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Corporate and Economic Laws · Accounts and Audit

Internal Audit and Cost Audit under the Companies Act, 2013

Updated 11 October 2026 · Fact-checked

Section 138 requires prescribed classes of companies to appoint an internal auditor, who is a chartered accountant, a cost accountant or another professional chosen by the Board. Section 148 lets the Central Government order cost records and, for companies above prescribed net worth or turnover, a cost audit by a cost accountant appointed by the Board.

Understand Internal Audit and Cost Audit

A company has more than one kind of audit. The statutory audit (Section 143) checks whether the financial statements give a true and fair view. It is done by an auditor appointed under Section 139 and reports to the members.

The internal audit (Section 138) is different. It reviews the functions and activities of the company and is meant for management and the Board. Only the classes of companies the rules prescribe must have it. The internal auditor must be a chartered accountant, a cost accountant or another professional the Board decides on. The Central Government can prescribe by rules the manner and intervals of the audit and its reporting to the Board.

The cost audit (Section 148) works in two stages. First, the Central Government may order that particulars of material, labour or other items of cost be included in the books of account of companies in prescribed goods or services. This is the cost records requirement. Second, if it thinks it necessary, it may order an audit of those cost records for companies above a prescribed net worth or turnover. Details of which companies and thresholds come from the Companies (Cost Records and Audit) Rules, not from the Act itself.

A cost auditor must be a cost accountant. The Board appoints the cost auditor, and the members determine the remuneration in the prescribed manner. The statutory auditor appointed under Section 139 cannot be appointed to audit cost records. The cost auditor must follow the cost auditing standards issued by the Institute of Cost Accountants of India with the approval of the Central Government.

Cost audit is additional to the statutory audit. The cost auditor reports to the Board of Directors. The company then sends the cost audit report to the Central Government within thirty days of receiving it, with full information and explanation on every reservation or qualification.

Key rules to remember

Internal auditor eligibility (Section 138(1))
Internal auditor = chartered accountant OR cost accountant OR other professional decided by the Board
Applies to prescribed classes of companies only. The Act says the professional conducts internal audit of the functions and activities of the company.
Internal audit manner and intervals (Section 138(2))
Central Government prescribes by rules the manner and intervals; reporting is to the Board
The Act leaves the details to rules.
Cost records (Section 148(1))
Central Government order + prescribed class of companies, goods or services → cost items included in books of account
For companies under a special Act, the Central Government must first consult the regulator.
Cost audit trigger (Section 148(2))
Order by Central Government + company covered by 148(1) + prescribed net worth or turnover
Both the order and the prescribed limits matter. Coverage under 148(1) alone does not mean an audit.
Cost auditor appointment (Section 148(3))
Cost accountant appointed by the Board; remuneration determined by members as prescribed
The Section 139 auditor cannot be appointed as cost auditor. Cost auditing standards must be followed.
Cost audit report (Sections 148(5) and 148(6))
Report to the Board of Directors; company files with Central Government within 30 days of receiving a copy
Include full information and explanation on every reservation or qualification.

How to solve Internal Audit and Cost Audit questions

Use this order for any question on internal or cost audit. It keeps you tied to the section and the facts given.

  1. 1Identify which audit the question is about: internal (Section 138), cost (Section 148) or statutory (Sections 139 and 143).
  2. 2Check whether the company falls in a prescribed class. State that the classes, net worth and turnover limits come from the rules.
  3. 3For cost audit, separate the two stages: cost records under 148(1) and cost audit under 148(2). Check each against the facts.
  4. 4Check who is being appointed. Internal auditor: CA, cost accountant or other professional. Cost auditor: cost accountant, appointed by the Board, and not the Section 139 auditor.
  5. 5Check remuneration, standards and reporting: members determine cost auditor remuneration; cost auditing standards apply; report goes to the Board.
  6. 6Check the timeline: the company furnishes the cost audit report to the Central Government within thirty days of receipt.
  7. 7State the consequence of default, if asked: the company and officers in default are punishable under Section 147(1), and the cost auditor under Section 147(2) to (4).
  8. 8Close with a one-line conclusion that answers the question asked.

Quickest way: Who, which, to whom

When to use it: Use this for MCQs and short case questions where you have about two minutes.

  1. Ask who: internal auditor (CA, cost accountant or other professional) or cost auditor (cost accountant only).
  2. Ask which company: prescribed class for internal audit; ordered, and above net worth or turnover limits, for cost audit.
  3. Ask to whom: both report to the Board; cost audit report then goes to the Central Government within 30 days.
  4. Check for a trap: the statutory auditor cannot be the cost auditor, and cost audit is in addition to the Section 143 audit.

Common mistakes in Internal Audit and Cost Audit

  • Saying every company must appoint an internal auditor.

