DOCUMENTATION DEFINED Auditing Help

Documentation refers to working papers kept by the auditor as regards audit planning, procedures performed, information and explanations obtained from client and the conclusions drawn from the work performed.

OBJECTIVES / IMPORTANCE OF DOCUMENTATION

a) Assist in planning and performance of audit

Preparation of audit programme and performance of procedures accordance with audit programme assist in planning performance of audit.

While performing the audit, the assistant can check whether or not be has carried out all steps as set out in audit programme.

b) Assist in supervision and review of audit work

Working papers assist in supervision and review of audit work as they enable the reviewer to ensure that:

i) Working papers are signed, dated and indexed.

ii) All subsidiary working papers are cross-referenced.

iii) Lead schedules agree with trial balance and financial statements.

iv) Work has been done in accordance with audit programme.

v) Time spent has been recorded.

c) Record the audit evidence resulting from the audit work performed to support the auditor’s opinion, including representation that the examination was conducted in accordance with International Standards on Auditing.

In the above context, working papers will facilitate ensuring following matters:

i) Conclusions drawn are consistent with results of work performed.

ii) Errors and irregularities found are documented

iii) Proposed audit adjustments have been recorded.

iv) Points for further investigation are noted.

v) After the issuance of audit report working papers are the only tangible proof the auditor has, to demonstrate that the examination has been conducted in accordance with  International Standards on Auditing. The auditor works with original documents and books of accounts, which are left with the client after complete of audit. There is always a possibility that the auditor will have to prove the adequacy and appropriateness of the tests in the court.

FORM OF WORKING PAPERS

Working papers should be sufficiently complete and detailed. If through the study of working papers alone, another auditor who has no previous experience with the client is able to understand the work performed and to determine the bases of significant conclusions drawn, it is considered that working papers are sufficiently complete.

QUALITY OF WORKING PAPERS

Working papers should be:

  1. Clear
  2. Concise
  3. Complete
  4. Neat
  5. Well indexed
  6. Informative.

ORGANISATION OF WORKING PAPERS

Working papers should be so organized and indexed that any information required at a subsequent date may be instantly obtained from the working paper files.

Usual approach is to assign certain alphabetical references to various sections of the current audit file, generally in the same order in which the assets and liabilities are reported in the financial statements.

One scheme of indexing of current file will be

(A) Administration
(B) Letter of representation
(C) Audit planning Memorandum
(D) Draft accounts
(E) Time budget
(F) Fixed assets
(G) Group accounts
(H) Holding companies
(I) Intangibles
(J) Stocks and work in progress
(K) Debtors and prepaid expenses
(L) Cash and bank
(M) Shareholders’ equity
(N) Long term debt
(O) Creditors and accrued expenses
(P) Profit and loss accounts
(Q) Ratio analysis
(R) Subsequent events
(S) Transactions tests
(TA) Purchases
(TB) Sales
(TC) Cash receipts and payments
(TD) Payroll
(TE) Cost of production
(TF) Operating expenses.

Various sections of the working paper files are segregated through dividers or separators. Each section will contain audit programme, a lead schedule and subsidiary working papers setting out the work performed and conclusions drawn.

For example, the working paper for fixed assets may be organized like this:

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The above is the lead schedule which will be labeled as “F.” Motor vehicles are indexed as F-l, Furniture as F-2, and office equipment as F- 3,

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UTILIZATION OF WORKING PAPERS PREPARED BY CLIENT

Generally it would be cost efficient to request the client to prepare certain lead schedules and other analyses to be used for audit purposes. For example, the auditor may request the client to prepare a summary of fixed assets. The auditor may also use the documentation and summaries prepared by the client for internal purposes.

Where the auditor uses the working papers prepared by the client, he should test such working papers to satisfy himself as to the accuracy and reliability. The time spent in testing the client’s schedules will normally be substantially less than the time that would have been required had the auditor prepared the schedules himself.

CONTENTS OF WORKING PAPERS

In case of recurring audits, working paper files are classified as:

a) Permanent audit files; and
b) Current audit files.

PERMANENT FILE

• Permanent files are used to accumulate information of continuing importance to succeeding audits, and are updated every year.

• Instead of obtaining certain documents for each year’s working paper file, the auditor places them in a separate file as part of each year’s audit evidence. Obviously each year, the contents of the permanent file will be updated where necessary.

• The use of permanent files save the time by providing a central reference point in respect of matters of continuing audit importance.

• Usual contents of permanent file are:

• Legal status of the entity, e.g., limited company, partnership or sole proprietorship.

• Holding, subsidiary and associated companies

• Extracts from legal documents e.g., memorandum of association, article of association, or partnership deed.

• Organization chart

• Loan agreements

• Labour contracts

• Pension plans

Related parties

• Plant capacity

• Location of factories and manufacturing process

• Distribution channels

• Specimen signatures

• Authority limits

• Major suppliers and customers

• Client products

• Addresses of professional advisers, solicitors and bankers

• Joint auditors

• Scope of internal auditor

• Market share

• Legislation and regulation that significantly affect the client

• Key ratios

• Reporting environment

• Minutes of meeting of directors and shareholders

• Copies of previous management letters, and action taken by management on the recommendations made by the auditors.

• Record of information about management attitude toward internal controls, design of records and controls.

• Accounting system and books of accounts maintained.

• Copies of financial statements of previous years

• Other financial information of continuing nature e.g., financial highlights and significant ratios of last ten years.

• A summary of the study and evaluation of the accounting system and related internal controls.

• Specimen forms used by the client e.g., payment vouchers, receipt
vouchers, journal vouchers, sales invoices, delivery notes, goods receiving notes, purchase orders, inventory cards and internal control reporting formats.

• Other matters of permanent nature or which need updating.

Posted on November 2, 2015 in Audit Documentation

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