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Requirement for Audit Documentation

The auditor must prepare audit documentation, on a timely basis, in sufficient detail to provide a clear understanding of:

● The work performed, including the nature, timing, extent, and results of audit procedures performed;

● The evidence obtained and its source, and the conclusions reached; and

● The fact that the audit was planned and performed in accordance with GAAS and relevant legal and regulatory requirements.

(AU-C 230.02)

The form and content of the audit documentation should be designed for the specific engagement.

Form, Content, and Extent of Audit Documentation

The quantity, type, and content of the audit documentation are based on the auditor's professional judgment and vary with the engagement. Factors to consider in determining the content of audit documentation are discussed in the following paragraphs.

The Audience

The auditor should prepare audit documentation that would allow an experienced auditor8 having no previous connection with the audit to understand:

● The nature, timing, and extent of auditing procedures performed to comply with GAAS and applicable legal and regulatory requirements;

● The results of the audit procedures performed and the audit evidence obtained; and

● The significant findings for issues that arose during the audit, the conclusions reached on those significant matters, and professional judgments made in reaching those conclusions.

(AU-C 230.08)

Sufficiency of Audit Documentation

Audit documentation should include:

● Who reviewed specific audit work and the date the work was completed

● Who performed the audit documentation and the date of such review

● Identifying characteristics of specific items tested

(AU-C 230.09)

Audit documentation should also include abstracts or copies of significant contracts or agreements that involved audit procedure. (AU-C 230.10)

Documentation of Significant Findings

The auditor should document significant audit findings or issues, actions taken to address them (including additional evidence obtained), and the basis of the conclusions reached. Significant audit findings or issues include:

● Matters that are both significant and involve the appropriate selection, application, and consistency of accounting principles with regard to the financial statements, including related disclosures. Such matters often relate to (1) accounting for complex or unusual transactions or (2) estimates and uncertainties, and the related management assumptions, if applicable.

● Results of auditing procedures that indicate that the financial statements or disclosures could be materially misstated or that the auditing procedures need to be significantly modified.

● Circumstances that cause significant difficulty in applying necessary auditing procedures.

● Other findings that could result in a modified auditor's report.

The auditor should document discussions with management and those charged with governance, including when and with whom, about significant findings. (AU-C 230.11)

Departures from a Relevant Requirement

The auditor may find it necessary to not perform a required procedure. If so, the auditor should document the reason for the departure and how alternative procedures enabled the auditor to fulfill the objectives of the audit. (AU-C 230.13)

This documentation is required only if the required procedure is relevant to the audit. For example, if the entity does not have an internal audit function, procedures in AU-C 610 would not be relevant.

Factors to Consider in Determining the Nature and Extent of Audit Documentation

The auditor should consider the following factors in determining the nature and extent of the documentation for an audit area or auditing procedure:

● What is the risk of material misstatement associated with the assertion, or account or class of transactions?

● What is the extent of judgment involved in performing the work and evaluating results?

● What is the nature of the auditing procedure?

● What is the significance of evidence obtained to the tested assertion?

● What is the nature and extent of identified exceptions?

● Is there a need to document a conclusion or basis for a conclusion not readily determinable from the documentation of the work performed?

● What are the methodologies or tools used?

(AU-C 230.A4)

Documentation of Report Release Date and Revisions

The auditor should document the report release date and complete the assembly of the final audit file on a timely basis, but no later than 60 days following the report release date. (AU-C 230.15-.16) After this date, the auditor must not delete or discard existing audit documentation before the end of the specified retention period, not less than five years. If changes are made to the audit documentation after this date, the auditor should document the change, when and by whom the changes were made, the specific reasons for the change, and the effect of the changes, if any, on the auditor's previous conclusions. (AU-C 230.14 and .18)

Ownership and Confidentiality

The auditor owns the audit documentation, but his or her ownership rights are limited by ethical and legal rules on confidential relationships with clients. The auditor should adopt reasonable procedures to protect the confidentiality of client information. (AU-C 230.15-19) The auditor should also adopt reasonable procedures to prevent unauthorized access to the audit documentation. Sometimes audit documentation may serve as a source of reference for the client, but it should not be considered as a part of, or a substitute for, the client's accounting records.

Standardization of Audit Documentation

Audit documentation should be designed for the specific engagement; however, audit documentation supporting certain accounting records may be standardized.

