Audit Documentation Basics

Transcription

1 Audit Documentation Basics READING MATERIAL 1 I. Purpose of Workpapers 1 A. How Much to Document 1 1. Extent -- Matter of Professional Judgment 1 2. Leave a Trail as a Guide 2 3. Typical Workpapers 2 4. Importance of Clear Conclusions 2 5. Conclude on Financial Statements as a Whole, Not on Individual Audit Areas 2 6. Important Areas to Document 3 7. Significant Issues 3 B. Filing and Indexing 4 1. Index the Files Simply 4 2. Broad Categories of Workpapers 4 3. Common Documentation Across Multiple Engagements 4 4. Obtain Does Not Mean Retain 5 C. Format of Workpapers 5 1. Purpose Section on Each Workpaper is Optional 5 2. Use of Tick Marks 5 3. Organize from General to Specific 5 D. Include Conclusions for Passed Adjusting Entries 6 E. Typical Supporting Schedules 6 1. Cross-Reference Between Inter-Related Accounts 6 2. Consider Documentation of Presentation and Disclosure Testing 6 3. Typical Format for Tests of Details in Workpapers 6 4. Documentation of Specific Items Tested 7 F. Consider Efficiency When Preparing Workpapers 7 G. Workpaper Preparers Have a Duty to Perform Self-Review 8 H. What to do When Clearing Review Notes 9 I. Typical Audit Areas Assigned to New Staff Auditors 9 1. Planning 9 2. Fieldwork 9 3. Reporting and Wrap-Up 9 J. During Fieldwork Locating All of the Information You Need Potential Significant Audit Findings or Issues The Workpaper Review Process Workpaper Documentation 11 LEARNING QUESTIONS 12 HOMEWORK 14 i

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3 Audit Documentation Basics I. Purpose of Workpapers READING MATERIAL Audit documentation is essential to quality audits. The SAS No. 122 Section 230 entitled Audit Documentation requires auditors on every engagement to prepare and maintain audit documentation to provide sufficient appropriate audit evidence to support the auditor s opinion. The form and content of workpapers should be designed to meet the circumstances of the engagement, and also be sufficient to: Provide a clear understanding of the nature, timing, and extent of auditing procedures applied, the results of the auditing procedures, evidence obtained and its source, and conclusions reached; Indicate who performed and reviewed the work and when the work was performed and reviewed; and Show that the accounting records agree or reconcile with the financial statements or other information being reported on. A. How Much to Document The documentation should be sufficiently detailed so that an experienced auditor, with no previous connection to the particular audit, can understand the scope and results of work, the conclusions reached, and that the financial statements agree or reconcile to the underlying accounting records. The workpapers are going to provide the trail of what procedures were done (including sources of information obtained), why procedures were performed, when procedures were performed, and the conclusions reached as the foundation of the auditor s opinion. It is not practicable to document absolutely everything that the auditor encounters, inquires about, etc. Therefore, there needs to be some ability to selectively include audit evidence in the file. 1. Extent -- Matter of Professional Judgment The nature, type, and content of workpapers are largely a matter of professional judgment, although the minimum documentation standards need to be met. The workpapers are crucial to provide information about whether the audit was conducted as planned and whether the financial statements are presented in conformity with the applicable financial reporting framework. Therefore, most CPA firms have specific workpaper policies that are expected to be followed on all engagements to ensure conformity with quality control standards. As a result, there are best practices that are generally followed throughout the profession regarding the types of workpapers prepared, what they look like, how they are filed and indexed, etc. Workpapers consist of anything that the auditor retains to document compliance with professional and regulatory standards. From an audit perspective, the workpapers should accomplish the following: Record the nature and scope of reviews, discussions, testing, and other procedures corroborating the amounts in the financial statements; Record the basis for significant audit findings and conclusions, including actions taken in response; Provide a basis for supervision and review of work performed; and Provide a basis for subsequent period audits. 1

