Cost and Management Audit · Cost Auditor

Applicability of Cost Audit and Cost Records Rules

Updated 11 October 2026 · Fact-checked

Section 148 of the Companies Act, 2013 lets the Central Government require certain companies to keep cost records and to get those records audited. The Cost Records and Audit Rules fix which industries and turnover limits apply. To solve a question, check the industry, the preceding year's turnover, the exemptions, and then records and audit separately.

Understand Applicability of Cost Audit and Cost Records Rules

Cost audit is not a general requirement for every company. It applies only where the law says so. The law works in two layers. The Companies Act, 2013 gives the power, and the Cost Records and Audit Rules say who is covered.

Under Section 148(1), the Central Government may, by order, direct a class of companies engaged in producing specified goods or providing specified services to include particulars of material, labour or other items of cost in their books of account. This is the cost records layer.

Under Section 148(2), if the Government thinks it necessary, it may direct that the audit of cost records of such companies be conducted. This applies to companies with a prescribed net worth or turnover. This is the cost audit layer. The audit is in addition to the statutory audit under Section 143 (Section 148(4)).

The point students miss: a company can be covered for cost records but not for cost audit. Records come first. Audit applies only to a narrower group that crosses higher thresholds. The Rules also divide industries into regulated sectors (such as telecommunication, electricity, petroleum, fertilizers, pharmaceuticals and sugar) and non-regulated sectors. Regulated sectors have lower audit thresholds.

The tests use the turnover of the immediately preceding financial year. They cover the company including its units and branches. Always check the exemptions before you conclude that a company is covered.

Key rules to remember

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.

How to solve Applicability of Cost Audit and Cost Records Rules questions

Use the same sequence for every applicability question. Do not jump straight to the audit limit.

1Identify the industry of the company and decide whether it is in the regulated or the non-regulated list of the Rules.
2Take the turnover of the immediately preceding financial year. Use overall turnover and the turnover of each individual product or service.
3Check the exemptions in the Rules, for example export-heavy companies operating from a Special Economic Zone. Apply them if the facts match.
4Apply the cost records test first (overall turnover against ₹35 crore).
5If records apply, apply the cost audit test for the correct sector, checking both the overall and the individual product limits.
6State the conclusion for records and for audit separately.
7Add the consequence: the Board appoints a cost accountant, the Section 139 auditor cannot be appointed, the audit is in addition to Section 143, and the report goes to the Board and then to the Government.
8If the question is theory, quote Section 148(1) and (2) for the power and say the Rules supply the thresholds.

Quickest way: Two-gate check: records gate, then audit gate

When to use it: Use for MCQs and short case scenarios that give industry and turnover figures.

Gate 1: in a listed industry and overall turnover ≥ ₹35 crore? If no, stop: no records, no audit.
Check for an exemption. If one applies, stop.
Gate 2: regulated sector? Use ₹50 crore overall or more than ₹25 crore for one product.
Non-regulated sector? Use ₹100 crore overall or more than ₹35 crore for one product.
If either test in Gate 2 is met, audit applies. Otherwise only records apply.

Common mistakes in Applicability of Cost Audit and Cost Records Rules

Treating cost records and cost audit as the same requirement.
Both come under Section 148 and the question says 'applicability' without specifying.
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.
Students read the latest figure in the question.
Fix: Underline the year of the turnover. The Rules test the preceding year.
Using the non-regulated limits for a regulated-sector company, or the reverse.
The limits look alike and students do not classify the industry first.
Fix: Decide the sector before touching any number. Regulated: ₹50 crore and ₹25 crore. Non-regulated: ₹100 crore and ₹35 crore.
Checking only overall turnover and ignoring the individual product test.
The word 'or' in the Rules is overlooked.
Fix: Test both limits. Meeting either one is enough for audit.
Saying the statutory auditor can also do the cost audit.
Students assume one professional can do both for convenience.
Fix: Recall the first proviso to Section 148(3): a person appointed as auditor under Section 139 cannot be appointed for the cost audit. The cost auditor must be a cost accountant.
Ignoring exemptions and assuming every company above the limit is covered.
Students memorise limits but not the carve-outs.
Fix: Check the exemptions in the Rules, such as export-oriented SEZ operations, before applying the limits.

Worked examples

Example 1

Kaveri Packaging Ltd operates in a non-regulated sector listed in the Rules. In the preceding financial year its overall turnover was ₹82 crore, and one product alone had a turnover of ₹38 crore. No exemption applies. Is cost audit applicable? (Use the limits as set out in this guide.)

Show the solution

Sector: non-regulated, so use the non-regulated limits.
Cost records test: overall turnover ₹82 crore ≥ ₹35 crore, so cost records apply.
Cost audit, overall limit: ₹82 crore is less than ₹100 crore, so this limit is not met.
Cost audit, individual product limit: ₹38 crore is more than ₹35 crore, so this limit is met.
Meeting one of the two alternative tests is enough for audit.

Answer: Cost records apply, and cost audit also applies because the product turnover of ₹38 crore exceeds ₹35 crore. The Board must appoint a cost accountant, and the Section 139 statutory auditor cannot be appointed for this work.

Example 2

Narmada Power Components Ltd is in a regulated sector listed in the Rules. In the preceding financial year its overall turnover was ₹44 crore and its largest product had a turnover of ₹22 crore. No exemption applies. State whether cost records and cost audit apply.

Show the solution

Sector: regulated, so use ₹50 crore overall and more than ₹25 crore for one product.
Cost records test: ₹44 crore ≥ ₹35 crore, so cost records apply.
Cost audit, overall: ₹44 crore is less than ₹50 crore, so not met.
Cost audit, individual product: ₹22 crore is not more than ₹25 crore, so not met.
Neither audit test is met.

Answer: The company must maintain cost records, but cost audit is not applicable. It should keep the records because its turnover may cross the audit limits in a later year.

Exam tips

For theory questions, split the answer into power (Section 148(1) and (2)) and thresholds (the Rules). Examiners reward this structure.
In case-scenario MCQs, write down sector, preceding-year turnover and product turnover before calculating. Most errors come from using the wrong sector.
Remember that the cost audit is in addition to the Section 143 audit and that the Section 139 auditor cannot be the cost auditor. These are favourite one-mark facts.
Give separate conclusions for records and audit. A half-answer loses marks.
Since limits can be amended, state them as 'under the Cost Records and Audit Rules' and check them against the latest Rules text before the exam.

Practice questions from Cost Auditor

Applicability of Cost Audit and Cost Records Rules in other exams

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

Applicability of Cost Audit and Cost Records Rules: frequently asked questions

What is the difference between cost records and cost audit applicability?

Cost records apply to companies in the specified industries that cross the lower turnover limit. Cost audit applies only to those companies that also cross the higher audit limits. A company can therefore keep cost records without needing a cost audit.

Who conducts the cost audit and to whom is the report submitted?

A cost accountant appointed by the Board conducts it. The person appointed as statutory auditor under Section 139 cannot be appointed. The cost auditor submits the report to the Board, and the company furnishes it to the Central Government within thirty days of receiving a copy.

Is cost audit a substitute for the statutory audit?

No. Section 148(4) says the cost audit is in addition to the audit under Section 143. Each audit has its own scope and its own auditor.

Which turnover is used to test applicability?

The Rules use the turnover of the immediately preceding financial year. Test both the overall turnover and, where relevant, the turnover of individual products or services.