The auditor should analyze the nature of his or her clients and the complexity of their accounting systems. This analysis will indicate accounts for which audit documentation may be standardized. An auditor ordinarily may be able to standardize audit documentation for a small-business client as follows:

1. Cash, including cash on hand

2. Short-term investments

3. Trade accounts receivable

4. Notes receivable

5. Other receivables

6. Prepaid expenses

7. Property, plant, and equipment

8. Long-term investments

9. Intangible assets

10. Deposits

11. Accrued expenses

12. Taxes payable

13. Long-term debt

14. Stockholders' equity accounts

Preparation of Audit Documentation

All audit documentation should have certain basic information, such as the following:

1. Heading

a. Name of client

b. Description of audit documentation, such as:

i. Proof of cash – Fishkill Bank & Trust Company

ii. Accounts receivable – confirmation statistics

c. Period covered by engagement

i. For the year ended…

2. An index number

a. All audit documentation should be numbered for easy reference. Audit documentation is identified using various systems, such as the following:

i. Alphabetical

ii. Numbers

iii. Roman numerals

iv. General ledger account numbers

v. A combination of the preceding

3. Preparer and reviewer identification

a. Identification of person who prepared audit documentation and date of preparation:

i. If client prepared the audit documentation, this should be noted. Person who checked papers also should be identified.

b. Identification of person who reviewed the audit documentation and date of review

4. Explanation of symbols

a. Symbols used in the audit documentation should be explained. Symbols indicate matters such as the following:

i. Columns were footed.

ii. Columns were cross-footed.

iii. Data were traced to original sources.

5. Source of information

a. The audit documentation should indicate source of information:

i. Client records

ii. Client personnel

Related Accounts

One page of audit documentation may provide documentation for more than one account. Many balance sheet accounts are related to income statement accounts. In these circumstances, the audit work on the accounts should be documented in one page of audit documentation. Examples of related accounts are the following:

1. Notes receivable and interest income

2. Depreciable assets, depreciation expense, and accumulated depreciation

3. Prepaid expenses and the related income statement expenses, such as insurance, interest, and supplies

4. Long-term debt and interest expense

5. Deferred income taxes and income tax expense

Client Preparation of Audit Documentation

It is advisable to have the client's employees prepare as much as possible of the auditor's audit documentation. This increases the efficiency of the audit. The auditor should identify the audit documentation as “Prepared by the Client” (PBC) and note the auditor who reviewed the client-prepared audit documentation. The preparation of audit documentation by the client does not impair the auditor's independence. However, the auditor should test the information in client-prepared audit documentation.

Quality of Audit Documentation

Audit documentation aids the execution and supervision of the current year's engagement. Also, such documentation helps the auditor in planning and executing the following year's audit. Audit documentation also serves as the auditor's reference for answering questions from the client. For example, a bank or a credit agency may want information that the auditor can provide to the client for submission to the third party from the audit documentation.

In case of litigation against the client, the auditor's audit documentation may be subpoenaed. In litigation against the auditor, the audit documentation will be used as evidence. Therefore audit documentation should be accurate, complete, and understandable. After audit documentation is reviewed, additional work, if any, is done, and modifications are made to the audit documentation, superseded drafts, corrected documents, duplicate documents, and review notes, and all to-do points should be discarded because the issues they addressed have been appropriately responded to in the audit documentation. (AU-C 230.A6)

Likewise, miscellaneous notes, memoranda, e-mails, and other communications among members of the audit engagement team created during the audit should be included or summarized in the audit documentation when needed to identify issues or support audit conclusions; otherwise, they should be discarded. Any information added after completion of fieldwork should be dated at the date added.

Oral Explanations

Oral explanations on their own do not represent sufficient support for the work the auditor performed or conclusions the auditor reached but may be used by the auditor to clarify or explain information contained in the audit documentation. (AU-C 230.A7)

NOTE: For example, if the auditing standards state that the auditor should obtain an understanding of the entity's control environment, but there is no evidence that he or she obtained such an understanding, then the auditor cannot make a plausible claim that the understanding was obtained but just not documented.

Audit Documentation Deficiencies

Some of the more common audit documentation deficiencies are failure to:

1. Express a conclusion on the account being analyzed.

2. Explain exceptions noted.

3. Obtain sufficient information for note disclosure.

4. Reference information.

5. Update and revise permanent file.

6. Post adjusting and reclassification journal entries to appropriate audit documentation.

7. Indicate source of information.

8. Promptly review audit documentation prepared by assistants.

9. Sign or date audit documentation.

10. Foot client-prepared schedules.

11. Explain tick marks.

Documentation Requirements in Other Sections

Certain other sections require documentation of specific matters. These requirements are presented in Illustration 4 at the end of this chapter. In addition, other standards, such as government auditing standards, laws, or regulations, may also contain specific documentation requirements.