1 Why Document Audit?
Audit documentation is simply the record of:
- audit procedures performed
- Relevant audit evidence obtained by the application of audit procedures
- And the conclusions and interpretations drawn by the auditor on the basis of audit evidence obtained
The main purpose of audit documentation is to provide written or documented evidence regarding different audit related matters and provides evidence of:
- The basis for a conclusion that auditor’s overall objective has been achieved
- Audit planning and performance in accordance with the ISAs, applicable laws and regulatory requirements
Other important purposes audit documentation serves are as follows:
- Helping the engagement team in planning and performing audit. For example issues observed in previous and current audit can help plan further procedures.
- Enabling team members in supervision and review responsibilities of audit work performed by junior team members.
- Make engagement team answerable for the work it performed.
- Helps in keeping the record of such matters which can aid in future audits.
- Making it easy to conduct quality control reviews in accordance with ISAs or other applicable regulations.
- Making it possible to conduct external evaluations and inspections in the light of applicable frameworks during or after engagement.
Auditor’s objective is to prepare documentation in such a way that it provides:
- sufficient appropriate record of the basis on which auditor’s report is issued.
- sufficient evidence that audit was carried out in accordance with applicable ISAs, legal and regulatory requirements
Achieving objectives – Requirements
In order to achieve the objective, auditor has to take care of number of things related to documentation which are:
- Prepare audit documentation on timely basis
- Document the audit procedures performed and evidence obtained
- Assemble the audit documentation in a file called audit file
2.1 Timely preparation of audit documentation
The auditor shall assure timely preparation of audit documentation as it:
- reinforces audit quality
- Aids in review of work performed and evaluation of evidence gathered
- Enables the assessment of conclusions reached before audit report is finalized
Documentation should be done while performing the audit as documentation prepared after the work will not be as accurate if it was prepared during the engagement.
2.2 Documentation of procedures performed and evidence obtained
Auditor shall document in such a way that an experienced auditor even having no connection with the audit engagement can understand the following:
- The nature, timing and extent of the audit procedures performed to comply with the ISAs and applicable legal and regulatory requirements;
- The results of the audit procedures performed, and the audit evidence obtained; and
- Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions.
In documenting the audit procedures performed, the auditor shall also include in the documentation following items:
- Identifying characteristics of items and matters examined
- Who conducted the audit work and when such work completed?
- Who reviewed the work and when such review took place including the extent of such review?
The way the documentation is prepared and what should be included and what depends on number of factors such as:
- The size and complexity of the entity.
- The nature of the audit procedures to be performed.
- The identified risks of material misstatement.
- The significance of the audit evidence obtained.
- The nature and extent of exceptions identified.
- 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.
- The audit methodology and tools used.
The audit documentation may be kept in paper form or electronic form or any media deemed fit.
The auditor however needs not to include the following in the documentation:
- superseded drafts of working papers and financial statements,
- notes that reflect incomplete or preliminary thinking,
- previous copies of documents corrected for typographical or other errors,
- duplicates of documents.
Oral description i.e. undocumented explanations cannot adequately supplement the work performed but can be used to clarify the documented information.
2.2.1 Documenting compliance with ISAs
If entity follows the instructions stated in ISA 230 then it will automatically result in sufficient appropriate documentation. However, other standards may contain additional instructions regarding documentation which are given NOT to overrule the requirements of this standard rather supplement and clarify the requirements of ISA 230. Further, if no instruction is given regarding documentation in other standard then it does not mean that no documentation should be made and in such cases ISA 230 will still be applicable.
It is neither possible nor required by the auditor to document each and every aspect of audit engagement. Also, auditor is not required to document compliance in such matters where compliance is confirmed by the documents included in audit file. For example:
- Inclusion of detailed audit plan evidences the fact that auditor conducted a planned audit
- Presence of engagement letter duly signed proves that auditor and client agreed upon terms of engagement
- A qualified report indicates that auditor complied with relevant standard’s requirements.
