Understanding Cost Audit Report-XBRL

What is a Cost Audit?

A cost audit is an audit of company’s cost documents and other related data, which audit is conducted to ensure the interested parties such as shareholders, management, and regulatory authorities, that the final cost data reported under the audit by a business is accurate and in compliance with applicable laws and standards.

It is submitted that the Cost audit is mandatorily required to be conducted by certain classes of companies under Section 148 of the Companies Act, 2013 and the Companies (Cost Records and Audit) Rules, 2014. Hence, companies that fit certain requirements viz. specific yearly turnover, industry, or company structure, are subject to cost audits.

During the cost audit, an impartial auditor thoroughly reviews the financial statements, cost accounts, and other financial records of the company as part of the cost audit procedure. Basis these statements and records, the auditor is required to create a comprehensive report identifying any errors in the company’s expense accounting system, checking the maintenance of cost books, accounts & records etc. It is to be noted that the cost audit report is helpful for the management to make informed cost-control decisions.

Types of Cost Audits

Companies have to option to conduct various types of audits in a financial year. Some of the audits are mentioned herein below:

• Statutory/Mandatory Audit

If the audit is governed by any statute or regulations, then the same is duly prescribed by law and is called a statutory audit.

• Voluntary/Independent Audit

Since there is no statutory requirement mentioned thereunder, this audit can be conducted at the discretion of the governing body as the same is purely optional. Here the scope of an audit is defined by the letter of engagement between the auditor and the client.

• Interim Audit

Interim audit is the one which is conducted between two annual audits in a financial year. The interim audit is usually conducted at a specific date as per client’s requirement.

• Concurrent Audit

Concurrent audit is primarily required to verify transactions conducted in a year on a continuous basis. The period of verification is primarily determined by the auditor to verify the Assets & liabilities.

• Continuous Audit

In a Continuous Audit, the Auditor’s staff attends audit work at some intervals in a financial year and/or is engaged continuously in checking the accounts of the client during the whole year round.

Cost Audit Applicability in India

It is pertinent to note that cost audit is applicable to all the companies (which is also inclusive of the foreign company) provided these companies are substantially engaged in the production of goods or services as enumerated in Table A or Table B of the Companies (Cost Records and Audit) Rules, 2014.

For ease of reference, Table A primarily includes the companies which are engaged in the regulated sectors, such as electricity, petroleum, drugs, fertilizers, sugar, etc., whereas Table B includes the companies in the non-regulated sectors, such as automobiles, cement, steel, paper, textiles, etc.

As regards the applicability of cost audit, the same can be determined on the following criteria:

• If the overall annual turnover of the company through the production/sell of all its products and services in the immediately preceding financial year is Rs. 50 crore or more in the regulated sectors, these companies will be required to maintain the cost records and also conduct cost audit (if it satisfies the other criteria as well). Similarly, the companies engaged in the non-regulated sectors which have the annual turnover of Rs. 100 crore or more will be required to maintain the cost records as per the rules.
• The aggregate turnover of the individual products or services for which cost records are required to be maintained should be Rs. 25 crores or more for the companies in the regulated sectors and Rs. 35 crores or more for the companies in the non-regulated sectors.

If a company complies with both criteria (as mentioned above), then the company will have to mandatorily cost audit of its records by a cost auditor. In case the company does not fulfil either of the above-mentioned mandatory criteria, then there is no mandatory requirement to get its cost records audited. However, if the company fulfils only one criteria or does not come under any of the above criteria, the company is still required to maintain the cost records as per the rules.

The Role of XBRL Filing Services in Cost Audits

XBRL filing services play a vital role in cost audit and it is company’s responsibility to create the Cost Audit Report in XBRL format which further ensures that all data is accurately represented in accordance to the prescribed format and standards.

Under XBRL filing services, the company is mandated to compile and organize financial and operational data of a financial year and the same will be later reflected in the report. Once the XBRL report is created, the XBRL formatted Cost Audit Report is mandatorily required to be approved by the company’s board before its final submission.

As regards the Cost Auditor, he/she is responsible to verify the cost audit report and check the accuracy and completeness of the report. Upon receipt of the approval from the board, the Cost Auditor will certify its compliance of the report with regulatory standards and will be required to digitally sign the report.

In the end, it is the responsibility of the cost auditor to file the report with the Central Government and ensure that the document submitted is the final, verified version. Later, the Cost Audit Report (under Form CRA-3) must be submitted by the Cost Auditor to the Company within the next 180 days of closure of financial year. Subsequently, the company will be required to file Form CRA-4 to MCA within 30 days from the receipt of the cost audit report (under Form CRA-3).

Benefits of Using XBRL Filing Services in Cost Audits

While there are various benefits of using XBRL filing services, we have enlisted some of the major benefits below:/

• The filing service and cost audit ensure the accuracy, reliability, and transparency of the cost records and accounts of the company.
• The filing services further help to assess the efficiency and effectiveness of the company’s operations, management, and control including the future actions.
• It provides useful information to stakeholders, regulators, and policymakers which enable them to make an informed decision and policy formulation for the next financial year.
• It helps in improving the cost competitiveness and profitability of the company.
• The stock value and worth of inventories can be integrated easily by cost auditing.
• The filing service is also helpful in complying with legal and regulatory requirements as mandated thereunder and to avoid penalties or legal actions against the company.

Conclusion

As mentioned above, a cost audit is a mandatory process of examination of a company’s cost records (for certain group of companies) and adherence to prescribed accounting standards, as mandated under Section 148 of the Companies Act, 2013, and the Companies (Cost Records and Audit) Rules, 2014 in India.

