PRESENTATION BY V.C. KOTHARI (M.COM., LL.B., FICWA, FCS, GDCS ) PRACTISING COST ACCOUNTANT

1
PRESENTATION BY V.C. KOTHARI (M.COM.,
LL.B., FICWA, FCS, GDCS ) PRACTISING COST
ACCOUNTANT

• NEW ORDERS FROM COST AUDIT BRANCH
• FOR
• COST AUDIT / COMPLIANCE REPORT

2
IMPLICATIONS OF NEW ORDERS FROM COST AUDIT BRANCH

• The Government
• Regulatory push to Indian Companies highest level
  of cost management and cost competitiveness
• Strengthening the better corporate mechanism
• Simplification of rules, procedures and formats
• Recognition to cost accounting standards
• Reliable data for various government and
  regulatory bodies
• Easy tax administration
• Better policy decision for subsidies, economic
  decisions, etc.
• Use of data by SEBI, CBDT, CBEC, CCI, NPPA, ETC
  for regulation

3
IMPLICATIONS OF NEW ORDERS FROM COST AUDIT BRANCH

• INDUSTRY
• Simplification of rules, procedures, structure,
  formats with emphasis on cost and efficiency
  parameters
• Better planning
• Optimisation of use of scarce resources
• Improved competitiveness
• Better corporate governance
• Reduction in cost of data management
• Ready availability of authentic cost data for use
  in
• anti-dumping proceedings in India and abroad
• Transfer pricing assessment
• Competition commission hearings

4
IMPLICATIONS OF NEW ORDERS FROM COST AUDIT
BRANCH

• Cost accountants
• Recognition of the profession for conservation
  for scarce resources
• Added responsibility for cost management
• Reliance for the first time for professional
  integrity for certification of Compliance
  Report by Cost Accountant in full time employment
  of the Company
• More opportunities for other professional
  services
• Society at large
• Competitive prices due to better cost management
• Certified Cost data useful for various tax and
  other statutory compliances
• Better creditability with banks and other stake
  holders of the Company
• Consumer protection

5
INDIAN ECONOMY NEED FOR COST CONSCIOUSNESS

• COUNTRY FACING UNIQUE CHALLENGES
• Impact of severe global recession since 2008
• Cost management by USA / European Governments
• High inflation and increasing cost of living
• Need for better public administration
• Farmers dis-satisfaction due to volatile prices
• Increasing subsidy bill for the government
• -Fuel 38,386 Food 60,600 Fertilizer 54,976
  Total Rupees 164,153 Crore 15 of Govt.
  Expenditure in 2010-11
• High interest rates for business
• Govt.s concern for BPL population

6
NEW DIRECTIONS FOR COST AUDIT IN 2011-12

• General Circular No. 15/2011 dated 11-04-2011
  (File No. 52/5/CAB-2011 for Appointment of Cost
  Auditor
• Order No. 52/26/CAB/2010 dated 02-05-2011 for
  Cost Audit by all companies covering 8 products
• Order No. 52/26/CAB/2010 dated 03-05-2011 for
  Cost Audit by all companies covering 6 products
• GSR NO. 429 (E) dated 03-06-2011 prescribing Cost
  Accounting
• (Record )Rules, 2011 and specially for
  Compliance Report
• GSR NO. 430 (E) dated 03-06-2011 prescribing Cost
  Audit
• (Report)Rules, 2011 Cost Audit
• Order No. 52/26/CAB/2010 dated 30-06-2011
  modifying order dated 03-05-2011 for Cost Audit
  by all companies covering 8 products and linking
  with Excise Tariff
• Master Circular No. 2/2011 dated 11-11-2011 on
  Cost Records and Cost Audit
• General Circular No. 67/2011 dated 30-11-2011
  (File No. 52/13/CAB-2011 for clarifications for
  coverage of certain sectors for Cost Accounting
  Records and Cost Audit

