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Audit documentations

Financial Accounting And Auditing- Auditing (University of Mumbai)

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C4

Chapter 4 – Audit Process &

Documentation
SA 210 - Agreeing the terms of audit engagement

Objective - Accept & Continue An Audit Engagement

only when

Basis of performance has been agreed through

Establish whether precondition are present Confirm Common Understanding

Auditor Management & TCWG

To establish precondition
are present

Auditor Shall

of Terms of Engagement

If preconditions does not exist auditor shall not accept eng. unless
req by Law and regulation

Determine Obtain Agreement that

Management
Financial reporting
framework for
preparation of financial
statement is acceptable Acknowledge Understand

Its responsibility

For Preparation Financial To provide auditor

For Such Internal Control with ALL info,
Statement in accordance as management
with AFRF including their ADDITIONAL info,
determines is necessary to UNRESTRICTED
Fair Presentation enable the preparation of ACCESS - (Check
financial statement that premises on which
free from MMS whether audit is conducted)
due to fraud or error.

Limitation on Scope Prior to Audit Engagement

Acceptance
If management or those charged with governance

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impose a limitation on the scope of the auditor's work
in the terms of a proposed audit engagement
such that the auditor believes the limitation will result in the auditor disclaiming an opinion on the
financial statements,
the auditor shall not accept such a limited engagement as an audit engagement.

Audit Engagement
Terms
Law & regulation prescribes Audit engagement
Shall be Shall be terms in sufficient details
agreed recorded Shall include (Content of
Audit Eng. Letter)
Between In Audit Auditor need not record them in
management Engagement writing
Objective &
and auditor Letter
scope of audit
Except 2
In suitable Things
Respo of
Form
Auditor Such law & Management Accept &
Regulation is Understand its responsibility
Respo of Mgt. aaplicable to the
entity PPFS DIMIC All info
Identification additional info.
AFRF for prep & Unrestricted
of FS access
Reference to expected
form and content of any
report to be issued by
auditor. Statement that
in may vary in some
circumstances

Recurring Audits
Question
It is not mandatory to send a new engagement letter in recurring audit, but sometimes it becomes mandatory to send new
letter". Explain those situations where new engagement letter is to be sent. (M.imp)

Answer
Issue of Audit Engagement Letter in Recurring Audits:
On recurring audits, the auditor shall assess whether circumstances require the terms of the audit engagement to
be revised and whether there is a need to remind the entity of the existing terms of the audit engagement.

The auditor may decide not to send a new audit engagement letter or other written agreement each period. However,
in the following situations it is appropriate to revise the terms of the audit engagement or to remind the entity
of existing terms:

(i) Any indication that the entity misunderstands the objective and scope of the audit.
(ii) Any revised or special terms of the audit engagement.
(iii) A recent change of senior management.
(iv) A significant change in ownership.
(v) A significant change in nature or size of the entity's business.
(vi) A change in legal or regulatory requirements.
(vii) A change in the financial reporting framework adopted in the preparation of the financial statements.
(viii) A change in other reporting requirements.
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Acceptance of a Change in the Terms of the Audit

Engagement
1. If, prior to completing the audit engagement,
• the auditor is requested to change the audit engagement
• to an engagement that conveys a lower level of assurance,
• the auditor shall determine whether there is
• Reasonable justification for doing so.

2. If the
• auditor is unable to agree to a change of the terms of the audit engagement
• and is not permitted
• by management to continue the original audit engagement, the auditor shall
• Withdraw from the audit engagement where possible under applicable law or regulation; and
• Determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as those charged with governance, owners or regulators.

3. If the terms of the audit engagement are changed,

• the auditor and management shall agree on and
• record the new terms of the engagement in an engagement letter or other suitable form of
written agreement.

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Additional Considerations in Engagement

Acceptance

Financial Reporting Standards Supplemented by Law or Regulation

the auditor shall determine whether there are any conflicts between the financial reporting standards &
additional requirement

Yes

the auditor shall discuss with management the nature of and shall agree whether
the additional requirements

The additional requirements can be met through OR

additional disclosures in the financial statements If the action is not possible,
the auditor shall determine
whether it will be necessary
to modify the auditor's report
as per SA 705.

Layout of words of report prescribed by law and

regulation and they differ from SA Requirement

Check whether user might

misunderstand assurance

Yes No

Whether additional OK, Accept the

exaplanation mitigate engagement
misunderstanding

YES No

OK Accept the Shall not accept the audit engagement

engagement unsless required by Law and regulation

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C4

Planning an audit of Financial Statements – SA

300

(1) The auditor should plan his work to enable him to conduct an
a. effective audit in an
b. efficient and
c. timely manner.
(2) It should be based on knowledge of the client's business.

