Cost Auditing Standards Board

Cost Auditing Standard - 101

Cost Auditing Standard on
Planning an Audit of Cost Statements

The following is the Cost Auditing Standard (Cost Auditing Standard- 101) on “Planning an
Audit of Cost Statements”. In this Standard, the standard portions have been set in bold italic
type. This Standard should be read in the context of the background material, which has been
set in normal type.

1. Introduction
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.

2. Objective
The objective of this Standard is 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.

3. 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.

4. Definitions
The following terms are being used in this standard with the meaning specified.

4.1 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.

4.2 Audit Partner: Audit partner means the partner in the firm who is a member of the
Institute of Cost Accountants of India and is in full time practice and is responsible for the

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audit and its performance, and for the report that is issued on behalf of the firm, and who,
where required, has the appropriate authority from a professional, legal or regulatory
body.

4.3 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.

4.4 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.

(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.

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

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

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4.7 Cost Audit: Cost audit is 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.

4.8 Cost Auditor: “Cost Auditor” means 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.

4.9 Firm: Firm means a sole practitioner, partnership including LLP (Limited Liability
Partnership) or any other entity of professional cost accountants as may be permitted by
law and constituted under The Cost and Works Accountants Act & Regulations.

4.10 Initial Audit: Initial audit means an audit where:-

(a) The entity is subject to audit for the first time, as per the applicable laws, or
(b) The audit of the entity for the prior period was conducted by a different audit firm.

4.11 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.

Where the cost auditor expresses an opinion on whether the cost statements give a true
and fair view, misstatements also include those adjustments of amounts, classifications,
presentation, or disclosures that, in the cost auditor’s judgment, are necessary for the
cost statements to be presented fairly, in all material respects, or to give a true and fair
view.

4.12 Overall Audit Strategy: Overall Audit Strategy sets the scope, timing and direction of
the audit, and guides the development of the detailed audit plan.

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4.13 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 thereof.

5. Requirements
5.1 Prior to entering the planning phase, the Cost Auditor shall ensure that:
(a) the appointment as cost auditor is proper, he has received the letter of
appointment and legal formalities regarding his appointment have been
complied with;
(b) the ethical requirements as per the regulations continue to be satisfied; (Refer
6.3)
(c) 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.

5.2 The 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. (Refer 6.4)

5.3 The Cost Auditor shall formulate an Overall audit strategy that sets the scope, timing
and direction of the audit.
The overall audit strategy guides the development of the audit plan.

5.4 In formulating the Overall audit strategy, the Cost Auditor shall consider all relevant
factors. (Refer 6.5)
These relevant factors include:
(a) results of preliminary activities as specified in 5.1 above
(b) knowledge from previous audits and other engagements with the auditee
(c) knowledge of business
(d) nature and scope of the audit
(e) statutory deadlines and reporting format
(f) relevant factors determining the direction of the audit efforts
(g) nature, timing and extent of resources required for the audit.

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5.5 The Cost Auditor shall develop an audit plan.

The audit plan will include the nature, extent and timing of risk assessment, audit
procedures and other activities (Refer 6.5, 6.6)

5.6 The Cost Auditor shall plan the nature, extent and timing of the direction and supervision
of audit team members and the review of their work.(Refer 6.7)

5.7 The Cost Auditor shall update the Overall audit strategy and the audit plan as required
during the course of audit. (Refer 6.8)

5.8 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.

5.9 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. (Refer 6.9)

6. Application Guidance

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

6.2 Planning is not a discrete phase of an audit, but rather a continuous and iterative process.
Planning includes scheduling which involves determining the priority of audit procedures
and their inter dependence. For example, the risk assessment procedures are planned early
in the audit process.

6.3 Prior to the performance of other significant activities for the current year’s audit, the
auditor shall ensure that {Refer 5.1 (b)} :

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(a) 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 system for the entity.

(b) Subsequent to his acceptance of the assignment, no issues about management

integrity has cropped up that may affect the auditor’s willingness to continue the
engagement.

6.4 The involvement of the audit partner and other key members of the audit team in planning
the audit draws on their experience and insights, thereby enhancing the effectiveness and
efficiency of the planning process.(Refer 5.2)

6.5 Matters that are relevant in formulating the overall audit strategy and drawing up the audit
plan include, in addition to those mentioned earlier, the following (Refer 5.4, 5.5):

(a) The cost reporting framework generally prescribed, under the Companies Act and
Rules prescribed thereunder, 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 reconciliation with financial reporting framework.
(b) Industry regulators’ requirement as to how costs will be handled.
(c) Unique features of an industry that influence audit requirements such as definition of
product in the newspaper industry.
(d) 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
(e) State of IT (Information Technology) implementation, whether the entity is using an
ERP (Enterprise Resource Planning) system or internally developed systems and the
reliance that can be placed on them.
(f) Statutory timelines for cost reporting, which can be modified by the management for
early completion.
(g) Timelines for Board/ audit committee meetings, which can set the time limits for
completion of audit work.

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(h) Resources required and available in terms of manpower, equipment and others and
the assignment of these to specific parts of the work.

6.6 The audit plan is more detailed than the overall audit strategy as it 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. For example, planning of the auditor’s risk assessment procedures
occurs early in the audit process. However, planning the nature, timing and extent of specific
further audit procedures depends on the outcome of those risk assessment procedures.
(Refer 5.5)

6.7 The nature, extent and timing of the direction and supervision of audit 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.(Refer 5.6)

6.8 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. (Refer 5.7)

6.9 Additional Consideration in Initial Audit Engagements (Refer 5.9): 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.

(a) 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.
(b) Any major issues (including the application of cost accounting principles or of auditing
and reporting standards) discussed with 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.

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(c) The audit procedures necessary to obtain sufficient appropriate audit evidence regarding
opening balances (such as Inventory).
(d) Other procedures required by the firm’s system of quality control for initial cost audit
engagements (for example, the firm’s system of quality control may require the
involvement of another partner or senior individual to review the overall audit strategy
prior to commencing significant audit procedures or to review reports prior to their
issuance).

6.10 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 mentioned under Requirements.

7. Effective Date
This Standard is effective for audits on or after September 11, 2015.

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