CHAPTER 18

AUDIT DOCUMENTATION
INTRODUCTION

PSA 230, "Audit Documentation" establishes standards and provides guidance

regarding audit documentation in the context of the audit of financial statements.

The standard on documentation requires that the auditor should prepare on a timely
basis, audit documentation that provides:
(a) A sufficient and appropriate record of the basis for the auditor's report;
and
(b) Evidence that the audit was performed in accordance with PSAs and
applicable legal and regulatory requirements.

"Audit documentation" means the record of audit procedures performed,

relevant audit evidence obtained, and conclusions the auditor reached (terms
such as ''working papers" or "work papers" are also sometimes used).
"Audit file" means one or more folders or other storage media, in physical or
electronic form, containing the records that comprise the audit documentation
for a specific engagement.

"Experienced auditor" means an individual (whether internal or external to the

firm) who has practical audit experience, and a reasonable understanding of:

(i) audit processes,

(ii) PSAs and applicable legal and regulatory requirements,

(iii) the business environment in which the entity operates, and

(iv) auditing and financial reporting issues relevant to the entity's industry.

NATURE OF AUDIT DOCUMENTATION

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Audit working papers are the records kept by the auditor of the
procedures applied, the tests performed, the information obtained and the
pertinent conclusions reached in the engagement. They represent the
documentation Of audit evidences collected and evaluated.

OBJECTIVES OF AUDIT DOCUMENTATION

The primary objective of audit documentation is preparing sufficient and
appropriate, audit documentation on a timely basis to help enhance the quality of
the audit and to facilitate the effective review and evaluation of the audit evidence
obtained and conclusions reached before the auditor's report is finalized.
Documentation prepared at the time the work is performed is likely to be more
accurate than documentation prepared subsequently.

The other objectives of audit documentation are:

a. Assisting the engagement team to plan and perform the audit.
b. Assisting• members of the engagement team responsible for supervision
to direct and supervise the audit work, and to discharge their review
responsibilities in accordance with PSA 220.
c. Enabling the engagement team to be accountable for its work.
d. Retaining a record of matters ofcontinuing significance to future audits.
e. Enabling the conduct of quality control reviews and inspections in
accordance with PSQC l .
f. Enabling the conduct of external inspections in accordance with
applicable legal, regulatory or other requirements

FORM, CONTENT AND EXTENT OF AUDIT DOCUMENTATION

The auditor shall prepare audit documentation that is sufficient to enable an experienced
auditor, having no previous connection with the audit, to understand:

(a) The nature, timing, and extent of the audit procedures performed to comply with
the PSAs and applicable legal and regulatory requirements;
(b) The results of the audit procedures performed, and the audit evidence. obtained;
and
 Audit Documentation 478
(c) Significant matters arising during the audit, the conclusions reached
thereon, and significant professional judgments made in reaching those
conclusions.
The form, content and extent of audit documentation dépend on factors such as.

The size and complexity of the entity.

The nature of the audit procedures to be performed.
The identified risks of material misstatement.
The significance ofthe audit evidence obtained.
The nature and extent of exceptions identified,

The need to document a conclusion or the basis for a conclusion not

readily determinable from the documentation of the work performed of
audit evidence obtained.
The audit methodology and tools used.

It is, however, neither necessary nor practicable to document every matter the

auditor considers during the audit.

Oral explanations by the auditor, on their own, do not represent adequate support
for the work the auditor performed or conclusions the auditor reached, but may be used
to explain or clarify information contained in the audit documentation.

In documenting the nature, timing and extent of audit procedures performed, the
auditor shall record:
(a) The identifying characteristics of the specific items or matters tested;
(b) Who performed the audit work antl the date such work was completed;
and
(c) Who reviewed the audit work performed and the date and extent of such
review.

The auditor shall assemble the audit documentation in an audit file and
complete the administrative process of assembling the final audit tile on a
tituely basis after the date of the auditoös report.
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After the assembly of the final audit file has been completed, the auditor shall n ot
delete or discard audit documentation of any nature before the end of its retentio n
period.
A

In circumstances other than those mentioned in paragraph 13 of PSA 230 where

the auditor finds it necessary to modify existing audit documentation or add new
audit documentation after the assembly of the final audit tile has been completed,
the auditor shall, regardless of the nature of the modifications or additions,
document:
(a) The specific reasons for making them; and
(b) When and by whom they were made and reviewed.

