chapter 10

Documentation

Contents

Introduction
Examination context
Topic List
1 Purpose of documentation
2 Form and content of documentation
3 Safe custody and retention of
documentation
4 Ownership of and right of access to
documentation
Summary and Self-test
Technical reference
Answers to Self-test
Answer to Interactive question

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Introduction

Learning objectives Tick off

 Understand the nature of working papers

 Understand the form and content of working papers

 Understand why assurance providers record their work

 Understand why and how assurance providers keep these records

The specific syllabus reference for this chapter is: 3a.

Practical significance
Assurance providers need to keep working papers about the work they have done for clients, so assurance
firms will have stores of files relating to their clients. They are required to keep them for a set period of
time and may keep them for longer if they feel it benefits the relationship. These records must be kept
secure. Firms may keep files in paper or electronic form, which will bring different security problems.

Stop and think

Why are assurance providers required to keep working papers on the work they have done?

Working context
If you work in practice, you will prepare working papers from very early on in your career, so it is
important to know the key contents of these and the purpose of them so that you record the correct
details within them. Some contents are required by BSAs, but each firm will have a particular way of
detailing their work and keeping their files, which you will learn very quickly. Most firms have pre-printed or
pre-programmed working papers which already contain some of the reference details that the working
papers are required to have.

Syllabus links
One reason for keeping working papers is to protect the assurance provider in the event of a negligence
claim. This will be looked at in more detail in Audit and Assurance.

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Examination context

Exam requirements
This topic is likely to be examined on a regular basis and questions should be reasonably straightforward if
you are well prepared.
There is one question in the sample paper on documentation, looking at the reasons behind preparing
particular pieces of documentation and whether these reasons were valid.
In the assessment, candidates may be required to:
 Define audit documentation
 State the reasons for preparing and keeping documentation relating to an assurance engagement
 State the form and content of working papers
 Identify the advantages of automated working papers
 State the content of a permanent audit file and a current audit file

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1 Purpose of documentation

Section overview
 Assurance providers should document the work they have done.
 This should be a record of the procedures performed, the evidence obtained and the conclusions
reached.
 This provides evidence that the engagement was performed in accordance with any relevant
standards, law or regulatory requirements.
 A record of work done also assists the team to plan and direct work, facilitates review by senior staff,
provides accountability for work, provides a record of matters that are relevant to future
engagements and enables experienced auditors to carry out any additional reviews necessary.

All assurance work must be documented: the working papers are the tangible evidence of the work done in
support of the conclusion.
Audit documentation or working papers should provide:
(a) A sufficient and appropriate record of the basis for the assurance provider's report; and
(b) Evidence that the engagement was performed in accordance with standards and applicable legal and
regulatory requirements.
They should be prepared on a timely basis.

Definition
Audit documentation (working papers) is the record of procedures performed, relevant evidence
obtained and conclusions reached.

In addition, particularly in relation to audit, assurance providers record their work to:
 Assist the audit team to plan and perform the audit
 Assist relevant members of the team to direct and supervise work
 Enable the audit team to be accountable for its work (and to prove adherence to BSAs in a litigious
situation)
 Retain a record of matters of continuing significance to future audits
 Enable an experienced auditor to carry out quality control reviews
 Enable an experienced auditor to conduct external inspections in accordance with applicable legal,
regulatory or other requirements
Audit working papers should include a summary of all significant matters identified which may require the
exercise of judgement, together with the auditor’s conclusions thereon. If difficult questions of principle or
of judgement arise, the auditor should record the relevant information received and summarise both the
management’s and his own conclusions. It is in such areas as these that the auditor’s judgement may
subsequently be questioned, particularly by a third party who has the benefit of hindsight. It is important to
be able to tell what facts were known at the time the auditor reached his conclusion and to be able to
demonstrate that, based on those facts, the conclusion was reasonable.

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2 Form and content of documentation

Section overview
 Working papers should be headed in a certain way and contain certain information.
 They may be automated.

Working papers should be sufficiently complete and detailed to provide an overall understanding of the
engagement.
However, assurance providers cannot record everything they consider. Therefore judgement must be used
as to the extent of working papers, based on the following general rule (given in an audit context):
'What would be necessary to provide an experienced auditor, with no previous connection with the audit,
with an understanding of the nature, timing and extent of audit procedures, the results of audit procedures,
and the audit evidence obtained, and significant matters arising during the audit and conclusions reached
thereon.'
The form and content of working papers are affected by matters such as:
 The nature of the audit procedures to be performed
 The identified risks of material misstatements
 The extent of judgement required in performing the work and evaluating the results
 The significance of the audit evidence obtained
 The nature and extent of problems or exceptions from expected test results identified
 The need to document a conclusion or the basis for a conclusion not readily determinable
from the documentation of the work performed or audit evidence obtained
 The audit methodology and tools used

