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Auditing

The New Audit Documentation Requirements

SAS no. 96 raises the bar for audit documentation— adding specific requirements in several areas.

By Ray Whittington and Gretchen Fischbach
April 2002
EXECUTIVE SUMMARY
STATEMENT ON AUDITING STANDARDS (SAS) no. 96, Audit Documentation, marks the first big change in the requirements auditors must observe when documenting their audit work. It provides general guidance on the nature and extent of documentation necessary to support the auditor’s report, and it reaffirms documentation’s role as the principal support for that report and as a tool that helps the auditor conduct and supervise the audit.

WHILE AUDITORS NEED NOT DOCUMENT all evidence, findings and conclusions from an audit, the documentation still must meet all of SAS no. 96’s specific requirements, which are effective for audits of financial statements for periods beginning on or after May 15, 2002.

SAS NO. 96 EXPLICITLY REQUIRES that audit documentation be sufficient to enable engagement team reviewing or supervising members to understand the evidence other team members obtained and the nature, timing, extent and results of audit procedures they performed.

THE AUDITING STANDARDS BOARD added a requirement to document significant audit findings or issues—currently a best practice among firms of various sizes.

SAS NO. 96 REQUIRES AUDITORS TO RETAIN documentation long enough to meet the needs of their practices and to satisfy any applicable legal or regulatory requirements.

THE NEW STATEMENT ADDS SPECIFIC documentation requirements to SAS no. 47, Audit Risk and Materiality in Conducting an Audit, SAS no. 56, Analytical Procedures, and SAS no. 59, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.

Ray Whittington, CPA, is a member of the ASB and the SAS no. 96 task force and is director of the School of Accountancy and Management Information Systems at DePaul University in Chicago. His e-mail address is rwhittin@wppost.depaul.edu . GRETCHEN FISCHBACH is a technical manager on the AICPA audit and attest standards team. Her e-mail address is gfischbach@aicpa.org .
 
he AICPA issued its first standard on audit working papers in 1967. Now, working papers—which often consist of electronic files and have been renamed “audit documentation”—are the subject of new guidance from the auditing standards board (ASB). Issued in January, Statement on Auditing Standards (SAS) no. 96, Audit Documentation, provides general guidance on the nature and extent of documentation necessary to support an auditor’s report and specific documentation guidance for several other SASs. The new statement is effective for audits of financial statements for periods beginning on or after May 15, 2002, although earlier application is permitted.
This article discusses SAS no. 96’s major requirements and how they affect auditors. Among these changes are factors the auditor should consider in determining the nature and extent of documentation for a particular audit procedure. In addition, the statement requires the auditor to document certain types of audit evidence and significant audit findings or issues.

The exhibit compares the major requirements of SAS no. 96 with those of the superseded SAS no. 41, Working Papers. SAS no. 96’s provisions address peer reviewers’ concerns about the quality of documentation of audit evidence and significant conclusions. As a result of the SAS no. 96 guidance, auditors may be able to better demonstrate compliance with GAAS. SAS no. 96 also responds to some of the issues and recommendations the Public Oversight Board’s Panel on Audit Effectiveness raised in its August 2000 Report and Recommendations (See Front Line Views , JofA, Dec.00, page 20).

AUDIT DOCUMENTATION
Supports the auditor’s report.
Helps the auditor conduct
and supervise an audit.

AUDIT DOCUMENTATION OBJECTIVES

SAS no. 41 said that audit documentation serves mainly to provide the “principal support for the auditor’s report” and to help the auditor conduct and supervise the audit. SAS no. 96 reaffirms these objectives.

It’s not feasible for auditors to document all the evidence they obtain and conclusions they reach on an engagement. Therefore, the board carried forward a SAS no. 41 footnote that stated there is no intention to imply the auditor would be precluded from supporting his or her report by other means “in addition to [audit documentation].” This enables auditors, when necessary, to supplement or clarify information in the audit documentation, which itself must meet all the new statement’s requirements.

A CPA firm may want to use audit documentation for purposes other than those stated in SAS no. 96. For example, it understandably may choose to examine audit documentation to determine whether an engagement complied with the firm’s quality control policies and procedures. Also, certain third parties may want to use the documentation for other purposes. But given the overall objective of a GAAS audit—to express an opinion on the fairness with which the financial statements present, in all material respects, the financial position, results of operations and cash flows in conformity with GAAP—the ASB developed guidance that would satisfy the needs of those parties involved in the performance, supervision and review of the audit.

DOCUMENTATION OF AUDIT EVIDENCE

Under the new guidance, the documentation should be sufficient to

Enable engagement team members with supervision and review responsibilities to understand the evidence obtained and the nature, timing, extent and results of auditing procedures performed.

