cost accounts and audit Oct 2015rmaca.co.in/development/images/pdf/cost accounts... · Link to the...

Oct. 2015

1

CA Anjani Kheterpal, Kanpur

BACKGROUND

� The 2011 Cost Accounting Record Rules brought a major change in the Cost

Accounting requirements under the Companies Act.

� The Rules provided:

◦ Wider coverage

◦ Common consolidated Rules for non regulated sectors unlike the erstwhile

industry and product specific regulations

◦ Maintenance of cost records according to nature and size of business.

◦ Simplified reporting

◦ Link to the Central Excise Tariff Act (CETA) and thus removed ambiguity

as regards coverage.

� These remained in force only for a brief period from 2011 to 2014 whereafter

the Companies (Cost Records & Audit) Rules 2014 were notified.


Oct. 2015

2

BACKGROUND

� The 2011 Cost Accounting Record Rules brought a major change in the Cost

Accounting requirements under the Companies Act.

� The Rules provided:

◦ Wider coverage

◦ Common consolidated Rules for non regulated sectors unlike the erstwhile

industry and product specific regulations

◦ Maintenance of cost records according to nature and size of business.

◦ Simplified reporting

◦ Link to the Central Excise Tariff Act (CETA) and thus removed ambiguity

as regards coverage.

� These remained in force only for a brief period from 2011 to 2014 whereafter

the Companies (Cost Records & Audit) Rules 2014 were notified.


DATE NOTIFICATION/

SECTION DESCRIPTION

01.04.2014 Section 148 Section made applicable. Govt.

to specify audit of items of cost

01.07.2014 Companies (cost records

and audit) Rules, 2014

Rules notified for applicability of

section 148, forms to be filed for

appointment of cost auditor etc.

31.12.2014

Companies (cost records

and audit) Amendment

Rules, 2014

Major overhauling of the 2014

rules to bring them some what in

line with the 2011 Rules

CHRONOLOGY


Oct. 2015

3

“Books of account” includes records maintained in respect of—

(i) all sums of money received and expended by a company and

matters in relation to which the receipts and expenditure take

place;

(ii) all sales and purchases of goods and services by the company;

(iii) the assets and liabilities of the company; and

(iv) the items of cost as may be prescribed under section 148 in the

case of a company which belongs to any class of companies

specified under that section.

Books of Account- Section 2(13) of the Companies Act, 2013


Sub Section (3) requires an auditor to report as under:

(b) whether, in his opinion, proper books of account as required by law have

been kept by the company so far as appears from his examination of those

books and proper returns adequate for the purposes of his audit have

been received from branches not visited by him;

(d) requires an auditor to report:

“whether the company’s balance sheet and profit and loss account dealt

with in the report are in agreement with the books of account and

returns.

(h) any qualification, reservation or adverse remark relating to the

maintenance of accounts and other matters connected therewith;

Section 143- Powers & duties of Auditors


Oct. 2015

4

Appointment of cost auditor- By the Board

Report to be submitted to- The Board of Directors of the company.

Sub section (6):

A company shall within thirty days from the date of receipt of a copy of the cost audit report prepared in pursuance of a direction under sub-section (2) furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained therein.


� Penalty for default- sub section (8) of section 148 states as under:

“If any default is made in complying with the provisions of this section,—

(a) the company and every officer of the company who is in default shall

be punishable in the manner as provided in sub-section (1) of section

147;

(b) the cost auditor of the company who is in default shall be punishable in

the manner as provided in sub-sections (2) to (4) of section 147.”


Oct. 2015

5

� Defaulting Company- Shall be punishable with a minimum fine of Rs.25,000 and a maximum fine of Rs.5 lacs.

� Officer in default-

◦ Fine- Minimum Rs.25000/- and maximum Rs.5 lacs; and/or

◦ Imprisonment- upto a term of one year .


� Auditor/Cost Auditor-

◦ Fine-Minimum Rs.25000/- and maximum Rs.5 lacs;

◦ If the contravention has been done knowingly or wilfully, with an intention to

deceive the company/the shareholders/creditors/tax authorities, the auditor will be

punishable with:

� Fine- Minimum 1 lac and maximum 25 lac; and/or

� Imprisonment upto one year; and

� If convicted:

(a) the auditor will have to refund the remuneration received by him; and

(b) pay damages to the company, statutory bodies, authorities or to any other

persons for loss arising out of incorrect or misleading statements of

particulars made in his audit report.


