The use of standardized working papers (for example checklists, specimen letters) may improve the efficiency with which such working papers are prepared and reviewed. Give five examples each of standardized checklists and specimen letters.
1. Financial statement disclosure checklist, issued by ICAP setting out disclosure requirements in accordance with International Accounting Standards, Companies Ordinance, 1984 and technical releases issued by ICAP.
2. Internal control questionnaire, a useful checklist to document the client’s system of internal controls 3. Audit completion checklist, provides a comprehensive list of essential audit procedures
4. Quality control checklist, provides a list of audit firm’s policies and
procedures designed to ensure that all audits are conducted in accordance with International Standards on Auditing.
5. Client’s acceptance checklist, a form which lists client’s acceptance procedures in particular the investigation procedures from bankers, solicitors and investment bankers.
1. Accounts receivable confirmation letters, used to confirm outstanding balances from customers.
2. Bank confirmation letters, to directly confirm bank balances, securities, guarantees issued by bank on behalf of client and authorized signatories.
3. Letter of representation, obtained where other sufficient appropriate audit evidence cannot reasonably be expected to exists.
4. Engagement letter, sets out terms of engagement.
5. Communication with the predecessor auditor, asking whether there are any professional reasons why the nomination should not be accepted.
What could be the consequences of maintaining inadequate working papers?
Possible consequence of maintaining inadequate working paper are:
(a) Supervision of the audit will be difficult
(b) Non compliance of ISA 300 which requires documentation of the overall audit plan.
(c) Non compliance oflSA 400 which requires documentation of:
(i) Understanding of the entity’s accounting and control system.
(ii) Assessment of control risk.
(d) it will be difficult to review that:
(i) the work has been performed in accordance with the audit program.
(ii) All significant matters have been resolved or are reflected in audit conclusions.
(iii) Conclusions are consistent with result of work performed and support the audit opinion.
(iv) Performance of test of controls and substantive procedures are not evidenced.
(v) Evidence for proposed audit adjustments will be missing.
(vi) Record of communication with other auditors. Experts and other third parties will not be evidenced.
(vii) Matters discussed with entity and their responses will not be evidenced.
(viii) Inappropriate audit opinion may be given.
(ix) Difficult to defend in case of litigation
(x) Ineffective and inefficient audit.
Your assistant has prepared following work paper to ascertain the customers have been billed for all dispatches.
Client Doc Enterprises Prepared by by 3/2/07
Year ended 31/12/09 Reviewed by km 15/2/07
Subject Sales and receivables
Enumerate some significant deficiencies in the above work paper.
1. The Population selected is incorrect. The auditor should have checked dispatch notes with invoices to see that an invoice exists for all dispatches.
2. Following information should have been mentioned in work papers:
– Total population (value and number)
– Basis of selection (value and number)
– Reference of invoice numbers and dispatch notes tested
– Reference of page number.
The auditor should update permanent file for changes in accounting system of the client. State procedures you would apply to update the system.
(a) Make a study of last year’s internal control questionnaire
(b) Obtain procedures manual from the client for the current year
(c) Inquire from client of changes made in the current year
(d) Record appropriate changes in the last year’s questionnaire
(e) Perform walk through test to confirm understanding of the updated system.
Discuss objectives and importance of documentation
Refer to paragraph 2 of the text
List some of the contents of current and permanent working paper files.
Refer to paragraph 6.1 and 6.2 of the text
Why the documentation should be prepared on a timely basis?
If documentation is not prepared on a timely basis, the effective review will be difficult. Also, documentation prepared too late, is likely to be less accurate.
What matters determine the form and contents of documentation.
Matters to be considered in. determining form, contents and extent of audit documentation include;
– Nature and size of business
– Nature of audit procedures
– Risk of material misstatement
– Misstatements and non compliance of controls
– Audit methodology used
– Extent of professional judgment exercised
– Factors which influence the judgment
– Basis for evaluation of validity of audit evidence in circumstances when further investigation is carried out.
Give some examples of identifying characteristics to be recorded.