7
NEW DIRECTIONS FOR COST AUDIT IN 2011-12-
Continued
9. General Circular No. 68/2011 dated 30-11-2011
(File No. 52/13/CAB-2011 for clarifications for
regarding applicability and compliance
requirements for Cost Accounting Records and Cost
Audit 10. Notification No. GSR 869 (E) dated
07-12-2011 prescribing new Cost Accounting
Records for Telecommunication Industry 11.
Notification No. GSR 870 (E) dated 07-12-2011
prescribing new Cost Accounting Records for
Petroleum Industry 12. Notification No. GSR 871
(E) dated 07-12-2011 prescribing new Cost
Accounting Records for Electricity Industry 13.
Notification No. GSR 872 (E) dated 07-12-2011
prescribing new Cost Accounting Records for
Sugar Industry 14. Notification No. GSR 873 (E)
dated 07-12-2011 prescribing new Cost Accounting
Records for Fertilizer Industry 15. Notification
No. GSR 874 (E) dated 07-12-2011 prescribing new
Cost Accounting Records for Pharmaceutical
Industry 16. Order No. 52/26/CAB/2010 dated
24-01-2012 for Cost Audit by all companies
covering 9 products and linked with Excise
Tariff
8
Order No. F. No. 52/26/CAB/-2010 DT. 2nd May,
2011 for Cost Audit by all Companies in 8 Groups
of Regulated Industries(1)

• PRODUCTS
• Bulk Drugs, Formulations, Fertilizers, Sugar,
  Industrial Alcohol, Electricity Industry,
  Petroleum Industry, Telecommunications
• APPLICABILITY
• a. As on the last date of the immediately
  preceding year
• (i) Net worth exceeds Rs. five crores, OR
• (ii) Aggregate value of the turnover from sale
  or supply of all products or activities
  exceeds Rs. twenty crores, OR
• b. The Companys equity or debt securities are
  listed or are in the process of listing on any
  stock exchange, whether in India or outside
  India

9
Order No. F. No. 52/26/CAB/-2010 DT. 2nd May,
2011 for Cost Audit by all Companies in 8 Groups
of Regulated Industries(2)

• 3. APPLICABLE RULES
• Product / Industry wise Cost Accounting Records
  Rules for companies coming under applicability
  clause
• Cost Audit compulsory for all companies covered
  under this Order
• 4. Auditor
• Cost Auditor -
• Either a cost accountant holding valid
  certificate of practice under the provisions of
  Cost and Works Accountants Act, 1959.
• OR
• A firm of cost accountants registered with ICWAI
  and whose partners hold valid certificate of
  practice under the provisions of Cost and Works
  Accountants Act, 1959.
• Appointment should be as per procedure laid down
  vide MCAs General Circular No. 15/2011 52/5/CAB
  2011 dated 11th April, 2011

10
Order No. F. No. 52/26/CAB/-2010 DT. 2nd May,
2011 for Cost Audit by all Companies in 8 Groups
of Regulated Industries(3)

• 5. FORM FOR REPORTING
• New From as per The Companies (Cost Audit
  Report) Rules, 2011 for Cost Audit Report
  submitted on or after 1st April, 2012
  irrespective of the financial year to which it
  relates.
• Existing Form as per The Companies (Cost Audit
  Report) Rules, 2001 for Cost Audit Report
  submitted on or upto 31st March, 2012 .
• 6. PERIOD OF REPORTING
• Each of the financial year commencing on or after
  the 1st April, 2011

11
Order No. F. No. 52/26/CAB/-2010 DT. 3RD May,
2011 Modified by Order No. F. No.
52/26/CAB/-2010 DT. 30th June, 2011 for Cost
Audit by all Companies in 8 Groups of
Industries(1)

• (1) PRODUCTS COVERED Including Intermediate
  products and articles or allied products
• S.NO. INDUSTRY RELEVANT CHPTR HEADING OF
  CENTRAL EXCISE TARIFF ACT, 1985 (CETA)
• Cement Chapter 25, 38 and 68
• Tyres and Tubes Chapter 40
• Steel Chapter 72 and 73
• Paper Chapter 47 and 48
• Insecticides Chapter 38
• Glass Chapter 70
• Paints Varnishes Chapter 32
• Aluminum Chapter 76
• NOTES
• Intermediate products and articles or allied
  products of above industries if included under
  any other Chapter of the CETA not mentioned
  above shall also be covered .
• Includes all classes of Insecticides as defined
  under The Insecticides Act, 1968

12
Order No. F. No. 52/26/CAB/-2010 DT. 3RD May,
2011 Modified by Order No. F. No.
52/26/CAB/-2010 DT. 30th June, 2011 for Cost
Audit by all Companies in 8 Groups of
Industries(2)