CHARACTERISTICS OF QUALITY AUDIT DOCUMENTATION

Audit documentation is the record that forms the basis for the auditor's
representations and conclusions. Audit documentation facilitates the planning,
performance, and supervision of the audit and forms the basis of the review of the
quality of the work performed. Audit documentation includes records of the
planning and performance of the work, the procedures performed, evidence
obtained, and conclusions reached by the auditor.

Documenting Planning and Risk Assessment Procedures

The planning process and risk assessment procedures from the foundation for
the audit and should be carefully documented. The auditor should document the
overall audit strategy and the audit plan. Further, the auditor should document
the overall planned responses to address the assessed risks of material
misstatement, and the nature. timing, and extent of the further audit procedures
to be performed, as well as the linkage of those procedures with the assessed risks
at the relevant assertion level. The documentation serves an important planning
function for the audit; it also serves as evidence that the auditors took their
responsibilities seriously in evaluating potential problems or special
circumstances involved in, or related to, the audit. Examples are:
Interviews with key executives, with implications clearly drawn for the conduct of
the audit.
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Business risk analysis, fraud risk analysis, and analytical procedures, with a
clear identification of accounts and assertions requiring special audit
attention.
The auditor's assessment of materiality, overall audit approach, and personnel
needed.
Evidence of planning (including identification of and response to risks of
material misstatement), including the audit program.
Audit approach and basic data utilized to identify risk, including fraud
risk.
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Documenting Audit Work Performed

Documentation about audit work performed is critical in demonstrating at a later date

that the audit was conducted in a quality manner. The following are typical
t) pes of documentation used to demonstrate the audit work that was

• The client's trial balance and any auditor-proposed adjustments to it

• Copies of selected internal and external documents.

• Auditor-generated analysis of account balances (for exutnph, software

analysis of accounts and relationships).

Documenting Significant Issues and Their Resolution

Significant issues or audit findings are defined as substantive matters that are
impo rtant to the analysis of the fair presentation of the financial statements.
The following examples of significant issues or audit findings:

• Significant matters involving the selection, application, and consistency of

accounting principles, .including related disclosure. Significant matters include,
but are not limited to, accounting for complex or unusual transactions,
accounting estimates, and uncertainties, as well as related management
assumptions.

• Results of auditing procedures that indicated a need for the modification of

planned auditing procedures, or the existence of material misstatements,
omissions in the financial statements, significant deficiencies, or material
weakness in internal control over financial reporting.

• Audit adjustments. An audit adjustment is a correction of a misstatement of the

financial statements that was or should have been proposed by the auditor,
whether or not recorded by management, which could, wither
individually or when aggregated with other misstatements, have a

material effect on the company's financial statements.

• Circumstances that cause significant difficulty in applying auditing

procedures
• Any matters that could result in the modification of the auditor's report

Copies (if Documentation

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Some client doctllnents are of such importance that a copy should be included in the
audit docutnentation. Such doctlluents usually have legal significance, such as lease
agreements, bon covenant agreements, significant portions of the boards of directors'
minutes, government correspondence regarding client investigations, and loan
agreements. Reponses to the auditor's confirmation requests for accounts receivable,
pending litigation, or bank loans are examples of documents from outside parties that
are retained. Finally, management representations are formally documented in a
management representation letter, which is signed by management to acknowledge the
accuracy of its verbal or written assertions.

TYPES OF WORKING PAPERS

There are innumerable types of audit working papers since they contain a variety of
infortnation gathered by the auditors. However, there are certain general categories in
which most working papers may be grouped. These are:
Audit administrative working papers
2. Working trial balance and lead schedule
3. Supporting schedules and analysis
4. Adjusting and reclassifying entries
5. Audit memoranda and documentation ofcorroborating information

1. Audit Administrative Working Papers

Tllese are working papers designed to aid the auditors in the planning and
administration of engagements. These include audit plans and programs,
internal control questionnaires and flowcharts, engagement letters,
and time budgets.

Audit program is a detailed list of procedures to be performed in an audit

engagement.

Purposes ofAudit Program include:

It serves as a procedural guide during the course of the audit.
2. It serves as a basis in dividing the audit work among staff members.

3. It serves as a basis of reviewing progress of audit work.

4. It enables the auditor to ensure that the program designed to substantiate
amounts appearing in the accounts and related notes have covered all
material aspects thereof.
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A well-designed audit program will provide evidence of: a. Proper planning

including assurance that important steps were not overlooked.
b. Coordination and monitoring the audit work.
c. Proper supervision and review of the audit.
d. Completion of all audit steps.
e. Compliance with the standards in performing an audit.

