DOCUMENTATION

Meaning of Documentation

“Documentation” refers to the working papers prepared or obtained by the auditor and retained by him, in connection with the performance of the audit.

Form and content of documentation

The Audit documentation therefore is not restricted to being only on papers, but can also be on electronic media. Generally the factors that determine the form and content of documentation for a particular engagement are:

 (a) The nature of the engagement.

(b) The nature of the business activity of the client.

 (c) The status of the client.

(d) Reporting format.

 (e) Relevant legislations applicable to the client.

(f) Records maintained by the client.

 (g) Internal controls in operation.

(h) Quality of audit assistants engaged in the particular assignment and the need to direct and supervise their work.

Permanent and Current Audit files

 In the case of recurring audits, some working paper files may be classified as permanent audit files, which are updated currently with information of continuing importance to succeeding audits. In contrast current audit files contain information relating primarily to the audit of a single period

Contents of Permanent File.

 A Permanent File should contain matters of continuing importance affecting the company or the audit. This file should normally include the following :

 1 Memorandum and Articles of Association and other appropriate statutory or legal regulations –

 2 Copies of other documents and minutes of continuing importance

3 A short description of the type of business carried on and the places of business

4 List of accounting records and responsible officials with plans of organization

5 Statements showing a note of any accounting matters of importance such as history of reserves and bases of accounting methods adopted'

6 The according instructions on internal accounting, internal auditing and stock-taking.

Contents of Current File

 The usual contents of a Current File a e those working paper which are of utility only in the year of audit. Example of Audit Working Paper  placed in a Current File are as follows :

1 A copy of the accounts on which the auditors are reporting, authenticated by directors' signatures

2 An Internal Control Questionnaire or other record designed to ascertain tile adequacy of the system of internal control

3 An Audit Programmesupplemented by particulars and dates of the work carried out and precise details of audit tests and their result

4 A schedule for each item in the Balance Sheet, preferably including comparative figures showing its make-up and how existence, ownership and value or liability have been verified

 5 A schedule supporting each item in the Profit and Loss Account, preferably including comparative figures and such other items in the trading or subsidiary accounts as may be necessary

 6 A check-list concerning compliance with statutory disclosure provisions–

7 A record showing queries raised during the audit and their disposal, with notes where appropriate for attention for the following year.

 8 A of important statistics or working ratios; significant variations will need to be explained

9. A record or extract of minutes of meeting of the directors and shareholders

10 Copies of letters to the company setting out any material weakness or matters with which the auditors are dissatisfied in respect of the accounts or control procedures I

I Letter of representation, i.e. written confirmation of information and opinions expressed in respect of matters such as stock value and amount of current and contingent liabilities. Thus a Current files relates primarily to the set of accounts being audited

Objectives of Audit working papers

 The working paper serves following purposes:

 1. They represent the volume of work performed by the auditor and his staff, which helps in preparing the report.

2. They show the extent of adherence to accounting principles and auditing standards.

 3. They are useful as evidence against the charge of negligence.

 4. They act as guide for subsequent examinations.

5. They enable the auditor to know the weakness of the internal check system in operation as also the accounting system.

6. They assist the auditor in coordinating and organizing the work of audit clerks.

 7. They assist in planning and performance of audit work.

RETENTION OF WORKING PAPERS/ DOCUMENTS

Period of retention The auditor should retain the working papers for a period of time sufficient to meet the needs of his practice and satisfy any pertinent legal or professional requirements of record retention. Ownership and custody Working papers are the property of the auditor. The auditor may, at his discretion, make portions of or extracts from his working papers available to his client. The auditor should adopt reasonable procedures for custody and confidentiality of his working papers General guidelines for the preparation of working papers are:

1. Clarity and Understanding – As a preparer of audit documentation, step back and read your work objectively. Would it be clear to another auditor? Working papers should be clear and understandable without supplementary oral explanations. With the information the working papers reveal, a reviewer should be able to readily determine their purpose, the nature and scope of the work done and the preparer’s conclusions.

2. Completeness and Accuracy – As a reviewer of documentation, if you have to ask the audit staff basic questions about the audit, the documentation probably does not really serve the purpose. Work papers should be complete, accurate, and support observations, testing, conclusions, and recommendations. They should also show the nature and scope of the work performed.

3. Pertinence – Limit the information in working papers to matters that are important and necessary to support the objectives and scope established for the assignment.

 4. Logical Arrangement – File the working papers in a logical order.

 5. Legibility and Neatness – Be neat in your work. Working papers should be legible and as neat as practical. Sloppy work papers may lose their worth as evidence. Crowding and writing between lines should be avoided by anticipating space needs and arranging the work papers before writing.