Some of the examples of identifying characteristics are:
(a) Date and number of sales invoices tested
(b) Confirmation to debtors whose balances exceed Rs. 100,000
(c) Basis for selection in systematic sampling
(d) To whom the queries were raised and on what dates
(e) Identifying numbers of inventories counted on test basis.
Discuss some significant matters regarding assembly of the audit file.
Significant matters regarding assembly of audit file include:
1. The assembly of the final audit file should be completed within 60
days of the date of auditor’s report.
2. Completeness of the file after the date of audit report is an administrative process only and does not involve additional audit procedures.
3. Allowed changes after the date of audit report include:
– Cross referencing
– Deleting superseded working papers
– Signing off checklist relating to completion of assembly process
– Documentation for comments arising for subsequent review of working ‘papers. by external parties.
Indus Limited has a policy to change their auditors every year. Explain whether the auditors of Indus Limited should prepare proper working papers, despite the fact that they would not be appointed for the next term?
ISA requires preparation of working papers in all circumstances because working papers assist in supervision and review of audit work. Also, the working papers provide an evidence for work performed.
The preparation of working papers is an integral part of the auditor’s responsibilities. Identify the factors that the auditor should consider while determining the form, content and extent of audit working papers.
The auditor should consider the following factors while determining the form, content and extent of audit working papers:
(i) The nature of the audit procedures to be performed
(ii) The identified risks of material misstatement
(iii) The extent of judgment required in performing the work and evaluating the results
(iv) The significance of the audit evidence obtained
(v) The nature and extent of exceptions identified
(vi) 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 and.
(vii) The audit methodology and tools used.
You work as assistant manager in one of the leading firm of chartered accountants. Your partner has asked you to prepare a presentation for some of the newly recruited staff. As part of this presentation, you are required to explain the nature and objectives of maintaining ‘Audit Documentation’ .
Nature and objectives of maintaining Audit Documentation
Audit documentation should provide:
- Evidence of the auditor’s basis for a conclusion about the achievement of the overall objective of the auditor; and
- Evidence that the audit was planned and performed in accordance with ISAs and applicable legal and regulatory requirements.
Audit documentation serves a number of additional purposes, which include:
– Assisting the engagement team to plan and perform the audit.
– Assisting members of the engagement team responsible for supervision, to direct and supervise the audit work and to discharge their review responsibilities.
– Enabling the engagement team to be accountable for its work.
– Retaining a record of matters of continuing significance to future audits.
– Enabling the conduct of quality control reviews and inspections.
– Enabling the conduct of external inspections in accordance with applicable legal, regulatory or other requirements.
You are the training manager at Guava & Co., Chartered Accountants. Some trainees in the firm have requested you to clarify the following issues:
(a) Can the auditor discard any audit document, forming part of his opinion, after the issuance of the auditor’s report?
(b) The changes that can be incorporated during the final the assembly process citing three such examples.
(c) The circumstances under which it becomes necessary to modify the existing audit documents or add new audit documents after the issuance of the auditor’s report and the matters that should be documented in such a situation.
Offer appropriate explanations for each of the above issues.
- After the assembly of the final audit file has been completed, the auditor shall not delete or discard audit documentation of any nature before the end of the retention period.
The firm should establish its own policies and procedures for the retention of engagement documentation. The retention period for audit engagement ordinarily is no shorter than five years from the date of auditor’s report.
- Changes in the audit documentation during the final file assembly process may only be made if they are administrative in nature. Examples of such changes include:
(i) Deleting or discarding superseded documentation;
(ii) Sorting, collating and cross referencing working papers;
(iii) Signing off on completion checklist relating to file assembly
(iv) Documenting audit evidence that the auditor has obtained,
discussed and agreed with the relevant members of the engagement team before the date of the auditor’s report.
- Under exceptional circumstances, the auditor performs new or
additional procedures or draws new conclusions after the date of the Auditor’s report. In this relation the auditor should document:
(i) The circumstances encountered.
(ii) The new or additional audit procedures performed, audit evidence obtained, and conclusion reached, and their effect on the auditor’s report.
(iii) When and by whom the resulting changes to audit documentation were made and reviewed.