Indicate the engagement team member(s) “who performed and reviewed the work.”

For the purposes of these requirements, the ASB intended—although the statement does not specifically say so—that auditors consider any applicable second-partner reviewer a member of the engagement team.

SAS no. 96 introduces factors the auditor must consider in determining the nature and extent of documentation for a particular audit area or procedure. Although the auditor exercises professional judgment in making this determination, he or she must take into account each of the factors, which are

Risk of material misstatement associated with the assertion or with the account or class of transactions.

Extent of judgment the auditor exercises in performing the work and evaluating the results.

Nature of the auditing procedure.

Significance, to the assertion being tested, of the evidence the auditor obtains.

Nature and extent of exceptions the auditor identifies.

The need to document a conclusion or the basis for a conclusion not evident from the documentation of the work the auditor performed.

SAS no. 96 includes two requirements dealing with certain types of audit evidence. The ASB developed these in response to comments practitioners involved in the peer review process made about the quality of audit documentation and to the concerns of the Panel on Audit Effectiveness. One requirement is that the documentation must include abstracts or copies of significant contracts or agreements the auditor examined to evaluate the accounting for significant transactions. The other is that audit documentation for tests of operating effectiveness of controls and substantive tests of details involving inspection of documents or confirmation should include an identification of the items tested.

How the auditor identifies the tested items depends on how he or she selected them. For example, if the auditor selected from a particular accounting record all items meeting certain criteria (for instance, items that are over a specified dollar amount), he or she can simply identify that record and those criteria. In other situations—for example, when an auditor uses statistical sampling—the documentation may need to include identifying characteristics (such as the specific invoice numbers) of the selected items. The key question auditors should ask themselves is whether another auditor on the engagement team would be able to identify—by reviewing the audit program and related documentation—the particular items the original auditor selected for testing.

The board considered it impractical to develop specific documentation guidance for substantive tests of details that involve procedures other than inspection of documents and confirmation. This is because auditors can use these other types of procedures, such as observation, for a variety of purposes and can execute them in a number of different ways. The board, however, soon will issue an audit interpretation that will clarify how the audit documentation requirements in SAS no. 96 apply to observations of inventory counts.

Other standards, laws and regulations also may include specific documentation requirements applicable to an engagement. Auditors therefore will need to consider them in addition to the ones in SAS no. 96. Some, such as the ones in Government Auditing Standards (also known as the yellow book), may be more rigorous than the requirements in SAS no. 96.

DOCUMENTING SIGNIFICANT AUDIT FINDINGS OR ISSUES

SAS no. 96 requires the auditor to document certain audit findings or issues he or she considers significant—an existing best practice among firms of many sizes. Generally, these findings or issues are so important that they would affect the auditor’s report if not resolved. They include the following:

Matters that are significant and involve issues regarding the appropriate selection, application and consistency of accounting principles pertaining to the financial statements, including related disclosures. Such matters often relate to accounting for complex or unusual transactions or to estimates and uncertainties and any applicable management assumptions.

Results of auditing procedures that indicate the financial statements or disclosures could be materially misstated or that the auditing procedures need to be significantly modified.

Circumstances that cause the auditor significant difficulty in applying auditing procedures he or she considers necessary.

Other findings that could result in modification of the auditor’s report.

DEVELOPING RETENTION PROCEDURES

SAS no. 96 stresses that the auditor owns the audit documentation. It also requires an auditor to adopt reasonable procedures to retain such documentation long enough “to meet the needs of his or her practice and to satisfy any applicable legal or regulatory requirements for records retention.”

Because laws and regulations vary by jurisdiction and the nature of the engagement, SAS no. 96 does not say how long the retention period should be. It simply requires the auditor to adopt procedures that enable him or her to gain access to the documentation throughout that period. One way for auditors to accomplish this is by creating a policy to maintain electronic documentation in a format that ensures its compatibility with newer versions of audit software or by retaining older versions of such software and, if necessary, the hardware on which it runs.

AMENDMENTS TO OTHER SASs

SAS no. 96 includes amendments that add documentation requirements to three other statements: SAS no. 47, Audit Risk and Materiality in Conducting an Audit, SAS no. 56, Analytical Procedures, and SAS no. 59, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.

Audit risk and materiality. The amended SAS no. 47 requires an auditor to document the nature and effect of aggregated misstatements and his or her conclusion as to whether they cause the financial statements to be materially misstated. This facilitates compliance with the requirement in SAS no. 89, Audit Adjustments, that a summary of uncorrected financial statement misstatements aggregated by the auditor be included in or attached to management’s written representation regarding its belief that the uncorrected misstatements are immaterial, both individually and in the aggregate.

