Cost and Management Audit · Cost Audit Programme

SCA 105: Agreeing Terms of Cost Audit Engagement

Updated 11 October 2026 · Fact-checked

SCA 105 requires the cost auditor to agree the terms of the cost audit engagement with management and record them in an engagement letter or other suitable written agreement. The terms cover objective and scope, both sides' responsibilities, the cost reporting framework, and the expected report. Changes need reasonable justification and fresh written terms.

Understand Agreeing Terms of Cost Audit Engagement (SCA 105)

Before a cost auditor starts work, both sides must understand what the job is. SCA 105 makes this a formal step. The cost auditor must agree the terms of the cost audit engagement with management. The standard's guidance notes that the role of management here depends on the entity's governance structure and on relevant law or regulation.

The agreed terms must be written down in a cost audit engagement letter or other suitable form of written agreement. This avoids later disputes about scope, duties and the report. The form and content of the letter may vary for each entity.

The standard lists what the written terms must include: the objective and scope of the audit of the cost statements; the responsibilities of the cost auditor; the responsibilities of management; identification of the applicable cost reporting framework; and the expected form and content of any reports, with a statement that a report may differ from its expected form in some circumstances.

The standard also deals with later events. On recurring audits, you need not send a new letter every period, but you must assess whether the terms need revising or whether to remind the entity of the existing terms. If management asks for a change in terms, you must not agree unless there is reasonable justification. Exam questions test these requirements, usually on a short scenario.

Key rules to remember

Agreeing the terms (para 5.4): Cost auditor agrees the terms of the engagement with management; The counterparty is management. Governance structure and law decide how management's role works (para 6.21).
Minimum contents of the engagement letter (para 5.5): (a) objective and scope; (b) cost auditor's responsibilities; (c) management's responsibilities; (d) applicable cost reporting framework; (e) expected form and content of reports; Five items. The report item includes a statement that a report may differ from its expected form and content.
Recurring audits (para 5.8): Assess whether terms need revising or whether to remind the entity of existing terms; A new letter each period is not compulsory (para 6.26).
Change in terms (paras 5.9, 5.10, 5.11): No agreement to change without reasonable justification; if change is to lower assurance, determine whether justification exists; record new terms in writing; New terms go in an engagement letter or other suitable written agreement.
If change is refused (para 5.12): Withdraw where possible under law or regulation + determine any obligation to report to others; Applies when the auditor cannot agree to the change and management does not let the original engagement continue. Others include those charged with governance, owners or regulators.

How to solve Agreeing Terms of Cost Audit Engagement (SCA 105) questions

Use this method for any question on agreeing terms, whether theory or a case scenario.

1Identify the stage: first engagement, recurring audit, or a request to change terms.
2State the core rule: terms are agreed with management and recorded in writing in an engagement letter or other suitable form.
3For content questions, list the five mandatory items of para 5.5, then add optional items from para 6.23 such as fees, timetable, written representations and inherent limitations.
4For recurring audits, state that a new letter is not compulsory, then apply the para 6.26 factors to the facts given.
5For change requests, ask whether there is reasonable justification. If none, the auditor must not agree. If agreed, record the new terms in writing.
6If the auditor cannot agree and management will not let the original engagement continue, state withdrawal where possible under law and the duty to consider reporting to others.
7Close with a clear conclusion tied to the facts.

Quickest way: Five-item checklist and three-stage test

When to use it: Use for MCQs and short notes when time is tight.

Recall the five mandatory items: scope, auditor's duties, management's duties, framework, report form.
Classify the situation: new, recurring or change request.
New: agree and record in writing. Recurring: assess revision or reminder. Change: justify, record, or withdraw.
Eliminate options saying a new letter is always required each year, or that a change may be accepted without justification.

