Cost records and cost audit under section 148: the second audit companies overlook

The statutory audit under s.143 is done, the board is relieved, and then a cost audit question lands on the finance team's desk. Section 148 of the Companies Act 2013 sets up a parallel audit track for prescribed classes of companies that produce goods or provide services. It has three working parts: cost records kept inside the books of account, a separate cost auditor appointed by the board, and a report that goes to the board first and then to the Central Government. Section 148(4) says an audit under this section "shall be in addition to the audit conducted under section 143". One audit never stands in for the other.

Legal basis: Section 148, Companies Act 2013, read with the Companies (Cost Records and Audit) Rules, 2014.

Two steps: cost records first, cost audit second

The section works through two successive Central Government orders, and it is worth keeping them apart because they apply to different companies.

Step one: cost records. Under s.148(1), the Central Government may, by order, take "such class of companies engaged in the production of such goods or providing such services as may be prescribed" and direct that "particulars relating to the utilisation of material or labour or to other items of cost as may be prescribed shall also be included in the books of account kept by that class of companies". In plain terms, a company in a covered class must carry cost particulars (material, labour and other cost items) in its books of account, whether or not any audit follows. Keeping these records is a separate duty from having them audited.

The proviso to s.148(1) adds a safeguard: before issuing such an order for a class of companies regulated under a special Act, the Central Government "shall ... consult the regulatory body constituted or established under such special Act". Companies in regulated sectors should know the proviso exists, but the draft of any order is a matter for the government, not the company.

Step two: cost audit. Under s.148(2), if the Central Government "is of the opinion, that it is necessary to do so", it may by order direct that the audit of cost records of a class of companies "which are covered under sub-section (1) and which have a net worth of such amount as may be prescribed or a turnover of such amount as may be prescribed" be conducted "in the manner specified in the order". So the test has two layers. A company must first be in a class covered by the cost-records order, and then it must meet the prescribed net worth or turnover amount before the audit requirement applies. A company can therefore be required to keep cost records without being required to have them audited.

The classes and the net worth and turnover amounts are not in the Act. They sit in the Companies (Cost Records and Audit) Rules, 2014 (rules 3 and 4), which have been amended several times since 2014. Because the numbers matter and have changed, read the current text of rules 3 and 4 in the official gazette or on the MCA website before concluding that your company is in or out. This article does not state the thresholds for that reason.

Who the cost auditor is, and who it cannot be

Section 148(3) provides that the cost audit "shall be conducted by a cost accountant who shall be appointed by the Board on such remuneration as may be determined by the members in such manner as may be prescribed". Two features stand out.

The board appoints, the members fix the pay. Neither organ controls both the choice and the fee. The manner of fixing remuneration is prescribed in the Rules.
The statutory auditor is barred. The first proviso reads: "no person appointed under section 139 as an auditor of the company shall be appointed for conducting the audit of cost records". The cost audit is therefore always done by someone other than the s.139 auditor.

The second proviso adds that "the auditor conducting the cost audit shall comply with the cost auditing standards". The Explanation to s.148(3) defines those as "such standards as are issued by the Institute of Cost Accountants of India, constituted under the Cost and Works Accountants Act, 1959 (23 of 1959), with the approval of the Central Government".

Rights, duties and the report to the board

Section 148(5) carries the general auditor regime across. The "qualifications, disqualifications, rights, duties and obligations applicable to auditors under this Chapter shall, so far as may be applicable, apply to a cost auditor appointed under this section". It also puts a duty on the company "to give all assistance and facilities to the cost auditor appointed under this section for auditing the cost records of the company".

The proviso to s.148(5) fixes where the report goes first: "the report on the audit of cost records shall be submitted by the cost accountant to the Board of Directors of the company". The board therefore sees the report and any reservations before anything reaches the government. That is the moment to prepare written explanations.

Filing with the Central Government: thirty days

Section 148(6) sets the clock: "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."

Three points follow from the wording.

The thirty days run from receipt of a copy of the cost audit report, so the date of receipt should be recorded.
The filing is the report together with "full information and explanation on every reservation or qualification". A bare report is not a complete filing if it contains qualifications.
The duty rests on the company. The auditor's duty ends with submitting the report to the board.

The Rules also contain procedural timelines and forms for the appointment of the cost auditor and for filing the report. Those details have been amended over time, so confirm them in the current Rules before relying on a date.

Further inquiries by the Central Government

Section 148(7) lets the government go further. If, after considering the cost audit report and the company's information and explanation, the Central Government "is of the opinion that any further information or explanation is necessary, it may call for such further information and explanation and the company shall furnish the same within such time as may be specified by that Government". The time limit in that case comes from the government's request, not from the Act, so it is worth diarising on receipt.

What happens on default

Section 148(8) provides that if any default is made in complying with the section:

"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"; and
"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".

