Company Law and Practice · Accounts and Auditors

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

Updated 11 October 2026 · Fact-checked

These are three audits beyond the statutory financial audit. Internal audit (Section 138) checks company functions and activities. Cost audit (Section 148) checks cost records, done by a cost accountant. Secretarial audit (Section 204) checks secretarial records, done by a company secretary in practice. Apply each only to the prescribed classes of company.

Understand Cost Audit, Secretarial Audit and Internal Audit

The statutory audit under Section 143 checks whether the financial statements give a true and fair view. Three other audits look at different things. Each applies only to certain companies, and each has its own auditor.

Internal audit (Section 138) is a check of the functions and activities of the company. Prescribed classes of companies must appoint an internal auditor. The auditor is a chartered accountant, a cost accountant, or another professional decided by the Board. The Central Government prescribes by rules the manner and intervals of the audit and how it is reported to the Board.

Cost audit (Section 148) is about cost records. First, the Central Government may order prescribed classes of companies, engaged in producing prescribed goods or providing prescribed services, to include particulars of material, labour or other cost items in their books of account. Second, if it thinks it necessary, it may order an audit of those cost records for companies above a prescribed net worth or turnover. The audit is done by a cost accountant appointed by the Board. The members determine the remuneration in the prescribed manner.

Secretarial audit (Section 204) checks the secretarial and related records. Every listed company, and companies of other prescribed classes, 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. The Board must explain in full any qualification, observation or remark in that report.

The key idea: the audits are separate and the auditors differ. Cost audit is in addition to the Section 143 audit. The statutory auditor appointed under Section 139 cannot do the cost audit.

Key rules to remember

Internal audit: who must appoint (Section 138(1)): Prescribed classes of companies → internal auditor (CA, cost accountant or other professional decided by the Board); The classes are set by rules. Do not say every company needs one.
Internal audit: manner and intervals (Section 138(2)): Central Government prescribes by rules how and how often the audit is conducted and reported to the Board; The report goes to the Board.
Cost audit: two-stage order (Section 148(1) and (2)): Order to keep cost records → then order for audit of cost records, only for covered companies with prescribed net worth or turnover; Cost records come first. The audit applies only if the Central Government so directs.
Cost auditor (Section 148(3)): Cost accountant, appointed by the Board; remuneration determined by members in the prescribed manner; A Section 139 statutory auditor of the company cannot be appointed as cost auditor. The cost auditor must follow cost auditing standards.
Cost audit relation to other audit (Section 148(4)): Cost audit is in addition to the Section 143 audit; It does not replace the financial audit.
Cost audit report (Section 148(5) proviso and (6)): Report goes to the Board of Directors; company sends a copy to the Central Government within 30 days of receiving it, with full information and explanation on every reservation or qualification; The 30 days run from the date the company receives the report.
Secretarial audit (Section 204): Listed companies and prescribed classes → secretarial audit report by a company secretary in practice, annexed to the Board's report under Section 134(3); The Board must explain in full any qualification, observation or remark.
Penalty for contravening Section 204: Company, every officer in default and the company secretary in practice in default: liable to a penalty of ₹2,00,000; The penalty can fall on the company secretary too.

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

Use this method for any question on these three audits, whether it is a theory note or a fact-based problem.

1Identify which audit the question is about: internal (Section 138), cost (Section 148) or secretarial (Section 204).
2State the rule: who must have it. For all three, the class of company is set by rules, except that every listed company needs a secretarial audit.
3Name the right auditor: internal auditor (CA, cost accountant or other professional decided by the Board); cost accountant; company secretary in practice.
4State how the auditor is appointed and to whom the report goes: cost auditor appointed by the Board with remuneration set by members; cost audit report to the Board; secretarial audit report annexed to the Board's report.
5Add the follow-up duties: the 30-day filing of the cost audit report with the Central Government, or the Board's duty to explain secretarial audit qualifications.
6Check for traps: statutory auditor acting as cost auditor, cost audit replacing the Section 143 audit, or an unqualified person doing secretarial audit.
7Close with a clear conclusion that applies the provision to the facts and cites the section.

Quickest way: Three-line table in your head

When to use it: Use this when a question asks you to compare the audits or when you have little time.

Write the three section numbers: 138, 148, 204.
Against each, write who audits: internal auditor (CA, cost accountant or other professional), cost accountant, company secretary in practice.
Against each, write what is audited: functions and activities; cost records; secretarial and related records.
Add one distinctive point each: Board decides the professional (138); extra to Section 143 audit and 30-day filing (148); annexed to Board's report and Board explains qualifications (204).
Write the answer from these points in the order provision, application, conclusion.

