audit documentation

AUDITING THEORY

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AUDIT DOCUMENTATION (AUDIT WORKING PAPERS) Audit Documentation represents the record of audit procedures performed, relevant audit evidence obtained,   

and conclusions the auditor reached Audit documentation is sometimes called “ working papers ” or “ work papers ”. The audit documentation for a specific audit engagement is assembled in an audit file. Audit file means one or more folders or other storage media, in physical or electronic form, containing the records tha t comprise the audit documentation for a specific engagement

Purposes of Audit Documentation: Audit documentation provides: a. A sufficient and appropriate record of the basis for the auditor’s report (or audit opinion) b. Evidence that the audit was planned and performed in accordance with PSAs (and applicable legal and regulator y requirements) Pr imary purposes:  To provide suppor t/basis for auditor’s opinion/repor t  To provide a basis for determining the appropriate audit report  To support the auditor's representation that the audit was conducted in accordance with PSA  To provide evidence of the audit wor k performed  To assist the auditor in the planning, performance, review, supervision and coordination of the engagement and in preparation of the audit report  To show that the accounting records agree or reconcile with the financial statements  Provide supervisor y personnel the oppor tunity to assess the sufficiency of evidence obtained during the audit Addit ional purposes:  To assist the engagement team to plan and per form the audit  To assist members of the engagement team responsible for supervision to direct and super vise the audit work, and to discharge their review responsibilities  To enable the engagement team to be accountable for its work  To retain a record of matters of continuing significance to future audits – this w ould assist the auditor in planning future audits  To enable the conduct of quality control reviews and inspections in accordance with quality control standards  To enable the conduct of external inspections in accordance with applicable legal, regulatory or other requirements  To provide information useful in rendering other services (MAS or tax consulting)  To provide adequate defense in case of litigation Audit documentation: (NOT)  Does not suppor t the financial statements (the client's accounting records are considered the primary suppor t for the financial state ments)  Does not serve as basis for the preparation of the financial statements  Does not replace or substitute the entity's accounti ng records. Requirements on Audit Documentation: 1.

Timely preparation of audit documentat ion – Audit documentation prepared by the auditor on a timely basis will help to: a. Enhance the quality of the audit; and b. Facilitates the effective review and evaluati on of the audit evidence obtained and conclusions reached before the auditor's report is finalized

2.

Documentation of the audit procedures perfor med and audit evidence obtained – This includes: a. Documentation of compliance with PSAs: (1) Compliance with PSA 230 (Redrafted) – Audit Documentation (2) Compliance with other PSAs (other PSAs contain specific documentation requirements that are intended to clarify the application of PSA 230) b.

Documentation of the nature, t iming and extent of audit procedures: record:

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(1) The identifying characteristics of the specific items or matters tested (2) Who performed the audit work and the date such work was completed, and (3) Who reviewed the audit w ork performed and the date and extent of such review

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c.

Documentation of significant matters: Examples of significant matters include:  Matters that give rise to significant risks  Results of audit procedures indicating: 1) That the financial statements could be materially misstated, or 2) A need to revise the auditor's previous assessment of the risks of material misstatement and the auditor's responses to those risks  Circumstances that cause the auditor significant difficulty in applying necessary audit procedures.  Findings that could result in a modification to the audit opinion or the inclusion of an Emphasis of Matter paragraph in the auditor's repor t

d.

Documentation of significant professional judgments: This documentation serves to: (1) Explain the auditor's conclusions and (2) Reinforce the quality of the j udgment The auditor may consider it helpful to prepare and retain as part of the audit documentation a summary (sometimes known as a complet ion memorandum) that describes the significant matters identified during the audit and how they were addressed, or that includes cross -references to other relevant supporting audit documentation that provides such information.

e.

Documentation of discussions of significant matters wit h management, those charged with governance, and others (other personnel within the entity, and external part ies) This documentation shall include: (1) The nature of the significant matters discussed and (2) When and with whom the discussions took place  The documentation is not limited to records prepared by the auditor but may include other appropriate records such as minutes o f meetings prepared by the entity's personnel and agreed by the auditor.

f.

Documentation of how inconsistencies have been addressed If the auditor identified information that is inconsistent with the auditor's final conclusion regarding a significant matter, the auditor shall document how the auditor addressed the inconsistency. The auditor need not retain documentation that is incorrect or superseded.

g.

