FEU - Makati
AT – Lecture 4
Auditing Theory
Prof. Francis H. Villamin
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“Audit Documentation” (PSA 230 Redrafted)
1. The purpose of this PSA is to establish standards and provide guidance on audit documentation.
2. The auditor should prepare, on a timely basis, audit documentation that provides:
a. Evidence of the auditor’s basis for a conclusion about the achievement of the overall
objective of the auditor.
b. Evidence that the audit was planned and performed in accordance with PSAs and applicable
legal and regulatory requirements.
3. Audit documentation serves a number of purposes including:
a. Assisting the audit team to plan and perform the audit.
b. Assisting the members of the audit team responsible for supervision to direct and supervise
the audit work, and to discharge their review responsibilities in accordance with PSA 220
Redrafted, “Quality Control for an Audit of Financial Statements.”
c. Enabling the engagement team to be accountable for its work.
d. Retaining a record of matters of continuing significance to future audits.
e. Enabling the conduct of quality control reviews and inspections in accordance with PSQC 1
Redrafted, “Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information and Other Assurance and Related Services Engagements.
f. Enabling the conduct external inspections in accordance with applicable legal, regulatory or
other requirements.
4. Overall Objectives and Approach – Audit documentation (working papers) is the principal support
for the representation that the audit is performed in accordance with PSAs and for the opinion.
The objective of the auditor is to prepare documentation that provides:
a. A sufficient and appropriate record of the basis of the auditor’s opinion.
b. Evidence that the audit was planned and performed in accordance with PSAs and applicable
legal and regulatory requirements.
Definitions
1.
Audit documentation – the record of audit procedures performed, relevant audit evidence
obtained, and conclusions the auditor reached. (Working papers or workpapers are sometimes
used).
a.
Audit programs
b.
Analyses
c.
Issues memoranda
d.
Summaries of significant matters
e.
Letters of confirmation and representation
f.
Checklists
g.
Correspondence (including e-mail) concerning significant matters.
2.
Audit file – one or more folders or other storage media, in physical or electronic form, containing
the records that comprise the audit documentation for a specific engagement.
3.
Experienced auditor – an individual (whether internal or external to the firm) who has practical
audit experience, and a reasonable understanding of
a. Audit processes.
b. PSAs and applicable legal and regulatory requirements.
c. The business environment in which the entity operates.
d. Auditing and financial reporting issues relevant to the entity’s industry.
Audit report date – The date on the audit report. This date must not be earlier than date auditor
has sufficient appropriate evidence
Report release date – The date the auditor grants the client permission to use the audit report
Documentation completion date – The time period during which the final audit file should be
completed. This period is ordinarily not more than 60 days after the date of the auditor’s report
date.
Retention period – The period for which the audit files must be kept. This period should not be
shorter than ten years from the auditor’s report date, or if later, the date of the group auditor’s
report.
4.
5.
6.
7.
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5 Timely Preparation of Audit Documentation
The auditor shall prepare audit documentation on a timely basis.
6. Form, content and extent of audit documentation
1. Overall requirement: The auditors should prepare audit documentation that enables an
experienced auditor, having no previous connection to the audit, to understand
a.
b.
c.
d.
e.
Nature, timing, extent and results of auditing procedures performed.
1. The identifying characteristics of the specific items or matters tested.
2. Who performed the audit work and the date such work was completed.
3. Who reviewed the audit work performed and the date and extent of such review.
Results of the audit procedures performed and the audit evidence obtained.
Significant matters arising during the audit
Conclusions reached on significant matters.
Significant professional judgments made in reaching those conclusions..
2.
The form, content and extent of audit documentation depend on factors such as:
a. The nature of audit procedures to be performed.
b. The size and complexity of the entity.
c. The identified risks of material misstatement.
d. The extent of judgment required in performing the work and evaluating the results.
e. The significance of the audit evidence obtained.
f. The nature and extent of exceptions identified.
g. The need to document a conclusion or the basis for a conclusion not readily determinable from
the documentation of the work performed or audit evidence obtained.
h. The audit methodology and tools used.
3.