    Students remember the section heading and ignore the words 'such class or classes of companies as may be prescribed'.

    Fix: Always say that only prescribed classes need an internal auditor, and the classes are set by rules.

  • Saying the internal auditor must be a chartered accountant.

    Internal audit is confused with statutory audit, where the auditor is a chartered accountant.

    Fix: Remember the three options: chartered accountant, cost accountant, or another professional decided by the Board.

  • Treating cost records and cost audit as the same thing.

    Both appear in Section 148 and students merge them.

    Fix: Cost records come from 148(1). Cost audit comes from 148(2) and also needs a prescribed net worth or turnover.

  • Appointing the company's statutory auditor as cost auditor.

    It seems efficient for one firm to do both.

    Fix: The first proviso to 148(3) bars a person appointed under Section 139 from the cost audit. The cost auditor must be a cost accountant.

  • Saying the members fix the cost auditor's appointment or the cost audit report goes to members.

    Students copy the statutory audit pattern.

    Fix: The Board appoints the cost auditor. Members only determine remuneration in the prescribed manner. The report goes to the Board, and the company then files it with the Central Government.

  • Thinking cost audit replaces the statutory audit.

    Students assume one audit covers the other.

    Fix: Section 148(4) says cost audit is in addition to the audit under Section 143.

Worked examples

Example 1

Sundaram Engineering Ltd is in a class of companies covered by a Central Government order under Section 148(1) and is above the prescribed turnover limit for cost audit. Its statutory auditor, a chartered accountant firm appointed under Section 139, offers to also audit the cost records at a lower fee. Advise the company.

Show the solution
  1. The company is covered by the cost records order and is above the prescribed turnover, so a cost audit applies under 148(2) if ordered.
  2. Section 148(3) requires a cost accountant to be appointed by the Board.
  3. The first proviso says no person appointed under Section 139 as auditor of the company shall be appointed for the cost audit.
  4. So the statutory auditor cannot be appointed for the cost audit, whatever the fee.
  5. The cost audit is in addition to the Section 143 audit, so the company needs both.

Answer: The company must not appoint its statutory auditor as cost auditor. The Board must appoint a separate cost accountant, with remuneration determined by the members in the prescribed manner. The cost audit is additional to the statutory audit.

Example 2

Kaveri Textiles Ltd receives the cost audit report from its cost auditor on 10 March. Explain to whom the report is submitted by the cost auditor, what the company must do next, and by when.

Show the solution
  1. Under the proviso to Section 148(5), the cost auditor submits the report to the Board of Directors.
  2. Under Section 148(6), the company must furnish the Central Government with the report within thirty days of receiving a copy.
  3. The report must come with full information and explanation on every reservation or qualification in it.
  4. Counting thirty days from 10 March, the last date is 9 April.
  5. If the Central Government asks for more information under 148(7), the company must furnish it within the time the Government specifies.
  6. On default, the company and officers in default are liable under Section 147(1), and the cost auditor under Section 147(2) to (4).

Answer: The cost auditor reports to the Board. The company must furnish the report to the Central Government, with full information and explanation on every reservation or qualification, within thirty days, that is by 9 April.

Exam tips

  • In MCQs, watch for the word 'every'. Internal audit applies only to prescribed classes, and cost audit only where ordered and above the prescribed limits.
  • Learn the eligibility lists by heart: internal auditor (CA, cost accountant, other professional) versus cost auditor (cost accountant only).
  • In case questions, look for a statutory auditor being offered the cost audit. This is a favourite trap.
  • Quote the thirty-day filing period and the Board as the recipient of the cost audit report.
  • Do not quote threshold figures from memory in a written answer unless you are sure of the Rules. Say 'as prescribed' and name the Companies (Cost Records and Audit) Rules.

Practice questions from Accounts and Audit

Internal Audit and Cost Audit in other exams

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

Internal Audit and Cost Audit: frequently asked questions

Who can be appointed as internal auditor under Section 138?

A chartered accountant, a cost accountant, or another professional the Board decides on. The appointment is required only for such classes of companies as are prescribed.

What is the difference between internal audit and statutory audit?

Statutory audit under Sections 139 and 143 examines the financial statements and is done by an appointed auditor. Internal audit under Section 138 reviews the functions and activities of the company and is reported to the Board. Internal audit applies only to prescribed classes of companies.

Who appoints the cost auditor and who fixes the fee?

The Board appoints the cost auditor, who must be a cost accountant. The remuneration is determined by the members in the prescribed manner.

Is cost audit required in addition to the statutory audit?

Yes. Section 148(4) states that the audit under Section 148 is in addition to the audit conducted under Section 143.

Where can I find the applicability limits for cost audit?

The Act leaves them to be prescribed. They are found in the Companies (Cost Records and Audit) Rules and the Central Government's orders. Check the latest rules before the exam.