4 2. Leave a Trail as a Guide The goal should be not only to provide information about the current period s audit, but also to leave a trail for subsequent period auditors to use as a guide. Therefore, the workpapers need to be complete and accurate, sufficient to stand on their own without oral explanation. Even the same person who prepared a particular workpaper may have difficulty remembering what was done and why a year or two later. Therefore, it is important that the documentation be complete enough to support the basis for significant findings and conclusions. The nature and extent of documentation depends on factors such as the following: Risk of material misstatement associated with the assertion, or account, or class of transactions; Extent of judgment involved in performing the work and evaluating the results; Nature of the auditing procedure; Significance of the evidence obtained to the assertion being tested; Nature and extent of exceptions identified; and The need to document a conclusion or the basis for a conclusion not readily determinable from the documentation of the work performed. 3. Typical Workpapers Typical workpapers will include the following: Audit programs; Audit checklists; Analysis schedules; Confirmation letters; Copies or abstracts of contracts, meeting minutes, etc.; Correspondence regarding significant issues; and Memos documenting procedures or conclusions. 4. Importance of Clear Conclusions Results of audit procedures should be stated or readily determinable from the documentation of the work performed. While specific conclusions may be documented at the conclusion of each test, explicit conclusions are not required as long as the results of all tests are readily determinable from the documentation of the work performed. If all individual tick marks on a specific workpaper do not indicate any exceptions, then it is reasonable to conclude that the audit objective for that workpaper was met, regardless of a specific conclusion. Even if there was an exception in the testing performed, the documentation of the resulting impact of that exception (e.g., proposed audit adjustment, passed audit adjustment, extended testing) may satisfy the requirement that conclusions are readily determinable. The workpapers that will likely require an explicit conclusion are those related to substantive analytical procedures, estimates, and other areas where there is some level of inherent uncertainty. 5. Conclude on Financial Statements as a Whole, Not on Individual Audit Areas It is important to ensure that conclusions do not overstate the amount of assurance provided by a specific test, where the work is done to provide a basis for an opinion on the financial statements as a whole, and not on each financial statement element, account, or line item. Often, there is insufficient basis to conclude that a specific account balance tested is in conformity with GAAP. 2

5 6. Important Areas to Document The following are examples of important requirements of the auditing standards, which were issued to enhance the strength of audit documentation. Oral explanations on their own do not represent sufficient support for the work the auditor performed or conclusions the auditor reached, but may be used by the auditor to clarify or explain information contained in the audit documentation. Retention of abstracts or copies of significant contracts or agreements that auditors examined to evaluate the accounting for significant transactions is required only if they are needed to enable an experienced auditor to understand the auditor s work and conclusions. The auditor is required to document audit evidence that is being identified as being contradictory or inconsistent with the final conclusions, and how the auditor addressed the contradiction or inconsistency. Documentation may include, but is not limited to, procedures performed in response to the information, and records of documentation consultations on, or resolutions of, differences in professional judgment among members of the engagement team or between the engagement team and others consulted. Therefore, documentation of significant findings or issues should include oral discussions of significant matters with, among others, management and those overseeing the financial reporting process. The auditor is required to document audit misstatements identified by the auditor, whether or not corrected by management. The auditor is required to document the reasons for any departures from statements on auditing standards and the sufficiency of alternative procedures used to achieve the objectives of the requirement. 7. Significant Issues The review of the quality and adequacy of individual tests relies on significant items being brought to the partner s attention for specific consideration. Auditing standards require documentation of significant findings or issues, actions taken to address them, and the basis for the final conclusions reached. Discussions with management about significant issues, including the issue discussed, when and with whom the discussion took place, and management s response should also be documented. The audit documentation trail should include how contradictory or inconsistent information was addressed. Significant issues may include the following: Matters involving the selection, application, and consistency of accounting principles with regard to the financial statements and disclosures (e.g., complex or unusual transactions, estimates and uncertainties, etc.); Results of audit procedures that indicate possible material misstatement; Possible need to revise previously assessed risks of material misstatement and the auditor s responses to those risks; Significant difficulty in applying necessary auditing procedures (e.g., confirmation nonreplies, absence of original documents, etc.); Findings that could result in a modified auditor s report; and Corrections of misstatements identified by the auditor, which could individually or in the aggregate have a material effect on the financial statements (regardless of whether recorded by management or not). 3

