Audit Documentation PDF

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A summary for the rules on the auditor's report....

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Audit Documentation (PSA 230) I. Definition of Terms Audit Documentation – the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached. This is synonymous to “work papers” and “working papers”. The auditor should prepare on a timely basis, audit documentation that provides: a) A sufficient and appropriate record of the basis for the auditor’s report, and; b) Evidence that the audit was performed in accordance with PSAs and applicable legal and regulatory requirements. Audit file – one of more folders or other storage media, in physical or electronic form, containing the record that comprise the audit documentation for a specific engagement. Experienced auditor – an individual (whether internal or external to the firm) who has practical audit experience, and a reasonable understanding of: a) audit process; b) PSAs and applicable legal and regulatory framework; c) the business environment in which the entity operates, and; d) auditing and financial reporting issues relevant to the entity’s industry.

II. Nature of Audit Documentation Audit working papers – records kept by the auditors of the procedures applied, the test performed, the information obtained and the pertinent conclusions reached in the engagement. They represent the documentation of audit evidence collected and evaluated.

III. Objectives of Audit Documentation Primary objectives 1. To prepare sufficient and appropriate documentation on a timely basis to help enhance the quality of the audit and to facilitate the effective review and evaluation of the audit evidence obtained and conclusions reached before the auditor’s report is finalized. 2. To support the auditor’s opinion on financial statements and to support the auditor’s representation as to compliance with PSAs. 3. To assist the auditor in the planning, performance, review, and supervision of the engagement. 4. The auditor shall prepare audit documentation that is sufficient to enable the subsequent inexperienced auditor or 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 PSAs and applicable legal and regulatory requirements;

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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.

Secondary objectives: 1. Assisting the engagement team to plan and perform the audit. 2. Assisting members of the engagement team responsible for supervision to direct and supervise the audit work, and to discharge their review responsibilities in accordance with PSA 220 (Clarified). 3. Enabling the engagement team to be accountable for its work. 4. Retaining a record of matters of continuing significance to future audits. 5. Enabling the conduct of quality control reviews and inspections in accordance with PSQC 1 (Clarified). 6. Enabling the conduct of external inspections in accordance with the applicable legal, and regulatory, or other requirements. 7. Assisting the auditor in planning future audits, providing information useful in rendering other services and providing adequate defense in case of litigation.

IV. Form, Content and Extent of Audit Documentation Factors to consider in the form, content, and extent of audit documentation: 1. The size and complexity of the entity. 2. The nature of the audit procedures to be performed. 3. The identified risks of material misstatement. 4. The significance of the audit evidence obtained. 5. The nature and extent of exceptions identified. 6. The need to document a conclusion of the basis for a conclusion not readily determinable of the work performed or audit evidence obtained. 7. The audit methodology and tools used. It is neither necessary nor practical to document every matter the auditor considers during the audit. Oral explanations however, while they do not represent adequate support for the work that auditor performed or conclusions the auditor reached, may be used to explain or clarify information contained in the audit documentation. In documenting the nature, timing, and extent of audit procedures performed, the auditor shall record: Page 2 of 7 Salanguit | CEU | Auditing Theory | AY 2018-2019

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. The person who reviewed the audit work performed and the date and extent of such review.

V. Types of Working Paper General categories in which most working papers may be grouped as follows: 1. Audit administrative working papers 2. Working trial balance and lead schedule 3. Supporting schedules and analysis 4. Adjusting entries and reclassifying entries 5. Audit memoranda and documentation of corroborating information Audit Administrative Working Papers These are designed to aid the auditors in the planning and administration of engagements. These include audit plans and programs, internal control questionnaires and flowcharts, engagement letter, and time budgets. Working Trial Balance and Lead Schedule The trial balance is the list of the accounts in the client’s general ledger with columns that, as a minimum include unadjusted amounts directly from the clients accounting records, proposed adjusting entries, and adjusted (audited amounts). The lead schedule is a working paper that shows the grouping of related account and balances. Supporting Schedules and Analysis Supporting schedules are the detailed schedules prepared by the auditors in support of specific amounts in the financial statements while an account analysis working paper shows the activity during the period in a particular statement of financial position account. Summary of Adjusting and Reclassifying Entries Adjusting entries are corrections of material errors in the accounting records discovered by the auditor. These entries must be approved by the client first because management has the primary responsibility for the fair presentation of the statement. Reclassification of entries, on the other hand, are made in the statements to present accounting information properly, even when the general ledger balances are correct. Audit Notes or Memoranda and Documentation of Corroborating Information Audit notes are the working papers used to note items of the work to be done that cannot be completed by following the usual sequence of audit procedures. Documents that are outside the documentation of the auditor such as confirmation replies, copies of client arrangements, etc. are indexed and interfiled and procedures are indicated on them in the same manner as on the other schedule. Page 3 of 7 Salanguit | CEU | Auditing Theory | AY 2018-2019

