Audit Planning & Documentation

Vishal Thakkar

Preface

“With great powers come great responsibilities”

And who better than we professionals have powers as well as sense of such big responsibility therewith? Many professionals prove this by excelling in the various fields of accounting and auditing. The Institute of Chartered Accountants of India is always full of activities for developing the nature of work pattern & services provided by the professionals. One of these responsibilities, which the auditor is expected to fulfill, is ‘Audit Planning and Audit Documentation’.

Auditing is an integral part of a Chartered Accountant’s profession & Audit Planning and Documentation is an integral part of Auditing. So the ICAI has dedicated a special statute for Audit Planning (SA 300) Audit Documentation- (SA 230).

AUDIT PLANNING (SA 300)

Introduction:

Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan. The objective of auditor is to plan the audit so that it will be performed in an effective manner. Once the overall plan can be developed to address various matters identified in the overall audit strategy, considering the need to achieve the audit objectives through efficient use of auditor’s resources. Auditor should consider various matters in developing the overall plan like:-

• Terms of Engagement,
• Nature and Timing of reports,
• Applicable legal and statutory requirements,
• Accounting policies adopted by the client,
• Identification of significant audit areas,
• Setting Materiality levels etc. and more.

Auditor needs to obtain level of knowledge of client’s business that will enable them to identify events, transactions and practices that, in their judgment, may have a significant effect on financial information. Audit plan is more detailed

than overall audit strategy that includes the nature, timing and extent of audit procedures to be performed by engagement team members. Engagement partner and other key members of engagement team shall be involved in planning the audit, including planning and participating in the discussion among engagement team members so as to enhance effectiveness and efficency of planning process.

Auditor shall plan nature, timing and extent of direction and supervision of engagement team members and review of their work. Audit planning ideally commences at the conclusion of previous year’s audit, and along with related programme, it should be reconsidered for modification as the audit of their compliance and substantive procedures progress. For an initial audit, auditor may need to expand the planning activities because the auditor does not ordinarily have previous experience with the entity that is considered when planning recurring engagement.

For preparing the Audit Plan the auditor has to do the following Preliminary Planning Activities

Understanding the Entity and its Enviourment

Obtaining the required knowledge of the business is a continuous and cumulative process of gathering and assessing the information and relating the resulting knowledge to audit evidence and information at all stages of audit. For example, although information is gathered at the planning stage, it is ordinarily refined and added to in later stages of the audit as the auditor and the members of his audit team learn more about the business.

For continuing engagements, the auditor would update and re-evaluate information gathered previously, including information in the prior year’s working papers. The auditor would also perform procedures designed to identify significant changes that have taken place since the last audit, and document the same.

Understanding of Accounting process and Control environment

The auditor obtains an understanding of the accounting system sufficient to identify and understand:

• Major classes of transactions in the entity’s operations
• How such transactions are initiated
• Significant accounting records, supporting documents and specific accounts in the financial statements and
• The accounting and financial reporting process, from the initiation of significant transactions and other events to their inclusion in the financial statements.

The auditor should obtain an understanding of the control environment sufficient to assess management’s attitudes, awareness and actions regarding internal controls and their importance in the entity. Auditor’s overall understanding of the entity’s internal control systems sufficient to develop the audit plan.

Assessing Audit Risk

Audit risk has defined as, the risk that the auditor gives an inappropriate audit opinion when financially statements are material misstated. The auditor has to assess the risk for determining the extend of audit to be done or extend of sampling to be done, for preparing the audit plan.

After such above assessing such parameters auditor should summaries the audit plan by way of audit programme which should set forth the procedure needed to implement the audit plan. The audit plan may contain the audit objectives for each area and should have sufficient details to serve as a set of instructions to the assistants involved in the audit.

The auditor may wish to discuss elements of his overall plan and certain audit procedures with the client to improve efficiency of the audit and to coordinate audit procedures with work of the client’s personnel. The overall audit plan and the audit programme, however, remains auditor’s responsibility.

AUDIT DOCUMENTATION (SA 230)

Audit Documentation- Emergence of concept

In audit, the auditor is expected to maintain the systematic track of records to provide a high level of assurance on the reliability of financial statements. The auditor provides a positive opinion, which essentially states that based on the work performed; the financial statements comply with relevant accounting standards and principles. The level of testing procedures to obtain the evidence necessary to support such an opinion needs to be high. It is essential for the auditor to design audit plan in such a manner that the audit procedures brings into light all material and relevant factors that go in as part of the audit and finally finds its place in the Audit Report. Oral explanations are not sufficient to document auditors’ work or conclusions. Auditors should document audit evidence that contradicts or is inconsistent with audit conclusions. The audit working papers constitute the link between the auditor’s report and the client’s record. Thus the concept of Audit Documentation came into emergence.

