MODULE 4: Audit Documentation

Audit Documentation

1. The purpose of this PSA is to establish standards and provide guidance on audit documentation.

2. The auditor should prepare, on a timely basis, audit documentation that provides:
a. Evidence of the auditor’s basis for a conclusion about the achievement of the overall objective of the
auditor.
b. Evidence that the audit was planned and performed in accordance with PSAs and applicable legal
and regulatory requirements.

3. Audit documentation serves a number of purposes including:

a. Assisting the audit team to plan and perform the audit.
b. Assisting the members of the audit team responsible for supervision to direct and supervise the
audit work, and to discharge their review responsibilities in accordance with PSA 220 Redrafted,
“Quality Control for an Audit of Financial Statements.”
c. Enabling the engagement team to be accountable for its work.
d. Retaining a record of matters of continuing significance to future audits.
e. Enabling the conduct of quality control reviews and inspections in accordance with PSQC 1
Redrafted, “Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information and Other Assurance and Related Services Engagements.
f. Enabling the conduct external inspections in accordance with applicable legal, regulatory or other
requirements.

4. Overall Objectives and Approach – Audit documentation (working papers) is the principal support for
the representation that the audit is performed in accordance with PSAs and for the opinion.

The objective of the auditor is to prepare documentation that provides:

a. A sufficient and appropriate record of the basis of the auditor’s opinion.
b. Evidence that the audit was planned and performed in accordance with PSAs and applicable legal
and regulatory requirements.

Definitions

1. Audit documentation – the record of audit procedures performed, relevant audit evidence obtained,
and conclusions the auditor reached. (Working papers or workpapers are sometimes used).
a. Audit programs
b. Analyses
c. Issues memoranda
d. Summaries of significant matters
e. Letters of confirmation and representation
f. Checklists
g. Correspondence (including e-mail) concerning significant matters.

2. Audit file – 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.

3. Experienced auditor – an individual (whether internal or external to the firm) who has practical audit
experience, and a reasonable understanding of
a. Audit processes.
b. PSAs and applicable legal and regulatory requirements.
c. The business environment in which the entity operates.
d. Auditing and financial reporting issues relevant to the entity’s industry.

4. Audit report date – The date on the audit report. This date must not be earlier than date auditor has
sufficient appropriate evidence,
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5. Report release date – The date the auditor grants the client permission to use the audit report.

6. Documentation completion date – The time period during which the final audit file should be
completed. This period is ordinarily not more than 60 days after the date of the auditor’s report date.

7. Retention period – The period for which the audit files must be kept. This period should not be
shorter than five years from the auditor’s report date, or if later, the date of the group auditor’s report.

5 Timely Preparation of Audit Documentation

The auditor shall prepare audit documentation on a timely basis.

6. Form, content and extent of audit documentation

1. Overall requirement: The auditors should prepare audit documentation that enables an
experienced auditor, having no previous connection to the audit, to understand

a. Nature, timing, extent and results of auditing procedures performed.

1. The identifying characteristics of the specific items or matters tested.
2. Who performed the audit work and the date such work was completed.
3. Who reviewed the audit work performed and the date and extent of such review.
b. Results of the audit procedures performed and the audit evidence obtained.
c. Significant matters arising during the audit
d. Conclusions reached on significant matters.
e. Significant professional judgments made in reaching those conclusions..

2. The form, content and extent of audit documentation depend on factors such as:
a. The nature of audit procedures to be performed.
b. The size and complexity of the entity.
c. The identified risks of material misstatement.
d. The extent of judgment required in performing the work and evaluating the results.
e. The significance of the audit evidence obtained.
f. The nature and extent of exceptions identified.
g. 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.
h. The audit methodology and tools used.

3. It is not necessary nor practical to document every matter considered during the audit, but oral
explanations by the auditor

a. On their own do not represent sufficient support for the work auditor performed or
conclusions
b. May be used to clarify or explain information contained in the audit documentation

4. The auditor should document findings or issues that are significant; significant audit findings or
issues involve
a. Selection, application, and consistency of accounting principles
b. Results of audit procedures indicating information could be materially misstated or a need to
revise auditor’s previous assessment of risks of material misstatement
c. Circumstances causing auditor significant difficulty in applying audit procedures (e.g., lack of
responsiveness, lack of original documents)
d. Findings that could result in modification of the auditor’s report
e. Audit adjustments

