Overview of Standards on Cost Auditing By CMA

Overview of Standards on Cost Auditing By: CMA Pradip H. Desai

Cost Audit o. Cost Audit is a critical review o. Undertaken to verify the correctness of Cost Accounts, o Ascertain the accuracy of cost accounting records and o. To check that they are prepared as per CRA 1. o It is noteworthy that India is the only country which has introduced statutory cost audit.

Objectives of Cost Audit o Accuracy of costing data o Ensure that cost accounting principles are governed by the management objectives o Detect errors, frauds and wrong practice in the existing system o Check up the general working of the costing department o Help the management in taking correct decisions o Internal Cost audit will reduce the amount of detailed checking by the external auditor

Need for SCAs Sec 147 (2) • If an auditor of a company contravenes any of the provisions of • Section 139 – Appointment of auditors • Section 143 - Powers & duties of auditors and Auditing Standards • Section 144 – Auditor not to render certain services, or • Section 145 – Auditor to sign Audit Report, • the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.

Need for SCAs Sec 143 (12) • If an auditor of the company in the course of performance of his duties as auditor has reason to believe that an offence involving fraud is being or has been committed against the company by an officer or the employee of the company then the auditor should immediately report the matter to the Central Govt within such time and in such manner as may be prescribed, otherwise, for non- reporting, he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.

Need for SCAs Sec 143 (9) • Each Auditor has to comply with the auditing standards. Cost Accountant has to comply with Cost Auditing Standards and Company Secretary needs to comply with secretarial standards. Otherwise, provisions of Section 143(15) read with Section 147(2) will be applicable

Need for SCAs Provided that if an auditor has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.

Cost Auditing and Assurance Standards Board o Constituted by The Council of the Institute of Cost Accountants of India o Responsible to formulate standards and develop guidance notes, review the existing Standards o CAASB to provide Interpretations or formulate General Clarifications o Guidance Notes are issued to assist implementation of Standards on Cost Auditing. o The CAASB may also publish Technical Guides, Practice Manuals and other pronouncements aimed at providing additional guidance to the CMAs.

Why SCAs? There are fundamental differences between the scope and methodology of financial and cost audit. Therefore, it shall not be appropriate to adopt in full or with modifications the International Standards on Auditing issued by the IAASB.

Formulation of SCAs o However in formulating the standards, the CAASB will consider: o Framework and other aspects of the International Standards o Applicable laws, usage and business environment prevailing in India. o Provisions of Cost and Works Accountants Act, Rules and Regulations, Code of Professional Ethics, Cost Accounting Standards and other Statements issued by the Institute. o Aligned with other recognized Standards issued in India and prevailing International Practices.

SCAs and their Status CAASB has formulated 19 no. of SCAs till date Government has approved following 4 Cost Auditing Standards on 11 th Sep, 2015 1. SCA-101 Planning an audit of Cost Statements 2. SCA-102 Cost Audit Documentation 3. SCA-103 Overall objectives of the independent cost auditor 4. SCA-104 Knowledge of business, its processes and the business environment

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Following 15 standards have been proposed by the institute which are conveyed to MCA for their approval and publication. SCA-105 Agreeing the Terms of Cost Audit Engagements SCA-106 Audit Sampling SCA-107 Audit Evidence SCA-108 Materiality in Planning and Performing a Cost Audit SCA-109 Cost Auditor’s Responsibility relating to Fraud in an Audit of Cost Statements SCA-110 Written Representations SCA-111 Evaluation of Misstatements identified during the Cost Audit SCA-112 Analytical Procedures SCA-113 Using the work of internal Auditor SCA-114 Using the Work of Cost Auditor's Expert SCA-115 Communication with Those Charged with Governance SCA-116 Communicating Deficiencies in Internal Control to Those charged with Governance and Management SCA-117 Identifying and Assessing the Risks of Material Misstatement SCA-118 The Cost Auditor’s Responses to Assessed Risks SCA-119 Related Parties

Structure of SCAs 1. 2. 3. 4. 5. 6. 7. 8. Each Standard generally follows a following structure. In case of deviation, suitable explanation is provided by the Task Force/Study Group preparing the Standard: Introduction Objectives Scope Definitions Requirements Applications and other Explanatory Material Effective Date Statement of Modification (Modification made in comparison to International Auditing Standards)

Purpose served by SCAs o Prescribe the norms of principles and practices, which the Cost Auditors are expected to follow o Provide minimum guidance to the cost auditor o Helps determine the extent of auditing steps and procedures that should be applied in the cost audit o Constitute the criteria against which the quality of audit results are evaluated o Conducting audit in accordance with standards gives necessary assurance to stakeholders o Cost Audit tends to increase the credibility of cost statements

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