Auditing 1Lecture 7

Audit Documentation

Audit DocumentationIt is the record of audit procedures

performed, relevant audit evidence obtained and conclusions reached.

The working documents are the tangible evidence of the work done in support of the audit opinion.

ISA 230 Audit documentation states that the auditor shall prepare audit documentation on timely basis.

Why audit working papersISA 230 states:“Preparing sufficient and appropriate audit

documentation on a timely basis helps to enhance the quality of the audit and facilitates the effective review and evaluation of the audit evidence obtained and conclusions reached before the auditor’s report is finalised. Documentation prepared at the time the work is performed is likely to be more accurate than documentation prepared subsequently”.

Reasons for audit documentationIt provides evidence of the auditor’s basis for a

conclusion about the achievement of the overall objectiveEvidence that audit was planned and performed in

accordance with ISAs and other legal and regulatory requirements

Assists engagement team to plan and perform the audit.Assist team members to direct, supervise and review

audit work.Enables team to be accountable for its workAllows record of matters of continuing significance to be

retained.Enables conduct of quality control reviews and

inspections

Characteristics of audit working papers1. Control - a means of control on current

work.2. Planning – a basis on which to plan future

work.3. Evidence – evidence of the work carried

out.4. Support – schedules in support of the

accounts.5. Information – information about the

business including its recent history

Form and content of working papersISA 230 indicates;“Audit documentation may be recorded on paper or

on electronic or other media. It includes, for example, audit programmes, analyses, issues memoranda, summaries of significant matters, letters of confirmation and presentation, checklists, and correspondence (including e-mail) concerning significant and specific contracts and agreements may be included as part of audit documentation if considered appropriate. Audit documentation however, is not a substitute for the entity’s accounting records. The audit documentation for a specific audit engagement is assembled in an audit file”.

The form and content of working papers are affected by matters such as:

The size and complexity of the entityThe nature of the audit procedures to be

performedThe identified risks of material misstatementThe significance of the audit evidence

obtainedThe nature and extent of exceptions

identified

Form and content of working papers

Examples of working papersInformation obtained in understanding the

entity and its environment, including its internal control, such as the following;Information concerning the legal documents,

agreements and minutesExtracts or copies of important legal documents,

agreements and minutesInformation concerning the industry, economic

environment and legislative environment within which the entity operates

Extracts from the entity’s internal control manual

Evidence of planning processEvidence of auditor’s consideration of the work of

internal auditAnalyses of transactions and balancesAnalysis of significant ratios and trendsIdentified and assessed risks of material misstatementsA record of nature, timing, extent and results of audit

procedures.Copies of communications with other auditors/expertsCopies of letters and notes concerning audit mattersCopies of financial statements and auditors reportsWritten representations received from management

Examples of working papers

Audit files/working paper filesBy convention, auditors have conveniently

divided the working papers into two main files, i.e. the permanent file and the current file.

Permanent fileThis file contains documents which relate to

matters that are likely to affect the operations of the company in the foreseeable future.

These matters should be of such continuing importance that the auditor is likely to use such a file as a source of reference as long as he continues to act as the appointed auditor of the company.

It is important that the auditor reviews such a file to take into account changes in the statutory regulations affecting the company as well as general changes in the operations of the company

Contents of permanent fileBrief history of the client’s businessEngagement lettersNew client questionnaireThe memorandum and articlesOther legal documents such as prospectus, leases,

sales agreementBoard minutes of continuing relevancePrevious years’ signed accounts, analytical review and

management lettersAccounting system notes (internal control and audit

instructions), previous years’ control questionnaireOrganisation chart

Current file and contentsThis contains information of relevance to the current

years’ audit.These should be compiled on a timely basis after the

completion of the audit and should contain;Financial statementsAccounts checklistManagement accounts detailsReconciliation of management and financial accountsA summary of unadjusted errorsReport to partner including details of significant

events and errors

Review notesAudit planning memorandumTime budgets and summariesRepresentation letterManagement letterNotes of board minutesCommunication with third parties such as

experts or other auditors

Contents of current file

Lead schedule including details of the figures to be included in the accounts

Problems encountered and conclusions drawn

Audit programmesRisk assessmentsSampling plansAnalytical reviewDetails of substantive tests and tests of

controls

Contents of current file

Modifying current fileIf it is necessary to modify/add new audit

documentation to a file after it has been assembled, the auditor should document;Who made the changes, when, by whom they

were reviewedThe reasons for making changesThe effect of changes on the auditors’

conclusions

Current file changes after report is signedIf in exceptional circumstances, changes are

made to an audit file after the audit report has been signed, the auditor should document;The circumstancesThe audit procedures performed, evidence

obtained, conclusions drawn.When and by whom changes to audit

documents were made and reviewed.

Procedures for keeping/recording audit working papersRecord as much details as would enable another

unconnected auditor to ascertain the work done and the basis of the opinion.

Record the work as the audit progresses. Do not keep important facts or information in your head

Matters of principle/judgement regarding the following must be recorded in detail;Facts known at the timeInformation received and explanation given by managementAgreement reached with management and auditors own

conclusions Working papers should be concise, comprehensive and

should not require any oral explanation.

Standardization of working papersThis is advocated by many professional

accountants and widely practiced by international accounting firms to ensure uniformity throughout the conduct of the audit.

This however can be dangerous because they may lead to auditors mechanically following an approach without using audit judgement.

It is not practicable to keep standardised working papers for all areas of the conduct of the audit.

Automated working papersAutomated working paper packages have

been developed which can make the documentation of audit work much easier.

Such programs aid preparation of working papers, lead schedules, trial balance and financial statements. These are automatically cross-referenced, adjusted and balanced by the computer.

Advantages of automated WPRisk of errors is reducedWorking papers will be neater and easier to

review.Time saved will be substantial as adjustments

can be made easily to all working papers including those summarising the key analytical information.

Standard forms do not have to be carried to audit locations.

Audit working papers can be transmitted for review via a modem or tax facilities.

Safe custody and retention of working papersJudgement may have to be used in deciding

the length of holding working papers, and further consideration should be given to the matter before their destruction.

ACCA recommends seven years as a minimum

Working papers are the property of the auditors. They are not a substitute for, nor part of, the entity’s accounting records

ISA 230 state;“the auditor should adopt appropriate

procedures for maintaining the confidentiality and safe custody of the working papers and for retaining them for a period sufficient to meet the needs of the practice and in accordance with legal and professional requirements of record retention”.

Safe custody and retention of working papers

Appointed auditor’s right of lien for unpaid fees An auditor does not have a general right of

lien over a client’s records but he may have a particular right of lien if the following conditions are satisfied;Work must have been performed on the

particular document/record.The documents/records must have gotten to

the auditor by proper means.The fees owing must relate to that workThe records must belong to a particular party

who owes the fees