Documentation of how departure from a relevant PSA requirement has been addressed If, in exceptional circumstances, the auditor judges it necessary to depart from a relevant requirement in a PSA, the auditor shall document: 1) How the alternative audit procedures performed achieve the aim of that requirement, and 2) The reasons for the depar ture Allowed departure from a relevant PSA requirement: a. The PSA is not relevant (for example, in a continuing audit engagement, nothing in Initial Audit Engagements – Opening Balances under PSA 510 (Redrafted) is relevant; or b. The circumstances envisioned do not apply because the requirement is conditional and the condition does not exist (for example, the requirement to modify the auditor's opinion where there is an inability to obtain sufficient appropriate audit evidence, and there is no such inability).

h.

Documentation of how matters arising after the date of the auditor's report have been addressed In exceptional circumstances where the auditor performs new or additional audit procedures or draws new conclusions after the date of the auditor's repor t, the auditor shall document: a. The circumstances encountered b. The new or additional audit pr ocedures performed, audit evidence obtained, and conclusions reached, and their effect on the auditor's report, and c. When and by w hom the resulting changes to audit documentation were made and reviewed Matters arising after the date of the auditor's report: Examples of exceptional circumstances include facts which become know n to the auditor after the date of the auditor's report but which existed at that date and w hich, if known at that date, might have caused the financial statements to be amended or the auditor to modify the opinion in the auditor's report.

Complet ion of assembly of final audit file on a t imely basis, ordinar ily not more than 60 days

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after the date of the auditor's report Changes to the audit documentat ion:  During the final assembly process: Changes are allowed if the changes to be made are administrative in nature , such as: a. Deleting or discar ding superseded information. b. Sorting, collating and cross-referencing w orking pa pers. c. Signing off on completion checklist relating to the file assembly process. d. Documenting audit evidence that the auditor has obtained, discussed and agreed with the relevant members of the engagement team before the date of the auditor’s report.  After the complet ion date of the assembly of the final audit file: Changes are not allowed.  The completion of the assembly of the final audit file after the date of the auditor’s report is an administrative process that does not involve the performance of new procedures or the drawing of new conclusions.  After the assembly of the final audit file has been completed, the auditor shall not delete or discard audit documentation of any nature before the end of its retention period.  In circumstances where the auditor finds it necessar y to modify existing audit documentation or add new audit documentation after the assembly of the final audit file has been completed, the auditor shall, regardless of the nature of the modifications or additions, document: a. The specific reasons for making them, and b. When and by w hom they were made and reviewed An example of a circumstance in w hich the auditor may find it necessary to modify existing audit documentation or add new audit documentation after file assembly has been completed is the need to clarify existing audit documentation arising from comments received during monitoring inspections performed by internal or external parties. 4.

Requirements as to for m, content and extent of audit documentation: a.

Auditor’s judgment: The form, content and extent of audit documentation are based on the auditor’s decision/judgment since it is neither necessary nor practical for the auditor to document every matter he/she has considered or professional judgment he has made in an audit. The audit documentation shall be designed to meet the circumstances and the auditor's needs for each individual audit.

b.

Use of “Exper ienced auditor ” concept: The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand: a. The nature, timing, and extent of the audit procedures performed to comply with the PSAs (and applicable legal and regulatory requirements) b. The results of the audit procedures performed, and the audit evidence obtained, and c. Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions Experienced auditor – means an individual (whether internal or exter nal to the firm) who has practical audit experience, and a reasonable understanding of:  Audit processes  PSAs and applicable legal and regulatory requirements  The business environment in w hich the entity operates, and  Auditing and financial repor ting issues relevant to the entity's industry Other important qualities of good audit documentation:  Concise but complete: Audit documentation should be concise but complete in itself that it does not require oral explanation.  Accurate: Audit documentation should be free from errors, clerical or computational.  Proper ly organized: Audit documentation should be appropriately organized to provide a clear link to the significant matters and to facilitate review of audit w ork. Elements of audit documentation: Working papers should be properly organized to facilitate their review. Working papers should have the following elements: 1. Heading – used to properly identify each working paper; the heading would include: a. Name of the client b. Type/title of working paper c. Description of its content, and

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d. Date or period covered by the examination Dates and initial of staff auditors who perfor med the audit procedures and reviewers Indexing – audit working papers are indexed by means of reference numbers to show the relationship between findings, conclusions, and the related facts Purposes of indexing:  To better organize the working papers  To aid in cross-referencing to other wor king papers Cross-indexing / cross referencing – T he primar y purpose of cross-indexing audit working papers is to: a. Permit cross-referencing and b. Simplify super visor y review by providing an audit trail of related items through the working papers For example, reported findings should be adequately cross-referenced to supporting documentation. Tickmar ks – symbols that indicate the audit procedures per formed  Audit documentation should include explanations of any tickmarks used.

c.