Oct. 2015

6

Companies (Cost Records and Audit) Rules, 2014


� Rule 2(e) defines “cost records” as:

“books of account relating to utilisation of materials, labour and other items of cost as applicable to the production of goods or provision of services as provided in section 148 of the Act and these rules”


Oct. 2015

7

� Applies to all companies including Foreign Companies defined u/s

2(42) of the Act.

� Section 8 Companies- No exclusion. Specific exclusion provided

under categories.

� Pvt.Ltd. Companies- No specific exclusion.


Company- whether Micro or Small Co.?

YES

NO

MAINTAIN COST

RECORDS

NOT TO MAINTAIN

COST RECORDS

WHETHER TURNOVER EXCEEDS RS.35 CRORES?

YES

Whether engaged in Specified activity?

NO

YES


Oct. 2015

8

Companies classified as Micro or small companies under the Micro, Small and

Medium Companies Act, 2006

• Manufacturing-Investment in Plant & Machinery < Rs.25 lacs

• Service-Investment in Equipment< 10 Lacs

Micro

• Manufacturing-Investment in Plant & Machinery > Rs.25 lacs but < 5 crores

• Service-Investment in Equipment >10 Lacs but less tha Rs.2 Crores

Small


Only In case of Imported Plant &

Machinery:

� Import Duty

� Shipping Charges

� Customs Clearance Charges

� Sales tax and VAT

� Tools, jigs, dyes, moulds and spare parts

� Installation costs

� R & D and Pollution Control equipment

� Power generation set

� Electrical control panels etc.

� Transportation costs in case of indigenous

machinery

� Technical fees for erection of machine

� Storage tanks not linked with manufacturing

process

� Fire fighting equipment

INCLUDE EXCLUDE


Oct. 2015

9

� Turnover in the immediately preceding year to be considered.

� Section 2(91) of the Companies Act, 2013 defines “Turnover” as:

the aggregate value of the realization of amount made from the sale,

supply or distribution of goods or on account of services rendered,

or both, by the company during a financial year.


� Duties and taxes like excise duty and VAT/CST

collected on sales?

� Sale value of scrap generated from manufacturing

operations?

� Other operational revenues like Duty Drawback,

Jobwork Charges?

� Trading Turnover?


Oct. 2015

10

Table A- Regulated Sectors

Table B- Unregulated Sectors

6 regulated sectors covered

including Pharma, Sugar

telecommunication,

Fertilisers, Petroleum

Products & Generation of

electricity.

Applicability from

01.04.14- all six sectors

Covers 33 unregulated sectors

Includes service sectors such as

Health, education, Port services

Also includes trading of

specified Medical equipment.

Applicability from 01.04.14-

22 out of 33 sectors

Applicability from 01.04.15-

the 11 remaining sectors


Particulars CETA

Heading

Applicable

w.e.f Remarks

Steel (Sl.No.9, Table B) 7201 to 7729

7301 to 7326

01.04.14 The Tariff heading is ‘Iron & Steel’. Very

extensive coverage. Includes almost all industries

manufacturing any items from Iron & Steel.

Construction Industry

(Sl.No.21, Table B)

Not

Applicable

01.04.14 Only covers construction specified in Sch.VI ,

Clause 5(a) of the Act. These include “real

estate development including industrial park

or special economic zone”

Education services

(Sl.No.23, Table B)

Not Applicable 01.04.14 Other than education services falling under

philanthropy or social spend, not forming part of

any business.

Textiles 5004-07; 5106-

13; 5205-12;

5303-10; 5401-

08 & 5501-16

01.04.15 Very extensive coverage. Covers all textile

industries including silk, cotton, woollen,

synthetic etc..


Oct. 2015

11

� Edible Oils

� Organic & Inorganic chemicals

� Base metals

� Plastic and polymers

� Paper

� Other Machinery

� Electricals and Electronic Machinery


� M/s Reliable Auto Limited is manufacturing three wheelers. The Finished

product sold by the company is NOT covered under any of the Tariff Headings

mentioned in Table B. The company makes certain iron parts in-house for

captive consumption and fitting in the three wheelers. These are covered under

Sl.No.9 of the Table. However the turnover from parts is ‘Nil’. Assuming that

M/s Reliable Auto Ltd. is:

◦ Not a Micro/Small Enterprise

◦ Had a total turnover of Rs.55 Crores from three wheelers in the preceding

year.

Whether the company is required to maintain cost records? If yes, in respect

of which items?


Oct. 2015

12

� The criteria for applicability of Rule 3 is as under:

◦ The company should be engaged in manufacture of specified items

◦ The ‘overall turnover’ of the company as a whole should be atleast Rs.35 crores in the preceding year.

� Therefore even if the the Turnover of the company from the specified items is Nil, it would still be covered.