6 B. Filing and Indexing The evidence obtained and the results of audit procedures for individual audit areas are documented within specific workpapers or audit programs, fulfilling the specific audit objectives detailed in the various audit programs. The audit evidence obtained supports the lead schedules, which group general ledger accounts into financial statement line items. The lead schedules reference up to the client s final trial balance, which should be traceable to the financial statements. In addition, supporting evidence for footnote disclosures and supplementary information should be retained within the related specific audit area workpapers or within a section of the administrative or report file. All evidence must be sufficient to support the independent auditor s opinion, which means that an independent reviewer should be able to start with the complete set of financial statements and trace all amounts and information to supporting evidence in the audit files. 1. Index the Files Simply Auditing standards require that all documentation for a specific audit be accumulated and assembled in an audit file. Workpapers are generally consecutively indexed, usually using either numbers or letters to designate individual topics (e.g., Section A may be cash, or Section 100 may be cash). Any system that is understandable is acceptable. An overly complex indexing system may make it difficult to follow the workpapers. 2. Broad Categories of Workpapers Workpapers are also usually arranged to show the flow of information from the financial statements to individual account balances or classes of transactions. The decision to place a particular workpaper may vary based on firm preference, but should be consistently applied within a firm. Typically, audit files can be divided into the following large categories: Current files -- Workpapers that support the current year s financial statements and audit opinion, including the trial balance and detail schedules that support specific account balances; Permanent files -- Documents important to each year s audit, but not expected to change significantly from period to period (e.g., lease agreements, debt amortization schedules, policy manuals, extracts of bylaws, key management compensation agreements, etc.); Note: Even if electronic workpapers are used, sometimes the permanent file is still retained in hard copy form. Lead schedules -- Reflect how the financial statement accounts are grouped for financial statement presentation, which assists with applying analytical procedures and ensuring consistency in presentation. 3. Common Documentation Across Multiple Engagements Documentation relevant to multiple engagements does not need to be duplicated in the audit file, but can be cross-referenced to ensure that all relevant audit evidence is appropriately retained. Example scenarios include work performed on a benefit-plan audit that also provides evidence related to the plan sponsor s financial statements, or work performed for subsidiaries managed by a centralized parent company. 4

7 4. Obtain Does Not Mean Retain It is impracticable to copy and include all audit evidence examined. Generally, it is sufficient to refer to the specific client documentation examined rather retaining it in the file. However, copies or abstracts of client records should be included if they would be necessary for an experienced auditor with no previous connection to the audit to understand the work performed and conclusions reached. They also would be required to be retained if a significant piece of audit evidence would not be available for future review during the audit document retention period (generally, a period of five years for non-issuers). Generally, auditors will accumulate much more information than necessary. So, it is important to use professional judgment to revise and refine the workpapers that are ultimately retained. All duplicates, drafts, preliminary conclusions, and other superseded documentation should be purged from the workpapers. However, information should not be removed simply because it is inconsistent with financial statement assertions made by management. C. Format of Workpapers Every workpaper should contain the following information: Heading (including client name, workpaper title, financial statement audit period); Indication of preparation and review (initials of preparer and reviewer and dates, as well as an indication if the schedule was prepared by the client); Note: It is common practice to initial and date each workpaper. However, documentation could also be performed solely on the audit program instead. Source of the information presented (for the benefit of reviewers less familiar with the engagement, and for a trail for the next year s auditor). 1. Purpose Section on Each Workpaper is Optional The purpose of the workpaper is often clear based on the audit program and the workpaper itself. However, it is optional to also include a purpose explanation on each workpaper to ease the review process. 2. Use of Tick Marks Tick marks are a common means of documenting the nature and extent of work performed. Tick marks can efficiently explain procedures used in multiple areas, rather than documenting separately on each workpaper (e.g., using an F for footed, T/B for agreed to trial balance, RC for recalculated, C for confirmed without exception, etc.). Standard tick marks may be explained in a central location in the file. Non-standard tick marks should be clearly explained for the workpaper to be clear. They should be simple and distinctive, so they are easily discerned by the reviewer. With the increased use of technology, colored tick marks can make tick marks even easier to identify. 3. Organize from General to Specific Workpapers usually are organized with the most summarized information in the front, with detailed supporting schedules and information following. Workpapers are generally cross-referenced to show the flow of information as follows: Detailed schedules show the supporting schedules for a specific account balance or class of transactions (e.g., reconciliation to another source, components of a final balance, independent calculation of an estimate, confirmations, extracts of minutes, etc.); 5