• APPLICABILITY
• a. As on the last date of the immediately
  preceding year aggregate value of the turnover
  from sale or supply of all products or activities
  exceeds Rs. hundred crores, OR
• b. The Companys equity or debt securities are
  listed or are in the process of listing on any
  stock exchange, whether in India or outside India

13
Order No. F. No. 52/26/CAB/-2010 DT. 3RD May,
2011 Modified by Order No. F. No.
52/26/CAB/-2010 DT. 30th June, 2011 for Cost
Audit by all Companies in 8 Groups of
Industries(3)

• 3. APPLICABLE RULES
• a. Cost Accounting Records Rules as Notified
  under Notification of 3rd June, 2011
• b. Product / Industry wise Cost Accounting
  Records Rules not applicable but Cost Accounting
  Standards and Generally Accepted Cost Accounting
  Principles (GACAP) issued by ICWAI have to be
  followed
• c. Cost Audit compulsory for all companies
  covered under this Order
• 4. Auditor
• Cost Auditor -
• Either a cost accountant holding valid
  certificate of practice under the provisions of
  Cost and Works Accountants Act, 1959.
• OR
• A firm of cost accountants registered with ICWAI
  and whose partners hold valid certificate of
  practice under the provisions of Cost and Works
  Accountants Act, 1959.
• Appointment should be as per procedure laid down
  vide MCAs General Circular No. 15/2011 52/5/CAB
  2011 dated 11th April, 2011

14
Order No. F. No. 52/26/CAB/-2010 DT. 3RD May,
2011 Modified by Order No. F. No.
52/26/CAB/-2010 DT. 30th June, 2011 for Cost
Audit by all Companies in 8 Groups of
Industries(4)

• 5. FORM FOR REPORTING
• New From as per The Companies (Cost Audit
  Report) Rules, 2011 for Cost Audit Report
  submitted on or after 1st April, 2012
  irrespective of the financial year to which it
  relates.
• Existing Form as per The Companies (Cost Audit
  Report) Rules, 2001 for Cost Audit Report
  submitted on or upto 31st March, 2012 .
• 6. PERIOD OF REPORTING
• Each of the financial year commencing on or after
  the 1st April, 2011

15
Order No. 52/26/CAB/2010 dated 24-01-2012 for
Cost Audit by all companies covering 9 products
and linked with Excise Tariff(1)

• (1) PRODUCTS COVERED Including Intermediate
  products and articles or allied products
• S.NO. INDUSTRY RELEVANT CHAPTER OF EXCISE
  TARIFF
• Jute, cotton, silk, woollen
• or blended fibers / textiles Chapter 50 to
  63
• Edible oil seeds and Oils
• (including vanaspati) Chapters 12 and 15
• 3. Packaged food products Chapters 2 to 25
  (except Chapters 5, 6, 14, 23 and 24)
• Organic and Inorganic
• Chemicals Chapters 28, 29, 32, 38 and 39
• 5. Coal and lignite Chapter 27
• Mining Metallurgy of
• Ferrous and non-ferrous Chapters 26 and 74 to
  83 (except
• Metals Chapters 76 and 77)
• Tractors other motor
• vehicles (including auto Chapters 84,85 and 87
• Components)

16
Order No. 52/26/CAB/2010 dated 24-01-2012 for
Cost Audit by all companies covering 9 products
and linked with Excise Tariff(2)

• (1) PRODUCTS COVERED Including Intermediate
  products and articles or allied products
• S.NO. INDUSTRY RELEVANT CHAPTER OF EXCISE
  TARIFF
• Plantation Products Chapters 8,9, 21 and 40
• Engineering Machinery
• (including electrical and Chapters 84 and 85
• electronic products)
• NOTES
• Intermediate or final products and articles or
  allied products of above industries if included
  under any other Chapter not mentioned above shall
  also be covered
• Items falling under above Chapter references
  exclude products already covered vide Cost Audit
  Orders dated 02-05-2011 and 30-06-2011
• Products falling under above Chapter references
  are to be considered against the respective
  industry as applicable

17
Order No. 52/26/CAB/2010 dated 24-01-2012 for
Cost Audit by all companies covering 9 products
and linked with Excise Tariff(3)

