Analysing the Audit Documentation from the PCAOB
The Sarbanes-Oxley Act of 2002 created the Public Company Accounting Oversight Board (PCAOB), which became responsible for managing and regulating the public accounting profession of auditing. The PCAOB created a set of standards for preparing an audit report this paper will focus on Auditing Standard No.3-Audit Documentation. Standard number 3 requires that publicly traded companies that are registered with the Securities and Exchange Commission maintain all auditing documents for up to seven years. The PCAOB had required that companies now maintain adequate documentation to support conclusions in the auditing report, referred to as audit documentation which is a precise record kept of everything from an auditor's planning to how they formed their conclusions. Audit documentation is encompasses in a variety of forms from paper to electronic files containing information such as schedules and confirmations. The PCAOB considers that the comprehensive audit documentation, conclusions attained, and the supporting evidence is what compels the quality and honesty of the audit. Sufficient documentation helps uphold the integrity of meaningful reviews of the company, improves the quality of the audit, and also lets the PCOAB complete its job of inspecting companies registered with the PCAOB.
On September 29, 2003 the PCAOB, public accounting firms, investor groups, and representatives from public companies gathered to talk about issues and listen to opinions on developing standards on audit documentation. Before this discussion the PCAOB issued a paper about the matter of audit documentation that contained questions relating to objectives, the scope, and form of documenting an audit. They also asked those taking part in the discussion to talk about matters relating to things such as changes in audit documentation after the audit report is made public, critical elements of the documentation, the acceptable amount of detail disclosed and so on. Through this discussion the PCAOB recognized that the Statement on Auditing Standards No. 96, relating to Audit Documentation was insufficient for the PCAOB. So on November 17, 2003 they released a projected auditing standard for section 103 (a) called Audit Documentation and got 38 letters leading to some changes in the general requirements of Audit Documentation from various companies, regulators, and professional and governmental agencies.
Audit Documentation which is also known as work papers or working papers objective is to provide the evaluator with hard records and supportive evidence for the source of an auditor's conclusion. Some of the main things included in the audit documentation are the records for planning the audit, performing and procedures relating to the work, data found and the ultimate conclusion of the auditor. A company's audit committee, board of directors, stockholders, creditors, and others review and depend on the auditor's statement that is attached to the financial statements.
The engagement team performing an audit of a company assesses the audit documentation and auditors new to an engagement are required to look at the prior year's documents. New auditors look over previous year's documentation to form an understanding of what went into the previous audit when trying to plan the current year's audit. The list of those who review the audit documentation also includes supervisory personnel, engagement supervisors, and engagement quality reviewers who want to know and verify how auditors reached important conclusions, internal and external inspection teams who want to evaluate the audit quality and compliance, and other interested parties. Audit documentation has an overall objective to inform and verify findings contained in an audit to parties that are required or interested in looking over the work.
Documentation requirements of an audit must align to the standards of the PCAOB and be organized in adequate detail so that there is an apparent understanding of its intention, basis, final conclusions and connection to major findings. Audit documentation is the written proof that offers support for what embodies the auditor's report. Therefore, it should show that auditors complied with the PCAOB standards, sustain support for their conclusions, and reveal that the accounting records matched with the financial statements. It is required that auditors have to record their actions, procedures, data obtained, and final conclusions with reference to the related claims in the financial statement. This proves through audit documentation that the work was in fact performed. It should include enough information to allow an auditor with no past association with the engagement to comprehend the character, degree and timing of the results and to verify who did the work.
When it comes to establishing the character and degree of the documentation for claims made in the financial statement, the auditor has to consider a few factors. These factors include the character of the auditing procedure, risk of material misstatement related to the assertions in the financial statement, amount of judgment involved, and importance of the evidence gathered to the assertion being tested. Aside from just supporting an auditor's conclusion, documentation must also contain findings related to important conflicting issues in the auditor's final conclusion. Applicable documents to be kept consist of procedures completed, and testimony of discussion or decision of discrepancies in qualified judgment of auditors. If the auditor is alerted that anything relating to a procedure is missing as an effect of insufficient documentation they must verify that enough procedures were performed, enough evidence was obtained and suitable conclusions were reached. This extends beyond an oral explanation, auditors should determine what additional documentation would be required, and if they cannot verify how conclusions were reached that should abide by the terms of AU sec. 390, Consideration of Omitted Procedures fter the Report Date.
When it comes to inspection of a company's documents, audit documentation should include tests of facts, tests of operating efficiency of controls, and recognize items inspected during walkthroughs. Inspections of contracts in the audit documentation should include copies of all important documents. Documented in a central repository for the public accounting firm related to their staff accountants includes related auditor independence, staff training, and client retention. Audit documentation related to the certain engagement should include only related material.
In relation to every engagement major issues, actions taken to deal with them and sources for the conclusion reached must be documented. These major findings or issues are vital matters that are important to every step of the audit. This relates to significant matters such as the consistency of accounting principles, fallout of auditing procedures that require important alteration of intended procedures like material misstatements and omissions, audit adjustments, disagreements among auditors, and modifying assessed level of audit risk or audit report. An engagement completion document identifies all considerable findings or issues and includes data essential to understand them.
Seven years from when the auditor gives their consent to use the report in association with a company's financial statements is the standard length of time the auditor must retain the audit documentation. If something occurs and the auditor is unable to complete an engagement then it is seven years from when they stopped the engagement that audit documentation must be maintained. All essential auditing tasks must be finished before the audit report is released, including adequate evidence relating to their findings. However, the engagement team has up to 45 days after the releasing a report to compile the inclusive audit documentations or from the date an engagement stopped. After the completion date no information should be deleted or thrown out, but can still be added. If information is added it must also include the date which it is added, name of who organized the added information, and the grounds for adding information to the audit documentation.
Guaranteeing that audit documentation is sufficient to meet the requirements outlined in this paper and is properly prepared and maintained is the responsibility of the public accounting firm's office. They must also contain in the audit documentation work that was performed by other auditors not specifically on the engagement team. Relating to work performed by other auditors the issuing office must document an engagement finalized document, a record of considerable fraud risk factors, adequate information connected to any important findings or issues, any findings contributing to the consolidation of financial accounts, data to reconcile the financial statement totals audited by the other auditors, a timetable of audit adjustments, deficiencies and material inadequacies in internal control over financial reporting, and all issues to correspond to the audit committee. In some cases the auditor can be required to retain further documentation as obligated to by the retention and subsequent changes to audit documentation standard. Essentially audit documentation is part of auditor's job when it comes to doing thorough, detailed, and quality work that leaves little room for scrutiny or an eventual lawsuit.