It is neither necessary nor practical to document every matter considered during the audit, but oral
explanations by the auditor
a. On their own do not represent sufficient support for the work auditor performed or conclusions
b. May be used to clarify or explain information contained in the audit documentation
4. The auditor should document findings or issues that are significant; significant audit findings or
issues involve
a. Selection, application, and consistency of accounting principles
b. Results of audit procedures indicating information could be materially misstated or a need to
revise auditor’s previous assessment of risks of material misstatement
c. Circumstances causing auditor significant difficulty in applying audit procedures (e.g., lack of
responsiveness, lack of original documents)
d. Findings that could result in modification of the auditor’s report
e. Audit adjustments
5. If the auditor has identified information that contradicts or is inconsistent with the auditor’s final
conclusions regarding a significant finding or issue, the auditor should document how the auditor
addressed the contradiction or inconsistency in forming the conclusion
a. The documentation of how the auditor addressed the contradiction or inconsistency does not
imply that the auditor needs to retain documentation that is incorrect or superseded.
b. Documentation of the contradiction or inconsistency may include, but is not limited to,
procedures performed, records documenting consultations, or differences in professional
judgment among team members or between team members and others consulted
6.
The following should be documented:
a. Who performed the audit work and who reviewed specific audit documentation and the
dates.
b. Concerning specific items tested
(1) Documents inspected – should include identifying characteristics of the specific items
tested; examples
(a) Numbers of documents selected
(b) When a systematic sample is used, the information needed to identify the items
selected
(2) Copies of entity’s records when needed to enable experienced auditor to understand
work performed and conclusions reached
(a) For example, abstracts or copies of significant contracts or agreements that were
examined to evaluate proper accounting for a transaction should be saved
c. Any departure from a basic principle or essential procedure in the PSAs
7. Revisions to audit documentation after the date of the auditor’s report
1. Audit report date – not earlier than date auditor has sufficient appropriate evidence
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a.
b.
c.
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Sufficient appropriate audit evidence includes evidence that the audit documentation has
been reviewed and that management has prepared and taken responsibility for the entity’s
financial statements, including disclosures
The report date will be close to the date the auditor grants the entity permission to use the
auditor’s report (the “report release date”)
The report release date should be recorded in the audit documentation
2. Documentation of new information
a. When new information is received after the date of the auditor’s report (e.g., a late third-party
confirmation) the auditor should consider whether to perform audit procedure on the new
information based on nature and significance of information.
(1) If new information suggests necessary procedures were not performed.
(2) If auditor becomes aware of subsequent event.
b.
If new information is added to working papers, documentation should include
(1) When and by whom changes were made and reviewed (if applicable).
(2) Specific reasons for changes.
(3) Effect, if any, of changes on auditor’s conclusions.
3. Changes resulting from the process of assembling and completing the audit file
a. The final audit file should be completed on a timely basis, but not later than 60 days after the
auditor’s report date (this is referred to as the documentation completion date)
b. At any time prior to the documentation completion date the auditor may make changes in the
audit documentation to
(1) Complete the documentation and assembly of audit evidence obtained, discussed and
agreed with relevant member of the audit team prior to the date of the auditor’s report
(2) Perform routine file-assembling procedures such as deleting or discarding superseded
documentation, and sorting, collating, and cross-referencing final working papers
(3) Signing off file completion checklists
(4) Add information received after audit report date (e.g., a confirmation that was previously
faxed)
4. Changes after the documentation completion date
a. After the documentation completion date, the auditor must not delete or discard audit
documentation before the end of the specified retention period.
b. When the auditor finds it necessary to make an addition (including amendments) to audit
documentation after the documentation completion date the auditor should document the addition
as
(1) When and by whom such changes were made and (where applicable) reviewed
(2) The specific reasons for the changes
(3) The effect, if any, of the change on the auditor’s conclusions
8. Ownership and confidentiality of audit documentation
1. Audit documentation is property of the auditor
a. Should be retained for a period of time sufficient to meet the auditor’s needs and to satisfy
applicable legal and regulatory requirements
b. Ordinarily not expected to be retained for less than 10 years
2. The auditor should apply appropriate and reasonable controls for audit documentation to
a. Clearly determine when and by whom audit documentation was created, changed or reviewed
b. Protect integrity of information at all stages of the audit
c. Prevent unauthorized changes
d. Allow access to audit team and other authorized parties
Working Paper Files
Working papers remain in the custody, and are the property of the auditor. Accordingly, the auditor
is prohibited by the Philippine Accountancy Act of 2004 from disclosing any information contained therein
without the client and the auditor. The only time anyone else has a legal right to examine files is when
they are subpoenaed by a court as legal evidence. Although portions of or extracts from the working
papers may be made available to the client at the discretion of the auditor, they are not a substitute for
the client’s accounting records.
