Cost Auditing and Assurance Standards: formula sheet

Key formulas

Objective of a cost audit (SCA 103)

Reasonable assurance that cost statements are free from material misstatement (fraud or error) → opinion on compliance with the cost reporting framework, CAS and GACAP, and a true and fair view of cost

Reasonable assurance is high but not absolute. Do not write 'absolute' or 'guarantee'.

CAS versus SCA

CAS = how cost is measured and presented by the entity; SCA = how the cost auditor plans, performs and reports the audit

Use this one-line split in every 'difference' question.

Cost Records (definition)

Books of account on utilisation of materials, labour and other items of cost, to compute true and fair cost of production or operations, cost of sales and margin per product, service or activity, in compliance with CAS

Same wording appears in SCA 105 and SCA 106.

Audit Partner (definition)

Partner who is a member of the Institute, in full time practice, responsible for the audit, its performance and the report issued on behalf of the firm

Same wording appears in SCA 101, 102, 103, 106, 107 and 108.

Fundamental ethical principles (SCA 103 guidance)

Independence, Integrity, Objectivity, Professional competence and due care, Confidentiality, Professional conduct

The auditor follows the Code of Ethics issued by the Institute.

Law conflicting with CAS (SCA 105)

Check conflicts → discuss with management → either (a) meet extra requirements through additional disclosures, or (b) amend the description of the framework in the cost statements

The auditor must determine whether conflicts exist before agreeing engagement terms.

Definition of cost audit (para 4.7)

Cost audit = independent examination of cost statements, cost records and related information, to express an opinion

Applies to any entity, including a non-profit entity.

Reporting objective (para 2.2)

Report on cost statements in the form required by law or the Cost Auditing Standards, in line with the auditor's findings

Reporting must follow the findings, not management's wishes.

Where assurance is not obtained (SCA 103 Objectives)

Reasonable assurance not obtained → qualify the opinion; extreme cases → disclaim

A disclaimer is for extreme cases only.

Evidence requirement (para 5.7)

Obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level

This lets the auditor draw reasonable conclusions for the opinion.

Responsibility for cost statements (para 6.5)

Auditor forms and expresses an opinion. Auditor is not responsible for designing internal control, selecting cost accounting policies, or making cost estimates (para 6.5(b))

Do not mix up the two roles: the opinion is the auditor's, preparation is not.

Cost reporting framework (para 5.9)

Framework followed by management must be in line with the Companies Act and the Rules under it

The auditor determines this.

Relevance of a standard (para 5.2)

Relevant = In effect AND circumstances addressed by the standard exist

Both conditions must hold. The auditor must comply with each relevant standard.

Claiming compliance (para 5.4)

Compliance stated in report only if ALL relevant standards fully complied with

Partial compliance does not permit the statement.

Departure (para 5.5)

Exceptional circumstances + alternative procedures to achieve the aim of the requirement

Per para 6.2(c), a departure is expected only where a specific procedure would be ineffective in achieving the aim of the requirement.

Unachieved objective (para 5.11)

Objective not achieved → evaluate whether overall objectives can still be achieved → if not, modify opinion

The modification is made in accordance with the Cost Auditing Standards.

Compliance with laws (para 5.10)

No identified or suspected non-compliance → no required procedures on entity's compliance with laws governing cost audit

The auditor is not required to perform such procedures in that case.

Objective of the cost auditor (SCA 103, para 2.1)

Reasonable assurance that cost statements as a whole are free from material misstatement (fraud or error) → opinion on compliance with framework, CAS and GACAP, and true and fair view

Assurance is on the statements as a whole, not on every item.

Limits on assurance (SCA 103, para 6.3)

Absolute assurance not attainable = sample testing + inherent limits of internal control + evidence mostly persuasive, not conclusive

Judgement in gathering evidence and drawing conclusions adds to these limits.

Skepticism requirement (SCA 103, para 5.6)

Plan and perform the audit with professional skepticism, recognising that statements may be materially misstated

Required throughout the audit, not only at the evidence stage.

Evidence requirement (SCA 103, para 5.7)

Obtain sufficient appropriate audit evidence → audit risk at an acceptably low level → reasonable conclusions for the opinion

Audit risk is reduced to an acceptably low level, not to zero.

Report when assurance is not obtained (SCA 103, para 2.2)

Reasonable assurance cannot be obtained → qualify the opinion; in extreme cases → disclaim an opinion

Report in the form required by law or the standards, per the auditor's findings.

Quick revision

• SCA 101-110 are Standards on Cost Auditing issued by ICMAI's Cost Auditing and Assurance Standards Board.
• SCA 103 deals with the overall objectives of the independent cost auditor and the conduct of an audit under the Cost Auditing Standards.
• In SCA 103, the term auditor includes the cost auditor.
• One objective is to report on the cost statements in the form required by law or by the Cost Auditing Standards, based on the auditor's findings.
• Where reasonable assurance cannot be obtained, the auditor should qualify the opinion and in extreme cases disclaim an opinion.
• The cost auditor's objective may extend to observations and suggestions where applicable regulations require them.
• The auditor shall comply with each Cost Auditing Standard relevant to the audit, meaning it is in effect and its circumstances exist.
• The auditor shall plan and perform with professional skepticism, recognising that cost statements may be materially misstated.
• Professional skepticism means a questioning mind, alertness to error or fraud, and critical assessment of evidence.
• Professional judgement is applying training, knowledge and experience within the standards and ethics to make informed decisions.
• The auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
• If a relevant standard's objective is not achieved, the auditor evaluates whether to modify the opinion.

Common mistakes

• Treating SCA and CAS as the same thing. Fix: Remember: CAS apply to the entity's cost measurement and presentation; SCA apply to the auditor's work.
• Writing that a cost auditor gives absolute assurance. Fix: Write that the objective is reasonable assurance that the cost statements are free from material misstatement.
• Saying the auditor prepares the cost statements. Fix: The auditor expresses an opinion. Management prepares and presents the statements and keeps internal control.
• Disclaiming an opinion whenever evidence is missing. Fix: The standard says qualify, and disclaim only in extreme cases.
• Saying the auditor must apply all Cost Auditing Standards in every audit Fix: Always state that only relevant standards apply: in effect and circumstances exist (para 5.2).
• Allowing a compliance statement after substantial but not full compliance Fix: Para 5.4 requires full compliance with all relevant standards before representing compliance in the report.
• Writing that a cost audit gives absolute assurance or guarantees no misstatement. Fix: Say reasonable assurance, and add that absolute assurance is not attainable because of the inherent limitations.
• Saying management's written representation is enough evidence if management is honest. Fix: Quote the principle: representations are not a substitute for sufficient appropriate audit evidence, and honesty is not assumed to justify weaker evidence.

Exam tips

• Expect MCQs asking which standard deals with a stated topic. Memorise the keyword-to-number link for 101, 102, 103, 105, 106, 107 and 108.
• In 'distinguish' questions, write the CAS versus SCA split in the first line, then add two or three supporting points.
• In case questions, check for independence threats first. Services listed in the SCA 103 guidance are favourite traps.
• Use the phrase 'reasonable assurance' and 'true and fair view of cost' exactly. Examiners look for these.
• There is no negative marking in Section A, so attempt every MCQ.
• Write the objectives you are sure of as a short list: reporting in the required form, qualification or disclaimer, and observations and suggestions where regulations require.
• In MCQs, watch the words qualify and disclaim. Qualify is the normal consequence, disclaim is extreme.
• Use the standard's terms: cost statements, cost reporting framework, sufficient appropriate audit evidence.