For companies covered under Section 148 of the Companies Act, 2013, a Cost Audit Report is a mandatory report submitted by a Cost Auditor in Form CRA-3 to confirm whether the company's cost records present a true and fair view of its costs, sales and margins. Applicable to specified manufacturers and service providers meeting prescribed thresholds, the report is a key compliance requirement with defined filing procedures, deadlines and penalties for non-compliance.
Which companies must prepare a cost audit report?
Rule 3 of the Companies CRA (Cost Records and Audit) Rules, 2014 requires companies engaged in specified goods or services to maintain cost records in accordance with CRA-1 if their overall turnover from all products and services was ₹35 crore or more in the immediately preceding financial year.
CRA-1 is not an Ministry of Corporate Affairs (MCA) filing form. It prescribes the principles and requirements for maintaining cost records.
The requirement applies to both domestic companies and covered foreign companies with a place of business in India. However, crossing the ₹35 crore threshold only triggers cost record maintenance; a separate test under Rule 4 determines whether a statutory cost audit is required.
The Rules divide covered sectors into two categories:
Regulated Sectors (Table A)
Examples include telecommunications, electricity, petroleum products, drugs and pharmaceuticals, fertilisers and sugar.
A cost audit becomes applicable when:
- Overall annual turnover from all products and services is ₹50 crore or more
- Aggregate turnover from the covered regulated products or services is ₹25 crore or more.
Non-Regulated Sectors (Table B)
Examples include cement, steel, paper, machinery, textiles and engineering products.
A cost audit becomes applicable when:
- Overall annual turnover from all products and services is ₹100 crore or more
- Aggregate turnover from the covered products or services is ₹35 crore or more
For example, a textile manufacturer with a turnover of ₹40 crore may need to maintain cost records under Rule 3. However, whether it must undergo a cost audit depends on whether it satisfies the applicable Rule 4 thresholds.
Pure trading businesses that do not undertake manufacturing or covered service activities generally fall outside the scope of the cost audit framework.
How is a cost auditor appointed?
The Board of Directors appoints a cost auditor under Section 148(3) of the Companies Act, 2013. The Board must appoint a Cost Accountant in Practice as the company's cost auditor within 180 days from the commencement of the financial year.
The company must then intimate the Central Government of the appointment through Form CRA-2 within 30 days of the Board meeting or within 180 days from the commencement of the financial year, whichever is earlier, in accordance with the Companies (Cost Records and Audit) Rules, 2014.
What is the structure and format of the CRA-3 Cost Audit Report?
A CRA-3 Cost Audit Report consists of the auditor's observations, opinion and supporting annexures prepared in the format prescribed under Rule 6(4) of the Companies (Cost Records and Audit) Rules, 2014.
The auditor begins by commenting on:
- Whether proper cost records have been maintained
- Whether adequate returns and information have been received from branches not personally visited
- Whether the records comply with applicable Cost Accounting Standards
- Whether the cost records reconcile with the company's financial books and statements
- Whether the records provide the information required under the Companies Act and the Rules
The most important part of the report is the auditor's opinion on whether the annexed cost statements provide a true and fair view of:
- Cost of production
- Cost of sales
- Margin relating to the products or services covered by the audit
CRA-3 also includes detailed annexures containing product-wise and service-wise cost statements, quantitative information, schedules, reconciliation statements and notes on costing methodologies.
The cost statements forming part of the audit are generally required to be approved by the Board of Directors before they can be relied upon for statutory reporting purposes.
The report concludes with observations, suggestions, qualifications, reservations or adverse remarks, if any, which the Board must consider before filing Form CRA-4.
What is the filing timeline from CRA-3 to CRA-4?
The filing timeline from CRA-3 to CRA-4 has two stages. The cost auditor must submit the CRA-3 report to the Board within 180 days of the financial year-end. The company must then file Form CRA-4 with the Central Government within 30 days of receiving the report.
Form CRA-4 must include details of any reservations or qualifications in the cost audit report and be filed in XBRL format using the MCA-prescribed taxonomy and validation utility.
Recent changes to filing forms
On 30 May 2025, the MCA notified the Companies (Cost Records and Audit) Amendment Rules, 2025 through G.S.R. 361(E), replacing both Form CRA-2 and Form CRA-4. The revised forms became effective on 14 July 2025 and apply to all filings made on or after that date. Companies preparing a cost audit report should ensure they use the latest CRA-4 version rather than an older saved template.
Which companies are exempt from cost audit?
Companies whose export revenue earned in foreign exchange exceeds 75% of total revenue, companies operating entirely from a Special Economic Zone (SEZ) and companies generating electricity solely for captive consumption through a captive generating plant are exempt from the cost audit requirement, even if they are otherwise covered under Rule 3.
These exemptions must be supported with appropriate documentation. For example, companies claiming the export exemption should maintain evidence such as Foreign Inward Remittance Certificates (FIRCs) and bank statements to substantiate the claim if questioned by the MCA. Claiming an exemption without adequate supporting records can lead to compliance issues during scrutiny.
What are the penalties for non-compliance with cost audit provisions?
Under Section 148(8) of the Companies Act, 2013, non-compliance with cost audit requirements attracts penalties under Section 147.
If a company defaults on its obligations under Section 148, the company may be fined between ₹25,000 and ₹5,00,000 under Section 147(1). Every officer in default may also be held liable.
A cost auditor who defaults is punishable under Sections 147(2) to 147(4) with a fine of up to ₹5,00,000 or four times the auditor's remuneration, whichever is lower.
If the contravention is knowing or wilful and intended to deceive the company, its shareholders or tax authorities, the auditor may face imprisonment of up to one year along with a higher fine.
Repeated or unexplained delays may attract closer scrutiny from the MCA.
Conclusion
A cost audit is not just a year-end compliance exercise. Identifying whether your company falls within the cost audit framework, maintaining accurate cost records and meeting the timelines for CRA-3 and CRA-4 filings are essential to avoid penalties and ensure regulatory compliance.
Regularly reviewing product classifications, exemption eligibility and cost accounting processes can help businesses stay prepared throughout the year. With TallyPrime, companies can maintain organised cost records, streamline compliance and support a smoother cost audit process.
