AUDIT DOCUMENTATION

PSA 230 (REDRAFTED) AUDIT DOCUMENTATION

Glossary of Terms• Audit Documentation/ Working Papers/ Work Papers-

means the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached.

• Audit File- means 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.

• Experienced auditor- means an individual who has practical audit experience, and a reasonable understanding of audit processes, PSAs and applicable legal and regulatory requirements, the business environments of its client and auditing and financial reporting issues relevant to the entity’s industry.

Nature of Audit Documentation

PSA 230 Para. 2 requires that 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.

(b) Evidence that the audit was performed in accordance with PSAs and applicable legal and regulatory requirements.

Objective of Audit Documentation

The primary objective of audit documentation is preparing sufficient and appropriate audit 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.

Other objective of audit documentation:(PSA 230 Para. 2)

a. Assisting the engagement team to plan and perform the audit

b. Assisting the members of the team responsible for supervision to direct and supervise the audit works and to discharge the review in accordance with PSA 220 (Redrafted).

c. Enabling the team to be accountable for its work.d. Retaining a record of matters of continuing significance of

future audits.e. Enabling the conduct of quality control reviews and

inspections in accordance with PSQC 1 (Redrafted)f. Enabling the conduct of external inspections in accordance

with applicable legal, regulatory or other requirements

Form, Content and Extent of Audit Documentation

Factors affecting the form and content of audit documentation: (PSA 230 para A2)

• 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• The need to document a conclusion not readily

determinable from the documentation of the work performed or audit evidence obtained.

• The audit methodology and tools used.

Examples of Audit Documentation: (PSA 230 para. A3)

• Audit programs.• Analyses.• Issues memoranda.• Summaries of significant matters.• Letters of confirmation and representation.• Checklists.• Correspondence (including e-mail) concerning

significant matters.• Copies of the entity’s records such as specific

contracts and agreements

PSA 230 para A4The auditor need not include in audit documentation

superseded drafts of working papers and financial statements, notes that reflect incomplete or preliminary thinking, previous copies of documents corrected for typographical or other errors, and duplicates of documents.

PSA 230 PARA A5Oral explanations by the auditor, on their own, do not

represent adequate support 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.

PSA 230 para A7Audit documentation provides evidence that the audit

complies with the PSAs. However, it is neither necessary nor practicable for the auditor to document every matter considered, or professional judgment made, in an audit.

For example:• The existence of an adequately documented audit

plan demonstrates that the auditor has planned the audit.

• The existence of a signed engagement letter in the audit file demonstrates that the auditor has agreed the terms of the audit engagement with management or, where appropriate, those charged with governance.

• An auditor’s report containing an appropriately qualified opinion demonstrates that the auditor has complied with the requirement to express a qualified opinion under the circumstances specified in the PSAs.

• In relation to requirements that apply generally throughout the audit, there may be a number of ways in which compliance with them may be demonstrated within the audit file:

> No single way in which the auditor’s professional skepticism is documented. But the audit documentation may nevertheless provide evidence of the auditor’s exercise of professional skepticism in accordance with the PSAs. Such evidence may include specific procedures performed to corroborate management’s responses to the auditor’s inquiries.

>Similarly, that the engagement partner has taken responsibility for the direction, supervision and performance of the audit in compliance with the PSAs may be evidenced in a number of ways within the audit documentation. This may include documentation of the engagement partner’s timely involvement in aspects of the audit, such as participation in the team discussions required by PSA 315 (Redrafted).3

The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand: (PSA 230 para. 8)

(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 preformed, and the audit evidence obtained

(c) Significant matters arising during the audit, the conclusions reached and the professional judgement made in reaching those conclusions.

In documenting the nature, timing and extent of audit procedures performed, the auditor shall record: (PSA 230 para 9)

(a) The identifying characteristics of the specific items or matters tested

(b) Who performed the audit and the date such work was completed

(c) Who reviewed the audit work performed and the date and extent of such review

Identifying will vary with the nature of the audit procedure, the item tested. For example: (PSA 230 para. A12)

• For a detailed test of entity-generated purchase orders, the auditor may identify the documents selected for testing by their dates and unique purchase order numbers.

• For a procedure requiring selection or review of all items over a specific amount from a given population, the auditor may record the scope of the procedure and identify the population.

• For a procedure requiring systematic sampling from a population of documents, the auditor may identify the documents selected by recording their source, the starting point and the sampling interval.

• For a procedure requiring inquiries of specific entity personnel, the auditor may record the dates of the inquiries and the names and job designations of the entity personnel.

• For an observation procedure, the auditor may record the process of matter being observed, the relevant individuals, their respective responsibilities, and where and when the observation was carried out.

PSA 230 para 10The auditor shall document discussions of

significant matters with management, those charged with governance, and others, including the nature of the significant matters discussed and when and with whom the discussions took place.

Minutes of meetings prepared by entity’s personnel and agreed by the auditor.

PSA 230 para 11

• 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.