8 Lead schedules show how trial balance accounts are grouped for financial statement presentation; Trial balance shows the accumulation of all accounts, used to show that all debits and credits net to zero; Adjusting journal and reclassification entries, including those both posted and waived; and Financial statements show the final presentation. D. Include Conclusions for Passed Adjusting Entries With respect to adjusting journal entries, the auditor is required to aggregate all journal entries proposed by the auditor but not posted by the client to ensure that, taken together, they are not material. The auditor should document the following to support these passed adjustments: Summary of passed adjustments, segregating known and likely misstatements and including the effect of uncorrected misstatements from prior periods; Auditor s conclusion about whether the aggregate materially misstates the financial statements; Basis for that conclusion; and Misstatements identified by the auditor that were corrected by the client. E. Typical Supporting Schedules Most balance sheet accounts have supporting schedules that show the activity in an account for the period of audit, such as additions and deletions. Reconciliation schedules show support by reference to a subsidiary ledger or detailed schedule. Tests such as recalculating, tracing to lead schedules, and vouching individual transactions are usually documented on these schedules. Other schedules may show the make-up of the balance in an account, which is most useful for scanning and reasonableness tests. Comparison schedules show the details for accounts for current year and prior year. 1. Cross-Reference Between Inter-Related Accounts Many expense areas (e.g., depreciation, interest expense, etc.) can be cross-referenced to related balance sheet account analyses. Therefore, analytical procedures and substantive testing of the balance sheet accounts may be sufficient to justify not performing detailed analysis of individual income statement accounts. 2. Consider Documentation of Presentation and Disclosure Testing Some income statement accounts are still generally reviewed in detail for identification of possible presentation and disclosure errors (including review for commitments and contingencies); these errors may involve: Legal and other professional fees; Repairs and maintenance, and other non-capitalized item accounts; Contributions; Advertising; Taxes, licenses, and fees; and Rents and royalties. 3. Typical Format for Tests of Details in Workpapers Tests of details relate to audit procedures performed on specific transactions. Workpapers using tests of details will generally document the following: 6

9 The account balance and date of the balance tested; Test procedures applied, including the specific items tested; When sampling is used to determine the items tested, the auditor should document how the sample size was determined and how the sample was selected; Dispositions of any items that were not properly supported; When inquiries are performed, the auditor should document the date of the inquiry, the name and job description of entity personnel, inquiries made and responses received; and When observations are the basis for audit evidence, the auditor should document what was observed, any relevant individuals involved in the subject matter along with their respective responsibilities, and where and when the observation occurred. 4. Documentation of Specific Items Tested For specific items tested, documentation could include the following: Haphazard or random sample: include the identifying characteristic (e.g., check number, invoice number, etc.); Scope approach: include the specified dollar amount used (e.g., all fixed asset additions greater than $15,000); or Systematic sample: include the source of the documents and an indication of the starting point and the sampling interval (e.g., the detailed accounts receivable was obtained, invoice #12345 was haphazardly selected as the starting point, and every 20th invoice was selected from that point). F. Consider Efficiency When Preparing Workpapers There is a lot of professional judgment involved in determining the exact nature and format of workpaper documentation. Some general suggestions for efficient workpaper preparation follow. (i) Use existing client schedules whenever possible (e.g., bank reconciliations, property, plant, and equipment roll-forward schedules, accounts receivable aging, etc.) Assist the client with establishing a format that is most suitable for both internal management and external audit purposes. Requesting that the workpapers be in electronic form can strengthen the ease of documentation, testing, and review. (ii) Consolidate related information into one schedule whenever possible. For example, show accounts receivable confirmation results and alternate procedures for confirmation non-replies on the same schedule. (iii) Document a summary of procedures in memo form whenever it makes sense. This will usually be appropriate for complex or significant audit areas. This will not only help the reviewer, but will also assist the auditor with being more organized and thoughtful in the audit process. A well-prepared memo can be infinitely better than a stack of detailed schedules and workpapers. (iv) Challenge all unnecessary paper, including supporting schedules. Do not retain unnecessary paper like copies of checks or invoices if not necessary. Obtain does not necessarily mean retain. Keep information not used in the workpapers until after the review process is complete, but then throw away copies or return originals to the client. Before putting a document in the workpaper file, ask the following questions first: What is the level of risk in the audit area? Have there been any known problems historically or anticipated this year that this document might address? 7