Example: Audit file

An audit file will normally contain the following working papers:
 Information obtained in understanding the entity and its environment, including its internal control,
such as the following:
– Information concerning legal documents, agreements and minutes
– Extracts from, or copies of, important legal documents, agreements and minutes
– Information concerning the industry, economic and legislative environment within which the
entity operates
– Extracts from the entity's internal control manual
 Evidence of the planning process including audit plans and any changes thereto
 Evidence of the auditor's consideration of the work of internal audit and conclusions reached
 Analyses of transactions and balances
 Analyses of significant ratios and trends
 The identified and assessed risks of material misstatements
 A record of the nature, timing, extent and results of audit procedures
 Evidence that the work performed by assistants was supervised and reviewed
 An indication as to who performed the audit procedures and when they were performed
 Details of audit procedures applied regarding components whose financial statements are audited by
another auditor
 Copies of communications with other auditors, experts and other third parties

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 Copies of letters or notes concerning audit matters communicated to or discussed with management,
including the terms of the engagement and material weaknesses in internal control
 Letters of representation received from the entity (these are covered in Chapter 12)
 Conclusions reached by the auditor concerning significant aspects of the audit, including how
exceptions and unusual matters, if any, disclosed by the auditor's procedures were resolved or treated
 Copies of the financial statements and auditor's reports
 Notes of discussions about significant matters with management and others
 In exceptional circumstances, the reasons for departing from a basic principle or essential procedure
of a BSA and how the alternative procedure performed achieved the audit objective

Working papers should show:

 The name of the client  How any sample was selected
 The balance sheet date  The sample size determined
 The file reference of the working paper  The work done
 The name of the preparer  A key to any audit ticks or symbols
 The date of preparation  Appropriate cross-referencing
 The subject of the working paper  The results obtained
 The name of the reviewer  Analysis of errors
 The date of the review  Other significant observations
 The objective of the work done  The conclusions drawn
 The source of information  The key points highlighted

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Example: Working paper

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KEY
1 The name of the client 8 The date of the review
2 The balance sheet date 9 The objective of the work done
3 The file reference of the working paper 10 The sources of information
4 The name of the person preparing the 11 The work done
working paper 12 A key to any audit ticks or symbols
5 The date the working paper was prepared 13 The results obtained
6 The subject of the working paper 14 Analysis of errors or other significant
7 The name of the person reviewing the observations
working paper 15 The conclusions drawn

The auditor should record the identifying characteristics of specific items or matters being tested.

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2.1 Automated working papers

Automated working paper packages have been developed which can make the documenting of audit work
much easier. Such programs aid preparation of working papers, lead schedules, trial balance and the financial
statements themselves. These are automatically cross referenced, adjusted and balanced by the computer.
The advantages of automated working papers are as follows.
 The risk of errors is reduced.
 The working papers will be neater and easier to review.
 The time saved will be substantial as adjustments can be made easily to all working papers, including
working papers summarising the key analytical information.
 Standard forms do not have to be carried to audit locations.
 Audit working papers can be emailed or faxed for review.
These days most documents can be scanned and stored electronically rather than in paper form.

2.2 Filing working papers

Firms should have standard referencing and filing procedures for working papers, to facilitate their review.
For recurring audits, working papers may be split between permanent and current audit files, although this
distinction is fading as audit files become automated, and 'permanent' documents can be scanned and
carried in computer files year on year.
Permanent audit files (contain any information of continuing importance to the audit). These may
contain:
 Engagement letters
 New client questionnaire
 The memorandum and articles of association
 Other legal documents such as prospectuses, leases, sales agreements
 Details of the history of the client's business
 Board minutes of continuing relevance
 Previous years' signed accounts, analytical procedures and management letters
 Accounting systems notes, previous years' control questionnaires
Current audit files (contain any information of relevance to the current year's audit). These should be
compiled on a timely basis after the completion of the audit and should contain (amongst other things):
 Financial statements
 Accounts checklists
 Management accounts details
 Reconciliations of management accounts and financial statements
 A summary of unadjusted errors
 Report to partner including details of significant events and errors
 Review notes
 Audit planning memorandum
 Time budgets and summaries
 Letter of representation
 Management letter
 Notes of board minutes
 Communications with third parties such as experts or other auditors
They also contain working papers covering each audit area. These should include the following:
 A lead schedule including details of the figures to be included in the accounts
 Problems encountered and conclusions drawn
 Audit plans
 Risk assessments

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 Sampling plans
 Analytical procedures
 Details of tests of detail and tests of control

3 Safe custody and retention of documentation

Section overview
 Assurance providers should retain documents for a certain period of time.
 Documents must be kept secure during this period due to confidentiality requirements.

