Auditing 1 L7 Working Papers
Lecture 7
Audit Documentation
Audit Documentation
It 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 papers
ISA 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 documentation
It provides evidence of the auditor’s basis for a conclusion about the achievement of the overall objective
Evidence 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 work
Allows record of matters of continuing significance to be retained.
Enables conduct of quality control reviews and inspections
Characteristics of audit working papers
1. 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 papers
ISA 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 email) 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”.
Form and content of working papers
The form and content of working papers are affected by matters such as:
The size and complexity of the entity
The nature of the audit procedures to be performed
The identified risks of material misstatement
The significance of the audit evidence obtained
The nature and extent of exceptions identified
Examples of working papers
Information obtained in understanding the entity and its environment, including its internal control, such as the following;
Information concerning the legal documents, agreements and minutes
Extracts or copies of important legal documents, agreements and minutes
Information concerning the industry, economic environment and legislative environment within which the entity operates
Extracts from the entity’s internal control manual
Examples of working papers
Evidence of planning process
Evidence of auditor’s consideration of the work of internal audit
Analyses of transactions and balances
Analysis of significant ratios and trends
Identified and assessed risks of material misstatements
A record of nature, timing, extent and results of audit procedures.
Copies of communications with other auditors/experts
Copies of letters and notes concerning audit matters
Copies of financial statements and auditors reports
Written representations received from management
Audit files/working paper files
By convention, auditors have conveniently divided the working papers into two main files, i.e. the permanent file and the current file.
Permanent file
This 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 file
Brief history of the client’s business
Engagement letters
New client questionnaire
The memorandum and articles
Other legal documents such as prospectus, leases, sales agreement
Board minutes of continuing relevance
Previous years’ signed accounts, analytical review and management letters
Accounting system notes (internal control and audit instructions), previous years’ control questionnaire
Organisation chart
Current file and contents
This 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 statements
Accounts checklist
Management accounts details
Reconciliation of management and financial accounts
A summary of unadjusted errors
Report to partner including details of significant events and errors
Contents of current file
Review notes
Audit planning memorandum
Time budgets and summaries
Representation letter
Management letter
Notes of board minutes
Communication 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 programmes
Risk assessments
Sampling plans
Analytical review
Details of substantive tests and tests of controls
Modifying current file
If 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 reviewed
The reasons for making changes
The effect of changes on the auditors’ conclusions
Current file changes after report is signed
If in exceptional circumstances, changes are made to an audit file after the audit report has been signed, the auditor should document;
The circumstances
The 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 papers
Record 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 time
Information received and explanation given by management
Agreement reached with management and auditors own conclusions
Working papers should be concise, comprehensive and should not require any oral explanation.
Standardization of working papers
This 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 papers
Automated 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 WP
Risk of errors is reduced
Working 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 papers
Judgement 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
Safe custody and retention of working papers
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”.
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 work
The records must belong to a particular party who owes the fees