10 (v) (vi) (vii) Is it likely that the supervisor will want to see the document? Does it need to be in the workpapers or just held aside in a folder to give to the reviewer along with the workpapers? Are there complex items or red flags contained in the document that the reviewer should be made aware of? How difficult will it be to obtain the document, if needed, in the future? How much extra work is being added by including the document in the workpapers? Avoid unnecessary procedures. Often, supporting documentation only needs to be scanned for unusual items and reasonableness, with no other procedures applied (e.g., footing, vouching, recalculating). Consider documenting work performed such as this in a tick mark on the lead schedule or trial balance, as opposed to putting all schedules in the workpapers. This may prevent the auditor from performing unnecessary procedures (like footing and cross-referencing) just because the workpaper is there. Use a standard tick mark legend, both for the overall engagement and within specific audit areas, when appropriate for recurring procedures. Critically rethink past efforts. Do not do something just because it was done last year. Same as last year, or SALY, should never be the automatic standard from which you guide decisions about the nature, timing, and extent of workpaper documentation. Each year when looking at prior year workpapers ask yourself the following two questions: Do we even need this workpaper? If so, is there a better way to perform and document the testing? G. Workpaper Preparers Have a Duty to Perform Self-Review Reviewer-friendly workpapers dramatically improve audit quality and improve audit efficiency. Reviewerfriendly workpapers improve quality by forcing the staff to understand what they are doing and lowering the chance that something will be missed in confusing documentation. Reviewer-friendly workpapers will result in fewer review notes for staff to clear. Following are suggested questions to ask yourself as a workpaper preparer in order to avoid review notes. (i) Is the purpose clear? The more significant and complex the audit area, the harder it is sometimes to pull all the pieces together. Often, a summary memo in the front of complex audit areas can give the reviewer a big picture perspective and provide a roadmap to the detailed testing. (ii) Is it complete? If not, be sure to include an open-items list, so the reviewer knows what is missing. (iii) Is it legible? With the increased use of technology on the audit, bad handwriting, spelling, and grammar are becoming less of an issue. However, the preparer still should pay attention to ensuring that the workpaper is legible. (iv) Is it organized? Workpapers should be thoughtfully organized and arranged in an order that facilitates easy review. Keep similar topics clustered together. (v) Is it easy on the eyes? Do not cram as much information as possible onto one page. Get rid of anything that does not add value. (vi) Is it simple to follow? Clean up wordy memorandums, duplicative explanations, useless columns, etc. If it is a client-prepared schedule, team with the client before fieldwork begins to put the documentation in a format that works for both internal management and external audit purposes. 8

11 H. What to do When Clearing Review Notes When it comes to review notes, there are a few key guidelines for the auditors clearing the review notes to ensure a high-quality and profitable audit. (i) Do not just automatically clear the review notes. Always make sure the reason for the review note is understood before blindly performing the additional work. Do not be afraid to defend your work! (ii) Do not forget efficiency when clearing review notes. Spend time considering the best approach for clearing a review note. If the cost-benefit is not apparent, do not be afraid to discuss the issue with the reviewer. Perhaps there is another way to satisfy his or her concerns, or maybe the reviewer really does not care that much about the review note after all. (iii) Respond to the review note in a way to help the reviewer see the change made. Options include: Summarizing the change made under the review note; Guiding the reviewer to the specific workpaper and tick mark, note, etc., where the note was addressed within the workpapers; and Explaining why a change may have not been necessary (e.g., the issue was covered in another section that the reviewer did not review yet). (iv) Continually update documentation during the audit, discarding superseded memos and files as the audit progresses. Making this a habit will help protect the auditor from potential peer review or legal liability issues. I. Typical Audit Areas Assigned to New Staff Auditors 1. Planning The new staff auditor may be assigned to help gain or update an understanding of the client s system of internal controls related to reliable financial reporting. This documentation may include flowcharts, narratives, or checklists. In addition, the new staff auditor may be involved in audit engagement planning meetings prior to fieldwork. 2. Fieldwork The new staff auditor may be responsible for performing tests of controls or substantive testing as detailed in the audit program. Tests of controls frequently assigned to new staff auditors include selecting a sample of transactions and walking them through the client s accounting process. Audit areas typically assigned to new staff auditors include cash, fixed assets, prepaid expenses and other assets, accounts payable, inventory observations, and analytical procedures of less complex income statement line items. New staff auditors may also be assigned to perform specific audit procedures within more complex audit areas, such as reconciling/performing alternate procedures for accounts receivable confirmations or performing a debt rollforward schedule. 3. Reporting and Wrap-Up New staff auditors may be asked to prepare abstracts of board of director and/or management meetings. They may also be asked to review for unusual or significant journal entries through the end of fieldwork. All members of the engagement team should help draft financial statements, footnote disclosures, and potential business advisory/management letter comments. 9

