FEU MAKATI - INTEGRATED ACCOUNTING REVIEW

Auditing Theory Prof. F. H. Villamin

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MODULE 6B
AUDIT DOCUMENTATION

Also known as working papers or workpapers is the record of the auditor’s planning; the nature, timing and
extent of the auditing procedures performed; results of those procedures; and the conclusions drawn from
the evidence obtained. Properly prepared working papers demonstrate that the audit was performed in
accordance with PSAs.

PSA 230 Redrafted “Audit Documentation” requires that audit documentation provide the
principal support for
1. The representation that the auditors performed the audit in accordance with PSAs.
2. The opinion expressed on the financial information.

These two (2) are the primary objectives of audit documentation.

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

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.

PSA 230 states “Working papers would include the auditor’s reasoning on all significant matters which
require the exercise of judgment, together with the auditor’s conclusion thereon.”

Significant Findings or Issues Documented

1. Significant matters involving the selection, application and consistency of accounting principles,
including related disclosures. Such significant matters include accounting for complex or unusual
transactions, accounting estimates and uncertainties as well as related management assumptions.
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2. Results of auditing procedures that indicate the need for significant modification of planned auditing
procedures or the existence of material misstatements or omissions in the financial statements or the
existence of significant deficiencies in internal control over financial reporting.
3. Audit adjustments and the ultimate resolution of these items.
4. Disagreements among members of the engagement team or with others consulted on the engagement
about conclusions reached on significant accounting or auditing matters.
5. Significant findings or issues identified during the review of quarterly financial information.
6. Circumstances that cause significant difficulty in applying auditing procedures.
7. Any other matters that could result in modification of the auditor’s report.

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

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 (5) years from the auditor’s report date, or if later, the date of the group auditor’s
report. (ISQC 1)

Timely Preparation of Audit Documentation

The auditor shall prepare audit documentation on a timely basis.
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Form, content and extent of audit documentation

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..

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.

It is neither 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

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

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
c. Any departure from a basic principle or essential procedure in the PSAs.
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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.
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
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

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 not less than 10 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 parties
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Ownership and custody of working papers

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.

Working papers prepared at the auditor’s request by the entity’s staff also belong to the auditor.
The auditor’s ownership rights, however, are subject to constraints imposed by the auditor’s own
professional standards. The Revised Code of Ethics for Professional Accountants in the Philippines imposes
an obligation on CPAs to refrain from (1) disclosing outside the firm or employing organization confidential
information acquired as a result of professional and business relationship without proper and specific
authority from the client or employer or unless there is a legal or professional right or duty to disclose and
(2) using confidential information acquired as a result of professional and business relationships to their
personal advantage or to the advantage of third parties.

According to PSA 230 Redrafted “Audit Documentation”, the auditor shall adopt appropriate procedures for
maintaining the confidentiality, safe custody, integrity and retrievability of audit documentation. A
successor auditor may have access to the working papers of the predecessor auditor with client approval.
However, there is no obligation on the part of the predecessor auditor to make working papers available.

Physical custody of the working papers rests with the auditor, who is responsible for their safekeeping.
Working papers included in the permanent file are retained indefinitely, current working papers should be
retained for as long they are needed to satisfy legal or professional requirements of record retention. PSQC
1 requires auditors to keep their working papers for a period not shorter than five (5) years from the
auditor’s report date.

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 File – normally contains information that the auditor will use on the engagement in both the
current and future years and may include:
1. Information concerning the legal and organizational structure of the entity such as the articles of
incorporation and by laws
2. Extracts or copies of minutes and important legal documents and agreements such as bond indentures,
pension plans, leases, stock options, contracts, etc.
3. Information concerning the industry, economic environment and legislative environment within which
the entity operates
4. Information related to the understanding of internal control and assessment of control risk;
organization charts, flowcharts, questionnaires and other internal control information
5. Copies of communications with other auditors, experts and other third parties
6. 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
7. Analysis from previous years, of accounts that have continuing importance to the auditors; long-term
debt, stockholders’ equity, goodwill, property, plant and equipment.
8. The results of analytical procedures from previous years’ audits
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Current File – includes all audit documentation applicable to the period under audit. This also contains
evidence gathered in the performance of the current year’s audit program to support the conclusions
reached. This file contains a significant amount of detail of the work performed including (but not limited
to) the documentation including the following:

1. Audit program – describes how the audit approach is to be implemented. It is a listing of auditing
procedures to be performed. This is used for the evaluation of internal controls and for substantive
procedures.
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:
a. Reference to assembly sheets and lead schedules
b. Current year’s ending balances (per client)
c. Reference for adjustments/reclassifications
d. Adjustments/reclassifications
e. Current year’s financial statement balances (per audit)
f. 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:
a. 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.
b. 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.
c. 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 receivable balance with confirmations from customers,
and accounts payable balances with vendors’ statements.

Preparation of Working Papers

The key concept in proper preparation of working papers is to structure the information so that it is easy
to interpret and gives the extent of the work in a concise form. Although the design of working papers
depends on the objectives involved, they would normally be properly identified, include the conclusions
that were reached, would be indexed and clearly indicate the audit work performed.
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Tick marks are symbols used by the auditor to indicate the nature and extent of procedures applied in
specific circumstances. These are notations directly on the working papers schedules.

Indexing

Working papers are indexed and cross-referenced to aid in the organizing and filing. This requires coding
the individual sheets of paper so that the necessary information may be found easily.

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