Types ofAudit Programs

1. Standard all-purpose auditprogram.

lists standard practices applicable to almost every engagement

2. Tailor-made audit program lists the procedures to be followed on

a specific audit engagement, indicating any departure from normal
practices and specifring the extent of the tests of transactions.

3. Modified standardform audit program a preprinted program that outlines

the usual audit procedures common to most businesses and provides space
for an auditor to indicate other specific procedures applicable to the
business under examination.

2. Working Trial Balance and Lead Schedules

Working Trial Balance

This is a list of the accounts in the client's general ledger with columns that,
as a minimum include unadjusted amounts directly from the client's
accounting records, proposed adjusting entries, and adjusted (audited)
amounts. Often called the backbone of the working papers, the working trial
balance
l. provides an overall index of the working papers,
2. aids in controlling and reviewing the examination as it progresses' and
3. serves as the base for accumulating and arranging account balances for
financial statement presentation.

Lead or Top Schedule

This is a working paper that shows the grouping of related account balances. Each
line item on the trial balance is supported by a lead schedule, containing the detailed
 Audit Documentation 484
accounts from the general ledger making up the line item total. Each detailed account on
the lead schedule is, in turn, supported by appropriate supporting schedules evidencing
the audit work performed and the conclusions reached.

3. Supporting Schedules and Analyses

Supporting Schedules
These are the detailed schedules prepared by auditors in support of specific
amounts on the financial statements. For example, a cash count sheet is prepared to
provide the details of the composition of cash on hand and account as of a particular
date.

Account Analysis
This working paper shows the activity during the period in a particular statement of
financial position account. It starts with the' beginning balance, shows the
transactions (additions and reductions) that occurred during the period, and
concludes with the ending balance. This type of working paper schedule is
often used for notes receivable, marketable securities, property, plant and
equipment, long-term debt and for all equity accounts.

4. Summary of Adjusting and Reclassifying Entries

Adjusting Entries are corrections of material errors in the accounting records

discovered by the auditor. These entries must be approved by the client because
management has primary responsibility for the fair presentation of the statement. For
example, if the client failed to provide allowance for doubtful accounts in the
accounts receivable, an adjusting entry can be made to reflect properly its realizable
value.

Reclassifying Entries are made in the statements to present accounting information

properly, even when the general ledger balances are correct. For example, material
credit balances in customers' accounts should be reclassified to accounts payable
for financial statement presentation purposes.
5. Audit Note or Memoranda and Documentation of Corroborating Information
Audit Notes
This is the working paper used to note items of work to be done that cannot
be completed by following the usual sequence of audit procedures. This is
also used to record questions concerning the audit investigation.

Outside Documentation
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Much of the content of the working paper consist of the outside
documentation gathered by auditors, such as confirmation replies, and
copies of client agreements. They are indexed and interfiled and
procedures are indicated on them in the same manner as on the other
schedule.

RELATIONSHIP OF WORKING PAPERS TO FINANCIAL

STATEMENTS

Figure 18-1 shows an illustration of the relationship between an account (cash on

hand and in bank) as eventually reflected in the financial statements and the working
papers that support its analysis and reflect the work performed by the auditor.

Working Paper Files

Each CPA firm establishes its own approach to preparing and organizing working
papers and the beginning auditor must adopt his or her firm's approach.

Figure 18-2 illustrates the contents and organization of a typical set of working papers.
In this illustration, the working papers start with more genera l information such as
corporate data in the permanent files and end with the financial statements and audit
report. In between are the working papers evidencing and supporting the auditor's
tests.

Figure 18-1 Relationship of Working Papers to Financial Statements

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Figure 18-2 Current File (workpnpers applicable exclusively to current

period under audit)
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There are two main divisions the

permanent file.
Current Audit File
The current year working paper tile is designed to support the assertion embodied
the financial statements. The financial statements shown at th e top of Figure 18-2 are
upported by working trial balance which shows t he propose adjustments and
classification. Each account on the working trial balance is supported by lead
nd supporting schedules.

This file contains all papers accumulated during the current year's
examination. The working papers normally included in the current file a re:
l . Original draft of the report
a. The financial statement
b. Draft of the auditor's report

c. Draft of income tax return

2. Audit plan and programs
3. Working trial balance
4. Adjusting and reclassifying journal entries
 Audit Documentation 488
5. Lead and supporting schedules
6. General information, such as
a. Abstracts or copies of minutes of the board of directors' meetings
b. Abstracts of contracts or agreements not included in the permanent tiles
c. Notes on discussions with the client
d. Notes about impressions of the form of the-client's office and plant
Permanent File

Working papers in permanent files contain information of continuing interest to the

auditor.

