Cost Auditing Standards under the Companies Act, 2013 : Part -I

[Rakesh Singh]

Introduction

Cost Audit has been dealt in Section 148 of the Companies Act, 2013 and is defined in the Cost Auditing Standards as “an independent examination of cost statements, 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 audit under the act is to be conducted by a cost accountant in practice. Cost auditing standards -101 defines cost auditor in its para 4.8 as “an auditor appointed to conduct an audit of cost records and shall be a cost accountant within the meaning of The Cost and Works Accountants Act 1959. “Cost Accountant” is 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) and who holds a valid certificate of practice under subsection (1) of section 6 and who is deemed to be in practice under subsection (2) of section 2 of that Act and includes a firm of cost accountants.”

Planning an audit of cost statements, records and other related documents is considered necessary to ensure achievement of audit objectives with available resources and securing coordination with the auditee on audit work. Section 148 (3) of the Companies Act, 2013 provides that the auditor conducting the cost audit shall comply with the cost auditing standards. The explanation below the provision states- “For the purpose of this sub-section, the expression “cost auditing standards” mean such standards as are issued by the Institute of Cost and Works Accountants of India, constituted under the Cost and Works Accountants Act, 1959, with the approval of the Central Government.

The Institute of Cost Accountants of India, has issued four (4) Cost Auditing Standards till now and the same are applicable from September 11, 2015, namely:

101	Planning an audit of Cost Statements
102	Cost Audit Documentation
103	Overall objectives of the independent cost auditor
104	Knowledge of business, its processes and the business environment

Cost Auditing Standard on Planning an Audit of Cost Statements

The objective clause in the first standard on “Planning an audit of cost Statements” states its objective as - to guide the members in planning for the audit of cost statements so that it is performed in an efficient and effective manner. Audit planning shall also include establishing the overall audit strategy and audit plan for the conduct of the audit. The objective clause read with scope as per para -3 of the standard places responsibility on auditor to:

1. plan an audit of cost statements, records and other related documents;
2. prepare and document the overall audit strategy: and
3. prepare and document the overall audit plan.

The responsibilities contained in the Auditing Standard and requirements arising therefrom include:

• confirmation of receipt of the letter of appointment and legal formalities regarding his appointment been complied along with ethical requirements as per regulations [Para 5.1 (a) &(b)];
• 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 is reached and documented.
• formulation of an Overall audit strategy that sets the scope, timing and direction of the audit (para 5.3);
• audit partner and other key members of an audit team shall be involved in planning the audit, including planning and participating in the discussion among audit team members (Para 5.2 read with Para 6.4)
• the audit plan will include the nature, extent and timing of risk assessment, audit procedures and other activities (Refer6.5, 6.6)
• plan the nature, extent and timing of the direction and supervision of audit team members and the review of their work(Refer 6.7).
• update the Overall audit strategy and the audit plan as required during the course of audit. (Refer6.8)
• document the overall audit strategy, the audit plan and any significant changes made therein during the audit engagements and the reasons for the changes.
• perform procedures regarding the acceptance of the client relationship and the specific audit and 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(Refer6.9).

It will be important to understand certain terms / definitions used in the standard given below to understand the requirements of the standard so far as it applies on cost auditors as well as company / unit.

1. Audit Plan: 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 (Para-4.3).

2. Audit Risk: Audit risk is the risk that the cost auditor expresses an inappropriate audit opinion on the cost statements that are materially misstated. Audit risk is a function of the risk of material misstatement and detection risk (para 4.4).

(a) The risk of material misstatement has two components viz. Inherent Risk and Control risk.

(1) Inherent risk: the susceptibility of an assertion about the measurement, assignment 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.

(2) Control risk: 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.

(b) Detection risk: 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.

3. Audit Team: Audit team means all personnel performing an engagement, including any experts contracted by the firm in connection with that engagement (Para 4.5).

4. Auditee: Auditee means a company or any other entity for which cost audit is being carried out (Para 4.6).

5. Misstatement: A difference between the amounts, classification, presentation or disclosure of a reported cost statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable cost reporting framework. Misstatements can arise from error or fraud (Para-4.11).

6. Risk Assessment: The audit procedures performed to obtain an understanding of the entity and its environment, including the entity’s internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the overall cost statement level and at the assertion level including items of cost, cost heads and disclosure thereto (4.13).