Common mistakes in Agreeing Terms of Cost Audit Engagement (SCA 105)

Saying a fresh engagement letter must be issued every year.
Students assume every audit period needs new paperwork.
Fix: Para 6.26 says the auditor may decide not to send a new letter each period. The auditor must still assess whether terms need revising or a reminder (para 5.8).
Listing fees and timetable as mandatory contents.
These appear in the same discussion of the letter.
Fix: The mandatory items are the five in para 5.5. Fees, timetable and similar points are examples of additional content in para 6.23.
Forgetting the reporting-framework item or the statement that a report may differ from its expected form.
Students remember scope and responsibilities only.
Fix: Learn all five items in order: scope, auditor, management, framework, report.
Accepting any change in terms requested by management.
Students treat the client's wish as decisive.
Fix: The auditor shall not agree to a change where there is no reasonable justification (para 5.9). A move to lower assurance needs the same test (para 5.10).
Stopping at 'withdraw' when a change is refused.
Students miss the second limb of the rule.
Fix: Para 5.12 also requires determining whether there is any obligation to report the circumstances to others, such as those charged with governance, owners or regulators.

Worked examples

Example 1

A cost auditor has audited Sagar Chemicals Ltd for three years under the same terms. This year, a new Managing Director has joined and the company has begun a new product line that significantly changes the size of its business. Advise whether a new engagement letter is needed.

Show the solution

Rule: on recurring audits the auditor assesses whether circumstances require revising the terms or reminding the entity of existing terms (para 5.8).
A new letter each period is not compulsory (para 6.26).
Apply the para 6.26 factors: a recent change of senior management and a significant change in nature or size of the business are both listed.
Both factors make revision of terms or a reminder appropriate.

Answer: A new letter is not compulsory every year, but here the change of senior management and the significant change in the business make it appropriate to revise the terms or at least remind the entity of the existing terms. Any revised terms should be recorded in writing.

Example 2

During a cost audit, management asks the cost auditor to convert the engagement into one that gives a lower level of assurance, citing no reason. The cost auditor cannot agree. Management does not allow the original engagement to continue. State the cost auditor's course of action.

Show the solution

A request to change to a lower level of assurance before completion requires the auditor to determine whether there is reasonable justification (para 5.10).
The auditor shall not agree to a change where there is no reasonable justification (para 5.9). No reason was given.
So the auditor cannot agree to the change.
Management does not permit continuing the original engagement, so para 5.12 applies.
The auditor withdraws where possible under applicable law or regulation.
The auditor also determines whether there is any obligation, contractual or otherwise, to report the circumstances to other parties such as those charged with governance, owners or regulators.

Answer: The auditor should not accept the change, should withdraw from the engagement where law or regulation permits, and should determine whether the circumstances must be reported to those charged with governance, owners or regulators.

Exam tips

Write the five para 5.5 items as a numbered list. Examiners look for all five.
In case scenarios, match the facts to the para 6.26 factors by name, such as change of senior management or change in legal requirements.
For change-in-terms answers, cover the full chain: justification, written record, or withdrawal plus the reporting-obligation check.
Add two or three optional letter contents from para 6.23, such as fee basis and written representations, to show depth.
In MCQs, reject options with words like 'always' or 'must issue a new letter every year'.

Practice questions from Cost Audit Programme

Agreeing Terms of Cost Audit Engagement (SCA 105): frequently asked questions

What must a cost audit engagement letter contain under SCA 105?

It must record the objective and scope of the audit of the cost statements, the responsibilities of the cost auditor and of management, the applicable cost reporting framework, and the expected form and content of reports. It must also state that a report may differ from its expected form in some circumstances.

Is a new engagement letter needed every year?

Not necessarily. The cost auditor may decide not to send a new letter each period. However, the auditor must assess whether circumstances require revised terms or a reminder of existing terms.

When can the cost auditor agree to change the terms?

Only where there is reasonable justification. If the request is to move to an engagement with lower assurance, the auditor must first determine whether such justification exists. Any new terms must be agreed and recorded in writing.

What if management does not allow the original engagement to continue after the auditor refuses a change?

The auditor withdraws where possible under applicable law or regulation. The auditor also determines whether there is any obligation to report the circumstances to other parties such as those charged with governance, owners or regulators.