Qualification and Disqualification of Cost Auditor – Who can be appointed

In our last articles we have discussed sectors or industry to which cost audit and cost records are mandatory as per new companies act 2013 and how to appoint cost auditor in companies.

In this article we will be discussing who can be appointed as cost auditor, qualification and disqualification of cost auditor.

Qualification and Disqualification of Cost Auditor

Qualification – Who can be appointed as a cost auditor?

As per clause (c) of rule 2 of Companies (cost records and audit) Rules, 2014, Cost auditor means a Cost Accountant in practice, as defined in clause (b), who is appointed by the Board.

As per Clause (b) of rule 2, “Cost Accountant in practice” means a cost accountant as defined in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 (23 of 1959), who holds a valid certificate of practice under sub-section (1) of section 6 of that Act and who is deemed to be in practice under sub-section (2) of section 2 thereof, and includes a firm or limited liability partnership of cost accountants.

Clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 defines “Cost Accountant”. It means a Cost Accountant who holds a valid certificate of practice under sub-section (1) of section 6 of the Cost and Works Accountants Act, 1959 and is in whole-time practice. Cost Accountant includes a Firm of Cost Accountants and a LLP of cost accountants.

This means, only a Cost Accountant, as defined under section 2(28) of the Companies Act, 2013, with valid certificate of practice is qualified to get appointed as a cost auditor.

Disqualification of a Cost Auditor

As per section 141 of the Companies Act, 2013 read with Rule 10 of the Companies (Audit and Auditors) Rules, 2014 and Section 148 of the Companies Act, 2013, following persons are not eligible for appointment as a cost auditor. This means in following cases a cost auditor will be disqualified to get appointed as cost auditor;

  • A body corporate. However, a Limited Liability partnership registered under the Limited Liability Partnership Act, 2008 can be appointed. [Section 141(3)(a)].
  • An officer or employee of the company. [Section 141(3)(b)].
  • A person who is a partner, or who is in the employment, of an officer or employee of the company. [Section 141(3)(c)].
  • A person who, or his relative or partner is holding any security of or interest in the company or any of its subsidiary or of its holding or associate company or a subsidiary of such holding company. [Section 141(3)(d)(i)].
  • Relatives of any partner of the firm holding any security of or interest in the company of face value exceeding Rs. 1 lakh. [Section 141(3)(d)(i) and Rule 10(1) of Companies (Audit and Auditors) Rules, 2014].
  • Relatives of any partner of the firm holding any security of or interest in the company of face value exceeding Rs. 1 lakh. [Section 141(3)(d)(i) and Rule 10(1) of Companies (Audit and Auditors) Rules, 2014].
  • A person who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company or its subsidiary, or its holding or associate company or a subsidiary of such holding company, for an amount exceeding Rs. 1 lakh. [Section 141(3)(d)(iii) and Rule 10(3) of Companies (Audit and Auditors) Rules, 2014].
  • A person or a firm who, whether directly or indirectly, has business relationship with the company or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company. [Section 141(3)(e) and Rule 10(4) of Companies (Audit and Auditors) Rules, 2014].

“Business Relationship” is defined in Rule 10(4) of Companies (Audit and Auditors) Rules, 2014 and the same shall be construed as any transaction entered into for a commercial purpose, except commercial transactions which are in the nature of professional services permitted to be rendered by a cost auditor or a cost audit firm under the Act and commercial transactions which are in the ordinary course of business of the company at arm’s length price – like sale of products or services to the cost auditor, as customer, in the ordinary course of business, by companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses.

  • A person whose relative is a director or is in the employment of the company as a director or key managerial personnel of the company. [Section 141(3)(f)].
  • A person who is in the full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor if such person or persons is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies. [Section 141(3)(g)].
  • A person who has been convicted by a court for an offence involving fraud and a period of ten years has not elapsed from the date of such conviction. [Section 141(3)(h)].
  • Any person whose subsidiary or associate company or any other form of entity, is engaged as on date of appointment in consulting and providing specialized services to the company and its subsidiary companies: [Section 141(3)(i) and Section 144].
    • accounting and book keeping services
    • internal audit
    • design and implementation of any financial information system
    • actuarial services
    • investment advisory services
    • investment banking services
    • rendering of outsourced financial services
    • management services

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