CHAPTER21

AUDITDOCUMENTATION
Questions
1.

Refer to page 806, 3rd paragraph of the textbook.

2.

The major function of audit workpapers is to provide evidence of conformance

with auditing standards. As a body, the workpapers are the principal record of
the evidence which the auditor has gathered and evaluated in support of the
audit opinion.

3.

Refer to pages 808 and 809 of the textbook.

4.

Refer to page 808 of the textbook.

5.

With electronic spreadsheets, audit adjustments need only be entered once in

the supporting schedule. The adjustments are then automatically reflected in
lead schedules and in the working trial balance through equations entered in
appropriate cells. The cell equations link the workpapers such that an
adjustment need be entered only once in order for all affected workpapers to be
automatically updated.

6.

Permanent files contain information that is of a continuing interest to the

auditor. A permanent file typically contains (1) copies or abstracts of significant
company documents and (2) auditor- or client-prepared information on accounts.
Current-year files contain working papers prepared to support the assertions
embodied in the financial statements.

7.

Client personnel may prepare working papers to reduce the time spent by the
auditor on the engagement. When client personnel prepare working papers, the
auditor should give the client personnel detailed instructions. Working papers
prepared by the client should be identified as PBC (prepared by client) and
should involve no decision making. The auditor should test completed working
papers against underlying documentation.

8.

The lead schedule, especially on larger engagements, is designed to bridge the

gap between the working trial balance and the general ledger by listing all
general ledger accounts that are reported as one account in the financial
statements. Supporting schedules is a term for working papers that support the

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amounts presented in the financial statements by providing support for a detailed
account on a lead schedule. Supporting schedules represent the bulk of working
papers.
In general, a properly prepared working paper should meet firm policy, have a
proper heading, clearly indicate the work performed, clearly meet the audit
objective for which it was designed, and clearly state the auditors conclusion.

10. The prior years audit working papers are a useful guide to staff assistants
because the audit procedures performed in the prior year usually are similar to
those of the current year. By referring to last years working papers, the
assistant can see how the procedures were documented and is given a possible
format for organizing the current years working paper. In addition, exceptions
noted in last years working papers may alert the assistant to possible problems
in the current year. Finally, the prior years working papers contain information
substantiating the beginning balances for the current year.
11. The more common types of audit working papers and their principal purposes
may be summarized as follows:
(1) Audit administrative working papers aid the auditors in planning and
administration of the audit, and include such items as the audit programs,
questionnaires and flowcharts, decision aids, time budgets, and
engagement letters.
(2) Working trial balance represents the backbone of the auditors working
papers, for it contains the balances of the ledger accounts, the adjustments
and reclassifications deemed necessary by the auditors, and the adjusted
amounts that appear in the financial statements. It also contains references
to all supporting schedules and analyses, thus serving to control the other
types of working papers.
(3) Lead schedules working papers that serve to combine similar general
ledger accounts, the total of which appears on the working trial balance.
(4) Adjusting journal entries material misstatements in the accounts
disclosed by the auditors investigation are corrected by means of adjusting
journal entries. These appear on the auditors working trial balance, and in
addition, a list of such entries is turned over to the client at the conclusion
of the audit with the request that they be approved and entered in the
accounting records.
(5) Reclassification entries entries necessary to properly reflect financial
results but not representing misstatements in the financial records of the
client.
(6) Supporting schedules although the term schedule is at times applied to
various types of working papers, the preferred usage is to designate a
listing of the details or elements comprising the balance in an account at a

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specified date. Preparation of such a listing is often an essential step in

determining the nature of an account.
(7) Analyses consist of working papers showing the changes which occurred
in an account during a given period. By analyzing an account, the auditors
determine its nature and contents.
(8) Reconciliations working papers that prove the relationship between two
amounts obtained from different sources.
(9) Computational working papers used to verify such data as interest
expense, income taxes, and earnings per share.
(10) Corroborating documents working papers that provide support for
specific representations made in the financial statements, such as letters of
representations from clients, lawyers letters, audit confirmations, and
copies of the contracts.
12. Audit working papers are the property of the auditor; however, they must not
violate the confidential relationship between client and auditors by making the
papers available to outsiders or even to the clients employees without specific
permission from the client.
13. Refer to page 820 of the textbook.
14. Refer to pages 820 to 822 of the textbook.
Multiple Choice Questions
1.
2.
3.
4.
5.
6.
7.
8.

d
d
c
a
d
c
c
d

9.
10.
11.
12.
13.
14.
15.
16.

b
b
a
d
d
b
d
d

17.
18.
19.
20.
21.
22.
23.
24.

d
c
c
d
b
d
a
b

25.
26.
27.
28.
29.
30.
31.
32.

b
d
d
c
d
c
d
d

Cases
1.

a.

(1) The functions of audit working papers are to aid the CPA in the
conduct of his work and to provide support for his opinion and his
compliance with auditing standards.
(2) Working papers are the CPAs records of the procedures performed,
and conclusions reached in the audit.

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b.

The factors that affect the CPAs judgment of the type and content of the
working papers for a particular engagement include:
1. The nature of the auditors report.
2. The nature of the clients business.
3. The nature of the financial statements, schedules or other information
upon which the CPA is reporting and the materiality of the items
included therein.
4. The nature and condition of the clients records and internal controls.
5. The needs for supervision and review of work performed by assistants.

c.