Common mistakes in Cost Audit, Secretarial Audit and Internal Audit

Saying cost audit applies to every company.
Students read Section 148 as a general rule.
Fix: Remember it works through Central Government orders. Cost records come first, then an audit order for covered companies above prescribed net worth or turnover.
Allowing the statutory auditor to also be the cost auditor.
Both seem like audits of the same books.
Fix: The first proviso to Section 148(3) bars a person appointed as auditor under Section 139 from being appointed for cost audit.
Saying cost audit replaces the financial audit.
Students think one audit makes the other redundant.
Fix: Section 148(4) says cost audit is in addition to the audit under Section 143.
Saying the internal auditor must be a chartered accountant.
Students remember only the first option in the section.
Fix: The internal auditor may be a chartered accountant, a cost accountant, or another professional the Board decides.
Sending the cost audit report to the Central Government first.
Students skip the route of the report.
Fix: The cost auditor submits the report to the Board. The company then furnishes a copy to the Central Government within 30 days of receiving it, with explanation of every reservation or qualification.
Thinking secretarial audit is only for listed companies, or that any professional can do it.
Students ignore the words 'other prescribed classes' and 'in practice'.
Fix: Section 204 covers every listed company and other prescribed classes. The auditor must be a company secretary in practice.

Worked examples

Example 1

Sunrise Cements Ltd, a company covered by a Central Government order directing audit of its cost records, proposes to appoint its existing statutory auditor, appointed under Section 139, as its cost auditor. Advise the company.

Show the solution

Provision: under Section 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 no person appointed under Section 139 as auditor of the company shall be appointed for conducting the audit of cost records.
Analysis: the existing statutory auditor was appointed under Section 139, so it cannot also be appointed as cost auditor.
Further, the cost audit is in addition to the Section 143 audit under Section 148(4), so the two audits cannot be merged.

Answer: The proposal is not permissible. Sunrise Cements Ltd must have its Board appoint a different cost accountant as cost auditor, with remuneration determined by members in the prescribed manner.

Example 2

Bharat Textiles Ltd, a listed company, received the cost audit report on 10 March from its cost auditor, who submitted it to the Board. The report contains a qualification. State what the company must do. Also state who gives the secretarial audit report of a listed company and what the Board must do about a qualification in it.

Show the solution

Cost audit: under Section 148(5) proviso, the cost auditor submits the report to the Board of Directors. This has been done.
Under Section 148(6), the company must furnish the Central Government with the report within thirty days of receiving it, with full information and explanation on every reservation or qualification.
Counting thirty days from 10 March, the company must furnish it on or before 9 April.
If the Central Government needs more information, it may call for it under Section 148(7), and the company must furnish it within the time specified.
Secretarial audit: Section 204(1) requires every listed company to annex a secretarial audit report, given by a company secretary in practice, to the Board's report under Section 134(3).
Under Section 204(3), the Board must explain in full any qualification, observation or other remark made in that report.

Answer: Bharat Textiles Ltd must furnish the cost audit report to the Central Government by 9 April with full explanation of the qualification. For secretarial audit, a company secretary in practice gives the report, which is annexed to the Board's report, and the Board must explain any qualification in full.

Exam tips

Write the section number with every point. Examiners reward the provision first, then the analysis and conclusion.
In compare-and-contrast questions, use the headings who audits, what is audited, who appoints, and to whom the report goes.
Do not quote thresholds of net worth, turnover or paid-up capital from memory unless you are sure of the rules. The Act says 'as may be prescribed'.
In fact-based questions, check for the 'statutory auditor as cost auditor' trap and the 30-day deadline.
Link to the Audit Committee: under Section 177 it reviews the auditor's independence and performance and evaluates internal financial controls, which is a useful point in related answers.

Practice questions from Accounts 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

What is the difference between cost audit and financial audit?

Financial audit under Section 143 checks the financial statements. Cost audit under Section 148 checks cost records and is done by a cost accountant. Cost audit is in addition to the financial audit, not a replacement.

Who can be appointed as internal auditor under Section 138?

A chartered accountant, a cost accountant, or another professional decided by the Board. The company need not choose a chartered accountant. Prescribed classes of companies must make this appointment.

Who conducts the secretarial audit under Section 204?

A company secretary in practice conducts it. Every listed company and companies of other prescribed classes must annex the report to the Board's report. The Board must explain any qualification in full.

What is the penalty for contravening Section 204?

The company, every officer in default and the company secretary in practice in default are each liable to a penalty of ₹2,00,000. Note that the company secretary in practice can also be penalised.

Can the statutory auditor also do the cost audit?

No. Section 148(3) says a person appointed as auditor under Section 139 cannot be appointed to conduct the audit of cost records. The Board must appoint a cost accountant.