a step mark.

Common mistakes in Cost Audit, Secretarial Audit and Internal Audit

Appointing the company's statutory auditor as cost auditor.
Students think one auditor can do all audits to save cost.
Fix: Remember the first proviso to s.148(3): a person appointed as auditor under section 139 cannot be appointed for cost audit.
Saying cost audit applies to every company in manufacturing.
Students ignore the words "as may be prescribed" and "by order".
Fix: Cost audit needs a Central Government order for the class, and net worth or turnover at the prescribed level.
Writing that cost audit replaces the statutory audit.
Both are called audits and students merge them.
Fix: State s.148(4): cost audit is in addition to the audit under section 143.
Saying the secretarial auditor can be any professional.
Students mix it up with internal audit, where the Board has choice.
Fix: Secretarial audit is by a company secretary in practice only. Internal audit allows a CA, cost accountant or other professional decided by the Board.
Forgetting that the Board must respond to a secretarial audit report.
Students stop at the annexure of the report.
Fix: Add s.204(3): the Board must explain in full every qualification, observation or remark in its report.
Sending the cost audit report straight to the Central Government or to the members.
Students overlook the two-step route.
Fix: The cost accountant submits to the Board. The company then furnishes it to the Central Government within 30 days of receipt, with full information and explanation on every reservation or qualification.

Worked examples

Example 1

ABC Ltd. is directed under section 148 to get its cost records audited. The Board proposes to appoint the company's existing statutory auditor, a chartered accountant firm, as cost auditor. Advise the Board. Also state to whom the cost audit report is to be submitted and what the company must do after receiving it.

Show the solution

Provision: under s.148(3), the cost audit is conducted by a cost accountant appointed by the Board on remuneration determined by the members in the prescribed manner.
The first proviso says a person appointed under section 139 as auditor of the company cannot be appointed to conduct the audit of cost records.
Facts: the proposed person is the statutory auditor appointed under section 139.
Conclusion on appointment: the Board cannot appoint the statutory auditor as cost auditor. It must appoint a cost accountant.
Report: the cost accountant submits the report to the Board of Directors.
After receipt: the company must, within 30 days from receiving the copy, furnish it to the Central Government with full information and explanation on every reservation or qualification in it (s.148(6)).
If the Central Government asks for further information, the company must furnish it within the time specified (s.148(7)).

Answer: The Board cannot appoint the statutory auditor as cost auditor; it must appoint a cost accountant. The report goes to the Board. The company must send it to the Central Government within 30 days of receipt, with explanations for every reservation or qualification.

Example 2

XYZ Ltd. is a listed company. Its Board says that since it already has a statutory audit and an internal audit, no secretarial audit is needed. Examine the position. Also state who may conduct the secretarial audit and what the Board must do about the report.

Show the solution

Provision: s.204(1) says every listed company and prescribed other classes of companies must annex a secretarial audit report to the Board's report made under s.134(3).
Facts: XYZ Ltd. is listed.
The statutory audit (s.143) and internal audit (s.138) are different audits. Neither replaces the secretarial audit.
Auditor: the report is given by a company secretary in practice, in the prescribed form.
Company's duty: it must give the company secretary in practice all assistance and facilities (s.204(2)).
Board's duty: the Board must explain in full every qualification, observation or remark made in the report (s.204(3)).
Default: the company, every officer in default and the company secretary in practice in default are liable to a penalty of ₹2,00,000 (s.204(4)).

Answer: The Board is wrong. As a listed company, XYZ Ltd. must have a secretarial audit report from a company secretary in practice annexed to the Board's report. The Board must explain in full any qualification or remark. Default attracts a penalty of ₹2,00,000 on the company, officers in default and the company secretary in practice in default.

Exam tips

Write the section number in the first line of the answer. It signals clear knowledge.
For difference questions, use a short side-by-side list of points: purpose, section, professional, report, applicability.
Use "as may be prescribed" for thresholds. Add figures only from the Rules in your study material.
Do not mix up who audits: cost accountant, company secretary in practice, CA / cost accountant / other professional.
For MCQs, watch for options that say the statutory auditor can be the cost auditor or that cost audit replaces section 143. Both are wrong.

Practice questions from Audit and Auditors

Cost Audit, Secretarial Audit and Internal Audit in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Cost Audit, Secretarial Audit and Internal Audit: frequently asked questions

Who needs to appoint an internal auditor under section 138?

Such class or classes of companies as are prescribed must appoint an internal auditor. The auditor may be a chartered accountant, a cost accountant or another professional decided by the Board. Check the Rules in your study material for the prescribed classes.

What is the difference between statutory audit and cost audit?

A statutory audit under section 143 checks the financial statements and is done by an auditor appointed under section 139. A cost audit under section 148 checks cost records and is done by a cost accountant appointed by the Board. The cost audit is in addition to the statutory audit, and the statutory auditor cannot be appointed as cost auditor.

Who can conduct a secretarial audit?

Only a company secretary in practice can give the secretarial audit report under section 204. The report is in the prescribed form and is annexed to the Board's report.

What is the difference between secretarial audit and internal audit?

Secretarial audit is done by a company secretary in practice and the report is annexed to the Board's report. Internal audit is done by a CA, cost accountant or other professional decided by the Board, and the manner, intervals and reporting to the Board are set by rules. Secretarial audit applies to every listed company and prescribed classes; internal audit applies to prescribed classes.