Introduction
International Standard on Auditing have defined audit documentation ISA 230 as ‘The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditors reached’ (Pine, 2009). This is a crucial element of an audit engagement and places great responsibilities on auditors to ensure that evidence collected during an audit is recorded in a specified format and is easily traceable for a continuation of audit work in any organization.
Keeping in view the events leading to almost a complete financial meltdown at the beginning of 2001 and also those that followed after the eruption of accounting scandals in the US and Europe the accounting profession remained under heavy criticisms and newer reforms were unavoidable. The enactment of Sarbanes Oxley in 2002 and the subsequent establishment of PCAOB was seen as a major interventional step forward by the government. This analytical paper will examine Auditing Standard No. 3 – Audit Documentation of Sarbanes Oxley Act 2002 which is over-sighted by PCAOB. The analysis will cover its objectives and requirements for preparing, documentation, storage, and subsequent changes.
The transition from SAS 96 to AS3
Auditing Standard No. 3 – Audit Documentation replaced the previous Statement of Auditing Standards (SAS 96) that was considered insufficient to deal with the issues of an increased obligation of the management and Board of Directors of companies. Sarbanes Oxley Act 2002 laid out new guidelines for audit documentation to ensure that the quality could be improved and the extent of the audit work could be increased to impose greater responsibilities on auditors and directors of organizations who have been involved in several accounting manipulations (PCAOB, 2004).
Importance of AS3
Auditing Standard No. 3 – Audit Documentation (AS3) became effective for financial years ending 15 November 2004 or onwards. The scope of AS3 covers audit engagements that may be conducted to audit financial reports and evaluate internal controls of an organization. Its primary objective is to outline requirements for audit documentation which includes working papers of auditors. The working papers on an audit engagement include those related to the planning stage of the audit which has details of business areas under review as per the audit agreement and different audit activities that will be performed to achieve those tasks.
In addition to these papers audit documentation also includes details of audit procedures performed, audit evidence collected and conclusions that support representations made by the auditors. Audit documentation usually takes the form of either paper or electronic memoranda, discussions, notes, presentations, performance reports and schedules etc. All of these documents help auditors to form an opinion on the accuracy and correctness of the financial information which is presented in the annual reports. It is therefore an important element of an audit engagement that needs to be carefully prepared, presented and stored to ensure accuracy and correctness of audit conclusions and supervision of audit functions performed during an audit engagement (PCAOB, 2004).
Different sub-issues pertaining to AS3
AS3 – Audit documentation suggests that the documentation prepared by auditors during their engagement forms the basis for representation made by auditors to various stakeholders and is therefore subject to review and scrutiny by parties involved in the engagement or others as well. These parties may include new auditors who may be appointed by the client or as successors by the same audit firm, supervisors to review the audit progress, advisors allocated to the task by the audit committee and any other internal or external parties which may require assessing the quality audit work performed at any point in time (PCAOB, 2004).
This suggests that the audit documentation prepared by an auditor, or a team of the auditor should be consistent with the types of business and financial information prepared by similar businesses. With greater emphasis on the information collected by auditors during an audit engagement, it became necessary for registered audit firms to develop a standardized reporting framework for their audit work.
The standardized reports would surely allow auditors to adopt an approach that is more objective and further permits auditors to change their audit approach to collect information that is most suited for making representations regarding the organizations. The standard under review also distinguishes between the information that must be recorded and that which could be left out of the audit documentation. It is set out that the conversations which are made between auditors and the staff of the company may not be recorded if it is just mere enquiry which requires further clarification from them. This standard places responsibilities on auditors to ensure that the audit documentation collection is shifted to the issuing office or is accessible to that office.
Furthermore, with this standard the AU Sec. 543, Part of Audit Performed by Other Independent Auditors was also amended where the principal auditor is required to collect audit evidence and other data from other independent auditors who may be working on a certain aspect of the audit assignment. Referring to the standard itself the requirements laid out by PCAOB for audit documentation are presented in the following paragraphs (PCAOB, 2004).
Documentation requirements laid out by AS3
The primary requirement laid out in this standard for the audit documentation is that the information presented in the audit engagement should conform with other standards pursued by PCAOB. The information provided should be clear and well organized so that the basic purpose of achieving reasonable assurance is to issue an opinion by auditors about the financial statements they audit. This suggests that the audit documentation should have supportive information on the basis used for collecting audit evidence. This requires auditors to plan out ahead of their audit engagement and determine what audit activities to perform and how to carry out them. This, therefore, involves an initial understanding of the business processes and examination of records previously audited as provided by the client.
As audit work initiates auditors need to document all information that helps them in forming representation regarding the financial statements prepared by their clients. The information collected should substantiate the audit work carried out by auditors.
This implies that the information should reflect that a particular audit test or inquiry was made during audit engagement that has resulted in useful information. In some cases where an independent specialist or surveyor is hired by the audit firm to assist in assessing or evaluating a certain process or information, the audit documentation should include all those findings prepared and it’s the responsibility of the principal auditor to do so (PCAOB, 2004).
Audit documentation should be prepared in such a way that incoming experienced auditor who has no prior connection with the current audit engagement can easily trace out the findings till a certain point in time. This would also assist in determining which audit procedures have been performed and assessing their outcome. This ensures the continuation of the audit work and allows further improvement in the audit approach if the new auditor considers it necessary. The extent of audit documentation depends upon the risk assessment regarding different accounting assertions by the auditor (PCAOB, 2004).
Furthermore, it is being required by the standard that if the audit work requires examination of documents audit documentation must include copies or abstracts of those important documents which would assist in forming audit opinion. The standard also provides further detailed guidelines regarding the recording and collection of important documentary evidence. The audit documentation should identify significant issues where there is a conflict between auditors and the management and include details of discussions that took place to resolve them.
The audit completion document is an integral part of the process which requires auditors to provide conclusions regarding their audit work and identify any significant issues which remain unresolved and differences in professional judgment that could affect the outcome of the audit engagement. In addition to the information regarding audit engagement, audit documentation may also include information regarding staff appointment, training, and allocation of duties (PCAOB, 2004).
The standard also sets out requirements for retention of audit documents for at least 7 years after completion date and release of auditor’s report. If an audit firm ceases to carry out an audit function for a client that this date will be the day audit engagement was ceased. As discussed, issuing office is responsible for document retention and final documentation should be submitted within 45 days of the documentation completion date. The auditors are also required to follow AU sec. 711, Filings Under Federal Securities to identify any additions in the documentation (PCAOB, 2004).
Conclusion
The above analysis paper identifies the objective and its scope underlying the requirements which SOX 2002 has placed upon registered audit firms. This standard has its importance as weak audit trials and loss of vital audit evidence has been one of the major criticisms which the accounting profession faced after major accounting scandals and involvement of audit firms in malpractice.
Reference List
PCAOB. (2004). Auditing and Related Professional Practice Standards. Washington: Public Company Accounting Oversight Board.
Pine, B. (2009). Audit Documentation. Web.