BALID, LEAH L.

–BSA 3

CHAPTER 18 AUDITING THEORY – OUTLINE

PSA 230, "Audit Documentation" establishes standards and provides guidance

regarding audit documentation in the context of the audit of financial statements

The standard on documentation requires that the auditor should prepare on a timely
basis, audit documentation that provides:

(a) A sufficient and appropriate record of the basis for the auditor's report; and

(b) Evidence that the audit was performed in accordance with PSAs and applicable
legal and regulatory requirements.

"Audit documentation" means the record of audit procedures performed, relevant

audit evidence obtained, and conclusions the auditor reached (terms such as ''working
papers" or "work papers" are also sometimes used).

"Audit file" means one or more folders or other storage media, in physical or
electronic form, containing the records that comprise the audit documentation for a
specific engagement.

"Experienced auditor" means an individual (whether internal or external to the firm)

who has practical audit experience, and a reasonable understanding of:

i. the business environment in which the entity operates, and

ii. audit processes,

iii. PSAs and applicable legal and regulatory requirements,

 iv. auditing and financial reporting issues relevant to the entity's industry.

NATURE OF AUDIT DOCUMENTATION

Audit working papers are the records kept by the auditor of the procedures applied,
the tests performed, the information obtained and the pertinent conclusions reached in
the engagement. They represent the documentation of audit evidences collected and
evaluated.

OBJECTIVES OF AUDIT DOCUMENTATION

The primary objective of audit documentation is preparing sufficient and

appropriate, audit documentation on a timely basis to help enhance the quality of the
audit and to facilitate the effective review and evaluation of the audit evidence obtained
and conclusions reached before the auditor's report is finalized.

Documentation prepared at the time the work is performed is likely to be more

accurate than documentation prepared subsequently.

The other objectives of audit documentation are:

a. Assisting the engagement team to plan and perform the audit.

b. Assisting• members of the engagement team responsible for supervision to direct

and supervise the audit work, and to discharge their review responsibilities in
accordance with PSA 220.

c. Enabling the engagement team to be accountable for its work.

d. Retaining a record of matters of continuing significance to future audits.

e. Enabling the conduct of quality control reviews and inspections in accordance with
PSQC 1.
f. Enabling the conduct of external inspections in accordance with applicable legal,
regulatory or other requirements.

FORM, CONTENT AND EXTENT OF AUDIT DOCUMENTATION

The auditor shall prepare audit documentation that is sufficient to enable an

experienced auditor, having no previous connection with the audit, to understand:

(a) The nature, timing, and extent of the audit procedures performed to comply with the
PSAs and applicable legal and regulatory requirements;

(b) The results of the audit procedures performed, and the audit evidence obtained;
and

(c) Significant matters arising during the audit, the conclusions reached thereon, and
significant professional judgments made in reaching those conclusions.

The form, content and extent of audit documentation depend on the factors such
as;

•The size and complexity of the entity.

•The nature of the audit procedures to be performed.

•The identified risks of the 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 of audit evidence
obtained.

•The audit methodology and tools used

It is, however, neither necessary nor practicable to document every matter the
auditor considers during the audit.

Oral explanations by the auditor, on their own, do not represent adequate support for
the work the auditor performed or conclusions the auditor reached, but may be used to
explain or clarify information contained in the audit documentation.

In documenting the nature, timing and extent of audit procedures performed, the
auditor shall record:

(a) The identifying characteristics of the specific items or matters tested,

(b) Who performed the audit work and the date such work was completed and

(c) Who reviewed the audit work performed and the date and extent of such
review.

The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit tile on a timely basis after the date
of the auditor's report.

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 its retention
period.

In circumstances other than those mentioned in paragraph 13 of PSA 230 where the
auditor finds it necessary to modify existing documentation or add new audit
documentation after the assembly of the final audit tile has been completed, the
auditor shall, regardless of the nature of the modification or additions, document:

(a) the specific reasons for making them; and

(b) When and by whom they were made and reviewed

CHARACTERISTICS OF QUALITY AUDIT DOCUMENTATION

Audit documentation is the record that forms the basis for the auditor's representations
and conclusions. Audit documentation facilitates the planning, performance, and
supervision of the audit and forms the basis of the review of the quality of the work
performed. Audit documentation includes records of the planning and performance of
the work, the procedures performed, evidence obtained, and conclusions reached by
the auditor.

Documenting Planning and Risk Assessment Procedures

The planning process and risk assessment procedures from the foundation for the
audit and should be carefully documented. The auditor should document the overall
audit strategy and the audit plan. Further, the auditor should document the overall
planned responses to address the assessed risks of material misstatement, and the
nature, timing, and extent of the further audit procedures to be performed. as well as
the linkage of those procedures with the assessed risks at the relevant assertion level.
The documentation serves an important planning function for the audit; it also serves
as evidence that the auditors took their responsibilities seriously in evaluating potential
problems or special circumstances involved in or related to, the audit.

