Introduction

Standard on Auditing (SA) 230, “Audit Documentation” is an important standard which lays down the basic principles of audit documentation. These principles need to be kept in mind by auditors while complying with requirements of SA 230 and specific documentation requirements of other Standards on Auditing. It can also save one from major problems when an audit performed becomes the subject matter of litigation and investigation.

SA 230, “Audit Documentation” defines audit documentation as “The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as “working papers” or “work papers” are also sometimes used”. It may be noted, that the ‘documents provided by client’ which are used to do audit should be part of audit documentation and checking notes should be attached by auditors on such documents.

Objective

The objective is to prepare documentation that provides:
(a) A sufficient and appropriate record of the basis for the auditor’s report; and

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

Why Documentation?

Documentation is considered the backbone of an audit. The work that the auditor performs, the explanations given to the auditor, the conclusions arrived at, are all evidenced by documentation. Poor documentation may depict poor performance in an audit. The auditor may have executed appropriate audit procedures, however, if there is no documentation to prove, it may put question on the work done, in case any material misstatement is reported. Improper and incomplete documentation, at times, may put the auditor in embarrassing situations.

Documentation is essential because:

• It supports the auditor’s basis for a conclusion about achieving the auditor’s objectives.
• Provides evidence that audit was planned and performed.
• It assists supervision and review.
• It results in better conceptual clarity, clarity of thought and expression.
• It facilitates better understanding and helps avoid misconception.
• It supports and evidences compliance with standards, applicable legal & regulatory requirements.

Further, audit documentation serves the following purpose:

• Assisting the engagement team to plan and perform the audit;
• Enabling the engagement team to be accountable for its work;
• Assisting members of the engagement team supervise in compliance with SA 220;
• Retaining a record of matters of continuing significance to future audits;
• Enabling   the   conduct   of  quality   control   reviews   and   inspections   in accordance with SQC 1; and
• Enabling the conduct of external inspections in accordance with applicable legal, regulatory or other requirements.

Failure of audit documentation to document the procedures applied, tests performed, evidence obtained, and relevant conclusions reached in an engagement shall raise a presumption that the procedures were not applied, tests were not performed, information was not obtained, and relevant conclusions were not reached.

Form, content and extent of documentation

The form, content and extent of audit documentation depend on factors such as:

• 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 or the basis for a conclusion not readily determinable  from  the  documentation  of  the  work  performed  or  audit evidence obtained; and
• The audit methodology and tools used.

Examples of documentation

Examples of audit documentation include:

• Engagement letter.
• Audit programmes defined, with details of work carried out and results filled, including planning memorandum.
• Analyses of various account balances through comparatives and corroborative.
• Issues memoranda.
• Summaries of significant matters.
• Letters of confirmation and representation.
• Checklists.
• Correspondence (including e-mail) concerning significant matters.
• Abstracts or copies of the entity’s records/contracts/ agreements.

Audit documentation, however, is not a substitute for the entity’s accounting records and vice versa.

Oral explanations by the auditor, on their own, do not represent adequate support for the work auditor performed or conclusions the auditor reached, but may be used to explain or clarify information contained in the audit documentation.

Function of documentation

Audit documentation enable auditor to understand the nature, timing and extent of the audit procedure performed; outcome of audit procedures performed and conclusions on significant matters and significant professional judgments made in reaching those conclusions.

Identification of Specific Items or Matters Tested, and of the Preparer and Reviewer

Recording the identifying characteristics of the specific items tested, for example, enables the engagement team to be accountable for its work and facilitates the investigation of exceptions or inconsistencies. Identifying characteristics will vary with the nature of the audit procedure and the item or matter tested. For example:

• 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 example, all journal entries over a specified amount from the journal register)
• 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 example, a systematic sample of shipping reports selected from the shipping log for the period April 1 to September 30, starting with report number 12345 and selecting every 125th report).

