SEP 22, 2025 Posted in Cost Audit, Accounting

Cost Audit: Legal Provisions and Issues

  • Maintenance of cost accounting records: As per Rule 3 and Rule 5 of the Cost Audit Rules, read with section 148(1) of the Act, every company engaged in a business enlisted in Table A (Regulated Sector) and Table B (Non-Regulated Sector), having an overall turnover from all its products and services of Rs. 35 Crore or more during the immediately preceding financial year, shall be required to maintain cost accounting records.
  • Applicability of cost audit: Rule 4 of the Cost Audit Rules, read with section 148(1) and 148(2) of the Act, provides that every company which is required to maintain cost accounting records as per Rule 3, shall get its cost records audited. The Rule provides for certain threshold limits for cost audit becoming applicable. Further, the Rule provides for certain exceptions:
    • whose revenue from exports, in foreign exchange, exceeds 75% of the total revenue; or
    • which is operating from a Special Economic Zone; or
    • which is engaged in the generation of electricity for captive consumption through the captive generating plant.
  • Appointment of cost auditor: Rule 6 of the Cost Audit Rules mandates that in cases where a cost audit is required to be carried out, a cost auditor shall be appointed within 180 days of the commencement of every financial year.

II. Key Issues

(A) Cost audit may not be applicable to all the companies

As per section 148(1) of the Act read with Rule 3 of the Cost Audit Rules the Central Government by order may ask for cost accounting records only of the companies who are engaged in either the manufacturing of certain goods or the companies which provide services. This forms the only basis for the concept of the cost audit i.e., only the manufacturing companies or the service provisioning companies are to be cost-audited. Hence, all the companies are not required to maintain the cost audit records.

Rule 4(3)(i) then provides for an exception for certain companies on which cost audit is not applicable. The companies which fall under this exception are:

  • whose revenue from exports, in foreign exchange, exceeds seventy-five per cent of its total revenue; or
  • which is operating from a Special Economic Zone; or
  • which is engaged in generation of electricity for captive consumption through Captive Generating Plant.