PSA 230 para 12

• If, in exceptional circumstances, the auditor judges it necessary to depart from a relevant requirement in a PSA, the auditor shall document how the alternative audit procedures performed achieve the aim of that requirement, and the reasons for the departure.

PSA 230 para 13If, in exceptional circumstances, the auditor performs

new or additional audit procedures or draws new conclusions after the date of the auditor’s report, the auditor shall document:

• (a) The circumstances encountered;• (b) The new or additional audit procedures

performed, audit evidence obtained, and conclusions reached, and their effect on the auditor’s report.

• (c) When and by whom the resulting changes to audit documentation were made and reviewed.

PSA 230 para 14• 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. (Ref: Para. A21-A22)>>> appropriate time is not more than 60 days after

the date of the auditor’s report.>>>the completion of the audit file does not involve

performance of new audit procedures which are not administrative in nature. However changes that are administrative in nature may be made.

Exmaples of changes that are administrative in nature:

• Deleting or discarding superseded documentation.• Sorting, collating and cross-referencing working

papers.• Signing off on completion checklists relating to the

file assembly process.• 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.

PSA 230 para 15• 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.

>>The retention period for audit engagements ordinarily is no shorter than five years from the date of the auditor’s report, or, if later, the date of the group auditor’s report.

PSA 230 para 16In circumstances other than those engaged in PSA

paragraph 13 where the auditor finds it 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:

• (a) The specific reasons for making them; and• (b) When and by whom they were made and

reviewed.

Types of Working Papers

• Audit administrative working papers– Working papers designed to aid the auditors in planning and

administration of engagements.– Includes audit plans and programs, internal control questionnaires

and flowcharts, engagements letters and time budgets.

• Working trial balance and lead schedule– The backbone of the working papers which contains a list of accounts

in the clients general ledger with columns that, as a minimum include unadjusted amounts directly from the clients accounting records, proposed adjusting entries and adjusted amounts.

• Supporting schedules and analysis– Support schedules are detailed schedules prepared by the auditor in

support of specific amounts in the financial statements.– Account Analysis shows the activity during the period in a particular

balance sheet account.

• 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.

– Reclassifying entries are made in the statements to present accounting information properly, even when the general balances are correct.

• Audit memoranda and documentation of corroborating information– Audit notes used to note items of work to be done that cannot be

completed by following the usual sequence of audit procedures. This is also used to record questions concerning the audit investigation.

– Outside Documentation comprises most of the content of the working papers such as confirmation replies and copies of client agreements.

Audit Administrative Working Papers• Audit Program– a detailed list of procedures that the auditor

believes are– It executesnecessary to accomplish the audit

objectives. the audit strategy.– Because of the changes in conditions or

unexpected results of audit procedures audit programs must be revised as necessary during the course of the audit and the reason for such significant changes must be recorded.

Purpose of the Audit Program• It serves as a procedural guide during the

course of the audit.• It serves as a basis in dividing the audit work

among staff members.• It serves as a basis of reviewing progress of

audit work.• It enables the auditor to ensure that the

program designed to substantiated amounts appearing in the accounts and related notes have covered all material aspects thereof.

A well designed audit program provides evidence of:

• Proper planning including assurance that important steps were not overlooked.

• Coordination and monitoring the audit work.• Proper supervision and review of the audit

work• Completion of all audit steps.• Compliance with the standards in performing

an audit.

Types of audit programs

1. Standard all-purpose audit program-List stadard practices applicable to almost every engagement

2. Tailor- made audit program-List the procedures to be followed on a specific audit

engagement, indicating any departure from normal practices and specifying the extent of the tests of transactions.

3. Modified standard form audit program-a preprinted program that outlines the usual audit

procedures common to most businesses with a space for an auditor to indicate other specific procedures applicable to the business under examination.

Working Trial Balance and Lead Schedules

Working trial balance…• Provides an overall index of the working

papers• Aids in controlling and reviewing the

examination as it progresses• Serves as the base for accumulating and

arranging account balances for financial statement presentation

Types of working trial balance

• AWorking Trial Balance in One Section- 10 column worksheet with headings provided

for the following:1. Trial balance- current yr. (Dr; Cr)2. Audit adjustments (Dr; Cr)3. Income statement (Dr; Cr)4. Balance sheet (Dr; Cr)5. Adj. Trial Balance- end of previous yr. (Dr; Cr)

• Working Trial Balance in 2 sections- 8 column worksheet divided into 2 sections

segregating the balances sheet accounts from the income statement accounts with each section being balances separately

• Working Trial Balance in4 sections- 8 column worksheet where the balance sheet

section is divided into 2 parts, one for assets and the other for equities while the income statement section is divided into profit and loss credits section and the profit or loss debits section.

• Working Trial Balance in Multiple Sections-8 column worksheet where the trial balance sectionalized into significant groupings of distinct elements of financial position and results of operations.