Record of work and the date of performance
In documenting the nature, timing and extent of audit procedures performed, the auditor shall record:

• The identifying characteristics of the specific items or matters tested
• Who performed the audit work and the date such work was completed; and
• Who reviewed the audit work performed and the date and extent of such review

The requirement to document who reviewed the audit work performed does not imply a need for each specific working paper to include evidence of review. The requirement, however, means documenting what audit work was reviewed, who reviewed such work, and when it was reviewed.

Documentation of Significant Matters and Related Significant Professional Judgments

Judging the significance of a matter requires an objective analysis of the facts and circumstances. Examples of significant matters include:

• Matters that give rise to significant risks (as defined in SA 315);
• Results of audit  procedures  indicating  (a)  that  the  financial  statements could be materially misstated, or (b) a need to revise the auditor’s previous assessment   of  the  risks  of  material  misstatement   and  the  auditor’s responses to those risks;
• Circumstances that cause  the  auditor  significant  difficulty  in  applying necessary audit procedures; and
• Findings that could  result  in  a  modification  to  the  audit  opinion  or  the inclusion of an Emphasis of Matter paragraph in the auditor’s report.

While determining and recording what are significant matters, it is also important to record the process of determining i.e. judging what are significant matters. This will enable the reviewer to ascertain the quality of the audit as well as providing those who carry out subsequent audits the necessary perspective.

The documentation is not limited to records prepared by the auditor but may include other appropriate records such as minutes of meetings prepared by the entity’s personnel and agreed by the auditor.

Others with whom the auditor may discuss significant matters may include other personnel within the entity, and external parties, such as persons providing professional advice to the entity.

It is a recommended practice that documentation should be an ongoing practice and should not be left to the end i.e. completion of the audit since that would diminish the quality of documentation.

Documentation not required where compliance with SA is self-evident

Compliance with an SA need not be documented where it is self-evident that the particular SA has been complied with. Although the function of audit documentation is to provide evidence that the audit complies with SAs, in order to keep the documentation to a reasonable level without losing its primary function, documentation can be dispensed with. For example, 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, andauditor’s report containing an appropriately qualified opinion demonstrates that the auditor has complied with the requirement to express a qualified opinion.

Documentation of how Inconsistencies have been addressed

If the auditor identified information that is inconsistent with the auditor’s final conclusion regarding a significant matter, the deviation should be documented with the reasoning and the subsequent action.

No need to document

The documentation requirement applies only to requirements that are relevant in the circumstances. A requirement is not relevant if a particular SA is not relevant or if the SA is applicable conditionally and the conditions do not exist.

Timely preparation and assembly of audit file

Preparation of documentation on a timely basis helps enhancing the quality of documentation since it is likely to be more accurate than documentation completed after completion of the audit.

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 which is not more than 60 days after the date of the auditor’s report.

The completion of the assembly of the final audit file is an administrative process meaning that there is no further processing. Changes may, however, be made to the audit documentation during the final assembly process if they are administrative in nature. Examples of such changes include:

• 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.

Considerations Specific to Smaller Entities

In the case of an audit where the engagement partner   performs   all   the   audit   work,   the documentation will not include matters that might have to be documented solely to inform or instruct members of an engagement team, or to provide evidence of review by other members of the team (for example, there will be no matters to document relating to team discussions or supervision). Nevertheless, the engagement partner complies with the overriding requirement in paragraph 8 to prepare audit documentation that can be understood by an experienced auditor, as the audit documentation may be subject to review by external parties for regulatory or other purposes.

The auditor of a smaller entity may also find it helpful and efficient to record various aspects of the audit together in a single document, with cross references to supporting working papers as appropriate.Examples of matters that may be documented together in the audit of a smaller entity include the understanding of the entity and its internal control, the overall audit strategy and audit plan, materiality, determined in accordance with SA 3207 , assessed risks, significant matters noted during the audit, and conclusions reached.

Conclusion

While the process of documentation has made the auditors more responsible towards audit, the technologies have however eased the process to a great extent.

By CA Vivek Bagrodia

Print