Cost Auditing Standards Board

Cost Auditing Standard - 103

Cost Auditing Standard on
Overall Objectives of the Independent Cost Auditor and
the Conduct of an Audit in Accordance with Cost Auditing Standards

The following is the Cost Auditing Standard (Cost Auditing Standard - 103) on “Overall
Objectives of the Independent Cost Auditor and the Conduct of an Audit in Accordance with
Cost Auditing Standards”. 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
This Standard on Auditing deals with the overall objectives of the independent cost auditor,
the nature and scope of a Cost audit the independent auditor’s overall responsibilities when
conducting an audit of cost statements in accordance with Cost Auditing Standards. It also
explains the requirements establishing the general responsibilities of the independent
auditor applicable in all audits, including the obligation to comply with the Cost Auditing
Standards.

The independent Cost Auditor is referred to as “Cost auditor” hereafter.

2. Objectives
The objective of this Standard is to lay down the overall objectives of the Cost Auditor and
ensuring the Conduct of the Audit of Cost Statements in accordance with the Cost Auditing
Standards.

The Cost auditor‘s overall objectives are:

2.1. to obtain reasonable assurance about whether the cost statements as a whole are
free from material misstatement, whether due to fraud or error, and to enable the
auditor to express an opinion whether the Cost Statements are prepared, in all
material respects, in accordance with the applicable Cost reporting framework, Cost
Accounting Standards(CAS) and Generally Accepted Cost Accounting Principles
(GACAP) as issued by the Institute, and give a true and fair view of the Cost of a

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product, activity or service. In the case of a Cost Audit under the Companies Act and
Rules prescribed thereunder, the objective is to express an opinion on whether the
Cost Statements subject to audit represent a true and fair view of the cost of
production, cost of sales and margin of products covered by the Cost Audit.
2.2. to report on the cost statements in the form required by law or by the Cost Auditing
Standards in accordance with the auditor’s findings.

Where reasonable assurance cannot be obtained, the cost auditor should qualify the
opinion and in extreme cases disclaim an opinion.

The Cost Auditors objective may extend to making observations and suggestions
where required by applicable regulations.

3. Scope
The scope of this standard is to establish overall objectives of the cost auditor while
conducting an audit of cost statements, in accordance with the cost auditing standards.

It also describes management responsibility for the preparation and presentation of the
Cost Statement, to identify the Cost Reporting framework and to lay down Cost
Accounting policies.

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 audit and its performance, and for the report that is issued on behalf of the firm,

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and who, where required, has the appropriate authority from a professional, legal or
regulatory body.

4.3. 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.

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

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

4.6. Auditor: Auditor is used to refer to the person or persons conducting the audit, usually
the audit partner or other members of the audit team, or, as applicable the firm.
Auditor includes Cost Auditor

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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. Management: The person(s) with executive responsibility for the conduct of the
entity’s operations. For some entities in some jurisdictions, management includes
some or all of those charged with governance.

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. Non-compliance: Acts of omission or commission by the entity, either intentional or

unintentional, which are contrary to the prevailing laws or regulations governing Cost

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Accounting, Cost Records and Cost Audit. Such acts include transactions entered into
by, or in the name of, the entity, or on its behalf, by those charged with governance,
management or employees. Non-compliance does not include personal misconduct
(unrelated to the business activities of the entity) by those charged with governance,
management or employees of the entity.

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

4.14. Professional Judgment: The application of relevant training, knowledge and

experience, within the context provided by cost auditing standards, cost accounting
standards and ethical requirements, in making informed decisions about the courses
of action that are appropriate in the circumstances of the audit engagement.

4.15. Professional Skepticism: An attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatements due to error or fraud, and a
critical assessment of audit evidence.

4.16. 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.

4.17. Those charged with governance: The person(s) or organisation(s) (e.g., a corporate
trustee) with responsibility for overseeing the strategic direction of the entity and
obligations related to the accountability of the entity. This includes overseeing the
financial reporting process. For some entities in some jurisdictions, those charged with
governance may include management personnel, for example, executive members of a
governance board of a private or public sector entity, or an owner-manager.

