Cost Audit: Law, Standards and the Cost Audit Report
Cost audit is the one paper-level topic where a cost accountant's exclusive statutory function is on full display — only a Cost Accountant in Practice can conduct it, and this chapter covers exactly the applicability thresholds, appointment mechanics and reporting timeline the exam tests, using the current, correct figures rather than older or approximate ones.
1. Who must maintain cost records, and who must get them audited
Under the Companies (Cost Records and Audit) Rules, 2014, two separate, sequential thresholds apply, and confusing them is the most common error in this topic. First, a company in a specified sector must maintain cost records at all once its overall annual turnover reaches ₹35 crore or more in the immediately preceding financial year — this alone does not yet require an audit, only record-keeping.
Second, only once that ₹35 crore threshold is already crossed, a further, higher pair of thresholds decides whether a mandatory cost audit is also required, and this pair differs depending on whether the company operates in a regulated or non-regulated sector:
| Sector | Overall company turnover | AND turnover of the specific product/service audited |
|---|---|---|
| Regulated (e.g. electricity, telecom, petroleum) | ₹50 crore or more | ₹25 crore or more |
| Non-regulated (all other specified sectors) | ₹100 crore or more | ₹35 crore or more |
Both conditions in a row (overall company turnover AND the specific product/service turnover) must be satisfied together for mandatory cost audit to apply — a large company with several product lines, only one of which individually clears the specific product/service threshold, requires cost audit only for that specific product or service, not automatically for its entire operations.
Certain companies are exempted from mandatory cost audit even where these thresholds are met: companies earning more than 75% of their revenue from exports, and companies operating in a Special Economic Zone.
2. Appointment of the cost auditor
The cost auditor must be an individual Cost Accountant in Practice, or a firm of Cost Accountants in Practice — a member (or members) of the Institute of Cost Accountants of India — and cannot be the company's own existing statutory (financial) auditor, since the two functions are kept institutionally separate.
The Board of Directors must appoint the cost auditor within 180 days of the commencement of the financial year, and the remuneration the Board fixes is subsequently ratified by the shareholders.
The appointment must then be formally intimated to the Central Government using e-Form CRA-2, filed within 30 days of the Board meeting at which the appointment was approved, or within 180 days of the commencement of the financial year, whichever is earlier — a two-clock rule that a candidate should be able to apply directly to a given date.
3. The cost audit report — two separate clocks
Filing the finished cost audit report is governed by two distinct, sequential deadlines, and this chapter's most frequently tested numerical fact is that these are two separate 180-day-then-30-day steps, not a single combined figure.
Step one: the cost auditor submits the completed cost audit report to the company's Board of Directors, in Form CRA-3, within 180 days from the close of the financial year.
Step two: the company then files that report with the Central Government, in Form CRA-4, within 30 days of receiving the CRA-3 report from the cost auditor — this second clock starts running only once the auditor has actually delivered the report to the Board, not from the financial year-end directly.
4. Cost Auditing Standards versus Cost Accounting Standards
These two ICMAI-issued sets of standards are easy to confuse by name, but they govern entirely different things, and the exam specifically tests whether a candidate keeps them separate. Cost Accounting Standards (CAS) — a larger set, numbering in the low twenties — tell a cost accountant how cost itself should be measured and computed (material cost, employee cost, overheads, and so on).
Cost Auditing Standards (Standards on Cost Auditing, or SCA) — a much smaller set — tell the cost auditor how the audit itself should be performed, in the same way Standards on Auditing govern a financial audit.
Currently, only four Cost Auditing Standards are mandatory under Section 148(3) of the Companies Act, 2013: SCA-101 (Planning an Audit of Cost Statements), SCA-102 (Cost Audit Documentation), SCA-103 (Overall Objectives of the Independent Cost Auditor), and SCA-104 (Knowledge of Business, its Processes and Business Environment).
A further set of draft standards has been approved by ICMAI's own Cost Auditing and Assurance Standards Board but had not yet received the Central Government notification needed to become mandatory — a candidate should state that four standards are currently mandatory, not the much larger CAS count, if asked specifically about auditing standards.
Worked Examples
Example 1. A company operating in a non-regulated specified sector has overall turnover of ₹120 crore, and its audited product line has a turnover of ₹30 crore. Is mandatory cost audit applicable?
Overall turnover (₹120 crore) exceeds the ₹100 crore non-regulated threshold, but the specific product's turnover (₹30 crore) does not reach the required ₹35 crore threshold for that product. Since both conditions must be satisfied together, mandatory cost audit is not applicable for this product, even though the company as a whole is large.
Example 2. A company in a regulated sector has overall turnover of ₹60 crore and the audited product/service has turnover of ₹28 crore. Is mandatory cost audit applicable, and would the answer differ if this were a non-regulated company with identical figures?
For a regulated company: overall turnover ₹60 crore ≥ ₹50 crore, and product turnover ₹28 crore ≥ ₹25 crore — both conditions met, so mandatory cost audit applies. For a non-regulated company with the same figures: overall turnover ₹60 crore is below the ₹100 crore threshold, so mandatory cost audit would not apply — the sector classification changes the outcome entirely at these figures.
Example 3. A company's financial year begins on 1 April. By what date must the Board appoint the cost auditor?
Within 180 days of 1 April — approximately by 28 September of the same year.
Example 4. The Board approves the cost auditor's appointment at a meeting on 15 May (within the same financial year beginning 1 April). By what date must Form CRA-2 be filed?
The earlier of 30 days from the Board meeting (15 May + 30 days = 14 June) or 180 days from the start of the financial year (approximately 28 September). Since 14 June is earlier, CRA-2 must be filed by 14 June.
Example 5. A company's financial year ends on 31 March. The cost auditor submits the CRA-3 report to the Board on 20 September (within the 180-day window). By what date must the company file Form CRA-4 with the Central Government?
Within 30 days of receiving CRA-3 — by approximately 20 October.
Example 6. Distinguish Cost Accounting Standards from Cost Auditing Standards, and state how many of the latter are currently mandatory.
Cost Accounting Standards (CAS) govern how cost itself is measured and computed (a larger set, numbering in the low twenties). Cost Auditing Standards (SCA) govern how the cost audit itself is performed (a much smaller set). Currently, four Cost Auditing Standards — SCA-101 to SCA-104 — are mandatory under Section 148(3).
Example 7. A company earns 80% of its total revenue from exports and otherwise meets every mandatory cost-audit threshold. Is it required to obtain a cost audit?
No — a company earning more than 75% of its revenue from exports is specifically exempted from mandatory cost audit, even where the turnover thresholds are otherwise met.
Summary
Maintenance of cost records (turnover ≥ ₹35 crore) and mandatory cost audit are two sequential thresholds, with cost audit requiring both an overall company turnover test (₹50 crore regulated / ₹100 crore non-regulated) and a specific product/service turnover test (₹25 crore regulated / ₹35 crore non-regulated) to be satisfied together, subject to export-revenue and SEZ exemptions.
The cost auditor — always a Cost Accountant in Practice, never the company's own statutory auditor — is appointed by the Board within 180 days of the financial year's start, with the appointment intimated via Form CRA-2 within 30 days of the Board meeting or 180 days of the year's start, whichever is earlier.
The finished report follows two separate clocks: the auditor delivers Form CRA-3 to the Board within 180 days of the financial year's close, and the company then files Form CRA-4 with the Central Government within 30 days of receiving that CRA-3 report — and only four Cost Auditing Standards (SCA-101 to SCA-104) are currently mandatory, a distinctly smaller and differently-purposed set from the broader Cost Accounting Standards governing cost computation itself.