• IMPORTATANT NOTES
• Due to issue of industry specific orders, all
  company specific cost audit orders issued to
  individual companies prior to 31-03-2011 stand
  withdrawn wef financial year commencing on or
  after 01-04-2012
• All companies who were issued cost audit orders
  to individual company prior to 31-03-2011 but
  covered by order dated 02-05-20110 or 30-06-2011
  shall now comply with the industry specific
  orders.
• Companies covered under company specific orders
  issued prior to 31-03-2011 shall comply such
  orders upto 31-03-2012 before their withdrawal
  wef financial year commencing on or after
  01-04-2012

18
PENALTIES UNDER Orders No. F. No. 52/26/CAB/-2010
DT. 2ND May, 2011, DT. 3RD May, 2011, 30th
June, 2011 and 24th January, 2012 for Cost Audit
by all Companies in 15 Groups of Industries
SECTIONS OF THE ACT OFFENCE PENALTY
209(5)/209(6) AND 209(7) Failure to keep proper books of accounts including cost account records For each offence imprisonment upto six months or fine upto
Persons Responsible Managing Director /Manager / Every Director, if MD or Manager is not there and Officer who is in default Rs. 10,000/- or both.

233B (11) Failure to comply with Cost Audit provisions Fine upto Rs. 5,000/- Imprisonment upto three years or
Company Fine upto Rs. 5,000/-
Officer who is in default Imprisonment upto three years or fine upto
Rs. 50,000/- or both.
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COST ACCOUNTING STANDARDS (CAS) ISSUED BY ICWAI
AND PRESCRIBED FOR MAINTANING COST ACCOUNTING
RECORDS

• CAS NO. TITLE RELEASE DATE
• CAS - 1 Classification of Cost 08-04-2002
• CAS - 2 Capacity Determination 03-01-2003
• CAS 3 Overheads 03-01-2003
• CAS - 4 Cost of production for captive
  consumption 03-01-2003
• CAS - 5 Determination of average (equalized)
  cost of
• transportation 21-07-2005
• CAS - 6 Material Cost 12-12-2008
• CAS - 7 Employee Cost 12-09-2009
• CAS - 8 Cost of utilities 12-09-2009
• CAS - 9 Packing material cost 14-12-2009
• CAS - 10 Direct Expenses 14-12-2009
• CAS - 11 Administrative Overheads 27-03-2010
• CAS - 12 Repairs and maintenance cost
  27-03-2010
• CAS - 13 Cost of service cost centre 25-02-2011

20
Master Circular No. 2/2011 File No.
52/14/CAB-2011 dated 11-11-2011 concerning Cost
Accounting Records and Cost Audit(1)

• The Cost Auditor cannot be internal auditor of a
  company for the period for which he is conducting
  the Cost Audit in the Company
• The specified number of companies for section
  233B(2) read with section 224 1B) is to be
  computed with reference to the number of
  companies wherein he is appointed as the cost
  auditor will include (i) for which he has given
  consent , and (ii) for which cost audit reports
  have not been submitted (overdue)
• A cost auditor is deemed to have concluded his
  appointment on rendering report to the MCA.
• The Cost Auditor should ensure that full and
  complete details of cost accounts are furnished
  in their cost audit reports.
• In case of appointment of a firm of Cost
  Accountants, the cost audit report can be signed
  by any one of the partners responsible for
  conducting the cost audit in his own hand with
  his membership number for and on behalf of the
  firm.
• -continued

21
Master Circular No. 2/2011 File No.
52/14/CAB-2011 dated 11-11-2011 concerning Cost
Accounting Records and Cost Audit(2)

• (f) If a cost audit is covered for the first
  time, the cost auditor shall mention previous
  year figures on the basis of information
  furnished by the management for which he should
  obtain a certificate from them.
• (g)U/S 292A (6) The term auditors includes cost
  auditor. The audit committee should ensure
  compliance of internal control systems and also
  suggestions made in the Cost Audit Report. The
  presence of Cost Auditor at meetings of the
  Audit Committee or Board does not make him a
  member or give him right to vote.