For m of audit documentat ion: Audit documentation may be recorded on paper or on electronic or other media.  Oral for m: Oral explanations by the auditor, on their ow n, do not represent adequate suppor t for the work the auditor performed or conclusions the auditor reached, but may be used to explain or clarify information contained in the audit documentation.

d.

Factors to consider in deciding the for m, content and extent of audit documentation: (1) The size and complexity of the entity. (2) The nature of the audit procedures to be perfor med. (3) The identified (and assessed) risks of material misstatement – this w ould include audit risk (or its components), materiality levels, and existence of material fraud and errors (4) The significance of the audit evidence obtained. (5) The nature and extent of exceptions identified. (6) The need to document a conclusion or the basis for a conclusion not readily determinable from the documentation of the w ork performed or audit evidence obtained. (7) The audit methodology and tools used.

Classification / Composit ion of Audit Documentation: In the case of recurring audits, wor king paper files are classified: 1.

Per manent files – contain information of historical or continuing or long- term significance/interest to the auditor in performing current audit. Permanent files are simply updated with new information of continuing importance to the auditor. Permanent files include: a. Information such as:  Organizational chart and excerpts from job manuals that indicate responsibilities  Analysis of business and industry  Chart of accounts and accounting procedures manuals  Carryforward schedules – continuing analyses of long-term accounts (such as PPE, intangible assets, long-term liabilities and stockholders' equity accounts) whose balances are carried forward in the permanent file  Analyses of internal control or information to understanding of internal control and assessment of control risk (include flowcharts, narrative descriptions, questionnaires, etc.) from previous year audit  Information regar ding related parties b. Copies, extracts or excerpts of entity’s important legal documents and agreements such as:  Corporate charter or Articles of Incor poration (or ar ticles of co-partnership) and By-laws  Major contracts (such as lease contracts and bond and note indentures) that affect future periods  Pension plans, stock option plans, profit-sharing plans and employee bonus  Terms of share capital and bond issues  Engagement letter

2.

Current audit file – contains evidence gathered, descriptions of auditing procedures performed and conclusions reached relevant to the audit of a par ticular year or single period. Current audit file is designed to support management assertions in the financial statements. Current audit file includes all wor king papers accumulated during the current year’s audit:  Copy of the financial statements and audit report

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Administrative working papers:  Overall audit strategy and audit plan  Audit programs – a detailed list of audit procedures (tests of controls and/or substantive tests) that the auditor will perform to gather sufficient appropriate evidence  Time budgets – an estimate of time that will be spent in executing audit procedures listed in the audit program Working (top) trial balance – shows a list of unadjusted ending balances of accounts or line items that are to be show n on the financial statements A working trial balance resembles the financial statements without footnotes, but contains columns for unadjusted year-end balances (per books), adjusting and reclassifying entries, and adjusted year-end balances (per audit). Proposed adjusting and reclassify ing entries – proposed adjustments are intended to correct material misstatement discovered by the auditor in the conduct of audit while reclassifications are made to properly present information in the financial statements (even w hen the general ledger balances are correct) Reclassification entries are entries made for financial statement presentation pur poses. They are recorded in the financial statements but not in the general ledger. Lead schedule or top schedule (assembly sheet) – shows the major components of an amount repor ted as a line item on the face of the financial statements The lead schedule supports each line item on the working trial balance by combining/grouping/summarizing similar or related items contained on the supporting schedules. In other words, it eliminates voluminous details from the auditor’s working trial balance. Supporting schedules – schedules that suppor t specific amounts on the financial statements by providing details of amounts aggregated in the lead schedule An example of a suppor ting schedule is a bank reconciliation schedule to suppor t cash in bank. Supporting schedules usually represent the largest portion of the auditor's working papers. Account analysis – shows the activity (transactions – both debits and credits) in a particular balance sheet account during the period under audit, tying together the beginni ng and ending balances Audit memoranda – include documentation on discussions of certain items such as internal control, inventory obser vation, errors identified, and problems encountered Correspondence (including e- mail) concerning significant matters – includes correspondence with other parties such as lawyers, customers, banks, and management Audit notes – used to record items of work to be done and questions concerning the audit investigation Documentation of corroborating infor mat ion:  Confirmation replies  Letters of representation  Abstract or copies of client’s agreements and minutes of board of directors’ meeting Summar ies of significant matters – include matters such as:  Significant risks  Possibility of risk of material misstatements  Revision of previous assessment of the risks of material misstatement  Circumstances that cause significant difficulty in applying necessary audit procedures  Findings that could result in a modification to the audit opinion