5. Requirements
5.1. The cost auditor shall comply with the relevant ethical requirements including those
pertaining to independence in respect of cost audit engagements. (refer 6.1)

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5.2. While conducting an audit, the cost auditor shall comply with each of the Cost Auditing
Standards relevant to the audit. A Cost Auditing Standard is relevant to the audit when
the Cost Auditing Standard is in effect and the circumstances addressed by the Cost
Auditing Standard exist. (refer 6.2)

5.3. The cost auditor shall have an understanding of the entire text of the Cost Auditing
Standard, including its application and other explanatory material, to understand its
objectives and to apply its requirements properly.

5.4. The cost auditor shall not represent compliance with the cost auditing standards in the
cost auditor’s report unless the auditor has complied fully with all of the Cost Auditing
Standards relevant to the audit.

5.5. In exceptional circumstances, the cost auditor may judge it necessary to depart from a
relevant requirement in a Cost Auditing Standard. In such circumstances, the auditor shall
perform alternative audit procedures to achieve the aim of that requirement.{Refer
6.2(c)}

5.6. The cost auditor shall plan and perform an audit with an attitude of professional
skepticism recognizing that circumstances may exist that cause the Cost Statements to be
materially misstated. (refer 6.3)

5.7. The auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an
acceptably low level and thereby enable the auditor to draw reasonable conclusions on
which to base the auditor’s opinion.(refer 6.4 )

5.8. The cost auditor shall exercise professional judgment in planning and performing the
audit.

5.9. The cost auditor shall determine whether the Cost Reporting Framework followed by
management in preparing cost statements is in line with the Companies Act and the Rules
prescribed thereunder. (refer 6.5)

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5.10 The cost auditor shall not be required to perform audit procedures regarding the
entity’s compliance with laws and regulations governing cost audit in the absence of
identified or suspected non-compliance. (refer 6.6)

5.11 If an objective in a relevant Cost Auditing Standard cannot be achieved, the auditor
shall evaluate whether this prevents the auditor from achieving the overall objectives
of the auditor and thereby requires the auditor, in accordance with the Cost Auditing
Standards, to modify the auditor’s opinion.

6 Application Guidance:
6.1 Audit and Ethics: The cost auditor should comply with relevant ethical requirements as
per Code of Ethics issued by the Institute of Cost Accountants of India. This code
establishes fundamental principles of professional ethics relevant to the auditor while
conducting an audit and provides a conceptual framework for applying these principles.
The fundamental principles with which the auditor is required to comply are
Independence, Integrity, Objectivity, Professional competence and due care,
Confidentiality and Professional conduct. In case of an audit engagement, it is in the
public interest that the auditor should be independent of the entity subject to the audit.
The cost auditor’s independence from the entity safeguards the cost auditor’s ability to
form an opinion without being affected by influences that might compromise that
opinion. Independence enhances the auditor’s ability to act with integrity to be objective
and to maintain an attitude of professional skepticism. (Refer 5.1)

For Example: The provision of services for maintenance of cost records, design and
implementation of Cost Systems and internal audit are considered to erode the
independence.

6.2 Conduct of audit: (Refer 5.2)

(a) The Cost Auditing Standards provide the standards for the cost auditor’s work in
fulfilling the overall objectives of the cost auditor. The Cost Auditing Standards
deal with general responsibilities of the cost auditor, as well as cost auditor’s
further considerations relevant to the application of those responsibilities to
specific topics.