While cost audits or maintaining the cost records of the company enhances accuracy, transparency, and operational assessment for companies (whether regulated or non-regulated) and stakeholders, the whole cost audit process substantially entails significant paperwork, coordination, and potential risks of errors, penalties, and liabilities for both companies and auditors. Nevertheless, it is crucial to note that the cost audit report is certainly helpful for the management to make informed cost-control decisions.

A cost audit is an audit of company’s cost documents and other related data, which audit is conducted to ensure the interested parties such as shareholders, management, and regulatory authorities, that the final cost data reported under the audit by a business is accurate and in compliance with applicable laws and standards.

It is submitted that the Cost audit is mandatorily required to be conducted by certain classes of companies under Section 148 of the Companies Act, 2013 and the Companies (Cost Records and Audit) Rules, 2014. Hence, companies that fit certain requirements viz. specific yearly turnover, industry, or company structure, are subject to cost audits.

During the cost audit, an impartial auditor thoroughly reviews the financial statements, cost accounts, and other financial records of the company as part of the cost audit procedure. Basis these statements and records, the auditor is required to create a comprehensive report identifying any errors in the company’s expense accounting system, checking the maintenance of cost books, accounts & records etc. It is to be noted that the cost audit report is helpful for the management to make informed cost-control decisions.

Companies have to option to conduct various types of audits in a financial year. Some of the audits are mentioned herein below:

• Statutory/Mandatory Audit

If the audit is governed by any statute or regulations, then the same is duly prescribed by law and is called a statutory audit.

• Voluntary/Independent Audit

Since there is no statutory requirement mentioned thereunder, this audit can be conducted at the discretion of the governing body as the same is purely optional. Here the scope of an audit is defined by the letter of engagement between the auditor and the client.

• Interim Audit

Interim audit is the one which is conducted between two annual audits in a financial year. The interim audit is usually conducted at a specific date as per client’s requirement.

• Concurrent Audit

Concurrent audit is primarily required to verify transactions conducted in a year on a continuous basis. The period of verification is primarily determined by the auditor to verify the Assets & liabilities.

• Continuous Audit

In a Continuous Audit, the Auditor’s staff attends audit work at some intervals in a financial year and/or is engaged continuously in checking the accounts of the client during the whole year round.

Cost Audit Applicability in India

It is pertinent to note that cost audit is applicable to all the companies (which is also inclusive of the foreign company) provided these companies are substantially engaged in the production of goods or services as enumerated in Table A or Table B of the Companies (Cost Records and Audit) Rules, 2014.

For ease of reference, Table A primarily includes the companies which are engaged in the regulated sectors, such as electricity, petroleum, drugs, fertilizers, sugar, etc., whereas Table B includes the companies in the non-regulated sectors, such as automobiles, cement, steel, paper, textiles, etc.

As regards the applicability of cost audit, the same can be determined on the following criteria:

• If the overall annual turnover of the company through the production/sell of all its products and services in the immediately preceding financial year is Rs. 50 crore or more in the regulated sectors, these companies will be required to maintain the cost records and also conduct cost audit (if it satisfies the other criteria as well). Similarly, the companies engaged in the non-regulated sectors which have the annual turnover of Rs. 100 crore or more will be required to maintain the cost records as per the rules.
• The aggregate turnover of the individual products or services for which cost records are required to be maintained should be Rs. 25 crores or more for the companies in the regulated sectors and Rs. 35 crores or more for the companies in the non-regulated sectors.

If a company complies with both criteria (as mentioned above), then the company will have to mandatorily cost audit of its records by a cost auditor. In case the company does not fulfil either of the above-mentioned mandatory criteria, then there is no mandatory requirement to get its cost records audited. However, if the company fulfils only one criteria or does not come under any of the above criteria, the company is still required to maintain the cost records as per the rules.

XBRL filing services play a vital role in cost audit and it is company’s responsibility to create the Cost Audit Report in XBRL format which further ensures that all data is accurately represented in accordance to the prescribed format and standards.

Under XBRL filing services, the company is mandated to compile and organize financial and operational data of a financial year and the same will be later reflected in the report. Once the XBRL report is created, the XBRL formatted Cost Audit Report is mandatorily required to be approved by the company’s board before its final submission.

As regards the Cost Auditor, he/she is responsible to verify the cost audit report and check the accuracy and completeness of the report. Upon receipt of the approval from the board, the Cost Auditor will certify its compliance of the report with regulatory standards and will be required to digitally sign the report.

In the end, it is the responsibility of the cost auditor to file the report with the Central Government and ensure that the document submitted is the final, verified version. Later, the Cost Audit Report (under Form CRA-3) must be submitted by the Cost Auditor to the Company within the next 180 days of closure of financial year. Subsequently, the company will be required to file Form CRA-4 to MCA within 30 days from the receipt of the cost audit report (under Form CRA-3).

As mentioned above, a cost audit is a mandatory process of examination of a company’s cost records (for certain group of companies) and adherence to prescribed accounting standards, as mandated under Section 148 of the Companies Act, 2013, and the Companies (Cost Records and Audit) Rules, 2014 in India.

While cost audits or maintaining the cost records of the company enhances accuracy, transparency, and operational assessment for companies (whether regulated or non-regulated) and stakeholders, the whole cost audit process substantially entails significant paperwork, coordination, and potential risks of errors, penalties, and liabilities for both companies and auditors. Nevertheless, it is crucial to note that the cost audit report is certainly helpful for the management to make informed cost-control decisions.