Usefulness
Audit planning helps to ensure that:
▪ appropriate attention is devoted to important areas of the audit;
▪ potential problems are promptly identified;
▪ the work is complete in time;
▪ assistants are utilised properly; and
▪ the work done by other auditors and experts is duly coordinated.

Factors Affecting Nature & Extent of planning

activities
The nature and extent of planning activities will vary according to
1. The size and complexity of the entity.
2. The key engagement team members previous experience with the entity and
3. Changes in the circumstances that occur during the audit engagement.

Audit Program
1. An audit program is
• detailed plan of work,
• prepared by the auditor,
• for carrying out an audit.
2. It provides a basis for the supervision and control of the audit work.
3. It consists of set of techniques and procedures; which auditor plans to apply in the given audit
for forming an opinion about the financial statements.
4. It is framed keeping in view the nature, size and composition of the business, assessment of internal
control and given scope of work.
5. Audit program may be altered while carrying out the work according to circumstances and situations
6. There should be a periodic review of audit program to check its efficiency and effectiveness

For the purpose of framing and audit programme the following points should be kept in view

• Audit objective
• Audit procedure to be applied
• Extent of checking to be done
• Timing of checking to be done

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• Allocation of work amongst the team member
• Special instructions based on past experience of the auditee

Advantages of Audit Program (Role of Audit

Program in Audit Plan & Performance)

The role of Audit Programme in audit plan and performance: The audit programme is helpful both in

planning and performance stages of audit as follows:

(i) The audit programme lists down areas of audit before commencement.

(ii) The audit timing is built therein; thereby it becomes a schedule of audit plan.

(iii) The staff that is entrusted with the audit assignment is also specified. It is a plan of

resources allocation of the firm.

(iv) It specifies the procedures to be checked during the audit.

(v) As the audit work is split into various elements of procedures to be performed, the audit

programme acts as a guiding chart or check list during the performance of audit.

(vi) Since the staff in charge of each work is specified and they sign the programme, it extracts

the responsibility from the audit assistants.

(vii) The working papers of the audit staff can be reviewed against the audit

programme which helps a base of reference for evaluation of the performa nce before

reporting on the financial statements.

(viii) It also helps in preparing a diary of the performance and plan also base for billing the

clients for the time manpower involved in the audit.

LIMITATIONS OF AUDIT PROGRAM

1. Mechanical Approach – The work may become mechanical and particular parts may be carried
out without understanding the whole concept.

2. Inflexibility - The program often becomes rigid & inflexible. There may be a change in nature of
business or the way business is carried out and we need to accordingly change the audit program.
Assistants are not able to change it as per requirements of specific case.

3. Lack of initiative - Hard & fast program hurts the initiative & judgmental skills of hard working
assistants.

4. Shelter for inefficient assistants - They think that it contains exhaustive matters. They don't
even think of any unusual matter, which is not listed in program even if its presence can change audit
approach. They defend deficiencies in their work on the ground that no instruction in the matter is
contained therein.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C4

SA 230 AUDIT DOCUMENTATION

Audit Documentation - also called

working papers

Record

AP (Audit AE (Audit
C (Conclusion)
Procedure) Evidence)

PERFORMED OBTAINED REACHED

Why Audit
Documentation

Additional
Basic Purpose
Purpose

Sufficient & Appropriate Plan/ Perform the

Evidence Audit
Record (Form the basis) audit

Supervise (To
For Audit Report Planned Performed
Direct & Supervise
the audit work)
In Accordance
with
Accountable
SA Law & Regulation
Future Audits

Quality Control
Review/ Internal
Inspection

External
Inspection

Objective of audit documentation

To provide
(a) A Sufficient & Appropriate record for audit report; and
(b) Evidence that the audit was planned and performed in accordance with SAs and applicable legal and
regulatory requirements.

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Audit documentation serves a number of Purposes, including the following:

1. Assisting the engagement team
to plan and perform the audit.
2. Assisting members of the engagement team responsible for supervision
to direct and supervise the audit work.
3. Enabling the engagement team
to be accountable for its work.
4. Retaining a record of matters of continuing
significance to future audits.
5. Enabling the conduct of
quality control reviews and internal inspections.
6. Enabling the
conduct of external inspections in
accordance with applicable legal, regulatory or other requirements

Basic requirements
(i) W.P should be designed &organized according to circumstances of each audit,
(ii) As far as possible, working papers should be kept in standardized form,
(iii) Documentation should be sufficiently complete, dated & signed.
(iv) All significant matters involving judgment should be documented.
(v) As per ICAI, documentation is the property of auditor& he should maintain it at least upto 7 years
from date of signing of audit report, (previously it was 10 years)
(vi) If it is in electronic /magnetic media, he should take proper care for its storage& retrieval.
(vii) He should maintain confidentiality (should not show his W.P. to outsiders).