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(b) In performing an audit, the cost auditor may be required to comply with legal or
regulatory requirements in addition to Cost Auditing Standards. In such cases in
addition to complying with each of the Cost Auditing Standard relevant to the
cost audit, it may be necessary for the cost auditor to perform additional audit
procedures in order to comply with the legislative and regulatory requirements.
The Cost Auditing Standards do not override law or regulations that govern
audit process.
The form of the cost auditor’s opinion will depend upon the applicable cost
reporting framework and any applicable laws or regulations such as Companies
Act and Rules prescribed thereunder.
(c) The need for the auditor to depart from a relevant requirement is expected to
arise only where the requirement is for a specific procedure to be performed
and, in the specific circumstances of the audit, that procedure would be
ineffective in achieving the aim of the requirement. (Refer 5.5)

6.3 Professional skepticism: An attitude of professional skepticism means the cost auditor
makes a critical assessment, with a questioning mind, of the validity of audit evidence
obtained and be alert to audit evidence that contradicts or brings into question the
reliability of documents and responses to inquiries and other information obtained from
management and those charged with governance. An attitude of professional
skepticism is necessary throughout the cost audit process for the auditor to reduce the
risk of overlooking unusual circumstances, of over generalizing when drawing
conclusions from cost audit observations, and of using faulty assumptions in
determining the nature, timing and extent of the cost audit procedures and evaluating
the results thereof. When making inquiries and performing other cost audit procedures,
the cost auditor should not be satisfied with less-than-persuasive audit evidence based
on a belief that management and those charged with governance are honest and have
integrity. Accordingly, representations from management are not a substitute for
obtaining sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the cost auditor’s opinion. (Refer 5.6)

(a) A cost auditor conducting an audit in accordance with Cost Auditing Standards
obtains reasonable assurance that the Cost Statements taken as a whole are free
from material misstatement, whether due to fraud or error. Reasonable assurance

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is a concept relating to the accumulation of the audit evidence necessary for the
auditor to conclude that there are no material misstatements in the Cost
Statements taken as a whole. Reasonable assurance relates to the whole audit
process.

A cost auditor cannot obtain absolute assurance because there are inherent
limitations in an audit that affect the cost auditor’s ability to detect material
misstatements. These limitations result from factors such as the following:

(1) The use of sample testing.

(2) The inherent limitations of internal control (for example, the possibility of
management override or collusion).
(3) The fact that most audit evidence is persuasive rather than conclusive.

Also, the work undertaken by the cost auditor to form an audit opinion is
permeated by judgment, in particular regarding:

(1) The gathering of audit evidence, for example, in deciding the nature, timing
and extent of audit procedures; and
(2) The drawing of conclusions based on the audit evidence gathered, for
example, assessing the reasonableness of the estimates made by
management in preparing the Cost Statements.

(b) Further, other limitations may affect the persuasiveness of audit evidence available
to draw conclusions on particular assertions. (For example, transactions between
related parties). In these cases certain Cost Auditing Standard identify specified
audit procedures which will, because of the nature of the particular assertions,
provide sufficient appropriate audit evidence in the absence of:
(1) Unusual circumstances which increase the risk of material misstatement
beyond that which would ordinarily be expected; or
(2) Any indication that a material misstatement has occurred.

Accordingly, because of the factors described above, an audit is not a guarantee

that the Cost Statements are free from material misstatement, because absolute

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assurance is not attainable. Further, an audit opinion does not assure the future
viability of the entity nor the efficiency or effectiveness with which management
has conducted the affairs of the entity.

6.4 Audit Risk and Materiality: Entities pursue strategies to achieve their objectives, and
depending on the nature of their operations and industry, the regulatory environment
in which they operate, and their size and complexity, they face a variety of business
risks. Management is responsible for identifying such risks and responding to them.
However, not all risks relate to the preparation of the Cost Statements. The auditor is
ultimately concerned only with risks that may affect the cost statements. (Refer 5.7)

(a) The cost auditor obtains and evaluates audit evidence to obtain reasonable
assurance about whether the Cost Statements give a true and fair view or in
accordance with the applicable cost reporting framework. The concept of
reasonable assurance acknowledges that there is a risk the audit opinion is
inappropriate. The risk that the cost auditor expresses an inappropriate audit
opinion when the Cost Statements are materially misstated is known as “audit
risk.”The cost auditor reduces audit risk by designing and performing audit
procedures to obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base an audit opinion. Reasonable assurance is
obtained when the auditor has reduced audit risk to an acceptably low level.