Auditors retain a set of working papers for each audit engagement for each year. The working papers for
the current year are referred to as the current working papers. Working papers that are relevant to
more than one audit engagement are often kept separately in a file referred to as permanent working
papers. These two categories of audit working papers can be classified to facilitate compilation and easy
reference, to wit:
Permanent Files – normally contain information that the auditor will use on the engagement in both the
current and future years and may include:
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Information concerning the legal and organizational structure of the entity such as the articles of
incorporation and by laws
Extracts or copies of minutes and important legal documents and agreements such as bond
indentures, pension plans, leases, stock options, contracts, etc.
Information concerning the industry, economic environment and legislative environment within
which the entity operates
Information related to the understanding of internal control and assessment of control risk;
organization charts, flowcharts, questionnaires and other internal control information
Copies of communications with other auditors, experts and other third parties
Copies of letters or notes concerning audit matters communicated to or discussed with the entity,
including the terms of the engagement or discussed with the entity, including the material
weaknesses in internal control
Analysis from previous years, of accounts that have continuing importance to the auditors; longterm debt, stockholders’ equity, goodwill, property, plant and equipment.
The results of analytical procedures from previous years’ audits
Current Files – include all audit documentation applicable to the period under audit, such as:
1. Audit program – describes how the audit approach is to be implemented. Auditors develop an
audit program for each material account balance or account balance assertion. An audit program
describes what and how much evidence is required to be gathered and evaluated, and how,
when and by whom it is to be gathered and evaluated during the interim and final visits. The
audit program is ordinarily maintained in a separate file to improve the coordination and
integration of all parts of the audit.
2. General information – which are of a general nature rather than designed to support specific
financial statement amounts; audit planning memos, abstract or copies of minutes of meetings
not included in permanent file, notes on discussions with the client, supervisor’s review
comments, and general conclusions.
3. Working trial balance – represents a listing of ending balance in the entire client’s accounts prior
to preparing adjusting and reclassification of journal entries and contains the following
information:
 Reference to assembly sheets and lead schedules
 Current year’s ending balances (per client)
 Reference for adjustments/reclassifications
 Adjustments/reclassifications
 Current year’s financial statement balances (per audit)
 Prior year’s ending balances
4. Assembly sheets or Lead schedules – summarize the major components of the account
balance or class of transactions in support of financial statement item such as Cash and cash
equivalents, Inventories and Property, plant and equipment
5. Adjusting and reclassification entries – documentation for the adjustment and reclassifications
identified by the auditor or client. Adjustments are made to correct errors while reclassifications
are made to properly present information in the financial statements. Reclassification entries are
not posted in the client’s records.
6. Audit memoranda – much of the auditor’s work is documented in written memoranda including
discussions of items such as internal controls, inventory observation, errors identified, and
problems encountered in the audit.
7. Supporting schedules – comprise the largest portion of audit documentation that are prepared
by the client or the auditor in support of specific amounts on the financial statements, which
include:
 Analysis – designed to show the activity in a general ledger account during the entire
period under audit, tying together the beginning and ending balances. Examples:
marketable securities, notes receivable, allowance for doubtful accounts, property, plant
and equipment, long-term debt and all equity accounts.
 Trial balance or list – consist of the details that make up a year-end balance of a
general account. Examples: trial balance or lists in support of trade accounts receivable,
trace accounts payable, repairs and maintenance expense, legal expense and
miscellaneous expense.
 Reconciliation of amounts – supports a specific amount and is normally expected to tie
the amount recorded in the client’s records to another source of information. Examples:
bank balances with bank statements, subsidiary accounts receivable balance with
confirmations from customers, and accounts payable balances with vendors’ statements.
 Tests of reasonableness - contains information that enables the auditor to evaluate
whether the client’s balance appears to include a misstatement considering the
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circumstances of the engagement. Examples: depreciation expense, interest expense
or finance cost, and allowance for doubtful accounts.
 Summary of procedures – summarizes the result of a specific audit procedure
performed. Examples: results of accounts receivable confirmation and summary of
physical inventory observation.
 Examination of supporting documents – show the detailed tests performed such as
examination of documents during cut offs, tests of controls and substantive tests of
transactions. These schedules show no totals and they do not tie in to the general ledger
balance because they document only the tests performed and the results found.
 Informational – contains information as opposed to evidence such as tax returns, time
budgets and client’s working hours.
 Outside documentation – although not “schedules” in the real sense, they are indexed
and interfiled and procedures are indicated in them such as confirmation replies from
banks customers.
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