Evidence which should be included in audit working papers to support a

CPAs compliance with generally accepted auditing standard includes:
1.
2.
3.
4.
5.

d.

2.

Evidence that the financial statements or other information upon which

the auditor is reporting were in agreement or reconciled with the
clients records.
Evidence that the clients system of internal control was reviewed and
evaluated to determine the nature, timing, and extent of audit
procedures.
Evidence of the auditing procedures performed in obtaining evidential
matter for evaluation
Evidence of how exceptions and unusual matters disclosed by auditing
procedures were resolved or treated.
Evidence of the auditors conclusions on significant aspects of the
engagement with appropriate commentaries.

The CPA should perform an adequate examination at minimum cost and

effort and the preceding years programs will aid in doing this. The
preceding years audit programs ordinarily contain information useful in the
current examination (such as descriptions of the unique features of a clients
operations or records, a formalized sequence of audit steps in logical order,
and approximate time requirements to perform various phases of the work).
The auditor should decide whether to use the old program or prepare a new
one.

In general, the working paper is not set up in a logical manner to show what the
auditor wants to accomplish. The primary objective of the working paper is to
verify the ending balance in notes receivable and interest receivable. A
secondary objective is to account for all interest income, cash received and cash
disbursed for new notes, collateral as security, and other information about the
notes for disclosure purposes.

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21-5

Specific deficiencies of the working paper presented in the question are:

1.

2.
3.
4.

a.
DEFICIENCY
Tick mark explanation tested
does not indicate specifically
what was done.

Explanation of some tick marks is

not given.
Classification of long-term
portion indicates no verification.
Paid-to-date row is confusing.

5.

Due dates are missing for C.C.

Co., P. Pablo and Tetra Co.

c.

SPREADSHEET SOLUTION

b.
IMPROVEMENT
Should have separate tick marks
meaning:
Agreed to confirmation
Footed
Traced to cash receipts journal
Recomputed, etc.
Explain all tick marks on the same
page of the working paper.
Recompute portions of notes which are
long-term.
Column should say date paid to and
this should be confirmed.
Include due dates on working paper
for these notes.

The purpose of using an Excel spreadsheet in this problem is to give the

student some experience in preparing a simple working paper using an
Excel spreadsheet. It should be explained to students that this type of
working paper may or may not be prepared in actual practice, and that often
templates are used to prepare more time-consuming working papers. Also,
whether or not tick marks are computerized is a matter to be decided. The
advantage is that the completed audit work can then be stored and reviewed
electronically, a direction many firms are going. On the other hand, it may
be more efficient to indicate audit work manually as it is performed, and a
contrast in the color of the tick marks through use of a colored pencil may
be desirable.
The formulas used are self-evident, so no listing is provided. Two items
deserve comment:
1.

An advantage of using a spreadsheet program for these types of

analyses is that footing and crossfooting are done automatically.

2.

When auditor tick marks are done by computer, a problem arises as

to how to place them on the worksheet. One could use narrow
columns inserted between the scheduled client data, or, as done

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here, the tick marks are placed in blank rows beneath the related
data.

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FOURTH PACIFIC COMPANY

A/C # 110 NOTE RECEIVABLE
12/31/13

Schedule
Prepared by
Approved by
Account # 110 Notes Receivable

Date
Made /
Due

Maker
Alba Co.

c*

6/15/12 /
6/15/14

Barrios,
Inc.

c*

11/21/12
/
Demand

C.C. Co.

c*

P. Pablo

c*

Martin
Cruz

c*

Tetra Co.

c*

11/1/12 /
4/1/18
(P200/Mo
.)
7/26/13 /
8/1/15
(P1000/M
o.)
5/12/12 /
Demand
9/3/13 /
2/1/16
(P400/Mo
.)

Interest
Rate /
Date Paid
to
5% /
None
pd.
5% /
12/31/1
3
5% /
12/31/1
3
5% /
9/30/13
5% /
12/31/1
3
6% /
11/30/1
3

Face
Amount

Value of
Security

5000

None

3591

None

Balance
12/31/1
2
4000
tp

Addition
s
0

Paymen
ts
1000
r

3591

3591

tp

N-1
JD
PP

Date
1/21/14
2/15/14

Interest

Balance
12/31/1
3
3000

Receiva
ble
12/31/12
114
tp

Receive
d
0

Receiva
ble
12/31/13
279

112

112

tp

<

Earned
175
<

13180

24000

12780
tp

2400
r

11380

24
tp

577
<

601
r

25000

50000

25000
r

5000
r

20000

468
<

200
r

268

2100

None

2100

2100

105

105

tp

<

tp
12000

Legend of Auditors Tick Marks

10000

12000
r

1600
r

11400

162
<

108
r

54

22471

37000

15691

43780

128

1589

1116

601

f
tp

f, cf
wtb

f
tb

f
op

f, cf
wtb

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f
cf
tp
wtb
op
*
c
r
<

Footed
Crossfooted
Traced to prior year working papers
Traced total to working trial balance
Traced total to operations working paper OP6
Examined note for payee, made and due dates, interest rate, face amount,
and value of security. No exceptions noted.
Received confirmation, including date interest paid to, interest rate, interest
paid during 2013, note balance, and security. No exceptions noted.
Traced to cash receipts journal
Recomputed for the year

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