COST AUDITING STANDARD – 101 PLANNING AN AUDIT OF COST STATEMENTS

[Mr. M. GOVINDARAJAN]

Ministry of Corporate Affairs has approved four Cost auditing Standard as framed by the Institute of Cost Accountants of India with effective from 11.09.2015-

• Cost Auditing Standard – 101 – Planning an Audit of Cost Statements;
• Cost Auditing Standard – 102 – Cost Audit Documentation;
• Cost Auditing Standard – 103 – Overall objectives of the Independent Cost Auditor and  The conduct of an Audit in accordance with Cost   Auditing Standards;
• Cost Auditing Standard – 104 – Knowledge of Business, its processes and the Business Environment.

The planning an audit of cost statements, records and other related document is highly required for the achievement of audit objectives with available resources and securing coordination with the auditee on cost audit work.

Objective

The Objective of Cost Auditing Standard 101 (‘Standard’ for short) is to guide the  ICMA members in planning for the audit of cost statements so that it is performed in an efficient and effective manner.   It also include establishing the overall audit strategy and audit plan for the conduct of the audit.

Scope

This standard deals with the auditors’ responsibility to plan an audit of cost statements, records and other related documents.   The auditor shall prepare and document the overall audit strategy and audit plan.

What is an audit?

Audit is an independent examination of financial, cost and other related information of an entity whether profit oriented or not, irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon.

Cost Audit

Cost audit is an independent examination of cost statement, cost records and other related information of an entity including a non profit entity, when such an examination is conducted with a view to expressing an opinion thereon.

Cost Auditor

‘Cost audit’ is an auditor appointed to conduct an audit of cost records.  He shall be a cost accountant within the meaning of the Cost and Works Accountants Act, 1959 and holds a valid certificate of practice under Section 6(1) and who is deemed to be in practice under Section 2(2) of that Act and includes a firm of Cost Accountants.

Audit Plan

Audit plan is a record of the planned nature, timing and extent of risk assessment procedures and further audit procedures at the assertion level in response to the assessed risks.

Audit Risk

It is the risk that the Cost auditor expresses an inappropriate audit opinion on the cost statements that are materially misstated.   It is the function of material misstatement and detection risk.

Risk of material management

It has two components, viz, inherent risk and control risk.   Inherent risk is the susceptibility of an assertion about the measurement, alignment or disclosure of cost to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.  The control risk is the risk that a misstatement that could occur in an assertion about the measurement, assignment or disclosure of cost and that could be material, either individually or when aggregated with other misstatements, will not be prevented or detected and corrected on a timely basis by the entity’s internal, operational and management control.

Detection risk

It is the risk that the procedures followed by the Cost Auditor to reduce audit risk to an acceptable low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

Pre-planning

The Cost Auditor, prior to planning an cost audit statements, shall ensure the following:

• The appointment as Cost auditor is proper;
• He has received the letter of appointment;
• Compliance of legal formalities in regard to his appointment;
• Satisfaction of ethical requirements;

• After the Cost Auditor has accepted the appointment for an entity, there are no changes in his position in relation to the entity that impede his arm’s length relationship with the entity, such as acceptance of an assignment relating to designing and implementation of cost accounting systems for the entity;
• Subsequent to the acceptance of his assignment, no issues about management integrity has cropped up that may affect the auditor’s willingness to continue the engagement;

• An understanding of the terms of reference including the units to be covered, products/services to be covered, scope of coverage where the regulations leave it to be agreed between the auditor and the auditee.

Overall audit strategy

The nature and extent of planning activities will vary according to the size and complexity of the entity’s activities, the number of products to be covered, the processes and operations involved, the audit team members’ previous experience with the entity and the industry and the changes in circumstances that occur during the audit.

Planning is not a discrete phase of an audit but a continuous and iterative process.  It includes scheduling which involves determining the priority of audit procedures and their inter dependence.