22
General Circular No. 67/2011 dated 30-11-2011
(File No. 52/13/CAB-2011) for clarifications for
coverage of certain sectors for Cost Accounting
Records and Cost Audit

1. It gives clarification about the products /
   businesses to which the Cost Accounting Record
   Rules 2011 are not applicable.
2. Captive power generation and own manufactured
   products for self consumption in products which
   are subject to cost audit.
3. It gives examples of intermediate products and
   allied products for determination under Excise
   Tariff.

23
General Circular No. 68/2011 dated 30-11-2011
(File No. 52/13/CAB-2011 for clarifications for
regarding applicability and compliance
requirements for Cost Accounting Records and Cost
Audit

1. Companies covered under Cost Accounting Records
   Rules, 2011 shall file only a simple compliance
   report and no other details of cost records.
2. Records shall be kept in good order for the eight
   years starting with first year of application of
   Record Rules and Audit Report Rules.
3. Turnover shall exclude taxes and duties.
4. If only one product is subject to cost audit and
   there are more than one cost auditor, only a
   consolidated cost audit report should be prepared
   and signed by all the cost auditors.
5. If more than one product are under cost audit for
   which same or separate cost auditors have been
   appointed, either separate report for each
   product or only one consolidated report
   containing details of each product group under
   audit separately can be submitted.
6. Cost Auditors shall not provide any other
   services relating to (i) design and
   implementation of cost accounting system, or (ii)
   the maintenance of cost accounting records, or
   (iii) act as internal auditor.

24
General Circular No. 15/2011 dated 11th April,
2011 (File No. 52/5/CAB-2011) for Appointment of
Cost Auditor by Companies. (1)

• EFFECTIVE FROM
• Financial year commencing on or after 1st April,
  2011
• ELLIGIBILITY
• A cost accountant in whole time practice
• Holding a valid certificate of practice, and
• Includes a firm of Cost Accountants registered
  with the ICWAI
• PROCEDURE FOR APPOINTMENT
• Company to enquire about availability of the Cost
  Auditor
• The Cost Auditor to submit consent declaring that
  
• He holds a valid certificate of practice
• He is not disqualified under sections 233 B (5),
  section 224 and sub-section (3) or sub section
  (4) of section 226 of the Act
• He is independent and at arms length

25
General Circular No. 15/2011 dated 11th April,
2011 (File No. 52/5/CAB-2011) for Appointment of
Cost Auditor by Companies. (2)

• PROCEDURE FOR APPOINTMENT Continued
• 3. The Audit Committee or the Board to ensure
  that the Cost Auditor confirms to his
  declarations and approves appointment subject to
  Governments approval.
• 4. The Company files Form 23C within 90 days of
  commencement of each financial year with (i) copy
  of board resolution and (ii) certificate from the
  proposed cost auditor
• Appointment deemed to be approved by the Central
  Government unless contrary is heard within 30
  days from the date of filing Form 23C.
• Company to resubmit Form 23C, if any
  clarification is asked for.
• Appointment deemed to be approved by the Central
  Government from the date of filing fresh Form 23C
  with clarifications.
• The Company to issue appointment letter to the
  Cost Auditor as approved by the Board.
• The Cost Auditor to file Form 23D within 30 days
  of receiving appointment letter.
• The Company to disclose full particulars of Cost
  Auditor and date of filing of the cost audit
  report in its annul report for each financial
  year.

26
General Circular No. 15/2011 dated 11th April,
2011 (File No. 52/5/CAB-2011) for Appointment of
Cost Auditor by Companies. (3)

• PENALTIES
• 1. Sections - 209(5)/209(6) AND 209(7) -
  Failure to keep proper books of
• accounts including cost account records
• Persons Responsible Managing Director /Manager
  / Every Director, if MD or Manager is not there
  and Officer who is in default
• For each offence imprisonment upto six months
  or fine upto Rs. 10,000/- or both
• 2. Section - 233B (11)
• Failure to comply with Cost Audit provisions
• Company - Fine upto Rs. 5,000/-
• Officer who is in default - Imprisonment upto
  three years or fine upto Rs. 50,000/- or both.
• COST AUDITOR
• Fine upto Rs. 5,000/-

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ROLE OF ICWAI

• Already issued frequently asked questions to be
  upgraded from time to time
• Issued 13 Cost Accounting Standards and will
  issue 26 more Cost Accounting Standards
• Already issued Draft of Generally Accepting Cost
  Accounting Principles as envisaged in new
  Notifications for suggestions by all stakeholders
• Will set up a technical guidance cell to help for
  compliance of the statutes by business and
  profession
• Will issue industry specific guidance notes for
  maintaining cost records, compliance with Cost
  Accounting Standards, product groups, etc.