The company and its officers on one side, and the cost auditor on the other, are dealt with under separate limbs of s.147. This article does not quote the s.147 penalty amounts; read s.147 directly for the current figures.

Practical points for finance and the board

Test coverage every year. Because the audit requirement depends on the class of the company and on net worth or turnover, the safest habit is a year-end check once the accounts are finalised: is any of our products or services in a class covered by the cost-records order, and do our figures meet the prescribed amounts in the Rules for cost audit? The answer can change from one year to the next as turnover moves.

Keep the two audits distinct. The s.143 audit tests whether the financial statements give a true and fair view. The s.148 audit examines the cost records. Both rely on the same books of account, which is a reason to brief the two auditors on their separate scopes at appointment. The same books, two different lenses.

Do not assume the statutory audit covers cost. The Act says the opposite in s.148(4). A company that treats the s.143 audit as sufficient risks defaults under s.148 on several fronts, including the appointment, the report and the filing with explanations.

Give the cost auditor access. The company's duty under s.148(5) is to give "all assistance and facilities". Cost sheets, bills of material, labour and overhead records, and access to plant personnel are the usual requests.

A worked scenario

Suppose a manufacturer produces goods in a class covered by a s.148(1) order and keeps cost records inside its books. In a later year it finds that it meets the prescribed net worth or turnover amount under the Rules, so the s.148(2) audit direction now applies to it. The board appoints a cost accountant who is not its s.139 statutory auditor. The members fix the remuneration in the prescribed manner. The cost auditor works to the cost auditing standards and delivers the report to the board. The report contains two reservations. The company records the date it received the report, prepares written explanations for each reservation, and furnishes the report with those explanations to the Central Government within thirty days of receipt, as s.148(6) requires. If the government asks for more, the company answers within the time the government specifies.

If, instead, the company assumed that the statutory audit "covered" costs, it would have no cost auditor, no cost audit report and nothing to file. Each is a separate default under s.148(8).

The cost-audit file in six parts

A file that can be defended on review has these six parts:

The class-coverage analysis showing why the company's products or services are or are not in a covered class.
The cost records as kept inside the books of account.
The size test against the net worth and turnover amounts in the current Rules, dated to the year-end.
The appointment of the cost auditor: the board resolution, the members' decision on remuneration, and confirmation that the person is not the s.139 auditor.
The cost audit report as received by the board, with the date of receipt and a written explanation for each reservation or qualification.
The filing with the Central Government within thirty days, and any reply to further inquiries under s.148(7).

What to do now

Next step: Check whether any of your products or services fall in a class covered by a s.148(1) cost-records order, and test your net worth and turnover against the amounts prescribed in rules 3 and 4 of the Companies (Cost Records and Audit) Rules, 2014 as currently in force (s.148(1) and (2), Companies Act 2013).
If a cost audit applies: The board must appoint a cost accountant who is not the s.139 statutory auditor, and the members must determine the remuneration (s.148(3), Companies Act 2013).
Deadline: Furnish the cost audit report, with full information and explanation on every reservation or qualification, to the Central Government within thirty days from the date of receipt of a copy of the report (s.148(6), Companies Act 2013).
Consequence of default: The company and every officer in default are punishable as provided in s.147(1), and the cost auditor in default as provided in s.147(2) to (4) (s.148(8), Companies Act 2013).

Have a CA review your facts before you act or file.

Frequently asked questions

Who must keep cost records?
Companies in classes the Central Government prescribes and orders, as to the particulars of material, labour and other cost items in their books of account (s.148(1), Companies Act 2013).

Who must get cost records audited?
Companies in classes covered by the cost-records order that also meet the net worth or turnover amount prescribed, where the Central Government has directed an audit (s.148(2), Companies Act 2013).

Can the statutory auditor also be the cost auditor?
No. A person appointed under s.139 as auditor of the company cannot be appointed to audit the cost records (proviso to s.148(3), Companies Act 2013).

Who appoints the cost auditor and who decides the fee?
The board appoints the cost accountant. The members determine the remuneration in the prescribed manner (s.148(3), Companies Act 2013).

Does the cost audit replace the statutory audit?
No. It is "in addition to the audit conducted under section 143" (s.148(4), Companies Act 2013).

To whom does the cost auditor report, and when must the government receive the report?
The cost accountant submits the report to the company's board (proviso to s.148(5)). The company must furnish it to the Central Government with explanations within thirty days from receipt of a copy (s.148(6), Companies Act 2013).

What are the consequences of default?
The company and officers in default are punishable under s.147(1). The cost auditor in default is punishable under s.147(2) to (4) (s.148(8), Companies Act 2013).

---

Next steps on annual compliance

See what applies to your company, then check it with a free tool.

Run a free compliance check →Compliance Health Check