Learning Objectives
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11-сhapter (COMPLETING THE AUDIT)
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In general terms, discuss the extent to which a US CPA firm’s potential liability to third parities is increased in an SEC registration audit. Discuss the implications of the IRS investigation, if any, relative to Marshall and Wyatt’s audit of Interstate LDC’s 20X3 financial statements. Discuss any additional investigative procedures that the auditors should undertake or any audit judgments that should be made as result of this investigation. Can Marshall and Wyatt validly refuse to surrender the subpoenaed working papers to the IRS? Explain. 472
Introduction The standard on documentation, ISA 230, 1 provides foundation principles of documentation. It advises: “The auditor should document matters which are important in providing evidence to support the audit opinion and evidence that the audit was carried out in accordance with ISAs.” The Audit Documentation standard from the US Public Company Accounting Oversight Board (PCAOB) 2 will also be considered in this appendix. 3 Audit documentation is the principal record of the basis for the auditor’s conclusions and provides the principal support for the representations in the auditor’s report. 4 Audit docu- mentation also facilitates the planning, performance, and supervision of the engagement and provides the basis for the review of the quality of the work by providing the reviewer with written documentation of the evidence supporting the auditor’s significant conclusions. Audit documentation includes records on the planning and performance of the work, the procedures performed, evidence obtained, and conclusions reached by the auditor. Working Papers Audit documentation also may be referred to as working papers (or work papers). Working papers are a record of the auditor’s planning; the nature, timing and extent of the auditing procedures performed; results of those procedures; and the conclusions drawn from the evidence obtained. Working papers may be in the form of data stored on paper, film, electronic media or other media. The terms working papers, work papers and documentation are often used inter-changeably in auditing. Working papers: Are a direct aid in the planning, performance, and supervision of the audit. If an auditor is to plan the audit adequately, the necessary reference information must be available in the working papers. The papers include a variety of planning information such as descriptive information about the internal control, background information about the client, a time budget for individual audit areas, the audit program, and the results of the preceding year’s audit. Record the audit evidence resulting from the audit work performed to provide support for the auditor’s opinion including the representation that the audit was conducted in accordance with ISAs. Working papers are an important physical aid in recording the results of audit tests. For example, when a sample is taken, the items drawn must be recorded and computations must be made. Working papers are also necessary for co- ordination of the work leading to an opinion. Supervisors who perform few, if any, actual audit tests make final decisions concerning opinion given on the financial statements. The supervisors use the working papers as a basis for evaluating the evidence gathered. Assist in review of the audit work. The working papers are used not only by supervisory personnel to evaluate whether sufficient competent evidence was accumulated, but also for other auditing and consulting work. Working papers are used by the consulting arm of accounting firms as a basis for income tax preparation, required government regulatory filings and other reports. They are a source of information for communications between auditors and boards of directors concerning internal control weaknesses. They are often used to train personnel. Provide proof of the adequacy of the audit. After the opinion has been given, working papers are the main physical proof that an adequate audit was conducted. The auditor works with original documents and accounting records that must be left with the client when the audit has been completed, so the working papers act as an index to those documents. If the auditor is called upon to prove the adequacy of the audit in a court of law or to regulatory agencies, the working papers are his basis of proof. ILLUSTRATION 11.A.1 Significant Findings or Issues Documented 8 Significant findings or issues include, but are not limited to, the following: Significant matters involving the selection, application, and consistency of accounting principles, including related disclosures. Such significant matters include accounting for complex or unusual transactions, accounting estimates, and uncertainties as well as related management assumptions. Results of auditing procedures that indicate a need for significant modification of planned auditing procedures or the existence of material misstatements or omissions in the financial statements or the existence of significant deficiencies in internal control over financial reporting. Audit adjustments and the ultimate resolution of these items. For purposes of this standard, an audit adjustment is a proposed correction of a misstatement of the financial statements that could, in the auditor’s judgment, either individually or in the aggregate, have a material effect on the company’s financial reporting process. Audit adjustments include corrections of misstatements, of which the auditor is aware, that were or should have been proposed based on the known audit evidence. Disagreements among members of the engagement team or with others consulted on the engagement about conclusions reached on significant accounting or auditing matters. Significant findings or issues identified during the review of quarterly financial information. Circumstances that cause significant difficulty in applying auditing procedures. Significant changes in the assessed level of audit risk for particular audit areas and the auditor’s response to those changes. Any other matters that could result in modification of the auditor’s report. FORM AND CONTENT OF THE WORKING PAPERS Significant Matters (Findings or Issues) ISA 230 states: “Working papers would include the auditor’s reasoning on all significant matters which require the exercise of judgment, together with the auditor’s conclusion thereon.” 5 The guidance does not explain what a “significant matter” would be. However, for a definition of significant matters, we may look to PCAOB’s documentation standard that states: “The auditor must document significant findings or issues, actions taken to address them (including additional evidence obtained), and the basis for the conclusions reached.” 6 See Illustration 11.A.1 for a list of significant findings or issues. The auditor must identify all significant findings or issues in an engagement completion memorandum. This memorandum should be as specific as necessary in the circumstances for a reviewer to gain a thorough understanding of the significant findings or issues. This memorandum should include cross-references, as appropriate, to other supporting audit documentation. Form and Content of the Working Papers The content of the working papers should be “sufficiently complete and detailed to provide an overall understanding of the audit”. 7 The working papers should contain information on planning the audit work; the nature, timing, and extent of the audit procedures performed; the results of the audit procedures; and the conclusions drawn leading to an opinion. 8 PCAOB is more specific: “Audit documentation must contain sufficient information to enable an experienced auditor, having no previous connection with the engagement: (1) to understand the nature, timing, extent, and results of the procedures performed, evidence obtained, and conclusions reached, and (2) to determine who performed the work and the date such work was completed as well as the person who reviewed the work and the date of such review.” 9 The working papers should convey the auditor’s reasoning on all matters, which require the exercise of judgment and the auditor’s conclusions. Where the auditor encounters difficult questions of principle or judgment, working papers record the relevant facts that were known by the auditor at the time the conclusions were reached. Extent of Contents The extent of what is included in working papers is a matter of professional judgment. It is neither necessary nor practical to document every matter the auditor considers. In assessing the extent of working papers to be prepared and retained, the auditor should think about what would be necessary to provide another auditor, who has no previous experience, with an understanding of the audit work performed. The working papers should convey the basis of the principal decisions taken. All auditing firms around the world have their own work paper formats, and these formats are modified from time to time. There is no one, standard, format. Format is influenced by audit requirements for direction, supervision and review of work performed by assistants as well as differences in audit firm methodology and technology. Working papers are designed and organized to meet the circumstances and the auditor’s needs for each individual audit. The use of standardized working papers (e.g. checklists, specimen letters, standard organization of working papers) may improve the efficiency with which such working papers are prepared and reviewed. They facilitate the delegation of work while providing a means to control its quality.
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