(Objectives 7-5, 7-6) The adhering to questions problem audit documentation. Choose the finest response.

a. Which of the adhering to is not a main function of audit documentation?

(1) To coordinate the audit.

(2) To help in preparation of the audit report.

(3) To assistance the financial statements.

(4) To provide proof of the audit work percreated.

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b. During an audit engagement, pertinent information are compiled and had in the audit records. The audit papers mainly are thought about to be

(1) a client-owned document of conclusions got to by the auditors who percreated the engagement.

(2) evidence supporting financial statements.

(3) support for the auditor’s depictions regarding compliance with auditing requirements.

(4) a document to be used as a basis for the following year’s engagement.

c. Although the amount, form, and also content of audit documentation will vary via the scenarios, audit documentation generally will certainly incorporate the

(1) duplicates of those client documents examined by the auditor during the course of the engagement.

(2) review of the performance and competence of the audit staff aides by the partner responsible for the audit.

(3) auditor’s comments concerning the efficiency and also competence of client regulate - ment personnel. (4) auditing actions complied with and also the experimentation percreated in obtaining audit proof.

d. The irreversible file of an auditor’s functioning documents most most likely would certainly incorporate copies of the

(1) lead schedule.

(2) attorney’s letters.

(3) financial institution statements.

(4) debt agreements.

(Objective 7-5)


Auditing criteria state that audit documentation is the primary record of auditing measures used, proof acquired, and conclusions reached by the auditor in the engagement. Audit documentation have to incorporate all the indevelopment the auditor considers necessary to adequately conduct the audit and also to administer support for the audit report. Audit documentation may additionally be referred to as functioning records, although audit documentation is often maintained in computerized papers. The in its entirety objective of audit documentation is to aid the auditor in giving factor - able assurance that an adequate audit was performed in accordance via auditing standards. More especially, audit documentation, as it involves the existing year’s audit, provides: A Basis for Planning the Audit If the auditor is to setup an audit adequately, the essential reference indevelopment need to be accessible in the audit files. The records might include such diverse planning indevelopment as descriptive information around internal control, a time budget for individual audit locations, the audit regimen, and the outcomes of the coming before year’s audit. A Record of the Evidence Accumulated and the Results of the Tests Audit documentation is the major means of documenting that an enough audit was conducted in accordance with auditing standards. If the need arises, the auditor need to have the ability to demonstrate to regulatory agencies and also courts that the audit walso planned and adequately supervised; the proof gathered was proper and sufficient; and also the audit report was proper, considering the outcomes of the audit. When audit actions involve sampling of transactions or balances, the audit documentation need to recognize the items tested. The audit papers should likewise document considerable audit findings or concerns, actions taken to attend to them, and also the basis for the conclusions reached. For instance, the auditor have to record certain transactions at year-end to determine whether transactions were taped in the appropriate duration. If misstatements are detected throughout these cutoff tests, the auditor must document the extra measures perdeveloped to identify the level of cutoff misstatements, the conclusion as to whether the account balances influenced are sensibly declared, and whether any type of audit adjustments must be proposed. Documents for Determining the Suitable Type of Audit Report Audit documentation provides an essential resource of indevelopment to help the auditor in deciding whether enough correct proof was built up to justify the audit report in a provided set of situations. The information in the papers are equally beneficial for evaluating whether the financial statements are sensibly proclaimed, provided the audit evidence. A Basis for Recheck out by Supervisors and also Partners The audit papers are the primary structure of reference offered by supervisory personnel to evaluation the occupational of aides. The careful testimonial by supervisors likewise offers evidence that the audit was properly oversaw. In enhancement to the objectives straight pertained to the audit report, the audit files often serve as the basis for preparing taxes returns, filings with the SEC, and various other reports. They are additionally a resource of information for issuing interactions to management and those charged with administration, such as the audit committee, concerning miscellaneous matters such as interior regulate deficiencies or operational references. Audit documents are additionally a advantageous frame of recommendation for training personnel and also as an assist in planning and coordinating succeeding audits. Audit documentation prepared during the engagement, including schedules prepared by the client for the auditor, is the residential or commercial property of the auditor. The just time anyone else, consisting of the client, has a legal ideal to research the documents is once they are subpoenaed


by a court as legal proof. At the completion of the engagement, audit papers are kept on the CPA’s premises for future reference and to comply via auditing criteria related to document retention. The should maintain a confidential connection with the client is expressed in Rule 301 of the Code of Professional Conduct, which states

• A member shall not disclose any kind of confidential information obtained in the course of a skilled engagement except through the consent of the client. Throughout the course of the audit, auditors obtain a substantial amount of informa - tion of a confidential nature, consisting of officers’ salaries, product pricing and also heralding plans, and product price information. If auditors divulged this indevelopment to outsiders or to client employees who have actually been denied accessibility, their connection with administration would certainly be seriously strained. In addition, having actually access to the audit papers would give employees an possibility to alter the documents. For these factors, care must be taken to safeguard the audit files at all times. Auditing criteria need that records for audits of personal suppliers be maintained for a minimum of five years. The Sarbanes–Oxley Act calls for auditors of public suppliers to prepare and also keep audit files and other information pertained to any kind of audit report in adequate information to assistance the auditor’s conclusions, for a period of not much less than salso years. The law makes the learning and also willful damage of audit documentation within the seven-year duration a criminal offense subject to financial fines and also impriboy - ment as much as ten years. SEC rules need public firm auditors to keep the adhering to docuguys - tation:

• Working documents or various other papers that develop the basis for the audit of the company’s annual financial statements or testimonial of the company’s quarterly financial statements

• Memos, correspondence, interactions, various other files and records, in - cluding digital records, related to the audit or review These rules substantially boost the audit documentation that need to be maintained for audits of public companies. For instance, auditors of public suppliers are required to retain e-mail correspondence that contains indevelopment meeting the preceding criteria.

