TMI BlogCost Audit and Assurance Standard on Knowledge of Business, its Processes and the Business EnvironmentX X X X Extracts X X X X X X X X Extracts X X X X ..... ve of this standard is to enable the cost auditor to have knowledge of the client's business which is sufficient to identify and understand the events, transactions and practices that, in the cost auditor's judgment may have a significant effect on the examination of cost statements or on the preparation of the cost audit report. Scope 3. This standard deals with obtaining the knowledge of the client's business, its processes and business environment as it is important for the cost auditor and members of the audit staff working on an engagement. Definitions 4. The following terms are being used in this standard with the meaning specified. 4.1 Audit : An 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. Audit includes cost audit. 4.2 Auditee : Auditee means a company or any other entity for which audit and or certification is carried out. 4.3 Audit Risk : Audit risk is the risk that the cost auditor expresses an inappropriate audit opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated . 4.6 Audit Strategy : Audit Strategy sets the scope, timing and direction of the audit, and guides the development of the detailed audit plan. 4.7 Cost auditor : Cost auditor means an auditor appointed to conduct audit of cost records, under sub-section (2) of section 233B of the Companies Act and should be 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. Cost Auditor includes Audit Partner. 5. Requirements 5.1 It is essential that the Cost Auditor should have adequate level of understanding of the knowledge of Business, its Processes and the Business Environment, to develop a reasonable assurance in order to express an opinion on the cost statements on which he is expressing an opinion. 5.2 The Entity and Its Environment : The cost auditor should obta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnificant estimates and disclosures. 5.7 Identifying and Assessing the Risks of Material Misstatement : The cost auditor should identify and assess the risks of material misstatement at the cost statement level; and at the assertion level for classes of transactions and disclosures. For this purpose, the cost auditor should: 5.7.1 Identify risks including relevant controls that relate to the risk of material misstatements or a risk of fraud; 5.7.2 Assess whether the risk is related to recent significant economic, accounting or other developments and, therefore, requires specific attention; 5.7.3 Assess whether the risk involves significant transactions with related parties; 5.7.4 Assess the degree of subjectivity in the measurement of information related to the risk. 5.7.5 Assess whether there arises a need for revising the assessment of risk based on additional audit evidence obtained. 6. Application Guidance: 6.1 Obtaining an understanding of the entity and its environment, including the entity's internal control, is a continuous dynamic process of gathering, updating and analyzing information throughout the audit. The understanding e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he entity and when and how the entity will adopt such requirements. 6.4 Management will measure and review those things they regard as important. Performance measures, whether external or internal, create pressures on the entity. These pressures, in turn, may motivate management to take action to improve the business performance or to misstate the cost or financial statements. Accordingly, an understanding of the entity's performance measures assists the cost auditor in considering whether pressures to achieve performance targets may result in management actions that increase the risks of material misstatement, including those due to fraud. Examples of internally-generated information used by management for measuring and reviewing financial performance, and which the cost auditor may consider, include: Key performance indicators and key ratios (financial and non-financial). Key trends and operating statistics. Period-on-period financial performance analyses. Budgets, forecasts, variance analyses, segment information and divisional, departmental or other unit level performance reports. Employee performance measures and incentive compensation pol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled to identify it, and evaluate whether the process is appropriate to its circumstances or determine if there is a significant deficiency in internal control with regard to the entity's risk assessment process. 6.9 As part of the risk assessment, the cost auditor should determine whether any of the risks identified are, in the cost auditor's judgment, a significant risk. In exercising this judgment, the cost auditor should exclude the effects of identified controls related to the risk. 6.10 An understanding of the business risks facing the entity increases the likelihood of identifying risks of material misstatement, since most business risks will eventually have financial consequences and, therefore, an effect on the cost statements. However, the cost auditor does not have a responsibility to identify or assess all business risks because not all business risks give rise to risks of material misstatement. 6.11 The cost auditor should obtain an understanding of control activities relevant to cost/ management information system in order to assess the risks of material misstatement at the assertion level and design further audit procedures responsive to assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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