(b) Audit risk is a function of the risk of material misstatement in the cost statements
(or simply, the “risk of material misstatement”) (i.e., the risk that the Cost
Statements are materially misstated prior to audit) and the risk that the auditor
will not detect such misstatement (“detection risk”). The cost auditor performs
audit procedures to assess the risk of material misstatement and seeks to limit
detection risk by performing further audit procedures based on that assessment.
The audit process involves the exercise of professional judgment in designing the
audit approach, through focusing on what can go wrong (i.e., what are the
potential misstatements that may arise) at the assertion level and performing audit
procedures in response to the assessed risks in order to obtain sufficient
appropriate audit evidence.

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(c) The cost auditor is concerned with material misstatements, and is not responsible
for the detection of misstatements that are not material to the Cost Statements
taken as a whole. The cost auditor considers whether the effect of identified
uncorrected misstatements, both individually and in the aggregate, is material to
the Cost Statements taken as a whole. Materiality and audit risk are related

In order to design audit procedures to determine whether there are misstatements

that are material to the cost statements taken as a whole, the cost auditor
considers the risk of material misstatement at two levels:

(1) the overall cost statement level and

(2) In relation to cost heads, items of cost and disclosures and the related
assertions.
(d) The cost auditor considers the risk of material misstatement at the overall cost
statement level, which refers to risks of material misstatement that relate
pervasively to the Cost Statements as a whole and potentially affect many
assertions. Risks of this nature often relate to the entity’s control environment
(although these risks may also relate to other factors, such as declining economic
conditions), and are not necessarily risks identifiable with specific assertions at the
cost heads, items of cost or disclosure level. Rather, this overall risk represents
circumstances that increase the risk that there could be material misstatements in
any number of different assertions, for example, through management override of
internal control. Such risks may be especially relevant to the cost auditor’s
consideration of the risk of material misstatement arising from fraud. The auditor’s
response to the assessed risk of material misstatement at the overall cost
statement level includes consideration of the knowledge, skill, and ability of
personnel assigned significant engagement responsibilities, including whether to
involve experts; the appropriate levels of supervision;

(e) The cost auditor also considers the risk of material misstatement at the cost heads,
items of cost and disclosure level because such consideration directly assists in
determining the nature, timing, and extent of further audit procedures at the
assertion level. The cost auditor seeks to obtain sufficient appropriate audit
evidence at the cost heads, items of cost, and disclosure level in such a way that

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enables the auditor, at the completion of the audit, to express opinion on the Cost
Statements taken as a whole at an acceptably low level of cost audit risk. Auditors
use various approaches to accomplish that objective. The discussion in the
following paragraphs provides an explanation of the components of audit risk.

(f) The risk of material misstatement at the assertion level consists of two
components as follows:

(1) “Inherent risk” is the susceptibility of an assertion to a misstatement that

could be material, either individually or when aggregated with other
misstatements, assuming that there are no related controls. The risk of such
misstatement is greater for some assertions and related cost heads, items of
cost and disclosures than for others. For example, complex calculations are
more likely to be misstated than simple calculations. Cost heads consisting of
amounts derived from cost estimates that are subject to significant
measurement uncertainty pose greater risks than do cost heads consisting of
relatively routine, factual data.
External circumstances giving rise to business risks may also influence inherent
risk. For example, technological developments might make a cause changes to
a manufacturing process rendering the existing classification of variable and
fixed costs inappropriate and cause product contribution to be misstated. In
addition to those circumstances that are peculiar to a specific assertion,
factors in the entity and its environment that relate to several or all of the
classes of cost heads, items of cost, or disclosures may influence the inherent
risk related to a specific assertion. These latter factors include, for example,
external market constraints may cause normal capacity as an unreliable basis
for determining unit costs.