� Therefore M/s Reliable Auto will have to maintain cost records in respect of the iron/steel components manufactured by it for captive consumption.


� M/s Succhi Chemicals (P) Ltd. is engaged in manufacture as well as trading in

chemicals. During F.Y.2013-14, the details of turnover of the company were as

under:

◦ Turnover from manufacturing activity : 10 crores

◦ Turnover from trading operations : 31 Crores

The company is not a micro or small enterprise. The chemicals manufactured

by the company fall within the CETA heading specified under Sl.18 of Table

B of Rule B of the CCRA 2014.

Whether the company is required to maintain cost records for F.Y.2014-15?


Oct. 2015

13

� Yes, the company is required to maintain cost records in respect

of its manufacturing activity as its total turnover in the preceding

year exceeded Rs.35 Crores.

� The fact that the turnover from manufacturing activity per se

was less than Rs.35 crores is not material for determination of

applicability of Rule 3.


� Form CRA-1- Form for maintenance of Cost Records.

� Records should be maintained in such manner so as to enable ◦ calculation of per unit

◦ Cost of production/operations

◦ Cost of sales & margins

◦ Of each of its Products.

� Records to be maintained on regular basis on a monthly/quarterly/half yearly/annual basis


Oct. 2015

14

Cost Audit


Table A- Regulated Sectors

Table B- Unregulated Sectors

If overall Turnover from all

its products and services in

the immediately preceding

year is atleast Rs.50 Crores;

AND

If total urnover from all

products/activities covered

under Rule 3 is atleast Rs.25

cr.

If overall Turnover from all

its products and services in

the immediately preceding

year is atleast Rs.100 Crores;

AND

If total urnover from all

products/activities covered

under Rule 3 is atleast Rs.35

cr.


Oct. 2015

15

Particulars Company A Comapny B

Total Turnover in

F.Y.2013-14

100 Crores 95 Crores

Turnover from products

covered under Rule 3

35 Crores 85 Crores

Whether cost audit

applicable

Yes No!!!

Assuming that both, Company A as well as Company B are engaged

in similar business, the applicability of Cost audit shall be as under:


1. Companies whose revenue from ‘Exports’, in Foreign

Exchange exceeds 75% of its total revenue.

2. Companies operating from a Special Economic Zone.


Oct. 2015

16

1. Companies to appoint Cost Auditor within 180 days from the

commencement of the Financial Year i.e. By 30th Sept. each year

2. Appointment to be done by the Board

3. Form CRA-2- ‘Notice of Appointment of Cost Auditor’ to be filed with

the Central Government within 30 days of appointment or within 180

days from commencement of the Financial Year, whichever is earlier!

4. Appointment of the cost auditor is upto date of submission of Report

of 180 days from close of the F.Y., whichever is earlier.


5. Form CRA-3- Cost Audit Report Format.

6. Cost audit Report to be submitted by the Cost Auditor to the Board

within 180 days from the end of the Financial Year.

7. Form CRA-4: Form for furnishing of Cost Audit Report to the Central

Govt.

8. CRA-4 is to be filed within 30 days of receipt of the Report along with

full information and explanation on every reservation/qualification

contained


Oct. 2015

17

� CRA 1- requires maintenance of separate and detailed cost records in

respect of transactions with related parties.

� CRA-3- requires a cost auditor to report following details in respect of

transactions with a related party:

◦ Name and address of each related party

◦ product/service wise transaction details with each of the related

parties.

◦ Normal price and basis thereof

◦ Transfer price


� Section 128(5) requires that the Books of account (which also

include cost records) to be to be kept in good order for the

preceding 8 years.. Therefore cost records, wherever applicable

are also required to be kept ready for a minimum period of 8

years.


Oct. 2015

18

Parameter 2011 Rules Present Rules

Coverage Wide Substantially reduced

Format of cost records Principle based cost records to be

maintained, according to size and

nature of business

No flexibility. Cost

elements are defined in

the rules

Report At product group level At product level

Confidentiality Maintained Compromised

Detailed product wise cost

statements

Not to be submitted To be submitted

Multiple cost audit reports for

each unit and each product

Dispensed with Reintroduced


� Whether the turnover limits are to be checked and applied on a year to year basis?

� The Rules and Act seem to be silent on the issue.

� The FAQ’s issued by the Institute of Cost Accountants of India opines otherwise.


Oct. 2015

19


cost accounts and audit Oct 2015rmaca.co.in/development/images/pdf/cost accounts... · Link to the...

Documents

Transcript of cost accounts and audit Oct 2015rmaca.co.in/development/images/pdf/cost accounts... · Link to the...