6. Safety – Keep your work papers safe and retrievable.

 7. Initial and Date – Put your initials and date on every working paper.

8. Summary of conclusions – Summarize the results of work performed and identify the overall significance of any weaknesses or exceptions found

TEST CHECKING –

 Test checking is a method of examining a selected number of items. It checks a representative sample from a large population of similar items. It is a technique of selective verification of an arbitrary percentage of transactions. The quantum of test checking is determined by the auditor's judgement and his personal assessment of situation; it may vary from 5 to 50% checking of the items selected at random.

Relevance of Test Checking

In many cases, the number of transactions is so large that it often becomes difficult as well as unnecessary to check each and every item within the limited time available for audit. Test check approach, ‘therefore, reduces the work of the auditor. Test Checking is a method of partial checking or selective checking. It is different from Routine Checking where each and every item is put under examination from beginning to the end. As detailed checking is considered unnecessary in every situation, the method of test checking is the one which is widely used in practice.

Precautions in Test Checking

As Test Checking is a selective approach of examination of accounts, this needs a number of precautions such as :

 1 Include in the check entries of every description

2 Select the entries td be checked at random

3 Verify greater number of entries relating to the opening and closing parts of the accounting year

 4 Extend the check to the work of every accounting staff '

5 Avoid test check of some important books like Cash Book where the transactions should be checked 100%

6 Distribute the checking lo different periods and entries at each audit anticipate it

7 Determine the size and selection af the sample without basis

8 Take care of the degree of risk involved in ignoring the checking of the substantial number of item

9 Extend the area of checking if the test check discloses some material irregularity or suspicious results  10 Choose entries for examination keeping in view the nature, size and amount of the transactions.

SAMPLING

“Audit sampling” means the application of audit procedures to less than 100% of the items within an account balance about some characteristic of the items selected in order to form or assist in forming a conclusion concerning the population. It is important to recognize that certain testing procedures do not come within the definition of sampling. Tests performed on 100% of the items within a population do not involve sampling.

FACTORS IN DETERMINING SAMPLE SIZE- SAMPLING RISK

(1) When determining the sample size, the auditor should consider sampling risk, the tolerable error, and the expected error.

(2) Sampling risk arises from the possibility that the auditor conclusion, based on a sample, may be different from the conclusion that would be reached if the entire population were subjected to the same audit procedure.

(3) The auditor is faced with sampling risk in both tests of control and substantive procedure as follow: (

a) Tests of control:

(I) Risk of under reliance: The risk that, although the sample result does not support the auditor’s assessment of control risk, the actual compliance rate would support such an assessment.

 (II) Risk of over reliance: The risk that, although the sample result supports the auditor’s assessment of control risk, the actual compliance rate would not support such as an assessment.

(b) Substantive procedures:

 (I) Risk of incorrect rejection: The risk that, although the sample results the supports the conclusion that a recorded account balance or class of transactions is materially misstated, in fact it is not materially misstated.

(II) Risk of incorrect acceptance: The risk that, although the sample result supports the conclusion that a recorded account balance or class or transactions is not materially misstated.

(4) The risk of under reliance and the risk of incorrect rejection affect audit efficiency as they would ordinarily lead to additional work being performed by the auditor, or the entity, which would establish that the initial conclusions were incorrect. The risk of over reliance and the risk of incorrect acceptance affect audit effectiveness and are more likely to lead to an erroneous opinion on the financial statements than either the risk of under reliance or the risk of incorrect rejection.

 (5) Sample size is affected by the level of sampling risk the auditor is willing to accept from the results of the sample. The lower the risk the auditor is willing to accept, the greater the sample size will need to be

TOLERABLE ERROR

Tolerable error is the maximum error in the population that the auditor would be willing to accept and still concludes that the result from the sample has achieved the audit objective. Tolerable error is considered during the planning stage and, for substantive procedures, is related to the auditor’s judgement about materiality. The smaller the tolerable error, the greater the sample size will need to be. In tests of control, the tolerable error is the maximum rate of deviation from a prescribed control procedure that the auditor would be willing to accept, based on the preliminary assessment of control risk. In substantive procedures, the tolerable error is the maximum monetary error in an account balance or class of transactions that the auditor would be willing to accept so that when the results of all audit procedures are considered, the auditor is able to conclude, with reasonable assurance, that the financial statements are not materially misstated

Auditor’s Liability

 If any errors are found in the accounts the auditor cannot take the shield against the fact that he conducted test check. The auditor should very carefully select the items for test check and ensure on the whole that the accounts show a true and fair view of the Profit/Loss in the case of the Profit & Loss Account and of the state of affairs of the organisation in the case of Balance Sheet.