- Some requirements are applied in general to the engagement e.g. professional skepticism, which cannot be documented directly. But documentation may demonstrate that auditor performs audit with skeptic attitude as he applied specific audit procedures to confirm the evidence provided by the management.
2.2.2 Documenting significant matters and related professional judgement
Significant matters are such matters that give risk to special audit consideration, treatment, conclusion or opinion.
What is significant matter is not clearly defined in International Standards on Auditing (ISAs) and therefore what amounts to significant matter while conducting audit engagement is left over the auditor to decide by exercising his professional judgement.
While deciding on significance of a matter, auditor is required to take an objective approach in analysing the circumstances surrounding the matter in consideration. Examples of significant matters include:
- Matters that give rise to significant risks
- Results of audit procedures indicating:
- that the financial statements could be materially misstated, or
- a need to revise the auditor’s previous assessment of the risks of material misstatement and the auditor’s responses to those risks.
- Circumstances that cause the auditor significant difficulty in applying necessary audit procedures.
- Findings that could result in a modification to the audit opinion or the inclusion of an Emphasis of Matter paragraph in the auditor’s report.
Due to their significance auditor has to ensure that they are resolved on timely basis. In addition to that such matters are required to be discussed with reasonable authority inside an entity like management or those charged with governance as the case may be.
The form, content and extent of documentation related to significant matters depend upon the extent of judgement exercised. This helps in:
- explain auditor’s conclusion
- later review by other auditors and
- subsequent audits
Sometimes a summary named completion memorandum is prepared that summarizes the matters identified and how it was resolved. It may contain references to other supporting documents. This helps in conducing quality assurance review being conducted efficiently and effectively.
The auditor should also document the significant matters raised in front of management or those charged with governance and the discussions on such matters including the date of discussions. For this auditor may include minutes of meeting or discussions with third parties who advise entity on professional matters.
If auditor discovers any inconsistency with his conclusion related to significant matters than auditor shall document how such inconsistency was resolved. For this auditor does not have to retain superseded and incorrect documents
2.2.3 Departure from ISA’s requirement
If auditor concludes that it is necessary to depart from the requirement of the ISA then he shall document how alternative treatment achieved auditor’s objective including the reasons for departure.
However, documentation is necessary only if auditor departed from relevant requirement. Requirement is not relevant when:
- Whole standard is irrelevant in the circumstances
- Requirement of standard is conditional and condition is not present
2.2.4 Matters arising after the date of auditor’s report
Auditor is not required to carry out any procedures once the auditor’s report has been issued. But in some circumstances auditor may perform additional audit procedures or draw new conclusions even after the date of auditor’s report e.g. subsequent events. In such circumventers auditor shall:
- The circumstances arisen
- Additional audit procedures performed, conclusions reached and resultant changes in audit documentation
- Who made and reviewed changes in audit documentation and when such changes were made and reviewed.
2.3 Assembly of audit file
All the audit documentation are assembled in a file named as audit file and auditor is required to complete the work related to assembling the audit file on timely basis. Usually completion of audit file should not take more than 60 days after the date of auditor’s report to complete.
Assembling the audit file involves administrative tasks and does not amount to additional audit procedures being performed.
Once the assembly of audit file is complete the auditor shall not made any changes to documentation until the end of retention period which is usually not be shorter than five years from the date of auditor’s report, or, if later, from the date of group auditor’s report.
However, during retention period, auditor may make administrative changes to audit file. For example;
- Sorting, collating and cross-referencing working papers
- Deleting or discarding superseded documents
- Signing off audit file assembly checklists
- Documenting evidence which was obtained, discussed and agreed with members of engagement team before the date of auditor’s report
In some circumstances after audit file is complete, auditor may conclude that modification to existing audit file is necessary then irrespective of nature of modification, auditor shall document:
- The reason for making such change
- When and by whom such changes were made and reviewed