Examples are:

 Interviews with key executives, with implications clearly drawn for the conduct of
the audit.
 Business risk analysis, fraud risk analysis, and analytical procedures, with a clear
identification of accounts and assertions requiring special audit attention.
 The auditor's assessment of materiality, overall audit approach, and personnel
needed.
 Evidence of planning (including identification of and response to risks of material
misstatement), including the audit program.
  Audit approach and basic data utilized to identify risk, including fraud risk.
Documenting Audit Work Performed

Documentation about audit work performed is critical in demonstrating at a later date

that the audit was conducted in a quality manner. The following are typical types of
documentation used to demonstrate the audit work that was performed.

 The client's trial balance and any auditor-proposed adjustments to it

 Copies of selected internal and external documents.
 Auditor-generated analysis of account balances (for example, audit software
analysis of accounts and relationships).
Documenting Significant Issues and Their Resolution

 Significant issues or audit findings are defined as substantive matters that are
important to the analysis of the fair presentation of the financial statements. The
following examples of significant issues or audit findings: Significant matters
involving the selection, application, and consistency of accounting principles,
including related disclosure. Significant matters include, but are not limited to,
accounting for complex or unusual transactions, accounting estimates, and
uncertainties, as well as related management assumptions.
 Results of auditing procedures that indicated a need for the modification of
planned auditing procedures, or the existence of material misstatements,
omissions in the financial statements, significant deficiencies, or material
weakness in internal control over financial reporting.
 Audit adjustments. An audit adjustment is a correction of a misstatement of the
financial statements that was or should have been proposed by the auditor,
whether or not recorded by management, which could, wither individually or
when aggregated with other misstatements, have a material effect on the
 company's financial statements. Circumstances that cause significant difficulty
in applying auditing procedures.
TYPES OF WORKING PAPERS

There are innumerable types of audit working papers since they contain a
variety of information gathered by the auditors. However, there are certain
gomers categories in which most working papers may be grouped. These are

1. Audit administrative working papers

2. Working trial balance and lead schedule

3. Supporting schedules and analysis

4. Adjusting and reclassifying entries

5 Audit memoranda and documentation of corroborating information

1. AUDIT ADMINISTRATIVE WORKING PAPERS

Audit program is a detailed list of procedures to be performed in an

engagement.
Purposes of Audit Program include:

1. It serves as a procedural guide during the course of the audit

2. It serves as a basis in dividing the audit work among staff members.

3. It serves as a basis of reviewing progress of audit work

4. It enables the auditor to ensure that the program designed to substantiate

amounts appearing in the accounts and have related notes have covered all
material aspects thereof.
 A well-designed audit program will provide evidence of

a. Proper planning including assurance that important steps were not overlooked.

b. Coordination and monitoring the audit work.

c. Proper supervision and review of the audit.

d. Completion of all audit steps. e. Compliance with the standards in performing an

audit.

Types of Audit Programs

1. Standard all-purpose audit program lists standard practices applicable to almost

every engagement

2. Tailor-made audit program lists the procedures to be followed on a specific audit

engagement, indicating any departure from normal practices and specifying the
extent of the tests of transactions.

3. Modified standard form audit program a preprinted program that outlines the
usual audit procedures common to most businesses and provides space for an
auditor to indicate other specific procedures applicable to the business under
examination.

2. WORKING TRIAL BALANCE AND LEAD SCHEDULES

This is a list of the accounts in the client's general ledger with columns that, as a
minimum include unadjusted amounts directly from the client's accounting records,
proposed adjusting entries, and adjusted (audited) amounts. Often called the
backbone of the working papers, the working trial balance Working Trial Balance

1. provides an overall index of the working papers,

 2. aids in controlling and reviewing the examination as it progresses. and serves as
the base for accumulating and arranging account balances

3: for financial statement presentation.

Lead or Top Schedule

This is a working paper on that shows the grouping of related acc. balances. Each
line item on the trial balance is supported by a lead schedule, containing the
detach detailed accounts from the general ledger making up the line item total.
Each detailed account on the lead schedule is, in turn, supported by appropriate
supporting schedules evidencing the audit work performed and the reached.

3. SUPPORTING SCHEDULES AND ANALYSES

Supporting Schedules

These are the detailed schedules prepared by auditors in support of specific

amounts on the financial statements. For example, a cash count sheet is prepared
to provide the details of the composition of cash on hand and account as of a
particular date.

Account Analysis

This working paper shows the activity during the period in a particular statement of
financial position account. It starts with the beginning balance, shows the
transactions (additions and reductions) that occurred during the period, and
concludes with the ending balance. This type of working paper schedule is often
used for notes receivable, marketable securities, property, plant and equipment,
long-term debt and for all equity accounts.

4. SUMMARY OF ADJUSTING AND RECLASSIFYING ENTRIES

Adjusting Entries are corrections of material errors in the accounting records
discovered by the auditor. These entries must be approved by the client because
management has primary responsibility for the fair presentation of the statement.
For example, if the client failed to provide allowance for doubtful accounts in the
accounts receivable, an adjusting entry can be made to reflect properly its
realizable value.

Reclassifying Entries are made in the statements to present accounting

information properly, even when the general ledger balances are correct For
example, material credit balances in customers' accounts should be purlassified to
accounts payable for finencial statement presentation purposes.