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5. If the auditor has identified information that contradicts or is inconsistent with the auditor’s final
conclusions regarding a significant finding or issue, the auditor should document how the auditor
addressed the contradiction or inconsistency in forming the conclusion
a. The documentation of how the auditor addressed the contradiction or inconsistency does not
imply that the auditor needs to retain documentation that is incorrect or superseded.
b. Documentation of the contradiction or inconsistency may include, but is not limited to,
procedures performed, records documenting consultations, or differences in professional
judgment among team members or between team members and others consulted

6. The following should be documented:

a. Who performed the audit work and who reviewed specific audit documentation and the dates.
b. Concerning specific items tested
(1) Documents inspected – should include identifying characteristics of the specific items
tested; examples
(a) Numbers of documents selected
(b) When a systematic sample is used, the information needed to identify the items
selected
(2) Copies of entity’s records when needed to enable experienced auditor to understand work
performed and conclusions reached
(a) For example, abstracts or copies of significant contracts or agreements that were
examined to evaluate proper accounting for a transaction should be saved
c. Any departure from a basic principle or essential procedure in the PSAs

7. Revisions to audit documentation after the date of the auditor’s report

1. Audit report date – not earlier than date auditor has sufficient appropriate evidence
a. Sufficient appropriate audit evidence includes evidence that the audit documentation has been
reviewed and that management has prepared and taken responsibility for the entity’s financial
statements, including disclosures
b. The report date will be close to the date the auditor grants the entity permission to use the
auditor’s report (the “report release date”)
c. The report release date should be recorded in the audit documentation

2. Documentation of new information

a. When new information is received after the date of the auditor’s report (e.g., a late third-party
confirmation) the auditor should consider whether to perform audit procedure on the new
information based on nature and significance of information.
(1) If new information suggests necessary procedures were not performed.
(2) If auditor becomes aware of subsequent event.

b. If new information is added to working papers, documentation should include

(1) When and by whom changes were made and reviewed (if applicable).
(2) Specific reasons for changes.
(3) Effect, if any, of changes on auditor’s conclusions.

3. Changes resulting from the process of assembling and completing the audit file
a. The final audit file should be completed on a timely basis, but not later than 60 days after the
auditor’s report date (this is referred to as the documentation completion date)
b. At any time prior to the documentation completion date the auditor may make changes in the
audit documentation to
(1) Complete the documentation and assembly of audit evidence obtained, discussed and
agreed with relevant member of the audit team prior to the date of the auditor’s report

(2) Perform routine file-assembling procedures such as deleting or discarding superseded

documentation, and sorting, collating, and cross-referencing final working papers

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(3) Signing off file completion checklists

(4) Add information received after audit report date (e.g., a confirmation that was previously
faxed)

4. Changes after the documentation completion date

a. After the documentation completion date, the auditor must not delete or discard audit
documentation before the end of the specified retention period.
b. When the auditor finds it necessary to make an addition (including amendments) to audit
documentation after the documentation completion date the auditor should document the
addition as
(1) When and by whom such changes were made and (where applicable) reviewed
(2) The specific reasons for the changes
(3) The effect, if any, of the change on the auditor’s conclusions

8. Ownership and confidentiality of audit documentation

1. Audit documentation is property of the auditor
a. Should be retained for a period of time sufficient to meet the auditor’s needs and to satisfy
applicable legal and regulatory requirements
b. Ordinarily not expected to be retained for less than 5 years
2. The auditor should apply appropriate and reasonable controls for audit documentation to
a. Clearly determine when and by whom audit documentation was created, changed or reviewed
b. Protect integrity of information at all stages of the audit
c. Prevent unauthorized changes
d. Allow access to audit team and other authorized partie

Working Paper Files

Working papers remain in the custody, and are the property of the auditor. Accordingly, the
auditor is prohibited by the Philippine Accountancy Act of 2004 from disclosing any information
contained therein without the client and the auditor. The only time anyone else has a legal right to
examine files is when they are subpoenaed by a court as legal evidence. Although portions of or
extracts from the working papers may be made available to the client at the discretion of the auditor,
they are not a substitute for the client’s accounting records.