Audit Documentation- Definition & Meaning

• As per SA -230 issued by the ICAI

Audit documentation is the working papers prepared and obtained by the auditor and retained by him in connection with performance of an audit.

• As per International Standard on Auditing – 230 (Revised)

Audit Documentation is the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached.

Audit documentation- A Practical Approach- Audit documentation has to provide the principal support for the representations in the auditor’s report and to assist in the planning, performance, and supervision of the audit engagement. The most fundamental aspect of documentation is preparation or acquisition of working papers by the auditor in connection with performance of his audit. The objective of working papers is to record the audit work from one year to another. Thus the auditor should provide for the entire following essential features.

Scope and Extent of Working Papers:

• The working papers can contain the following information:

1. Client’s Name
2. Type of engagement
3. Nature of business
4. Internal control system of the client
5. Reliance on internal control Measures
6. How the knowledge of business was obtained?
7. Clarifications obtained from the client.

• The auditor should sufficiently document the matters to give experienced auditors who were not previously involved in the audit a clear understanding of the work performed, the evidence obtained and the conclusions reached. Basically the subsequent matters should be covered.

1. The nature, timing, and extent of the audit procedures performed to comply with SA s and applicable legal and regulatory requirements,
2. The results of the audit procedures and the audit evidence obtained

Form and Content of Working Papers:

• The various aspects of the business environment may affect the process of audit. So the auditor should look after such things. As per the guidelines issued by the SA -230 the form or content of the working papers are affected by various matters such as

1. The nature of the audit engagement
2. The form of auditor’s report
3. The nature and complexity of the client’s business
4. The nature and condition of client’s records and degree of reliance on internal controls
5. The need in particular circumstances for direction, supervision and review of work performed by assistants.
6. Extent of judgment required in performing the work and evaluating the results, for example, accounting estimates require greater judgment and commensurately more extensive documentation;

• Further, the working papers should record the

1. Audit plan
2. The nature of audit
3. The timing and extent of auditing procedures performed

Significant Matters to be included in Working Papers:

• When preparing audit working papers, the auditor of an entity may also find it helpful and efficient to record various aspects of the audit together on a single working paper, with cross-references to supporting working papers where appropriate. Examples of matters that may be documented together in an audit include the understanding of the entity and its internal control,

1. The overall audit strategy and audit plan,
2. Materiality,
3. Assessed risks,
4. Significant matters noted during the audit, and conclusions reached.
5. Significance of the evidence obtained to the assertion being tested

a.Process of Audit Documentation-

The documentation process goes hand-in-hand with the Audit process. Thus in connection of above points considered, the actual process of documentation can be divided into three categories as follows:

a. Pre-audit Documentation

b. Audit ongoing documentation

c. Post-audit Documentation

a. Pre-audit Documentation- Main Features

Pre-audit documentation mainly comprise of the acquisition of the papers necessary for the Audit purpose such as

• Appointment letter from the appointing body

• Correspondence letters with the previous auditors

• Sharing responsibilities with the other auditors.

b. Audit ongoing Documentation- Main features

The main groups of documentation activities, which are to be completed during the audit process, are follows:

• Preparation of Audit program

• Filling of important documents

• Correspondence letters with the management

c. Post-audit Documentation- Main Features

The post audit documentation is equally important as it benefits the auditors of subsequent year. The post-audit activities include:

• Letter of reappointment of auditors

• Notice of AGM, etc.

d. Significance of Audit Documentation:

1. Aid in Peer Review:

The term “Review” is defined as “subject to a formal inspection or appraisal and reassessment of the matter in question”.

Thus, peer review for chartered accountants would mean evaluation of a colleague’s work professionally. Peer review applies only to practicing Chartered Accountants as Audit and practicing Chartered Accountants can perform assurance work only.

Peer review is conducted with an idea to suggest improvements in the reporting services provided unlike auditing and investigation which are conducted with a focus to comment on the truthfulness of the financial and accounting records.

This leads to strengthening of the audit process and methodology deployed, including documentation of working papers as the basis for arriving at conclusions on critical matters.

Documentation is the main focus for Peer Review. The experienced auditor with the help of documentation can very well conduct the audit Peer Review if the Documentation is good.

2. Aid in legal and professional requirements:

The Institute of Chartered Accountants of India has specified certain professional and technical ethics, which every Chartered Accountant is required to follow. These ethics are defined by codes of conduct and the standards issued by ICAI. Wherever the Institute feels that any CA does not follow these ethics, prosecution is initiated against him and if he is found guilty, the disciplinary actions are taken.

In prosecution cases the Documentation proves to be one of the important evidence.

