Cost Auditing Standards [Cost Audit Documentation (102)] – Part-II

1.Introduction : In continuation of our effort to make notified Cost Auditing Standards readable, next in line is theCost Auditing Standard on Cost Audit Documentation (102). The governing idea behind this standard immediately put in place after Standard on “Planning an Audit of Cost Statements (101)” is to place guidance on the documentation requirements relating to evidences leading up to the formation of opinion by the auditor. It is important to understand that a framework of compliance was already applicable through “Guidance Manual for Audit Quality” by the QRB of the Institute of Cost Accountants of India prior to 11^th September,2015, the effective date of implementation of this standard. For the sake of better appreciation of this standard, relevant part of the extract has been also incorporated in our discussion.

2.The Objective: of this Standard (Cost Audit Documentation -102) is to guide the members to prepare documentation that provides:

(a) A sufficient and appropriate record of the basis for the Cost Auditor’s Report; and

(b) Evidence that the audit was planned and performed in accordance with Cost Auditing Standards and applicable legal & regulatory requirements.

Though This Standard deals with the cost auditor’s responsibility to prepare audit documentation for the audit of cost statements, records and other related documents. The specific documentation requirements of other Cost Auditing Standard's do not limit the application of this Cost Auditing Standard. Laws or regulations may establish additional documentation requirements. Meaning that the words “sufficient and appropriate” is to be considered objectively and spirit of the standard requirements should be maintained instead of limiting implementation of the standard exclusively based upon compliance.

Another very interesting aspect comes out from the plain reading of the standard is, intent of the regulator to put in place peer review mechanism. For the record, peer review is not yet implemented by the regulator but as discussed, seems inevitable.

3. Requirements: envisaged in this standards:

• The cost auditor as part of the audit documentation shall record audit procedures performed, relevant audit evidence obtained, and conclusions reached. (Refer 6.1)
• The Cost Auditor shall prepare audit documentation that is sufficient to enable another competent person, having no previous connection with the said audit, including person undertaking peer review to understand:

(a) Conformance of audit procedures performed with legal and regulatory requirements;

(b) Conformance to Cost Auditing Standards. (Refer 6.6)

(c) The results of audit procedures performed

(d) The audit evidence obtained

(e) Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions. (Refer 6.7 & 6.8)

• The Cost Auditor shall record the discussions of significant matters with client personnel and outsiders.(Refer 6.9).
• The Cost Auditor shall record any departure from the standard requirement in a Cost Auditing Standard. (Refer 6.11)
• In documenting the nature, timing and extent of audit procedures performed, the Cost Auditor shall record the characteristics of the specific items or matters tested, the persons responsible for performing and reviewing such procedures with relevant dates and extent of review.(Refer 6.12)
• The Cost Auditor shall prepare audit documentation on a timely basis. (Refer 6.14)
• If, in exceptional circumstances, Cost Auditor performs any new or additional audit procedures or draws new conclusions, after the date of Cost Audit Report, then he shall document such circumstances and details of such procedures performed.(Refer 6.15)
• The cost auditor shall assemble the audit documentation in an audit file.(Refer 6.16)

4. Some important and relevant terms / definitions used in the standard are :

• Audit documentation: Audit Documentation means the records, in physical or electronic form, including working papers prepared by and for, or obtained and retained by the Cost auditor, in connection with the performance of the audit.

• As per Manual on QRB which is applicable on auditors in such audit and relevant here [ “ Audit documentation refers to the record of audit procedures performed, relevant audit evidence obtained, and conclusions reached by the auditor.

• Audit documentation is required as sufficient and appropriate record of the basis for the Auditor’s Report and providing evidence that the audit was planned and performed as per the audit plan and complying with legal & statutory requirements.

• The auditor shall document discussions of significant matters, when and with whom the discussions took place.

• The firm should establish its policies and procedures for audit documentation. Audit documentation should be completed “in time” even though no time limits as such are normally prescribed by any statute. It may be considered to be a good practice to complete audit documentation within a period not exceeding 45/60 days from the date on which the audit report is rendered. In case of statements are authenticated / certified by practicing cost accountant, the period may be restricted to 15 days from the date on which certificate is signed.
• The audit documents should have self-custody, easy but protected accessibility. If the data / information / audit evidence is in electronic form, it must be retrievable only with proper authorization. The real test will be the full confidentiality. A safeguard should be taken so that the documentation or audit evidence is not altered, or additions or deletions made without the knowledge Page 51 of 68 of the proper authority. The documentation should be fully protected from physical loss or damage. The electronic documents should have proper and safeguarded password protection and back up mechanism. The audit documents should be divided in sections and properly indexed with serial numbers.

• The audit documentation should be retained depending upon the relevance and significance of the same in relation to the matter authenticated or certified by the auditor. Normally the audit documentation should be retained for a minimum period of 5 years from the date of signing the report. However, the legal provisions or regulations will override the firm’s policy regarding the retention of such documentation e.g. TheCompanies Act, 1956 section 209 (4A) provides for retention of the accounting records for a period of not less than 8 years immediately preceding the current year. Even though the obligation is on the companies, a corollary follows that the auditors should also keep the audit documentation for the corresponding period.
• The audit documentation shall be sufficient to enable an experienced auditor, having no connection with the audit of specific entity, to understand the nature, timing and extent of audit procedures performed, compliance with cost accounting standards and other legal and regulatory requirements, the result of audit procedure performed, audit evidence obtained, significant matters arising out of audit and how they were addressed and audit conclusions reached with the underlying professional judgments for reaching such conclusion.
• In the process of audit documentation, the auditor shall record;

a) Identifying characteristics of specific items including cost items, cost records, other items and matters tested.

b) Who performed audit work and date.

c) Who reviewed audit work with dates of review.

d) Discussion of significant matters with the management or those in charge of its governance, nature of significant matters and when and with whom discussion took place.

e) Information, if any, about any significant matter that is inconsistent with overall Audit Report and how the inconsistency was addressed.

f) Departure, if any, in an exceptional circumstance, from a relevant requirement specified in any standard/stipulation prescribed by ICWAI/regulatory authority, reasons for such departure and how Page 52 of 68 application of an alternative audit procedure fulfilled the requirement. ]

• Audit file: Audit file means one or more folders or other storage media, in physical or electronic form, containing the records that comprise the audit documentation for a specific Assignment or audit.

• Audit working papers: Audit working papers are the 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 Auditing Standards.