(2) “Control risk” is the risk that a misstatement that could occur in an assertion
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 control. That risk is a function of the effectiveness
of the design and operation of internal control in achieving the entity’s
objectives relevant to preparation of the entity’s Cost Statements. Some

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control risk will always exist because of the inherent limitations of internal
control.
Inherent risk and control risk are the entity’s risks; they exist independently of
the audit of the Cost Statements. The auditor is required to assess the risk of
material misstatement at the assertion level as a basis for further audit
procedures, though that assessment is a judgment, rather than a precise
measurement of risk. When the auditor’s assessment of the risk of material
misstatement includes an expectation of the operating effectiveness of
controls, the auditor performs tests of controls to support the risk assessment.
The Cost Auditing Standard do not ordinarily refer to inherent risk and control
risk separately, but rather to a combined assessment of the “risk of material
misstatement.” Although the Cost Auditing Standard ordinarily describe a
combined assessment of the risk of material misstatement, the auditor may
make separate or combined assessments of inherent and control risk
depending on preferred audit techniques or methodologies and practical
considerations. The assessment of the risk of material misstatement may be
expressed in quantitative terms, such as in percentages, or in non-quantitative
terms. In any case, the need for the auditor to make appropriate risk
assessments is more important than the different approaches by which they
may be made.

(g) “Detection risk” is the risk that the cost auditor will not detect a misstatement that
exists in an assertion that could be material, either individually or when aggregated
with other misstatements. Detection risk is a function of the effectiveness of an
audit procedure and of its application by the auditor. Detection risk cannot be
reduced to zero because the auditor usually does not examine all of cost heads,
items of cost, or disclosure and because of other factors. Such other factors include
the possibility that a cost auditor might select an inappropriate audit procedure,
misapply an appropriate audit procedure, or misinterpret the audit results. These
other factors ordinarily can be addressed through adequate planning, proper
assignment of personnel to the audit team, the application of professional
skepticism, and supervision and review of the audit work performed.
Detection risk relates to the nature, timing, and extent of the auditor’s procedures
that are determined by the auditor to reduce audit risk to an acceptably low level.

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For a given level of audit risk, the acceptable level of detection risk bears an
inverse relationship to the assessment of the risk of material misstatement at the
assertion level. The greater the risk of material misstatement the auditor believes
exists, the less the detection risk that can be accepted. Conversely, the less risk of
material misstatement the auditor believes exist, the greater the detection risk
that can be accepted.

6.5 Responsibility for the Cost Statements: The cost auditor is responsible for forming and
expressing an opinion on the Cost Statements. (Refer 5.9)

The term “Cost Statements” refers to a structured representation of the cost

information, which ordinarily includes accompanying notes, derived from cost
accounting records and intended to communicate an entity’s use of economic resources
and the output obtained in accordance with a Cost reporting framework. The term can
refer to for example, a cost statement, reconciliation with financial accounts and related
explanatory notes.

(a) The requirements of the Cost reporting framework determine the form and content
of the Cost Statements and what constitutes a complete set of Cost Statements. For
certain Cost reporting frameworks, a single cost statement as such and the related
explanatory notes constitute a complete set of Cost Statements. For example: a Cost
Statement under Cost Accounting Standard 4.

(b) The Cost auditor is not responsible for preparing and presenting the cost statements
in accordance with the applicable Cost reporting framework including inter-alia:

(1) Designing, implementing and maintaining internal control relevant to the

preparation and presentation of Cost Statements that are free from material
misstatement, whether due to fraud or error;
(2) Selecting and applying appropriate Cost accounting policies; and
(3) Making cost estimates that are reasonable in the circumstances.

6.6 Non-compliance: The cost auditor shall request management to provide written
representation that all known instances of non-compliance or suspected non-

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compliance with laws and regulations governing Cost Accounting, Cost Records and Cost
Audit have been disclosed to the cost auditor. The representations provide necessary
audit evidence about management knowledge of identified or suspected non-
compliance with laws and regulations whose effects may have a material effect on the
cost statement however, written representation do not provide sufficient audit evidence
on their own, and accordingly do not affect the nature and extent of other audit
evidence that is to be obtained by the cost auditor. (Refer 5.10)

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

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