Other types of files: a. Tax files – contain files of information on client’s income taxes and other business taxes that may be used as bases for:  Preparing current year’s tax returns  Preparing other tax-related ser vices  Representing the client in tax assessment case b. Correspondence file – contains all correspondence/letters to or from (or in behalf of) a client c. Complet ion memorandum – a summary that describes the significant matters identified during the audit and how they are addressed

Exclusions from Audit Documentation: The auditor need not include in audit documentation the following: a. Superseded drafts of working papers and financial statements b. Notes that reflect incomplete or preliminary thinking c. Previous copies of documents corrected for typographical or other errors, and d. Duplicates of documents Superv isory Rev iew of Audit Documentation:  The auditor is required to review the audit wor k performed through review of the audit documentation.

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A supervisory review of audit documentation is conducted to determine if working papers adequately suppor t audit findings, conclusions, and opinion/reports.

Auditor/CPA fir m’s Responsibility on Audit Documentation: CPA firms shall adopt policies and procedures regarding the following: 1. Timely completion of assembly of final audit file – The appropriate time limit within which to complete the assembly of the final audit file is ordinarily not more than 60 days after the date of the auditor's report. 2. Confidentiality, safe custody, integrity, accessibility and retrievability of audit documentation:  Confidentiality: Firm’s personnel shall obser ve confidentiality of information at all times contained in the audit documentation, unless specific client authority has been given to disclose information, or there is a legal or professional duty to do so.  Design and implementation of controls to avoid/prevent unauthorized alteration or lost or damage of audit documentat ion (whether audit documentation is in paper, electronic or other media) For example, appropriate controls should protect the integrity of the information at all stages of the engagement, especially w hen the information is shared within the engagement team or transmitted to other parties via the Internet.  Design and implementation of controls to maintain the confident iality, safe custody, integrity, accessibility and retrievability: Examples of these controls include:  The use of a password to restrict access to electronic audit engagement documentation to authorized users.  Appropriate backup routines for electronic audit documentation at appropriate stages during the engagement.  Procedures for restricting access to hardcopy audit documentation 3. Retention of audit documentation: The CPA firm shall establish policies and procedures for the retention of audit documentation for a period sufficient to meet the needs of the firm’s practice and to satisfy any pertinent legal requirements of record retention.  The retention period for audit engagements would ordinarily be no shorter than seven (7) years from the date of the auditor’s report, or, if later, the date of the group auditor’s report. (based on proposed PSQC 1) The SEC requires a retention period of seven (7) years under its rules for accreditation of external auditors.  The auditor should not delete or discard audit documentation before the end of its retention peri od. Ownership of Audit Documentation:  Legal prov ision (Sec. 29 of RA 9298 – Ownership of Working Papers): All working papers, schedules and memoranda made by a CPA and his staff in the course of an examination, including those prepared and submitted by the client, incident to or in the course of an examination, by such CPA, except reports submitted by a CPA to a client shall be treated confidential and privileged and remain the pr operty of such CPA in the absence of a written agreement between the CPA and the client, to the contrary, unless such documents are required to be produced through subpoena issued by any court, tribunal, or government regulatory or administrative body.  PSA prov ision on ownership of audit documentation: Unless otherwise specified by law or regulation, engagement documentation is the pr operty of the firm (or auditor). The firm/auditor may, at its discretion, make portions of, or extracts from, engagement documentation available to clients, provided such disclosure does not undermi ne the validity of the wor k performed, or, in case of assurance engagements, the independence of the firm or its personnel. 

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Audit documentation or wor king papers are the personal property of the auditor/audit firm and the client has no right to the wor king papers prepared by the auditor. However, they cannot be shown to third parties under the rule on confidentiality, unless specific client authority has been given to disclose information, or there is a legal or professional duty to do so. Although certain wor king papers may sometimes ser ve as a useful reference source for his client, auditor’s working papers should not be regarded as part or substitute for the client's accounting records.

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