Cost Audit Documentation and Audit Process Cost and Management Audit 11.

Audit documentation: Audit documentation means the material such as

- Documents supporting the audit assertions of the management
- Evidence of checking of the various heads of the financial statements
- working papers etc.
prepared by and for, or obtained and retained by the cost auditor in connection with the performance
of the audit.
Audit file: Folders or other storage media, in physical or electronic form, containing the records that
comprise the audit documentation for a specific assignment or audit. (MTP Dec 2022)
Audit working papers: Documents which record all audit evidence obtained during audit. Such
documents are used to support the audit work done in order to provide assurance that the audit was
performed in accordance with the relevant Cost Audit and Assurance Standards.

Engagement Letter
Auditors agree with the client’s management, in writing, about the scope, terms and conditions of
the audit engagement, in an engagement letter. The purpose of such a letter is to minimize any possible
misunderstanding concerning the scope and terms of the audit engagement.
Terms of audit engagement
(i) The objective and the scope of the engagement.
(ii) Management’s responsibility for the financial statements.
(iii) The existence of inherent limitations of audit and resulting material misstatements that
may remain undiscovered,
(iv) The need for use of services of internal auditors and/ or other experts that may arise
during the course of the engagement.
(v) The requirement of management confirmation letter as regards representations made
by them concerning audit.
(vi) Restriction of the auditor’s liability, if any.
(vii) Basis for computation of audit fees and billing arrangements.
(viii) The form of reports or other communication of results of the engagement.

Audit stages
The stages of an audit of cost statements are
1) Planning
2) Performing and
3) Reporting

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Stage I: Planning involves:

- Gaining an understanding of the client,
- Identifying the objectives of audit (statutory requirements as well as management
expectations)
- identifying factors / account heads that may have the risk of a material misstatement
- performing a risk and materiality assessment, and developing an audit strategy
- identifying the nature, timing and extent of the procedures to be performed
Stage II: Performing involves:
- Detailed testing of internal controls and decide upon the extent of reliance which can be placed
on internal controls
- Substantive testing of cost accounting policies & procedures
Stage III: Concluding and Reporting involves:
- evaluating the results of detailed testing and
- forming an opinion on the fair presentation of the entity’s cost statements as a whole

Process of audit: After laying out the broad stages of audit, it is important to understand the exact
steps to be undertaken by a cost auditor when he undertakes any cost audit:
Stage-I Steps – Objectives of Audit and Management Outlook
At the outset, it is important to understand the statutory requirements and / or management expectations
from the cost audit, such as:
- cost optimization or cost reduction
- checking parameters of operational efficiency of a unit or any utility or any other function or
department
- suggesting product diversification or changed product-mix
- identifying profit making or loss making products
- suggesting changed marketing strategies; market expansion; market diversification
- complete review of business strategies

Stage-II Steps – Pre-conditions of audit

The cost auditor should fully understand the
- Objectives of cost audit
- Area, nature and scope of audit
- Number of cost auditors appointed
- The applicable reporting framework
- The reporting period
- The statutory deadlines
The Management should understand its scope of work and responsibilities:

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- maintenance of cost records & producing them to the cost auditor;

- preparation & presentation of cost statements & other details as per the applicable reporting
framework, and in compliance with the cost accounting standards;
- selection and consistent application of appropriate cost accounting policies;
- allowing access to the auditor all information, including the books of accounts, vouchers, cost
records, other records, documents, and other matters of the company, which are relevant to the
preparation of the cost statements;
- providing additional information that the cost auditor may request from the management for
the purpose of cost audit;
- allowing unrestricted access to persons within the company from whom the cost auditor
determines it is necessary to obtain cost audit evidence; and
- giving proper management representation.
The auditee and the cost auditor decides the audit fee and payment schedule; and finally, the cost
auditor gets an engagement letter.

Stage-III Steps – Understanding the Company’s Business

The cost auditor is required to understand the company’s business, its corporate structure and various
systems followed. It includes:
- The company, its nature of activities, its size, product profile, unit locations, ownership
structure, management structure, organisational structure, marketing set-up, accounting set-up,
etc.
- The nature of the industry or the sector in which client company operates
- The applicable regulatory framework, financial reporting framework and cost reporting
framework
- The company’s production process, product details, joint or by-products, outsourcing, if any
- Details of subsidiaries, associates and joint ventures
- Key personnel in all departments including in Finance, Accounts, Costing, IT, Administration,
Production, Purchase, Sales, etc
- Purchase policy, sales policy, pricing policy, export/import policy
- Inventory receipt, storage, issue & pricing policies; physical verification system; inventory
management system
- Related parties and nature of transactions with them
- Indirect tax structure, as applicable
- Internal Control Systems followed by the company
- Internal Audit System, its scope & adequacy of coverage as well as effectiveness
- Accounting Systems & Policies followed by the company
- Cost Accounting System & Policies followed by the company
- Company’s MIS system, risk identification & management system
- IT architecture followed for financial accounting and for cost accounting; IT policy, control
checks authorization checks; IT data security policy
- Previous auditor’s report

Stage-IV Steps – Planning the Audit

Planning the audit include

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• Timing [dates] and duration [no. of days] of audit period; including plan to visit the
unit(s)
• Level and number of audit personnel to be deployed;
• Audit partner to be deployed;
• Drawing up an overall audit plan and audit strategy
• Deciding the materiality levels & sampling levels
• Formulating appropriate audit procedures likes obtaining – Management
Representation; Management Assertion; Test of Controls, Test of Details, Substantive
procedures; Analytical procedures etc
• Key inputs for planning are knowledge from previous audits and other engagements
with the company
• nature, timing and extent of resources required for the audit
Stage-V Steps – Execution of Audit
- Perform the audit checks and procedures, as planned
- Collect all required audit evidence enabling the auditor to form his opinion. The audit evidence
should be – a) relevant and reliability; b) accurate, complete and sufficient; c) from a verifiable
source
- Prepare draft observations & discuss with key management personnel
- Prepare final audit report

Stage-VI Steps – Audit Documentation

- Document audit plan, audit strategy
- Document all working papers
- Document all the audit evidences
- Document draft observations and discussions
- Document final report
- Preserve all documents in a bound folder/file for the prescribed period
(MTP December 2022)

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