Under Sarbanes-Oxley Act of 2002, section 103(a)(2)(A)(i) directs the Public Company Accounting Oversight Board (PCAOB or Board) to establish auditing standards that require registered public accounting firms to prepare and maintain audit documentation in sufficient detail to support the conclusions reached in the audit report. Therefore, the Board made audit documentation a priority. This standard require preparation of audit document include an audit of financial statements, an audit of internal control over financial reporting, and a review of interim financial information. However, the standard does not replace specific documentation requirements of other standards of the PCAOB.
The audit documentation standard is one of the fundamental on which both the integrity of audit and Board's oversight will rest. The quality and integrity of an audit depends on the existence of a complete and understandable record of the work the auditor performed, the conclusions the auditor reached, and the evidence the auditor obtained that supports those conclusions. On September 29, 2003, the PCAOB started a standards-development project on audit documentation by convening a public roundtable discussion, with representatives from public companies, public accounting firms, investor groups, and regulatory organizations, to discuss issues and hear views on the subject. The PCAOB posed several questions in the meeting to help identify the objectives and appropriate scope and form of audit documentation. On November 17, 2003, the Board developed and issued a proposed auditing standard titled, Audit Documentation for comment. In the end, PCAOB received 38 comment letters from auditors, regulators, professional associations, government agencies, and others. There were some changes made according from these comments, and other changes made the requirements of the standard easier to understand.
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Audit documentation facilitates the planning, performance, and supervision of the engagement, and is the basis for the review of the quality of the work because it provides the reviewer with written documentation of the evidence supporting the auditor's significant conclusions. Audit documentation also includes records of the planning and performance of the work, the procedures performed, evidence obtained, and conclusions reached by the auditor. Audit documentation may be referred to work papers or working papers.
Auditor should present to a company's board of directors or audit committee, stockholders, investors, or other interested parties are usually included in the auditor's report accompanying the financial statements of the company. However, auditor may make oral representations to the company or others, either on a voluntary basis or if necessary to comply with professional standards, including in connection with an engagement for which an auditor's report is not issued.
In addition, audit documentation is usually reviewed by members of the engagement team performing the work and might be reviewed by others, which include:
1. Auditors who are new to an engagement and review the prior year's documentation to understand the work performed as an aid in planning and performing the current engagement
2. Supervisory personnel who review documentation prepared by assistants on the engagement.
3. Engagement supervisors and engagement quality reviewers who review documentation to understand how the engagement team reached significant conclusions and whether there is adequate evidential support for those conclusion.
4. A successor auditor who reviews a predecessor auditors audit documentation.
5. Internal and external inspection teams that review documentation to assess audit quality and compliance with auditing and related professional practice standards; applicable laws, rules, and regulations; and the auditor's own quality control policies.
6. Others, including advisors engaged by the audit committee or representatives of a party to an acquisition.
There are some requirements of audit documentation. Audit documentation has to be prepared in adequate detail to provide a clear understanding of its purpose, source, and the conclusions reached. In addition, the documentation has to be correctly organized to provide a clear link to the significant findings or issues. Audit documentation may be in the form of paper, electronic files, or other media. The audit documentation should demonstrate that the engagement complied with the standards of the PCAOB and support the basis for the auditor's conclusions concerning every relevant financial statement assertion. It should also demonstrate that the underlying accounting records agreed or reconciled with the financial statements. Audit documentation mush contain sufficient information to enable an experienced auditor to understand the nature, timing, extent, and results of the procedures performed, evidence obtained, and conclusions reached. The auditor has to determine who performed the work and the date such work was completed as well as the person who reviewed the work and the date of review.
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The audit documentation has to support the auditor's final conclusions, so it must contain information the auditor has identified relating to significant findings or issues that is inconsistent with or contradicts the auditor's final conclusions. If auditor can determines and demonstrates that sufficient procedures were performed, sufficient evidence was obtained, and appropriate conclusions were reached, but the documentation is not sufficient, auditor have to consider adding additional information. On the other hand, if auditor cannot determine or demonstrate, auditor should comply with the provisions of AU sec. 390, Consideration of Omitted Procedures After the Report Date.
There are requirements of documentation for specific matters. Documentation should have identification for auditing procedures that involve the inspection of documents or confirmation, including tests of details, tests of operating effectiveness of controls, and walkthroughs. The identification of the items inspected may be satisfied by indicating the source from which the items were selected and the specific selection criteria. Other matters like auditor independence, staff training and proficiency and client acceptance and retention, may be documented in a central repository for the public accounting firm ("firm") or in the particular office participating in the engagement. At the same time, the audit documentation should include a reference to central repository.
Significant findings or issues are substantive matters that are important to the procedures performed, evidence obtained, or conclusions reached, and in clued all matters that could result in modification of the auditor's report. Auditor must identify all significant findings or issues in an engagement completion document. The document with any documents cross-referenced should collectively be as specific as necessary for reviewers to gain a thorough understanding of the significant findings or issues.
The last part in the Auditing Standard is retention of and subsequent changes to audit documentation. The auditor must keep audit documentation for seven years from the date the auditor grants permission to use the auditor's report in connection with the issuance of the company's financial statements (report release date), unless a longer period of time is required by law. However, if a report is not issued in connection with an engagement, then the audit documentation must be retained for seven years from the date that fieldwork was substantially completed. If the auditor was unable to complete the engagement, then the audit documentation must be retained for seven years from the date the engagement ceased.
The auditor must complete all necessary auditing procedures and obtained sufficient evidence to support the representations in the auditor's report within prior to the report release date. Audit documentation must not be deleted or discarded after the documentation completion date, but information may be added with indication of date, name of the person who prepared the information, and the reason for adding it. In addition, the auditor must identify and document any additions to audit documentation as a result of these procedures consistent with the previous paragraph.
For the office of the firm issuing the auditor's report is responsible for ensuring that all audit documentation sufficient to meet the requirements of Audit Standard. Also, the office must obtain, and review and retain, prior to the report release date, the following documentation related to the work performed by other auditors. At the end, the auditor may be required to maintain documentation in addition to that required by the standard.