What does Audit Documentation Deals with?

Audit documentation deals with the questions

• What needs to be documented?
• Quantum and Extent of documentation required
• How to add documentation?

Audit documentation means the context of how the auditor and their team rationalize the testing performed. Work not documented means work not performed. So, such documentation shall be robust, and there should not be any scope for ambiguity.

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How about an example of Robust and Simple audit documentation?

The audit team needs to add an explanation for a procedure performed and how the team is comfortable in concluding that the particular transaction or account balance is free from material misstatements. 

Let’s see one such Explanatory point documentation. 

Consider an audit team who are testing an entity’s Property Plant and Equipment additions activity. They evaluate the validity of the samples with the help of support such as Vendor invoices, agreements, and inquiries. The rationale is below:

Simple Documentation:

“We verified the addition selection by reviewing the Vendor invoice and performing inquiries with the accounting team.”

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Robust Documentation:

“We obtained and reviewed the Invoice No. #43232 and Journal entry screenshots for the additions’ selections from Lewis, Accounting Manager. 

Per review of the support, 

• We noted that the Invoice is addressed to the entity and relates to the current audit period. 
• Journal Entry amount agrees with the Invoice, and the vendor, as per the invoice, is appropriately credited as a Liability.

Further, we have inquired with Matt, our Industry specialist, and confirmed that the nature of the item in the Invoice is a Spare part used for this Property, Plant & Equipment. We conclude that this transaction is properly supported by evidence and appropriately accounted for.“

The second rationale provides more details in the documentation and portrays that the audit team is not just focused on the invoices, but also on the accounting part.

What shall be the Audit Documentation?

Audit Documentation Deals with both the quality and quantity of documentation. Documentation of the audit procedures performed and audit evidence shall be sufficient so that an experienced auditor does not have any knowledge about the entity under audit, is able to understand it.

In other words, documentation shall be self-explanatory for an auditor who is not part of the audit team.

Also Read: Interim Audit

What does an Experienced Auditor mean?

An experienced auditor is an individual with adequate knowledge and training about the audit and its procedures.

What are the inclusive points that audit documentation deals with? 

Audit Documentation shall have the following points – 

• Name the persons who are part of the audit team, inquiring, and their responses
• Supports and Contracts that help the audit team in validating the transactions under audit
• Reference to the related Audit and Accounting literature
• If we are trying to prove the evidence of preparation or review, then we can mention the following

What’s the need for Audit documentation?

Audit Documentation deals not just with the quantum and quality but also addresses the requirements of statutory compliances and auditing standards. Let’s look into these in depth.

• Audit Professionals (Certified Public Accountants or Chartered Accountants) or firms will have inspections by the public company oversight boards (PCAOB) or Peer reviews. These are quality checks to confirm if there is proper documentation, compliance with regulatory requirements, and ethical and professional standards. So, if there is appropriate documentation, then it will help auditors to claim compliance with all such requirements.
• Nowadays, business frauds and scams are increasing. So, there is a high chance of questioning the auditors and their work. Therefore, the audit documentation will be a saviour to prove that the audit team performed audit procedures per the auditing standards. 

Where should the audit documentation be added?

Audit documentation involves the following documents

• Planning documents
• Checklists
• Memos (For example, if there is any new regulatory requirement, then the audit team will document the considerations with respect to its compliance by the entity)
• Risk assessment
• Designing the applicable substantive procedures as per the risks
• Working papers (where auditors add all testing and explanatory points/rationale)
• Evaluation of the Specialist’s qualification, knowledge, and training– if any specialists are part of the audit. 

The above documents may not be applicable to each entity under audit. So, the audit team needs to add all the applicable documents to the audit files.

What are the factors on which the extent of audit documentation depends?

1. Size and complexity of the entity
2. Nature of Funds. If there is an involvement of Public funds, then the need for more details and robust documentation is high. Otherwise, there can be little leverage in adding documentation. However, in either case, the auditor shall ensure that they have sufficient audit evidence to confirm that the financials are free from material misstatements.
3. Risk of Material Misstatements. For example, if the risk is higher, the rationale shall be extensive enough to cover why a particular audit team prefers performing a specific substantive audit procedure. Therefore, the risk is directly proportional to the quantum of audit documentation.

How about a practical scenario?

ABC Company’s debtor balance has been outstanding for more than 150 days. But the company is confident that this balance will not turn out to be bad debt. So, this outstanding balance is not part of the doubtful debts allowance. 

As an auditor, we shall have an independent evaluation of the risk factors and arrive at a level of risk. Auditor understood the debtor’s financial position and historical transactions, and concluded that the risk is higher as per their review of all the available information.

Audit documentation deals with a more elaborate rationale for why they consider this account balance as higher risk. So, they need to add documentation to prove why they consider it to have a higher risk of material misstatements. 

Here, the evidence is like – Financials of he debtor, current year transactions, and the realization of balance, hints from news articles regarding the financial position, credit ratings from analyst reports, etc. Now, let’s see the example documentation.

Rationale Documentation:

“We have performed our analytics over the historical balance of this debtor and noted that there is a huge change in the current year’s balance. Per inquiry with Mike, Accountant, we noted that there are no further transactions with the debtor as the previous balance is unclaimed. Further, we have obtained and reviewed the financials and credit ratings of the debtor and noted that the debtor’s financial position is deteriorating. As such, we consider this risk to be higher.”

Conclusion:

Audit documentation is a crucial part of performing audits or reviews, proving that the audit team followed the applicable auditing standards. The extent of documentation will depend on the entity and its size, and the risk of material misstatements. If the risk is higher, then the requirement for documentation is greater. There is no specific formula for audit documentation. However, there are some attributes like adding all the evidence, inquiries, and their responses and conclusions reached. Moreover, there shall be no mention of unclear and ambiguous terms in the documentation.