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Cost Audit and Assurance Standard on Knowledge of Business, its Processes and the Business Environment

CAAS - 104 - Rules - Cost Audit and Assurance Standards - CAAS - 104 - CAAS - 104 The following is the Cost Audit and Assurance Standard (CAAS 104) on "Knowledge of Business, its Processes and the Business Environment". 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 1.1 In performing an audit of cost statements and other related informat .....

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9;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 f .....

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udit 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. The risk of material misstatement has two components viz. Inherent Risk and Control risk. (a) 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 aggregat .....

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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 Assurance engagement : An engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. The outcome of the ev .....

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ession of the practitioner's conclusion. 4.4.2 Limited assurance engagement : The objective of a limited assurance engagement is a reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement, but where that risk is greater than for a reasonable assurance engagement, as the basis for a negative form of expression of the practitioner's conclusion. 4.5 Assurance Engagement Risk : "The risk that the practitioner expresses an inappropriate .....

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ntants 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 .....

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rting framework. 5.2.3 The entity's selection and application of cost accounting policies. 5.2.4 The measurement and review of the entity's performance. 5.3 The Entity's Internal Control: 5.3.1 The cost auditor should obtain an understanding of internal controls relevant to the audit. 5.3.2 The cost auditor should evaluate whether management has created and maintained a culture of honesty and ethical behaviour. 5.3.3 The cost auditor should evaluate the adequacy of the internal audit .....

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fying business risks relevant to cost reporting objectives; 5.5.2 Assessing the likelihood of their occurrence; 5.5.3 Estimating the significance of the risks; and 5.5.4 Deciding about actions to address those risks. 5.6 Cost Information System/Management Information System : The cost auditor should obtain an understanding of the management information system, relevant to cost reporting, including the following areas: 5.6.1 The classes of transactions and their analysis, that are significant to .....

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ks 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, requir .....

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of gathering, updating and analyzing information throughout the audit. The understanding establishes a frame of reference within which the cost auditor plans the audit and exercises professional judgment throughout the audit, for example, when: • Assessing risks of material misstatement of the cost statements; • Considering the appropriateness of the selection and application of cost accounting policies, and the adequacy of cost statement disclosures; • Identifying areas where spe .....

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h as the appropriateness of assumptions and of management's oral and written representations. 6.2 Relevant industry factors include industry conditions such as the competitive environment, supplier and customer relationships, and technological developments etc. Examples of matters the cost auditor may consider include: • The market and competition • Cyclical or seasonal activity • Changes in product technology • Business risk (for example, high technology, high fashion, e .....

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he entity's selection and application of cost accounting policies may encompass matters such as: • The methods the entity uses to account for significant and unusual transactions (abnormal events). • The effect of significant cost accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus. • Changes in the entity's cost accounting policies. • Cost reporting standards and laws and regulations that are new to .....

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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. & .....

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ion to discussions with the entity's personnel. 6.6 If an entity has an internal audit function, inquiries of the appropriate individuals within the function may provide information that is useful to the cost auditor in obtaining an understanding of the entity and its environment, and in identifying and assessing risks of material misstatement at the cost statement and assertion levels. If based on responses to the cost auditor's inquiries, it appears that there are findings that may be .....

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ent transactions, or inaccurate recording of transactions. Particular risks may arise where multiple users access a common database. • The possibility of IT personnel gaining access to privileges beyond those necessary to perform their assigned duties thereby breaking down segregation of duties. • Unauthorized changes to data in master files. • Unauthorized changes to systems or programs. • Failure to make necessary changes to systems or programs. • Inappropriate manual .....

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here is such a risk, the cost auditor should obtain an understanding of why that process failed 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 judgme .....

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erial 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 assessed risks. An audit does not require an understanding of all the control activities related to each significant class of transactions and disclosure in the Cost statements or to every assertion relevant to them. 6.12 The cost .....

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