12 Tasks and responsibilities will vary depending on knowledge of the client s business and industry, risk and complexity of the client, client service goals, relative competency of engagement team members with specific audit areas, and strength of engagement team supervision and review. J. During Fieldwork 1. Locating All of the Information You Need Look at the objectives and procedures detailed in the audit program. The standard audit programs should have been tailored based on knowledge of the client, risk assessment, and planning analytical review procedures. Consult prior year workpapers for potential recurring audit issues and adjustments. Use prior year workpapers as a tool, but do not merely take the SALY ( same as last year ) approach. Challenge the sufficiency or need for audit procedures, as appropriate. New information may come to light about risk, operations, or availability of information after planning was performed. Be aware of the audit budget for your area, and do not be afraid to challenge procedures and time allotment if it does not make sense to you. Discuss potential alternatives or solutions with the in-charge. Locate the lead sheet of the current year balances, and any supporting client schedules or third-party evidence (e.g., confirmations or statements). Once you have everything you need, it is time to start performing and documenting your audit procedures and conclusions. 2. Potential Significant Audit Findings or Issues Immediately bring all significant accounting and auditing questions raised during the audit to the attention of the in-charge so that the potential impact can be assessed in a timely manner. Examples of potential significant audit findings or issues include: Accounting for complex or unusual transactions. Material estimates and uncertainties and the related management assumptions. Inconsistency of accounting principles. Results of auditing procedures that indicate financial statements or disclosures could be materially misstated. Results of auditing procedures that indicate the need for significant modification of planned auditing procedures. Significant difficulty in applying planned audit procedures. Findings that could result in a modified opinion in the auditor s report. 3. The Workpaper Review Process Your workpapers should undergo various levels and extent of review before the auditor s report is ultimately issued. The first level of review is self-review before turning the workpapers into the in-charge. The second level of review is a detailed review of the workpapers by the in-charge. This review is typically completed as you finish each section. The manager will be the next level of review, performing a detailed review of any workpapers prepared by the in-charge and a higher-level review of workpapers where he or she is the second reviewer. This review is followed by the engagement partner review, which focuses on higher-risk audit areas and any workpapers containing significant judgments or assumptions. The final review will be by a quality assurance technical reviewer, or sometimes called the concurring reviewer. This review will focus on such items as the key planning and audit summary documents, the draft financial statements and footnotes, significant research memos, and summary of audit adjustments passed and booked. 10

13 Typical review notes include: Workpaper not signed and dated; Audit program not signed; Workpaper references or cross-references incomplete; Vague or incomplete notes in the workpapers; Documentation not sufficient; Unclear procedures; Unclear conclusions; and Missing documentation of all issues considered and addressed. 4. Workpaper Documentation Workpaper documentation should be sufficient to allow an experienced reviewer (i.e., relevant knowledge and experience related to GAAP, GAAS, and other relevant standards) with no knowledge about the specific client to understand the nature, timing, extent, and results of audit procedures performed and the evidence obtained based on the information presented. The reviewer (either internal or external to the engagement team and accounting firm) should be able to reperform the work and arrive at the same conclusions. In addition, the workpapers must indicate who performed and reviewed the work. The nature and extent of documentation will depend on: Risk of material misstatement; Extent of judgment involved in performance and evaluation; Nature of auditing procedure; Significance of evidence obtained; Nature and extent of exceptions identified; and The need to document a conclusion or the basis for a conclusion not readily determinable from the documentation of the work performed. Areas of documentation that are particularly susceptible to being inadequate include the following: Support for significant estimates, including management assumptions; Analytical procedures; Consideration of internal controls in planning an audit, including control risk assessment; Inquiries of management and responses to fraud risk; Significant audit issues and consultation on significant matters; Consideration of going concern uncertainties; Materiality considerations related to unadjusted audit differences; Corroboration of management inquiries and representations; and Compliance with loan covenants. 11