VI. Working Paper Files Current Audit File – The current year working paper file is designed to support the assertions embodied in the financial statements. The file contains all papers accumulated during the current year’s examination. Permanent File – Working papers in permanent files contain information of continuing interest to the auditor. These are intended to contain data of a historical or continuing nature pertinent to the current examination. These files provide a convenient source of information about the audit that is of continuing use from year to year. VII. Mechanics and Guidelines of Working Paper Preparation Qualities of a good working paper – Every working paper should: 1. be complete in itself and should not require subsequent of additional oral explanation. 2. be factual, accurate, and free from clerical and/or computational errors. 3. Clearly indicate the nature and extent of audit work performed. 4. be concise and limited only to essentials 5. be prepared in a neat and orderly manner to facilitate review of work done. Working papers in general should provide: 1. Evidence of compliance with the standards of auditing. 2. Sufficient data to demonstrate that the financial statements or other information being reported on by the auditor were in agreement or reconciled with the client’s records. 3. Clear indication of the work performed. This may require 1) writing a memorandum; 2) initializing the appropriate steps in the audit program, or 3) making notations called tick marks directly on the working papers and explaining the notations. 4. Indication as to how the auditor resolved any exception or unusual matter disclosed by his examination. 5. Appropriate corrections of the auditor on significant aspects of the engagement. Guidelines for the Preparation of Working Papers Working papers should be properly organized to facilitate their review. The following techniques may be used by the auditor when preparing working papers. 1. Heading – Each working paper must be properly identified with such information as the name of the client, type of working paper, description of its content, and the date or period covered by the examination 2. Indexing – Indexing refers to the use of lettering or numbering system. Each working paper must be indexed to aid in cross-referencing essential information. Page 4 of 7 Salanguit | CEU | Auditing Theory | AY 2018-2019

3. Cross-indexing/cross-referencing – To provide a trail useful to supervisors in reviewing the working papers. 4. Tick marks – Working papers must include symbols that describe the auditor procedures performed. Assembly of Final Working File The auditor shall assemble the audit documentation in an audit file and complete the administrative process of assembling the final audit file on a timely basis after the date of the auditor’s report. The assembly of the final audit file is only administrative in nature and does not require the auditor to perform additional audit procedure or draw new conclusions. The completion of this administrative process is to be completed on a timely bases not later than 60 days after the date of the auditor’s report. Modification and Addition to Audit Documentation In circumstances other than those mentioned in paragraph 13 of PSA 230 (Clarified)* where the auditor finds its necessary 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: 1. The specific reasons for making them; and 2. When and by whom they were made and reviewed.

VIII. Ownership and Retention of Audit Documentation Working papers are the property of the auditor and the client has no right to the working papers prepared by the auditor. Working papers may sometimes serve as the reference source for the client (at the discretion of the auditor) but they should not be considered as part or as substitute for the client’s records (See Section 29 of the Philippine Accountancy Act of 2004). 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. Working papers are to be retained by the auditor for a period of time sufficient to meet the needs of his practice and to satisfy any pertinent legal requirements of record retention. The retention period for audit engagement must be at least 5 years from the date of the auditor’s report. However, Securities Regulations Code No. 68 of the SEC requires that audit working papers be kept for at least 7 years.

IX. Confidentiality of Working Papers Although the working papers are the personal property of the auditor, they cannot be shown to third parties without the client’s permission. The Philippine Code of Professional Ethics requires the CPA to respect the confidentiality of information obtained in the course of performing professional services. However, the duty confidentiality may be overridden by laws. For example, the auditor can disclose confidential information to third parties even without the client’s consent under the following circumstances:

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1. When disclosure is required by law or when the working papers are subpoenaed by a court. 2. When there is a professional right to disclose information such as when the auditor uses his working paper to defend himself when sued by his client for negligence. 3. When the profession requires like the review of quality of audit conducted by the Board of Accountancy for the purpose of evaluating whether to grant a practitioner accreditation to practice public accountancy. In addition, the rules on confidentiality that should be observed by CPAs under Section 140 of the Revised Code of Ethics for Professional Accountants in the Philippines are quoted below: 140.1 The principle of confidentiality imposes an obligation on all professional accountants to refrain from: (a) Disclosing outside the firm or employing organization confidential information acquired as a result of professional and business relationships without proper and specific authority or unless there is a legal or professional right or duty to disclose; and (b) Using confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties. 140.2 A professional accountant shall maintain confidentiality, including in a social environment, being alert to the possibility of inadvertent disclosure, particularly to a close business associate or a close or immediate family member. 140.3 A professional accountant shall maintain confidentiality of information disclosed by a prospective client or employer. 140.4 A professional accountant shall maintain confidentiality of information within the firm or employing organization. 140.5 A professional accountant shall take reasonable steps to ensure that staff under the professional accountant’s control and persons from whom advice and assistance is obtained respect the professional accountant’s duty of confidentiality. 140.6 The need to comply with the principle of confidentiality continues even after the end of relationships between a professional accountant and a client or employer. When a professional accountant changes employment or acquires a new client, the professional accountant is entitled to use prior experience. The professional accountant shall not, however, use or disclose any confidential information either acquired or received as a result of a professional or business relationship. 140.7 The following are circumstances where professional accountants are or may be required to disclose confidential information or when such disclosure may be appropriate: (a) Disclosure is permitted by law and is authorized by the client or the employer; (b) Disclosure is required by law, for example: Page 6 of 7 Salanguit | CEU | Auditing Theory | AY 2018-2019

(i) Production of documents or other provision of evidence in the course of legal proceedings; or (ii) Disclosure to the appropriate public authorities of infringements of the law that come to light; and (c) There is a professional duty or right to disclose, when not prohibited by law: (i) To comply with the quality review of a member body or professional body; (ii) To respond to an inquiry or investigation by a member body or regulatory body; (iii) To protect the professional interests of a professional accountant in legal proceedings; or (iv) To comply with technical standards and ethics requirements. 140.8 In deciding whether to disclose confidential information, relevant factors to consider include: • Whether the interests of all parties, including third parties whose interests may be affected, could be harmed if the client or employer consents to the disclosure of information by the professional accountant. • Whether all the relevant information is known and substantiated, to the extent it is practicable; when the situation involves unsubstantiated facts, incomplete information or unsubstantiated conclusions, professional judgment shall be used in determining the type of disclosure to be made, if any. • The type of communication that is expected and to whom it is addressed. • Whether the parties to whom the communication is addressed are appropriate recipients.

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