• Specific Purposes & Objective of Audit Documentation:

a. Assisting auditors to plan & perform audit

b. Assisting those responsible to direct, supervise and review the work performed

c. Providing and demonstrating the accountability of those performing the work e.g. (compliance with applicable standards)

d. Assisting quality control reviewers to understand and assess how the engagement team reached and supported the significant conclusions

e. Enabling internal and external inspection teams and peer reviewers to assess compliance with professional, legal and regulatory standards and requirements and

f. Assisting successor auditors and article assistant

• Importance of Audit Documentation:

The audit documentation constitute important evidence of matters considered by the auditor during the course of the audit, some of which may not find a place in his report submitted to the shareholders or the directors, for the reason that on the basis of an explanation given to him by the management, he, on being satisfied, decided to drop them. As such,

1. Audit notes can be an important defense for the auditor in the event of an action for negligence in the discharge of his duties being subsequently brought against him.
2. The working papers provide guidance to the audit staff with regard to the manner of checking the schedule.
3. The auditor is able to fix responsibility on the staff member who signs each schedule checked by him
4. It acts as evidence in the court of law when a charge of negligence is brought against the auditor.
5. It acts as the process of planning for the auditor so that he can estimate the time that may be required for checking the schedules.
6. Provide a source of information for non-audit purpose-Working papers can serve as a repository of information that may assist in non-audit tasks. Audit working papers often provide convenient summarizations of auditee data and may be useful in ways unrelated to the original audit assignment. For example, models of the management control framework may be helpful to auditees as planning input for system design changes or as a training device for their staff. Also, the work done by auditors may be useful as input to other studies such as those performed by program evaluators.
7. Helps in Quality Control– Proper Audit Documentation definitely helps in Quality improvement as well as Quality control. If the significant matters are properly documented, it will definitely help in the reporting matters with the utmost accuracy.

• Auditor’s rights and responsibilities:

As specified in the SA -230, the auditor should adopt reasonable procedures for custody and confidentiality of his working papers and should retain them for a period of time sufficient to meet the needs of his practice and satisfy any associated legal or professional requirements of record retention.

Sometimes, the clients and the other auditors seek access to their audit working papers. At that point, the auditor should be aware of his rights as specified in SA -230 as follows:

1. The paragraph 13 therein says, “Working Papers are the property of the Auditor”. However the auditor may at his discretion, make portions of or extracts from are working papers available to his client and other auditors.
2. It is provided in paragraph 14 that the “Auditor should adopt reasonable procedures for custody and confidentiality of his working papers”
3. Part 1 of the second schedule to the Chartered Accountants Act, 1949, provides that “a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he discloses information acquired in the course of his professional engagement to any person other than his client, without consent of his client or otherwise than as required by any law for the time being in force.
4. Even the client does not have a right to access the working papers of the auditor. However the auditor may at his discretion make portions of or extracts from his working papers available to the client.

Tips for Auditors on documentation / working papers

General guidelines for the preparation of working papers are:

a) Clarity and Understanding -As a preparer of audit documentation, step back and read your work objectively. Would it be clear to another auditor?

Working papers should be clear and understandable without supplementary oral explanations. With the information the working papers reveal, a reviewer should be able to readily determine their purpose, the nature and scope of the work done and the preparer’s conclusions.

b) Completeness and Accuracy – As a reviewer of documentation, if you have to ask the audit staff basic questions about the audit, the documentation probably does not really serve the purpose.

Work papers should be complete, accurate, and support observations, testing, conclusions, and recommendations. They should also show the nature and scope of the work performed.

c) Pertinence – Limit the Information in working papers to matters that are important and necessary to support the objectives and scope established for the assignment.

d) Logical Arrangement – File the Working papers in a logical order.

e) Legibility and Neatness – Be neat in your work. Working papers should be legible and as neat as practical. Sloppy work papers may lose their worth as evidence. Crowding and writing between lines should be avoided by anticipating space needs and arranging the work papers before writing.

f) Safety- Keep your work papers safe and retrievable

g) Initial and Date- Put your initials and date on every working paper

h) Summary of conclusions- Summarize the results of work performed and identify the overall significance of any weaknesses or exceptions found.

• Epilogue

It is clear from the above discussion that the Proper Documentation creates more opportunities to offer new services. It helps in improving the writing and communication skills of auditors and assistants. It acts as a reminder to clients of what has been done for them thus helping the auditors.

In general it is opined that this concept of Audit Documentation provides organizational flexibility to enable the professional expertise and entrepreneurial initiative to combine, organize and operate in a flexible, innovative and efficient manner. It is needless to say that such a measure is justified in the context of global economic trends that facilitates investments and provision of services to flow across borders for the practicing members of ‘The Institute of Chartered Accountants of India’.