Substantive analytical procedures. The amendment to SAS no. 56 responds to a recommendation by the Panel on Audit Effectiveness; it requires auditors to document certain aspects of substantive analytical procedures they perform as a principal audit test of a significant financial statement assertion. Three requirements apply.

First, auditors now must document the factors they considered in developing the expectation for a particular analytical procedure. They also have to document the expectation if it is not apparent from the documentation of the work they performed. To illustrate this requirement, assume that auditors perform a substantive test of sales and accounts receivable by developing an expectation of the number of days’ sales in accounts receivable based on relationships in prior years. The documentation should include the number of—or range of—days’ sales expected for the current year and the factors, such as current economic conditions, considered in developing this expectation.

The amended SAS no. 56’s other two requirements will oblige auditors to document

The results of their comparison of the expectation with the recorded amounts or the ratios the auditors develop from those amounts.

Any additional auditing procedures they perform in response to significant unexpected differences arising from analytical procedures and those additional auditing procedures’ results.

These requirements add more structure to situations in which analytical procedures provide substantial evidence about a significant balance or class of transactions.

This amendment to SAS no. 56 applies only to substantive analytical procedures that an auditor performs as a principal audit test of a significant financial statement assertion. For all other analytical procedures, auditors should refer to the general documentation guidance in SAS no. 96.

Going concern considerations. The Panel on Audit Effectiveness called for improvement in the documentation of the auditor’s consideration of an entity’s ability to continue as a going concern, especially as it relates to his or her evaluation of prospective financial information that is significant to management plans.

SAS no. 96’s amendment to SAS no. 59 addresses the panel’s recommendation and requires the auditor to document

The conditions or events that led him or her to believe there is substantial doubt about the entity’s ability to continue as a going concern.

The work performed in connection with the auditor’s evaluation of management’s plans.

The auditor’s conclusion as to whether substantial doubt remains about the entity’s ability to continue as a going concern for a reasonable period of time.

The consideration and effect of that conclusion on the financial statements, disclosures and the audit report.

MOVING IN THE RIGHT DIRECTION

SAS no. 96 provides overall documentation requirements for GAAS audits. The ASB will use the statement’s documentation concepts and guidance when developing more specific requirements in future SASs.

Because some of the content in SAS no. 96 is relevant to practitioners performing attest engagements, in January the ASB issued Statement on Standards for Attestation Engagements (SSAE) no. 11, Attest Documentation, which incorporates SAS no. 96’s concepts and terminology and consolidates all documentation guidance in the attestation standards. (See Official Releases, page 105.)

SSAE no. 11 is effective for attest engagements when the subject matter or assertion is as of, or for a period ending on or after, December 15, 2002. The ASB does, however, permit earlier application.

Comparison of Audit Documentation Requirements
SAS no. 41, Working Papers SAS no. 96, Audit Documentation
Nature and extent of documentation    
Provides no explicit guidance other than a mention of some factors at the engagement level that affect the auditor’s judgment regarding the quantity, type and content of working papers. Identifies six factors the auditor should consider in determining the nature and extent of the documentation for a particular audit area or auditing procedure.

Requires audit documentation to include abstracts or copies of significant contracts or agreements that auditors examined to evaluate the accounting for significant transactions.

Requires documentation—for tests of operating effectiveness of controls and substantive tests of details that involve inspection of documents or confirmation—to include an identification of the items tested.

Sufficiency of audit documentation    
Says that working papers should be sufficient to show that the accounting records agree or reconcile with the financial statements or other information reported on and that the applicable standards of fieldwork have been observed. Incorporates the guidance in SAS no. 41 and expands it by also requiring that audit documentation be sufficient to

Enable members of the engagement team with supervision and review responsibilities to understand the evidence obtained and the nature, timing, extent and results of the auditing procedures performed.

Indicate the engagement team member(s) who performed and reviewed the work.

Documentation of significant findings or issues    
Has no equivalent requirement. States the auditor should document audit findings or issues that in his or her judgment are significant, actions taken to address them (including any additional evidence obtained) and the basis for the final conclusions he or she reached.
Retention of audit documentation    
Says the auditor should adopt reasonable procedures for safe custody of his or her working papers and should retain them for a period sufficient to meet the needs of his or her practice and to satisfy any pertinent legal requirements of records retention. Says the audit procedures should enable the auditor to access electronic audit documentation throughout the retention period.

Requires the auditor to adopt reasonable procedures to maintain the confidentiality of client information in audit documentation.

Requires the auditor to adopt reasonable procedures to prevent unauthorized access to the audit documentation.

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