Lead or Top Schedule- This is a working paper that shows the

grouping of related account balances.- It supports each line on the trial balance,

containing the detailed accounts from the general ledger making up the line item total.

Relationships of working papers to financial statements

Working Paper Files

• Current Audit File-These are files that contains all papers

accumulated during the current years examination that is designed to support the assertion embodied in the financial statements

Working paper files normally included in the current file are:1. Original draft of the report

a. The financial statementsb. Draft of the auditor’s reportc. Draft of income tax return

1. Audit plan and programs2. Working trial balance3. Adjusting and reclassifying journal entries4. Lead and supporting schedules5. General information, such as

a. Abstract or copies of minutes of the board of director’s meetingsb. Abstracts of contracts or agreements not included in the permanent filesc. Notes on discussions with the clientd. Notes about impressions of the form of the client’s office and plant

• Permanent Files- Working papers in permanent files contain

information of continuing interest to the auditor.

- These are intended to contain data of historical or continuing nature pertinent to the current examination.

- These files provide a convenient source on information about the audits that is of continuing use from year to year.

Permanent files typically includes:1. Excerpts of the corporate charter or articles of co partnership/ by laws2. Analysis of business industry3. Copies of contracts (that affect future periods)4. Chart of accounts and accounting procedure manuals5. Flowcharts and notes on the accounting system and related controls

from prior examination6. Continuing analyses of fixed assets7. Organization charts and excerpts from job manuals8. Terms of capital stock and bond issues9. Results of analytical procedures from previous years audit10. Excerpts from minutes of meeting11. Labour management agreement12. Information concerning related parties13. Description of complex business transactions and/or unique accounting

treatments14. Copies of pension plans, stock option plans and employee bonus and

profit sharing plans.

Other files maintained:• Tax Files- Contains information relevant to a client’s current

and past income tax and other business tax obligations that serve as basis for preparing current year’s return and performing other tax- related services like…- Amending prior years returns- Representing the client’s tax assessment case

• Correspondence File- Contains correspondence of letters from or in

behalf of client.

Qualities of good working papers:• It should be complete in itself and should not

require subsequent or additional oral explanation• It should be factual, accurate and free from

clerical and/ or computational errors.• It should clearly indicate the nature and extent of

audit work performed• It should be concise and limited only to essentials• It should be prepared in a neat ad orderly manner

to facilitate review of work done.

Working papers in general should provide:

• Evidence of compliance with the standards of auditing• Sufficient data to demonstrate that the financial

statements or other information being reported on by the auditor were in agreement or reconciled being with the client’s records

• Clear indication of the work perfromed. This may require:1. Writing a memorandum2. Initializing the appropriate steps in audit programs3. Making notations called tick marks directly on the working

papers and explaining the notations• Indication as to how the auditor resolved any exception or

unsual matter disclosed by his examination.• Appropriate connections of the auditor on significant

aspects of the engagement.

Ownership and custody of working paperThe Philippines Accountancy Act of 2004, Section 29

“All working papers, schedules and memoranda made by a certified public accountant in public practice 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 certified public accountant, except reports submitted by a certified public accountant to a client shall be treated confidential and privilege and remain the property of such certified public accountant in the absence of a written agreement between the certified public accountant 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.”

Confidentiality of Working Papers• PSA 230 (Redrafted) requires the auditor to adopt

appropriate procedure 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 records retention.

• The retention period for audit engagements ordinarily is no shorter than five years from the date of the auditor’s report, or, if later, the date of the group auditor’s report

Rules to be observed in relation to CPAs observance of confidentiality of information:

• 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 legal or professional right o duty to disclose.

• Using confidential information acquired as a result of professional and business relationships to their advantage or the advantage of third parties.

• A professional accountant should maintain confidentiality even in a social environment. Must be careful of inadvertent disclosure, particularly in circumstances involving long association with business associate or a close or immediate family member.

• A professional accountant should also maintain confidentiality of information disclosed by a prospective client or employer.

• A professional accountant should also consider the need to maintain confidentiality of information within the firm or employing organinization.

• A professional accountant should take all reasonable steps to ensure that staff under his control and persons from whom advice and assistance is obtained respect the professional accountant’s duty of confidentiality.

• The need to comply w/ the principle of confidentiality continues even after the end of relationships between a professional accountant and a client or employer.

Circumstances where professional accountants are or may be required to disclosed confidential information or when such disclosure may be appropriate:

• Disclosure is permitted by law

• Disclosure is required by law– Production of documents or other provision of

evidence in the course of legal proceedings– Disclosure to the appropriate public authorities of

infringements of the law that come to light

• There is a professional duty or right to disclose, when not prohibited by law:– To comply with the quality review of a member

body or professional body– To respond to an inquiry or investigation by a

member body or regulatory body– To protect the professional interests of a

professional accountant in legal proceedings – To comply with technical standards and ethics

requirements

Points to consider in deciding whether to disclose confidential information:• 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 judgement should 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. Addressed to the appropriate recipient.