(Objective 7-6)

Each CPA firm establishes its own approach to preparing and also organizing audit files, and also the start auditor have to take on the firm’s strategy. This text emphasizes basic concepts common to all audit documentation. Figure 7-2 (p. 190) illustrates the contents and company of a typical collection of audit documents. They contain virtually whatever involved in the audit. There is logic to the type of audit documentation prepared for an audit and also the means it is arranged in the papers, though various firms might follow somewhat various philosophies. In the figure, the audit documents start through basic information, such as corporate information in the permanent documents, and end with the financial statements and audit report. In between are the audit files supporting the auditor’s tests.

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Permanent files contain data of a historical or continuing nature pertinent to the existing audit. These documents administer a convenient resource of indevelopment around the audit that is of continuing interemainder from year to year. The irreversible files commonly encompass the following:

• Extracts or duplicates of such company papers of proceeding prominence as the short articles of incorporation, bylaws, bond indentures, and contracts. The contracts may incorporate pension plans, leases, stock alternatives, and also so on. Each of these records is signifi cant to the auditor for as many kind of years as it is in result.

• Analyses from previous years of accounts that have continuing prominence to the auditor. These encompass accounts such as permanent debt, stockholders’ equity accounts, goodwill, and solved assets. Having this information in the long-term documents enables the auditor to concentrate on analyzing only the changes in the present year’s balance while retaining the outcomes of previous years’ audits in a type easily accessible for testimonial.

• Indevelopment pertained to understanding inner control and also assessing manage threat. This contains organization charts, flowcharts, questionnaires, and other inner regulate indevelopment, consisting of identification of controls and also weaknesses in the system. These documents are offered as a starting suggest for documenting the auditor’s under standing of the regulate mechanism, given that facets of the systems are regularly unreadjusted from year to year.

• The outcomes of analytical actions from previous years’ audits. Among these information are ratios and percenteras computed by the auditor and the full balance or the balance by month for selected accounts. This information is beneficial in helping the auditor decide whether tright here are inexplicable changes in the current year’s account balances that must be investigated more generally. Documenting analytical actions, expertise of interior manage, and assessing control danger are included in the present period audit documents fairly than in the irreversible file by many type of CPA firms. The present papers encompass all audit documentation applicable to the year under audit. There is one set of irreversible documents for the client and also a set of existing documents for each year’s audit. The following are kinds of indevelopment often consisted of in the existing file: Audit Program Auditing standards require a created audit routine for eincredibly audit. The audit routine is ordinarily preserved in a sepaprice file to improve the coordina - tion and integration of all components of the audit, although some firms also incorporate a copy of the audit routine via each audit section’s audit documentation. As the audit progresses, each auditor initials or electronically indications the routine for the audit procedures percreated and suggests the date of completion. The inclusion in the audit files of a well-designed audit program completed in a conscientious manner is evidence of a high-top quality audit. General Information Some audit papers encompass current duration information of a general nature quite than proof designed to support certain financial statement quantities. This consists of such items as audit planning memos, abstracts or copies of minutes of the board of directors meetings, abstracts of contracts or agreements not consisted of in the permanent records, notes on discussions through the client, supervisors’ review comments, and also general conclusions. Working Trial Balance Because the basis for preparing the financial statements is the basic ledger, the amounts contained in that record are the focal allude of the audit. As at an early stage as feasible after the balance sheet date, the auditor obtains or prepares a listing of the general ledger accounts and also their year-finish balances. This schedule is the functioning trial balance. Software programs allow the auditor to downfill the client’s ending basic ledger balances right into a functioning trial balance file. The technique offered by many kind of firms is to have actually the auditor’s functioning trial balance in the very same format as the financial statements. Each line item on the trial balance is sustained by a lead schedule, containing the in-depth accounts from the basic ledger consisting of the line item complete. Each comprehensive account on the lead schedule is, subsequently, sustained by proper schedules sustaining the audit occupational perdeveloped and the conclusions reached. For example, the relationship between cash as it is stated on the financial statements, the functioning trial balance, the lead schedule for cash, and the supporting audit documentation is presented in Figure 7-3 (p. 192). As suggested, cash on the financial statements is the same as on the working trial balance and the complete of the detail on the cash lead schedule. Initially, amounts for the lead schedule were taken from the general ledger. The audit work-related perdeveloped led to an adjustment to cash that will be shown in the detail schedules and is reflected on the lead schedule, the functioning trial balance, and the financial statements. Adjusting and Reclassification Entries When the auditor discovers material misstatements in the accounting documents, the financial statements have to be corrected. For instance, if the client fairesulted in effectively alleviate inventory for obsolete raw products, the auditor deserve to propose an adjusting enattempt to reflect the realizable worth of the inventory. Even though adjusting entries uncovered in the audit are frequently ready by the auditor, they must be apconfirmed by the client because management has actually primary obligation for the fair presentation of the statements. Figure 7-3 illustrates an adjust ment of the basic cash account for $90 (thousand). Reclassification entries are generally made in the statements to present accountancy information properly, even as soon as the general ledger balances are correct. A prevalent example is the reclassification for financial statement purposes of product.