THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
COST AUDITING AND ASSURANCE STANDARDS BOARD (CAASB)
Presentation on Standard on Cost Auditing Knowledge of Business, its processes and the Business Envirnment (SCA 104)
Formulation of Standards on Cost Auditing
How Standards on Cost Auditing are formulated?
The Board is authorized to issue following literatures:
Structure of Standards on Cost Auditing
|Introduction||Explains subject matter of SCA in brief, and context in which the SCA is set.|
|Objectives||Objectives to be achieved by the cost auditor in complying with the requirements of SCA keeping in mind the interrelationships among other SCAs.|
|Scope||Scope and applicability of SCA keeping in view subject matter & specific expectations from cost auditor and others in the context in which the SCAs are set.|
|Definitions||Description of terminology used in SCA. However, no definition can override the meaning defined in law and regulations.|
|Requirements||Outlines the specific requirements of SCA. Requirements containing the word “shall”, is mandatory (Bold Italic) to be complied with, unless stated otherwise The Non Bold Italic part of this section provide further explanation to relevant requirement.|
structure of Standards on Cost Auditing
|Application Guidance||Provides further explanation of the requirements and guidance for carrying the requirements set out in the SCA. Covers background information, addresses meaning of requirements and explains the requirements precisely with examples wherever required.
However, the actual procedures selected by the cost auditor require the use of professional judgment based on the particular circumstances of the entity.
|Effective Date||Date from which the application of the SCA is mandatory.|
|Statement of Modification||SCAs are formulated based on International Standards on Auditing (ISAs) which primarily focus on financial audit. Due to fundamental differences between the scope and methodology of financial and cost audit, “Statement of Modifications” are issued by the Institute containing comparison to International Auditing Standards.|
|Annexure / Appendices||Appendices form part of the application and other explanatory material. The purpose and intended use of an appendix/ annexure are explained in the body of the related SCA, or within the title and introduction of the appendix/ annexure itself.|
Standards on Cost Auditing – Approved by MCA
Standards already approved by the MCA on 10.09.2015 and effective for audit on or after 11.09.2015
Note: As per direction of MCA, Board has developed 15 more Standards, already been sent to MCA for approval.
Standards on Cost Auditing – Approved by Board
SCA – 104
Knowledge of Business,
its Processes and
the Business Environment
SCA – 104 Knowledge of Bussiness ……….
Knowledge of Business
√ An auditor needs to understand the clients business before audit of cost statements.
[Current Business scenario, Nature of Business, Product Portfolio, Raw Material Prices Global impact etc., whether it is part of any regulatory scam]
√ An auditor needs to understand the general economic and industry knowledge where it operates.
[Global and Domestic market scenario of the product and segment, Pricing impact, economic status of the country, growth potential, Future threats from competitors & imports its impact on cost and profitability etc.]
√ An auditor needs to understand how the organization operates.
[The processes on which the organization works, its policies, controls]
With Specific industry knowledge, it becomes easier to plan the audit process that aids errors detection. Some sources to get the general information about the industry and entity are Annual Report of the organisation, Annual Report of Competitor Organisation, Internet surfing, Newspapers, Journals, Research Papers Published etc.
Entity and its Environment
(Business processes operations, major inputs, Joint & By-Products and Wastages and major outputs etc.)
[Organizational Structure, Controls on or by Sister Organization etc.]
[Electricity, petroleum, telecommunication, fertilizer, sugar and drugs & pharmaceutical industries have certain regulatory framework in which they work]
[Key performance indicators, key ratios, key trends, operating statistics, financial performance analysis, Budgets, forecasts, variance analyses, segment information, divisional/ department performance reports, employee performance measures, incentive compensation etc.]
[Evaluate the design of those controls and determine their proper implementation]
[No companies are alike; they are all special and have their own specific conditions. Therefore, an auditor must gather information about both internal and external circumstances for every individual client company audited.]
√ Identifying business risks relevant to cost reporting objectives;
√ Assessing the likelihood of their occurrence;
√ Estimating the significance of the risks; and
√ Deciding about actions to address those risks.
[If cost auditor identified that management failed to assess the risk, then the cost auditor would evaluate why that process failed to identify it and whether there is deficiency in internal control. However, the cost auditor does not have a responsibility to identify or assess all business risk because not all business risks give rise to risks of material misstatement]
Management Information System
[Reviewing cost elements, GL mapping, assumptions, basis of apportionment should be checked and Product wise Profitability Statement in MIS if available]
[Understanding of control activities relevant to cost/management information system in order to assess risks of material misstatement at assertion level and design further audit procedures responsive to assessed risks]
Monitoring of Controls
[How the entity initiates remedial actions to deficiencies in its controls]
[If based on responses to inquires by cost auditor, he found relevant may consider it appropriate to read the internal auditor’s report}
IT (Information Technology) Environment and Control
[Cost auditor needs to have knowledge of IT systems and its controls.]
[IT policy, control checks, authorization checks]
[IT security policy, whether unauthorized changes can be made, level of authorization required to make changes]
Assertions in the Audit of Cost Statements
Various types are:
√ Occurrence – Costs recognized in the cost statements have occurred and relate to the entity.
√ Completeness – All costs that were supposed to be recorded have been recognized in the cost statements.
√ Accuracy – Costs have been recorded accurately at their appropriate amounts. v’ Cut-off – Costs have been recognized in the correct accounting periods.
√ Measurement – Costs have been correctly measured as per the applicable Standards.
√ Classification – Costs have been classified and presented fairly in the cost statements.
√ Presentation & Disclosure – Costs have been correctly disclosed as per the applicable cost reporting framework.
Identifying and Assessing the Risks of Material Misstatement
[Specific consideration of the susceptibility of the cost statements to material misstatement due to fraud or error that could result from the entity’s related party relationships and transactions such as How special-purpose entities controlled by management might be used to facilitate pricing management and How transactions between the entity and a known business partner of a key member of management]
The documentation may be simple in form and relatively brief in case of uncomplicated organization. An audit undertaken by an audit team comprising less experienced individuals may require more detailed documentation to assist them to obtain an appropriate understanding of the entity than one that includes experienced individuals.