Definitions
(a) Audit documentation–
a. The record of
b. audit procedures performed,
c. relevant audit evidence obtained, and
d. Conclusions the auditor reached.
(b) Sometimes they are called working papers of the auditor.
(c) Example of audit documentation
a. Audit programme
b. Checklist
c. Correspondence with management and third party

(d) Audit file

• Records of audit documentation
• for a specific engagement
• in one or more folders or other storage media (Physical & Electronic)

(e) Experienced auditor

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C4

An individual (whether internal or external to the firm) who has practical audit experience, and a
reasonable understanding of:

(i) Audit processes;

(ii) SAs and applicable legal and regulatory requirements;
(iii) The business environment in which the entity operates; and
(iv) Auditing and financial reporting issues.

Documentation of Audit
Procedures PERFORMED &
Audit evidence OBTAINED

Procedures Discussions Inconsistency Departure from

elevant
requirement of
SA
Prepare AD that is sufficient to The auditor shall document If the auditor
enable an Experience audior to discussions of significant identified any
understand matter with management, inconsistent
TCWG, and other, information, If, in
the auditor exceptional
NTE of audit shall document circumstances,
proedure how he he departs from
Details such, addressed the SA, the auditor
matter discussed, inconsistency. shall document
results of AP performed AE when and with the reasons for
obtained whom discussion the departure
took place. and alternative
procedures
Significatnt matter arising performed.
during the audit and the
conclusions reached thereon

Auditor shall also record:

Who performed the Who reviewed the audit

audit work and the work performed and the date
date such work was and extent of such review.
completed; and

IMPORTANT NOTES
1. The standard does not in any way limit the specific documentation requirements of other SA’s. In other words, if other
SAs prescribe more documentation requirements, those documentations are also to be maintained.

2. Factors on which Extent of Audit Documentation Depends

a. Size, complexity of the entity.
b. Nature of the Audit Procedures.

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c. Identified Risks of Material Misstatements. (ROMM)
d. Significance of the Audit Evidence.
e. Need to document a conclusion.
f. Audit Methodology & Tools used.

3. Working paper are the Property of the Auditor. The Auditor may at his discretion make portion of or extracts from his
working paper available to his clients.

4. Working paper of the Auditor of Branch are property of the Auditor of the Branch.

Matters Arising after the Date of the Auditor's

Report
If, in exceptional circumstances, the auditor performs new or additional audit procedures or draws new conclusions
after the date of the auditor's report, the auditor shall document:
(a) The circumstances encountered; क्र्ा हुआ था
(b) The new or additional audit procedures performed, audit evidence obtained, and conclusions reached,
and their effect on the auditor's report; and (AP AE, C Effect on AR) क्र्ा ककर्ा
(c) When and by whom the changes to audit documentation were made and reviewed. (ककसऩे ककर्ा)

Assembly of the Final Audit File

▪ The auditor shall
assemble the audit documentation
in an audit file and
complete the administrative process of assembling the final audit file on a timely basis
after the date of the auditor's report. (not more than 60 days after the auditor’s report)
▪ After the assembly, the auditor
shall not delete audit documentation
before the end of its retention period.
▪ Where the Auditor finds it necessary
o to modify existing audit documentation or
o add new audit documentation
o after the assembly of the Final Audit has been completed,
o the Auditor shall,
o regardless or the nature of the modifications or additions, document –
▪ The specific reasons for making them, and
▪ When and by whom they were made and reviewed.

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आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C4

Audit Note Book

1. Meaning
An Audit Notebook is a bound notebook
in which a variety of matters observed during the course of audit are recorded.
It is notebook containing points or queries that require
i. clarification,
ii. explanation and
iii. investigation and

iv. The manner in which they are finally settled.

2. The audit notebook is maintained by the audit assistants

3. Contents:

Content of Audit Note Book

(a) Audit queries not cleared immediately, e.g. missing receipts, vouchers, etc.
(b) Mistakes or irregularities observed during the course of audit, e.g. failure to comply with requirements of
the Companies Act, or the provisions of the Memorandum or Articles, a change in the basis of valuation of
Finished Stock and WIP or in computation of depreciation, failure to provide adequate depreciation, etc.
(c) Unsatisfactory book-keeping arrangements, costing method, internal or financial administration or
organisation.
(d) Important information about the Company which is not apparent from the accounts.
(e) Special points requiring consideration at the time of verification of final accounts.
(f) Important matters for future reference.

Queries
Mistakes
Unsatisfactory
Important Info
Special Points
Future

4. Importance: - For this, Write the purpose of audit documentation (Additional Purpose)

Filing of working papers

The auditor, in case of recurring audits, may divide the audit working papers into two parts—permanent file and
current file.

