Cost audit applicability under the Companies (Cost Records and Audit) Rules is determined in two separate steps: first, whether the company is engaged in the production of goods or provision of services listed in the regulated or non-regulated sector tables under the rules and crosses the overall turnover threshold for maintaining cost records, and second, whether it separately crosses the higher turnover threshold specific to the regulated or non-regulated category, and net worth or other criteria, that triggers the obligation to actually get those cost records audited; a company can be in scope for maintaining cost records while falling below the audit threshold, and the exact sector tables and thresholds should be confirmed against the current rules.
The two-step test
| Step | Trigger | Consequence |
|---|---|---|
| Maintenance of cost records | Company's products or services fall in the regulated or non-regulated sector table and overall turnover exceeds the prescribed threshold | Company must maintain cost accounting records in the prescribed form, whether or not cost audit applies |
| Cost audit | Within the above, turnover from the specific regulated or non-regulated sector items, and in some cases aggregate turnover, exceeds a separate, higher threshold | Company must appoint a cost auditor and file a cost audit report in the prescribed form |
Why the regulated and non-regulated classification matters
Regulated sectors, such as telecommunications, electricity, and petroleum, generally carry a lower turnover threshold and stricter applicability than non-regulated sectors covering goods like cement, steel, pharmaceuticals and several others. A diversified company producing goods across both categories needs its turnover tested segment by segment against the correct threshold for each sector the product falls under, not against a single blended threshold.
What the statutory auditor cross-checks
- 01Confirm management's applicability assessment against the current sector tablesCheck the company's products or services, as actually produced or rendered, against the regulated and non-regulated sector lists in the rules, rather than accepting a prior year's conclusion carried forward without reassessment.
- 02Recompute relevant turnover independentlyConfirm turnover is computed on the basis the rules prescribe, which can be net of excise duty and other specified exclusions, and is segmented correctly where the company has multiple product lines.
- 03Check whether a cost auditor was appointed within the prescribed timelineAppointment requires board approval and a specified filing with the Registrar within a prescribed period of the board meeting; confirm this was done and filed on time where cost audit applies.
- 04Confirm the cost audit report was filed in the prescribed form and timelineThe cost auditor's report, and the company's own filing of it with the Registrar, each carry separate prescribed forms and timelines; confirm both were completed where applicable.
- 05Cross-reference to the CARO cost records clauseThe CARO clause on maintenance of cost records only confirms whether records are maintained, not whether they were actually audited; keep the two conclusions separate in the audit file even though they draw on the same applicability analysis.
A company that outsources production entirely to a job-worker sometimes assumes cost record requirements do not apply because it does not itself manufacture; applicability generally follows the company whose products these are, not the location where physical production occurs, and this should be tested rather than assumed.
Regulatory requirement
The exact sector tables, turnover thresholds for both cost records and cost audit, appointment and filing timelines, and the prescribed forms are set out in the Companies (Cost Records and Audit) Rules as currently in force. Confirm all of these against current source material before concluding on applicability.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- CARO & Companies ActCARO clause 3(vi): cost records, and the applicability check that comes firstMost companies this clause touches never get to the substantive question, because they aren't covered by the Cost Records Rules at all. Confirming that is the actual first step.
- CARO & Companies ActBooks of account compliance under the Companies ActWhat proper books of account require under the Companies Act, the audit-trail-software requirement, and how to test whether it is actually switched on.
- CARO & Companies ActSecretarial compliance checklist for a statutory auditorBoard meeting frequency, statutory registers and ROC filing timeliness, read as evidence of compliance culture rather than a secretarial checklist in its own right.
- CARO & Companies ActCARO 2020 reporting checklist for statutory auditorsThe topic areas CARO reporting covers, what evidence each one needs, and how the clauses fit together across the audit file.
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