Auditors retain a set of working papers for each audit engagement for each year. The working papers
for the current year are referred to as the current working papers. Working papers that are relevant to
more than one audit engagement are often kept separately in a file referred to as permanent working
papers. These two categories of audit working papers can be classified to facilitate compilation and
easy reference, to wit:

Permanent Files – normally contain information that the auditor will use on the engagement in both the
current and future years and may include:
 Information concerning the legal and organizational structure of the entity such as the articles of
incorporation and by laws
 Extracts or copies of minutes and important legal documents and agreements such as bond
indentures, pension plans, leases, stock options, contracts, etc.
 Information concerning the industry, economic environment and legislative environment within
which the entity operates
 Information related to the understanding of internal control and assessment of control risk;
organization charts, flowcharts, questionnaires and other internal control information
 Copies of communications with other auditors, experts and other third parties
 Copies of letters or notes concerning audit matters communicated to or discussed with the
entity, including the terms of the engagement or discussed with the entity, including the material
weaknesses in internal control

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 Analysis from previous years, of accounts that have continuing importance to the auditors; long-
term debt, stockholders’ equity, goodwill, property, plant and equipment.
 The results of analytical procedures from previous years’ audits

Current Files – include all audit documentation applicable to the period under audit, such as:
1. Audit program – describes how the audit approach is to be implemented. Auditors
develop an audit program for each material account balance or account balance assertion. An
audit program describes what and how much evidence is required to be gathered and
evaluated, and how, when and by whom it is to be gathered and evaluated during the interim
and final visits. The audit program is ordinarily maintained in a separate file to improve the
coordination and integration of all parts of the audit.

2. General information – which are of a general nature rather than designed to support
specific financial statement amounts; audit planning memos, abstract or copies of minutes of
meetings not included in permanent file, notes on discussions with the client, supervisor’s
review comments, and general conclusions.

3. Working trial balance – represents a listing of ending balance in the entire client’s
accounts prior to preparing adjusting and reclassification of journal entries and contains the
following information:

 Reference to assembly sheets and lead schedules

 Current year’s ending balances (per client)
 Reference for adjustments/reclassifications
 Adjustments/reclassifications
 Current year’s financial statement balances (per audit)
 Prior year’s ending balances

4. Assembly sheets or Lead schedules – summarize the major components of the

account balance or class of transactions in support of financial statement item such as Cash
and cash equivalents, Inventories and Property, plant and equipment

5. Adjusting and reclassification entries – documentation for the adjustment and

reclassifications identified by the auditor or client. Adjustments are made to correct errors while
reclassifications are made to properly present information in the financial statements.
Reclassification entries are not posted in the client’s records.

6. Audit memoranda – much of the auditor’s work is documented in written memoranda

including discussions of items such as internal controls, inventory observation, errors identified,
and problems encountered in the audit.

7. Supporting schedules – comprise the largest portion of audit documentation that are
prepared by the client or the auditor in support of specific amounts on the financial statements,
which include:
 Analysis – designed to show the activity in a general ledger account
during the entire period under audit, tying together the beginning and ending balances.
Examples: marketable securities, notes receivable, allowance for doubtful accounts,
property, plant and equipment, long-term debt and all equity accounts.
 Trial balance or list – consist of the details that make up a year-end
balance of a general account. Examples: trial balance or lists in support of trade
accounts receivable, trace accounts payable, repairs and maintenance expense, legal
expense and miscellaneous expense.
 Reconciliation of amounts – supports a specific amount and is
normally expected to tie the amount recorded in the client’s records to another source
of information. Examples: bank balances with bank statements, subsidiary accounts

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receivable balance with confirmations from customers, and accounts payable balances
with vendors’ statements.
 Tests of reasonableness - contains information that enables the
auditor to evaluate whether the client’s balance appears to include a misstatement
considering the circumstances of the engagement. Examples: depreciation expense,
interest expense or finance cost, and allowance for doubtful accounts.
 Summary of procedures – summarizes the result of a specific audit
procedure performed. Examples: results of accounts receivable confirmation and
summary of physical inventory observation.
 Examination of supporting documents – show the detailed tests
performed such as examination of documents during cutoffs, tests of controls and
substantive tests of transactions. These schedules show no totals and they do not tie in
to the general ledger balance because they document only the tests performed and the
results found.
 Informational – contains information as opposed to evidence such as
tax returns, time budgets and client’s working hours.
 Outside documentation – although not “schedules” in the real sense,
they are indexed and interfiled and procedures are indicated in them such as
confirmation replies from banks customers.

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