Judgement may have to be used in deciding the duration of holding working papers, and further
consideration should be given to the matter before their destruction. All firms should have a document
retention policy and auditing standards require auditors to keep all audit working papers for a reasonable
period of time from the end of the accounting period to which they relate.
According to the Companies Act 1994, section 181(5), “The books of accounts of every company relating
to a period of not less than twelve years immediately preceding the current year together with vouchers
relevant to any entry in such books of account shall be preserved in good order”.
Given that assurance work must be kept confidential (as we shall see in Chapter 16), it is important that
firms have good security procedures over their retained working papers. Paper documents must be kept
securely, in locked premises. Electronic documents should be protected by electronic controls.

4 Ownership of and right of access to documentation

Section overview
 Working papers belong to the assurance providers.
 The report, once issued, belongs to the client.
 Assurance providers must keep working papers confidential.
 They may show working papers to the client at their discretion.
 They should obtain client permission before showing working papers to third parties.

Working papers are the property of the assurance providers. They are not a substitute for, nor part of, the
entity's accounting records. However, the report becomes the property of the client once it has been
issued.
Assurance providers must follow ethical guidance on the confidentiality of working papers. As working
papers belong to the firm, the assurance providers are not required to show them to the client. However,
the firm may show working papers to the client at their discretion, so long as the assurance process is not
prejudiced.
Information should not be made available to third parties without the permission of the client. An example
of when working papers might be shared with a third party is when a new firm is taking over an audit from
the existing auditors.

Interactive question: Documentation [Difficulty level: Exam standard]

The auditor will prepare documentation in relation to the fieldwork carried out on an assurance
engagement.
Indicate whether the following are, or are not, valid reasons for preparing such documentation.

(i) To comply with the law. Valid Not valid

(ii) To provide a record of matters of continuing Valid Not valid

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significance to future audits.

(iii) To facilitate review by senior staff. Valid Not valid
(iv) To prove adherence to BSAs in a litigious situation. Valid Not valid

See Answer at the end of this chapter.

The table shows how the ownership of documents depends on the nature of the work being carried out.

Nature of work Type of document Who has

ownership?

Auditing
Preparation of audit report whether Any documents prepared by member solely for Member
carried out under statutory purpose of carrying out his duties as auditor
provisions or not
Audit Report Client
Accountancy
Preparation of accounting records Accounting Records Client
Preparation of financial statements Financial statements Client
from client's records
Draft/office copy of financial statements Member
Correspondence with third parties Member

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Summary and Self-test

Summary

Assurance providers should

document the work they have done

This should be a record of the

procedures performed, the evidence
obtained and the conclusions
reached

This provides evidence that the A record of work done also assists the
engagement was performed in team to plan and direct work, facilitates
accordance with any relevant review by senior staff, provides
standards, law or regulatory accountability for work, keeps a record
requirements of matters that are relevant to future
engagements and enables experienced
staff to carry out any additional reviews
necessary

Working papers should be

kept in assurance files

Assurance firms should have

a document retention policy

Files must be kept securely

to ensure confidentiality
requirements are met

Working papers belong to the Working papers may be shown to the

firm. Issued reports belong to the client at the assurance provider’s
client discretion.Working papers may only be
shown to third parties with the client's
permission (duty of confidentiality)

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Self-test
Answer the following questions.
1 State whether the following are advantages or disadvantages of standardised audit working papers:

(a) Facilitate the delegation of work Advantage Disadvantage

(b) Detract from proper exercise of professional Advantage Disadvantage

judgement

(c) Means to control quality Advantage Disadvantage

2 Complete the table, indicating in which file the working papers given below should be included.

Current audit file Permanent audit file

 Engagement letters
 New client questionnaire
 Financial statements relating to year under review
 Management letter
 Accounts checklists
 Audit planning memo
 Board minutes of continuing relevance
 Accounting systems notes

3 Which three of the following are true?

A Working papers belong to the auditor
B The issued audit report belongs to the auditor
C Auditors should retain working papers securely because of the duty of confidentiality
D Auditors need client permission to share working papers with third parties
Now, go back to the Learning Objectives in the Introduction, if you are satisfied you have achieved these
objectives, please tick them off.

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Technical reference

1 Purpose of documentation BSA 230.2 – 4

2 Form and content of documentation BSA 230.5 – 12

3 Safe custody and retention of documentation BSA 230.13

4 Ownership of and right of access to documentation BSA 230.14

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Answers to Self-test

1 (a) Advantage
(b) Disadvantage
(c) Advantage
2

Current audit file Permanent audit file

Financial statements relating to year under review Engagement letters

Management letter New client questionnaire
Accounts checklists Board minutes of continuing relevance
Audit planning memo Accounting systems notes

3 A, C, D

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Answer to Interactive question

Answer to Interactive question

(i) Not valid. It is not a legal requirement for the auditor to prepare working papers
(ii) Valid
(iii) Valid
(iv) Valid

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