The following are the requirements for planning:

• The audit partner and other key members of an audit tem shall be involved in planning the audit including planning and participation in the discussion among audit team members on their experience and insights thereby enhancing the effectiveness and efficiency of the planning process;
• The Cost auditor shall formulate an overall audit strategy that sets the scope, timing and directions of the audit;
• In formulating the overall strategy, the factors, including the following, shall be considered by the Cost Auditor:

• Results of preliminary activities;
• Knowledge from previous audits and other engagements with the auditee;
• Knowledge of business;
• Nature and scope of the audit;
• Statutory deadlines and reporting format;
• Relevant factors determining the direction of the audit efforts;
• Nature, timing and extent of resources required for the audit;

• The audit plan developed by the Cost Auditor will include the nature, extent and timing of risk assessment, audit procedures and other activities.  Besides the above requirements, the matters that are relevant in formulating the overall audit strategy and drawing up the audit plan include-

• The cost reporting framework generally prescribed, under the Companies Act and Rules prescribed there under, as well as under any other law as applicable on the basis of which the cost information to be audited has been prepared, including need for reconstitution with financial reporting framework;
• Industry regulators’ requirement as to how costs will be handled;
• Unique features of an industry that influence audit requirements such as definition of product in the newspaper industry;
• Reliance that can be placed on the work of financial auditors, other cost auditors appointed by the entity and internal auditors, such as their attendance in annual stocktaking;
• State of Information Technology implementation, whether the entity is using an ERP system or internally developed system and the reliance that can be placed on them;
• Statutory timelines for cost reporting, which can be modified by the management for early completion;
• Timelines for Board/audit committee meetings, which can set the time limits for completion of audit work;
• Resources required and available in terms of manpower, equipment and others and the assignment of these to specific parts of the work;

• The audit plan is more detailed than the overall audit strategy.  The audit plan includes the nature, timing and extent of audit procedures to be performed by audit team members;
• Planning for these audit procedures takes place over the course of the audit as the audit plan for the engagement develops.  However, planning the nature, timing and extent of specific further audit procedures depends on the outcome of those risk assessment procedures;
• The Cost Auditor shall plan the nature, extend and timing of the direction and supervision of audit team members and the review of their work.  The nature, extend and timing of the direction and supervision of such team members and review of their work vary depending on, among others, the size and complexity of the entities activities, risk assessment results and the capabilities and competence of the individual team members performing the audit work;
• The Cost Auditor shall update the overall audit strategy and the audit plan as required during the course of audit.  As a result of unexpected events, changes in conditions or the audit evidence obtained from the results of audit procedures, the auditor may need to modify the overall audit strategy and audit plan;
• The Cost Auditor shall document the overall audit strategy, the audit plan and any significant changes made therein during the audit engagements and the reasons for the changes;
• In the initial audit, the Cost Auditor shall perform procedures regarding the acceptance of the client relationship and the specific audit.   In case where the audit of the entity for the prior period was conducted by a different audit firm, the auditor shall communicate with the previous auditor.
• The purpose and objective of planning the audit are the same whether the audit is an initial or recurring engagement.   However for an initial audit, the auditor may need to expand the planning activities because the auditor does not ordinarily have the previous experience with the entity that is considered when planning recurring engagements.  For the initial audit, additional matters the auditor may consider in formulating the overall audit strategy and audit plan include the following:

• The planning activities may expand to cover consultations with the previous auditor, review of previous year’s audit working papers, if not prohibited by other law or regulation, and previous year’s transactions having an impact on current year’s cost;
• Any major issues discussed with the management in connection with the initial selection as cost auditor, the communication of these matters to those charged with governance and how these matters affect the overall audit strategy and audit plan;
• The audit procedure necessary to obtain sufficient appropriate audit evidence regarding opening balances;
• Other procedures required by the firm’s system of quality control for initial cost audit engagements.

Audit for small entities

In audits of small entities where the entire audit may be conducted by a small audit team comprising the audit partner working with say one team member, formulating the audit strategy and drawing up the audit plan need not be elaborate.   Nonetheless it is necessary to have regard to the matters above.