Types of audit file

Permanent audit file
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Permanent audit file should contain information, which is of continuing interest and relevance to
succeeding audits. The permanent file typically includes the following:

(a) Information regarding legal and organisational structure of the entity

(b) Extracts or copies of important legal documents, agreements and minutes relevant to the audit
(c) Record of study and evaluation of internal controls related to accounting system
(d) Copies of audited financial statements for previous years.
(e) Analysis of significant ratios and trends
(f) Copies of management letters issued by the auditor, if any
(g) Record of communication with the retiring auditor, if any.
(h) Notes regarding significant accounting policies.
(i) Significant audit observations of earlier years.

Keywords Hooks
Continuing Interest and Permanent audit file should contain information, which is of continuing interest
relevance and relevance to succeeding audits.
Legal organisational
structure
Legal documents
Internal Control
Previous Year
Trends
Management
Retire
Policies
Observation

Current audit file

Current audit file contains information relating to and relevant to the audit of current period. The information,
which may be contained in the current audit file, is given below:
(a) Correspondence relating to acceptance of annual re-appointment.
(b) Extracts of important matters in the minutes of the board meetings and general meeting as are relevant
to audit.
(c) Audit plan and audit programme.
(d) Analysis of transactions and balances.
(e) Record of audit procedures and their results.
(f) Evidence regarding the supervision and review of the work of assistants.
(g) Copies of communication with other auditors (e.g. branch auditor), experts (e.g. lawyers, architects)
and other third parties (e.g. banks; debtors).
(h) Copies of letters or notes concerning audit matters communicated to or discussed with client.
(i) Management representations.
(j) Auditor's conclusions regarding significant matters.
(k) Copies of financial statements being reported on and the related audit report.

Question Bank on C4
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♥ Audit documentation serves a number of additional purposes.

♥ 'Auditor shall establish an overall strategy that sets the scope, timing and directions of the audit, and that guides the
development of the audit plan."

Establishment of overall strategy for development of audit plan: According to SA 300, "Planning an Audit of

Financial Statements" the auditor shall establish an overall audit strategy that sets the scope, timing and
directions of the audit, and that guides the development of the audit plan.
In establishing the overall audit strategy, the auditor shall:

(i) Identify the characteristics of the engagement that define its scope;
(ii) Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of
the communications required;
(iii) Consider the factors that, in the auditor's professional judgment, are significant in directing the
engagement team's efforts;
(iv) Consider the results of preliminary engagement activities and, where applicable, whether
knowledge gained on other engagements performed by the engagement partner for the entity is
relevant; and
(v) Ascertain the nature, timing and extent of resources necessary to perform the engagement.

♥ Importance of working papers

Importance of Working Papers: Audit working papers constitute the basic records for the auditor in respect of the audit
carried out by him. They constitute the link between the auditor's report and the client's record.

These includes retention of permanent record in the nature of a document to show the actual audit work executed , the
nature of work, the extent of work and the important points, facts, dates and decisions having bearing on the audit of the
accounts audited. The audit working papers are found very useful in the following aspects as:

(i) It provides guidance to the audit staff with regard to the manner of checking the schedules.
(ii) The auditor is able to fix responsibility on the staff member who signs each schedule checked by him.
(iii) It acts as evidence in the court of law when a charge of negligence is brought against the auditor.
(iv) 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.

♥ What are the audit working papers? Discuss various contents of current file.

Audit Working Papers: Working papers are papers prepared and obtained by the auditor and retained by him, in
connection with the performance of his audit.

Working papers are the property of the auditor. As per SA 230 "Audit Documentation" refers to the record of audit
procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as "working
papers" or "work papers" are also sometimes used).

Working papers should record the audit plan, the nature, timing and extent of auditing procedures performed, and the
conclusions drawn from the evidence obtained.

Current Audit file: The current file normally includes:

(i) Correspondence relating to acceptance of annual reappointment.

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(ii) Extracts of important matters in the minutes of Board Meetings and General Meetings, as are relevant to the
audit.
(iii) Evidence of the planning process of the audit and audit programme.
(iv) Analysis of transactions and balances.
(v) A record of the nature, timing and extent of auditing procedures performed and the results of such procedures.
(vi) Evidence that the work performed by assistants was supervised and reviewed.
(vii) Copies of communications with other auditors, experts and other third parties.
(viii) Copies of letters or notes concerning audit matters communicated to or discussed with the client, including the
terms of the engagement and material weaknesses in relevant internal controls.
(ix) Letters of representation or confirmation received from the client.
(x) Conclusions reached by the auditor concerning significant aspects of the audit.
(xi) Copies of the financial information being reported on and the related audit reports.

♥ What are audit working papers? Discuss various contents of Permanent Audit File and Current File.

♥ The audit working papers constitute the link between the auditor's report and the client's records. Discuss stating
clearly the objectives of audit working papers.

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