Audit documentation, audit programs and letters of representation


Audit documentation or work/working papers, is all memoranda, confirmations, correspondence, schedules, audit programs and letters of representation created during an audit engagement which can be in the form of papers, electronic files, or other media. Audit documentation serves the purpose of providing evidence, which the auditor uses to support the conclusions reached during the engagement. It also facilitates the planning, performance and supervision of the audit engagement. Because audit documentation facilitates all these activities, it also serves as a basis for review of the completeness and quality of the work being performed.

Due to its importance in record keeping, audit documentation establishes the integrity of audits and the Board's oversight. Because it is relied on for review of work, conclusions reached, and the evidence collected, it is essential that it is complete and understandable. Incomplete documentation increases the difficulty of review, and therefore clear and complete documentation increases the quality of the audit work performed. Reviews are essential in reviewing an independent accounting firm's compliance with standards and inspecting public accounting firms.

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On September 29, 2003, the Board held a public roundtable discussion to discuss issues of audit documentation standards. The discussion was intended to hear the views of public companies, public accounting firms, investor groups, and regulatory organizations. This discussion was guided by a set of objectives and issues the Board focused on in improving audit documentation standards. The focus was on changes to documentation after release date, essential elements, degree of detail, and retention of audit documentation, the discussion also included the effect on documentation that the decision to use secondary auditors work in the audit documentation.

Based on the input provided by the roundtable, Board staff, and thirty eight comment letters provided by auditors, regulators, professional associations, government agencies and others, the Board concluded that the SAS No. 96, Audit Documentation was insufficient in meeting the requirements of standard setting under Section 103(a) of the act. The Board then issued proposed auditing standard titled Audit Documentation. Additionally, the thirty eight comments changed requirements and other changes were made to make it easier to understand.

The objectives of audit documentation is to provide records of the evidence used to support the conclusions of the auditor as well as facilitate the planning, performance, and supervision of the engagement. Also, audit documentation allows for review of audit work to ensure the completion of work, as well as the quality. Audit documentation is created for: planning, performance, procedure, evidence and conclusions of the auditor during the engagement.

Reviewers of audit documentation include: auditors new to an engagement, supervisory personnel, engagement supervisors and quality reviewers, successor auditor, internal and external inspection teams, advisors engaged by the audit committee, and representatives of a party to an acquisition. Auditors new to an engagement will look to prior year documentation to obtain a better understanding in order to facilitate current year planning and improve performance. Engagement supervisors will review documentation to better understand conclusions reached by auditors and whether proper evidence was obtained to reach those conclusions.

Auditors must prepare documentation for each engagement to the standards of the PCAOB. Audit documentation includes memoranda, confirmations, correspondence, schedules, audit programs, and letters of representation in the form of papers, electronic files or other media. Audit documents must contain sufficient detail in order to provide a clear understanding of purpose, source, and conclusions reached. Additionally, documentation should be organized in a manner that important issues and findings can be linked.

Audit documentation provides support for representations in the audit report and therefore should provide that the engagements compliance with PCAOB standards, support basis of the auditor's conclusions of relevant financial statement assertions, and provide that accounting records agreed/reconciled with financial statements.

Audit documentation standard also requires that all procedures, evidence, and conclusions from the engagement be recorded for all those who participate including specialist used by the auditor to evaluate financial statement assertions. Documentation must prove that the work was actually performed by the auditor. It must also be complete enough for a experienced auditor with no prior knowledge of the engagement to understand nature, timing, and results of procedures performed, evidence obtained, and conclusions reached. The experienced auditor must also be able to determine who performed work at what time and who reviewed it.

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In determining the extent of necessary documentation for an engagement an auditor should consider the nature of audit procedure, risk of material misstatement, extent of judgment, significance of evidence collected, and need for disclosure of additional conclusions. Adequate documentation is necessary because it will ultimately support the auditor's conclusions. However, the auditor must also include all information that is inconsistent or contradictory to their conclusions. This means that all procedures performed, recorded documenting consultations, resolutions, and differences in judgment between those involved in the engagement must be included. If the audit documentation is determined to be incomplete after the completion date the auditor must demonstrate that procedures were performed, evidence was collected and conclusions were reached according to the assertions of the financial statements, in the form of pervasive other evidence. Oral communication can help clarify evidence but, alone, is not considered pervasive other evidence.

Documentation of procedures, including testing of details, test of operating effectiveness of controls, and walkthroughs, should include items inspected. Documentation of procedures performed to inspect contracts and agreements must include abstracts or copies, identifying these documents may meet these standards by indicating the source and criteria. Sample documents should have identifying characteristics, defined scope of selection from sample, and identification of source and start point.

Documents specific to the engagement should be included in the audit documentation. However, some documentation can be kept at a central repository at the office of the engagement team, if referenced in the audit documentation for instance, documents on auditor independence, staff training and proficiency, and client acceptance and retention. Within the audit documentation, the auditor must include significant findings and issues, the actions taken, and the conclusions reached, including but not limited to selection application, and consistency of accounting principles, findings that result in modification of audit procedures, audit adjustments, disagreements, difficulty in applying procedures changes in accessed audit risk and response to change, and anything that requires change to the audit report. The engagement completion document includes significant findings that help understanding of findings, issues and cross references. The engagement completion document should be specific enough for reviewer to understand findings, and should include findings from interim reviews.

Unless required by law all audit documents must be retained for seven years from various release dates depending on whether it was issued with financial statements and if the audit engagement was completed. If the auditor grants the firm permission to use the audit report with their annual report, then the start date from the retention period is the date permission is granted. If the report is not used with the firm's financial statements then the completion of field work serves as a start date, and if the engagement is not completed then the start date for retention is the date the engagement ends. Additionally, forty five days prior to each release date, the auditor must have complete and final audit documents that are ready for retention.

After the completion date, forty five days before the release date, the auditor cannot delete or discard any audit documentation. However, documentation can be added after the release date so long as the date, as well as the person whom added the information and why it was added, is recorded. This includes material added after the release date because of other standard requirements and documents provided by other auditors. The standard also requires that the firm issuing the auditor's report must obtain, retain and review all documents provided by other auditors, including engagement completion document, a list of fraud risk factors and the response and results of procedures, findings that are inconsistent or contradictory of conclusions, findings that affect consolidation or combining accounts, information required for issuing firm to reconcile the financial statements audited by other auditor, schedule of audit adjustments, deficiencies and material weaknesses in internal control, letters of representation from management, and communications with audit committee. However, if the issuing auditor references the other auditor in the report he should disregard this and refer to AU sec.543.