28
Draft of Consent Letter by PCA to the
Company.----------------------------- COST
ACCOUNTANTS --------------------------------------
--------Ref. No. -------------------------------
Date----------------------------------The
Chairman, Audit Committee / Board of Directors,
-------------------------------------- Limited,
-------------------------------------------------
----Dear Sir, Subject COST AUDIT OF
---------------------(PRODCUT) FOR THE YEAR
ENDING 31ST MARCH, 201---I / we thank you for
your letter No. .. Dated .. (or
refer to the discussion with your Chief Finance
Officer Mr. / Ms. ..) for our availability
for appointment as Cost Auditor for Cost Audit of
..(Product) for the year ending on 31st
March, 201. In your esteemed company.I / we
have pleasure to inform you that I / we am/
are1. available for appointment as cost auditor
required by you2. free from any
disqualifications as specified under Section 233B
(5) read with Section 224 and sub-section (3) or
sub-section (4) of Section 226 of the Companies
Act3. having audits within the limits
prescribed under Section 224 (1B) read with
sub-section (2) of Section 233B of the Companies
Act, 1956 including your Company, if
appointed4. holding valid certificate of
practice issued by the Institute of Cost and
Works Accountants of India5. in whole time
practice having membership No / firm
Registration No. . 6. having PAN -------
7. not having any interest in your company
which will disqualify me / us from the proposed
appointment as auditorThanking you, Yours
faithfully FOR COST ACCOUNTANT/SPARTNE
R
29
----------------------------- COST ACCOUNTANTS
----------------------------------------------Re
f. No. -------------------------------
Date----------------------------------The
Chairman, Audit Committee / Board of Directors,
-------------------------------------- Limited,
-------------------------------------------------
----Dear Sir, Subject COST AUDIT OF
---------------------(PRODCUT) FOR THE YEAR
ENDING 31ST MARCH, 201---I / we thank you for
your letter No. .. Dated .. (or
refer to the discussion with your Chief Finance
Officer Mr. / Ms. ..) confirming our
appointment as Cost Auditor for Cost Audit of
..(Product) for the year ending on 31st
March, 201. In your esteemed company and
enclosing copy of resolution of the Board fo
Directors and Form 23 C filed with the Ministry
of Corporate Affairs. We would request you to
kindly invite us to meetings of your Audit
Committee and in the meanwhile give a suitable
appointment for a meeting to finalise procedure
for Cost Audit. Kindly note that as per clause
K of the General Circular No. 15/2011
52/5/CAB-2011) dated 11th April, 2011 issued by
the Ministry of Corporate Affairs, Cost Audit
Branch the company has to disclose full
particulars of the Cost Auditor along with the
due date and actual date of submission of the
Cost Audit Report by the Cost Auditor with the
Ministry in the Directors Report to the
Shareholders for each relevant financial year.
Thanking you, Yours faithfully FOR
COST ACCOUNTANT/SPARTNER
30
COST ACCOUNTING POLICIES1. Analysis
of Standards followedCost Accounting
standardsInternational Accounting
StandardsIndian Accounting StandardsIFRSGene
rally Accepted Cost Accounting Principles2.
Alternatives followed where multiple options are
availablea. Subsidy capital / revenue
transport, duty and taxes, incentives, etcb.
Valuation of works in process / in progress
engineering, construction, process industryc.
Foreign exchange fluctuations impacting shipments
/ inventoryd. Amortization of R D expenses e.
amortization of Intangible assets like soft ware,
copy rights, customers after sales servicef.
sales returns , expiry of shelf life of products
,bad debtsg. Transfer pricing norms e.g.. CAS
4,h. Depreciation 100 , SLM, WDV, Low value
assets / materials i. Retirement benefits
gratuity / leave entitlementsj. impairment of
assets insurance claimsk. financial costs
interest, bank charges, capital issue expenses,
etc. l. Carbon credits 3. Allocation of
overheads / estimation actual results
technical evaluation ratio of prime cost 4.
Overseas operations costs, revenues, local
laws, etc. ,
31
THANKS