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.
Estimated reading time: 6 minutes
Table of contents
- How about an example of Robust and Simple audit documentation?
- How shall be an Audit Documentation?
- What are the inclusive points that audit documentation deals with?
- What’s the need for Audit documentation?
- Where does the audit documentation be added?
- What are the factors on which the extent of audit documentation depends?
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 Points 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:
“We verified the additions selection by reviewing the Vendor invoice and performed inquires with the accounting team.”
“We obtained and reviewed the Invoice No. #43232 and Journal entry screenshots for the addition’s 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 that the vendor as per invoice is appropriately credited as 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.“
The second rationale provides more details in the documentation and portrays that audit team not just focused on the invoices but also the accounting part.
How shall be an Audit Documentation?
Audit Documentation Deals with both quality and quantity of documentation. Documentation of the audit procedures performed and audit evidence shall be sufficient enough so that an experienced auditor does not have any knowledge about the entity under audit able to understand it.
In other words, documentation shall be self-explanatory for an auditor who is not part of the audit team.
What does 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 inquiries and their responses
- Supports and Contracts which help the audit team in validating the transactions under audit
- Reference to the relating Audit and Accounting literature
- If we are trying to prove the evidence of preparation or review, then we can mention the following
- Sign off details along with dates,
- Review comments and how they are addressed,
- Any email in support of review
What’s the need for Audit documentation?
Audit Documentation deals with not just about the quantum and quality but also to address the requirements of statutory compliances and auditing standards. Lets 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 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 audit team performed audit procedures per the auditing standards.
Where does the audit documentation be added?
Audit documentation involves the following documents
- Planning documents
- Memos (For example, if there is any new regulatory requirement, then the audit team will documents the considerations in respect of 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 for each entity under audit. So, audit team need to add all the applicable documents together in the audit files.
What are the factors on which the extent of audit documentation depends?
- Size and complexity of the entity
- Nature of Funds. If there is a involvement of Public funds, then the need for more details and robust documentation is high. Else, 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.
- 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 the risk factors and arrive at level of risk here. Auditor understood the debtor’s financial position and historical transactions, and the concludes that the risk is higher as per their review of all the available information.
Audit documentation deals with more elaboration of rationale why they consider this account balance as higher risk. So, the they need add documentation to prove why they consider it has 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, lets see the example 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 balance. Per inquiry with Mike, Accountant, we noted that there are no further transactions with the debtor as the previous balance is uncleared. 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 is higher.”
Audit documentation is a crucial part of performing audits or reviews, proving that 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 of documentation is greater. There is no specific formula for audit documentation. However, there are some attributes like adding all the evidences, inquiries and their responses and conclusions reached. Moreover, there shall not be any mention of unclear and ambiguity in the documentation.