14 Audit Documentation Basics LEARNING QUESTIONS 1. Which of the following is NOT a purpose of audit documentation? A. Audit documentation provides the principal support for the auditor s report. B. Workpapers should demonstrate that accounting records agree or reconcile to the financial statements being audited. C. Audit documentation is not critical if oral explanations of conclusions would suffice. 2. Which of the following would require the auditor to include more persuasive audit documentation? A. Lower risk of material misstatement associated with the audit area. B. More subjectivity involved in evaluating audit results. C. Conclusions readily apparent. 3. Which of the following is an efficiency consideration for auditors to apply when preparing audit documentation? A. Create supporting schedules directly. B. Retain any supporting documentation obtained from the client. C. Use a memo format to describe procedures and conclusions, when appropriate. 4. Which of the following is NOT an appropriate self-review checklist item to avoid workpaper deficiencies? A. Is the source of audit evidence clearly evident? B. Is the purpose of the workpaper readily apparent or clarified with supplemental narrative? C. Can an experienced reviewer with knowledge of specific client circumstances reperform your work? 5. Which of the following are potential significant audit issues that should be brought to the attention of the in-charge or other engagement management in a timely manner? A. Inconsistency in application of accounting principles. B. Any known or likely misstatement. C. Results that are consistent with the planned audit objective. 6. Which of the following is a tip for effectively and efficiently clearing review notes? A. Automatically clear the review notes. B. Consider the most efficient way to clear the review notes. C. Focus on clearing the review note, not leaving a trail of workpaper changes. 7. Which of the following is the ultimate reviewer for which audit documentation should be written to satisfy in accordance with generally accepted auditing standards? A. Engagement partner. B. Engagement quality control reviewer. C. Experienced auditor with no previous connection to the engagement. 12

15 8. Which of the following is critical audit documentation in accordance with generally accepted auditing standards? A. Uncorrected identified misstatements. B. Corrected identified misstatements. C. Both of the above. 9. Which of the following is a significant issue that should be brought to the attention of engagement management during the workpaper review process? A. Client-identified adjusting entries. B. Misstatements that could result in a modified auditor report. C. No difficulty in applying planned audit procedures. 13

16 Audit Documentation Basics HOMEWORK Instructions: Review each of the following workpapers. Identify any deficiencies in audit documentation. XYZ Company Accounts Receivable Aged Trial Balance W/P Ref. Prepared By: RJD 2/8/XX Reviewed By: Customer Debit Credit < 30 Days Days Days > 90 Days Confirm Requested A 45,420 32,170 13,250 X B 7,718 5,218 2,500 X D 10,615 10, E 4,500 4,500 X F 2,180 2,180 G 2,911 1,500 1,411 H 11,177 11,177 I 7,705 5,500 2,205 J 1,500 K 13,820 13,280 X L 4,000 M 5,816 5,816 N 1,785 1,785 O X P 1,190 1,190 X Q 32,437 21,350 11,087 R 3,000 S 122,243 72,443 49,800 X Totals 270,049 8, ,316 80,785 7,996 13,412 Comments 14

17 XYZ Company Legal Fees 12/31/XX Attorney #1 Review board of directors minutes, type, and file 2/26/XX 1,505** Attorney #2 Title search for land adjacent to plant 3/11/XX 150 Attorney #3 Partial bill on Smith Matter per agreement 6/19/XX 15,000** Attorney #4 Updating pension plan for ERISA amendment, etc. 10/15/XX 12,250 Total 28,905 15

18 XYZ Company W/P Ref X-3 Analysis of Miscellaneous Expense Prepared By: GHF 2/4/XX 12/31/20XX Reviewed By: SFD 2/7/XX All charges > $1,000 1/XX 2,350 2/XX 1,083 3/XX 2,342 4/XX 521 5/XX 1,530 6/XX 4,000 Other 32,521 44,347 G/L 16

19 XYZ Company W/P Ref O-2 Accrued Product Warranty Prepared By: WDH 2/3/XX 12/31/XX Reviewed By: HFI 2/7/XX Beginning Balance $75,000 Accrued 36,000 ** Paid 43,500 ** 67,500 Add Back at Y/E (17,500) Ending Balance $50,000 ## Note to Tax Department: The deduction is not equal to the accruals. ** Agreed to G/L. ## Mr. Owens, Sales Dept., says that the amount of claims is going down so the reserve should be down also. 17

20 XYZ Company Test of Inventory Pricing 12/31/XX Prepared By: DUH 2/3/XX Reviewed By: DFY 2/7/XX Item Number Quantity Price Total Value , , , , , , , ** Agreed to price allocation voucher. Appears Price per voucher was Difference immaterial. 18