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Documentation
| by Kim Smith 01 Sep 1999 |
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This article deals with the audit working papers from both theoretical and practical perspectives. The following extracts from the paper 6 Audit Framework syllabus clearly show that audit working papers are examinable:
This article sets out the requirements of the relevant statements of auditing standards and some of the practicalities of preparing working papers. Auditing standards The relevant standards are ISA 230 Documentation and SAS 230 Working Papers. There are no significant differences between them. Both deal with:
Terminology `Documentation' or `working papers' means the material prepared or obtained and retained by the auditor in performing the audit. It may be in the form of data stored on paper, film, electronic or other media. Importance According to the Standards the need for documentation is twofold:
Documentation also provides guidance for planning future audits and for familiarising new staff, thereby saving time and cost. It is clearly of great importance that working papers should record facts as they are known at the time decisions are taken or conclusions reached in the event of any subsequent challenge or enquiry. Contents In summary, working papers provide a record of: (a) planning and performance of the audit (including the nature, timing and extent of audit procedures); (b) supervision and review of audit work; (c) audit evidence (including oral representations) obtained to support the audit opinion (including conclusions drawn). Extent Although documentation needs to be sufficiently complete and detailed, its extent is a matter of professional judgement. It is unnecessary and impractical to document every consideration. As a guide, an experienced auditor with no previous connection with the audit should at least be able to gain an understanding of the work performed and the basis of any decisions taken. Form and content The form and content of documentation is affected by matters such as:
Client's schedules Schedules, analyses and other documentation prepared by the entity, should be clearly distinguished from those prepared by audit staff, for example by heading them `PBC' (i.e., prepared by client). The auditor must confirm that a client's schedules are properly prepared and document the extent to which they have been checked. For example, agreeing balances extracted to ledger accounts and casting totals. Standardisation It is common practice for audit firms to use standard pre-printed documentation on audit engagements. For example:
Advantages of standardisation
Disadvantages of standardisation
Permanent Audit Files (PAF) and Current Audit Files (CAF) For recurring audit engagements it is usual for documentation which is of continuing importance (i.e., `permanent') to be filed separately from information relating primarily to the audit of a single period (i.e., `current'). General correspondence files are also likely to be maintained for each client although the engagement letter, management (weakness) letter and letters providing evidence (such as the bank report for audit purposes and management representation letter) will be filed on the current audit file. Permanent audit file — typical contents
Current audit file — typical contents
For larger clients Current files may be subdivided into `interim visit' and `final audit' and systems documentation may be held on a separate `systems' file. Separate files may also be set up for specific audit areas (e.g., inventory). Confidentiality, safe custody, retention and ownership General principles The standards only set out the general principles, being:
The standards do not suggest:
However, guidance can be found in the ACCA's Rules of Professional Conduct in the statements concerning professional duty of confidence and retention of books, etc. Considerations for retention
Determination of ownership The primary consideration is the contract with the client as agreed and evidenced in the engagement letter. If there is no specific agreement consider:
When accounting records are prepared for the client, they belong to the client. When financial statements are prepared from a client's records, they belong to the client. However, the drafts of financial statements will belong to the accounting firm (unless the client has asked that such drafts be prepared as a `product'). Security of working papers Practical procedures include locked fireproof cabinets or rooms and the use of physical keys and logical passwords. Electronic documentation may be particularly susceptible to corruption or loss and should be backed up. Planning documentation The `overall audit plan' describes the expected scope and conduct of the audit, whereas an `audit program' sets out the nature, timing and extent of the audit procedures. Audit program Features:
Documentation techniques (1) Narrative notes — written descriptions require little formal training and are best suited to small, simple systems descriptions or to explain peripheral aspects of larger systems not dealt with by other techniques (e.g., the issue of credit notes). (2) Flowcharts — visual descriptions highlight controls and are easy to understand by a trained user. However, different audit firms and their clients use different types (e.g., documentation flowcharts, information flowcharts and overview flowcharts). (3) Questionnaires — internal control questionnaires (ICQs) are designed to indicate which parts of a system are strong or weak and so make a preliminary assessment of the extent to which the auditor seeks to place reliance (if any) on internal controls. The form and extent of this documentation is influenced by such factors as:
General principles The standards offer little practical guidance in this area, apart from requiring that working papers show who carried out the audit procedures and when and by whom they were reviewed. It is therefore usual for audit firms to set out their own minimum standards. Layout is important because details need to be readily apparent to the reviewer. For example:
Particular audit firms may also specify that schedules should be prepared only in ink (not pencil) and that liquid paper should not be used to obliterate original figures. Indexing Audit firms may use standard indices for both permanent and current audit files. These are usually tailored, for example, by circling the references used. Figure 2 shows an example of a standard referencing system for current audit files. Alternative referencing systems might include separate sections for interim audit working papers, systems work, or analytical procedures. Audit ticks Audit ticks are the symbols, referenced to a key, which evidence a test having been performed. Some firms have standardised ticks to ensure consistency between audits and to ease the review process. For example: ß = agreement of a balance extracted from a ledger ^ = cast checked and agreed c/c = cross-cast checked and agreed
Ticks (e.g.ü) may be put in front of or after numbers to indicate that they have been traced from a particular source or record or to another. Reverse and upside-down ticks can similarly be used. The use of audit ticks on an auditor-prepared working paper is illustrated in Figure 3. Ticks may also be made in the client's books and on the client's documentation. Audit trail A definition —
The audit trail may also be called an information trail as it provides links between information in documents and records and provides the means by which recorded transactions can be traced back to their source. In paper 5 Information Analysis, the term is used to mean the record of significant data about each transaction. For example: audit record, user and terminal identifications, the time and date of the transaction, transaction type (e.g., despatch), quantities and values, cross-references to related transactions (e.g., invoice). Tracing transactions through a computer system facilitates testing during project development. Lead schedule These show how figures in the financial statements (including corresponding amounts) are made up from general (also called nominal) ledger account balances. The total agrees to the financial statements and the make-up is cross-referenced to supporting schedules. All supporting schedules are filed in logical sequence behind the lead schedule and cross-referenced to it.
(b) Describe the reasons why auditors use working papers to record their work and consider whether it is necessary for auditors to record all their audit work. (4 marks) Points to note (a) (i) calls for a `text book' answer. Be very careful not to over-run on the time allocation. Part (a) is only to be allocated 18 minutes of exam time in total. (ii) is not about advantages and disadvantages of standardised working papers in general but, more specifically, the standard organisation of working papers. (Take care always to READ THE QUESTION set.) (iii)although examples of checklists and specimen letters are referred to in the auditing standards on documentation, they are not described there. You therefore have to draw more widely on your knowledge. For example, in describing specimen letters, you have to demonstrate an understanding of the distinction between engagement letters, weakness letters and representation letters (say). (b) firstly calls for a text book answer (`why auditors record their work') but raises a second issue — whether ALL audit work should be recorded. Again, read the question set. Conclusion This article has reviewed the basic principles and essential procedures relating to documentation. You should now be able to:
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