These are intended to contain data of a historical or continuing nature pertinent to the
current examination. These files provide a convenient source

of information about the audit that is of continuing use from year to year.

The permanent files typically include the following:

Excerpts
the corporate charter or
ofbusiness
2. Analysis of and industry
3. Copies ofcontracts (that.affect future periods)
4. Chart of accounts and accounting procedure manuals
5. Flowcharts and notes on the accounting system and related from
controls prior
examination

6. Continuing analyses of fixed assets

7. Organization charts and excerpts from job manuals
8. Terms of capital stock and bond issues
9. Result of analytical procedures from previous years' audit

10. Excerpts from minutes of meetings

I l. Labor-management agreementbusiness
of complex
12. Information concerning related parties
13. Description accounting treatments

14. Copies of pension plans, stock option plans, and employee bonus and profit-
sharing plans
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 490 18
Cha

Other files may also be maintained such as:

l . TaxFi1es
These files contain information relevant to a client's current and past
income tax and other business tax obligations. They serve as basis for
preparing current year's returnä and performing other tax-
related services such as amending prior year returns or representing
the client's tax assessment case.

2. Correspondence File
This file contains all correspondence or letters to, from or in behalf of
a client.

CONTENTS OF A YEAR-END FILE INDEX

Index Year-end Audit File

Finalization of Audit
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1. Audit file closing
2. Financial statements/auditors report
3. Final analytical review
4. Reviewer's checklist
Quality control review (if EQCR
applicable)
5. Financial statement presentation
6. Engagement partner/sole
practitioner
review
7. Adjusting and closing joumal entries
8. Working trial balance
Correspondence, discussions, and
notes -
Representation letter

and disclosure review Discussions with management and

others
Management letter
Notes and queries

Audit Acceptance
11. Audit engagement acceptance 12.
Understanding the entity and its
checklist -
environment — New or
continuing client Information Client profile

from predecessors files* Documents to request Engagement

letter*

Overall Audit Strategy 21. Assessing Risks of Material

Establishing the overall audit Misstatement
strategy checklist 25. Assessing inherent risks
22. Determining materiality 26. Determining whether the risks
Evaluating misstatements indicate the need for an ECQR
23. Identifying risks using analytical procedures 27. Audit budget - Time and Fees
24. Conducting an audit team planning meeting Schedule of dccuments to be
prepared by client
31. Assessing the risks of material 36. Testing controls**:
misstatement checklist Revenue, receivables, and receipts
32. Inquiries for management, for those Purchases, payable, and payments
responsible for govemance, for Payroll those responsible for intemal
audit, Inventory, cost of sales and and for others in the entity production
 Audit Documentation 492
33. Evaluating control environment Financing and equity
34. Evaluating managements use of 37. Review of minutes of all meetings
estimates, including fair value appointment of auditor
(AGM

35. Information systems and intemal resolution) control:

38. Review of client's annual report or General IT system
and IT controls other document that will include the
Revenue, receivables, and receipts audited financial statements
Purchases, payables, and payments -39. Risk assessment summary

Payroll
Inventory, cost of sales, and production
Financing and equity
Financial Statement Checklists, Analytical

Procedures and Tests of Balances

A Cash and cash equivalents NN Equity/Net assets
B Trade and other receivables SS Joumal entries C Inventories TT
Responding to indications offraud

D Prepaid expenses UU Going concem

E InvestmentsW Foreign currency translation
F Property, plant and equipment (BUS) WW Accounting estimates
G Capital assets (NPO) Changes in accounting policies and correction of
prior period errors
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HGoodwill
and intangible assets (BUS) XXRelated party transactions AA Short-term
and long-term debt Significant transactions outside the normal course of
business
BB Accounts payable and accrued YY Contingencies and
contractual liabilities obligations
EE Taxes payable ZZ Economic dependence
HH Other liabilities

Income Statement I Statement of Operations

100 Revenue 300 Expenses

200 Cost of sales 400 Other income and expenses

Substantive Tests of Transactions **

500 Revenue, receivables, and receipts Inventory, cost of sales, and
Purchases, payables, and payments production
Payroll Financing and equity
Balance Sheet/Statement of Financial Position
* May be in permanent file
** May be in interim file

MECHANICS OF WORKING PAPER PREPARATION

Good working papers should possess or show the following qualities:

1. Every working paper should be complete in itself and should not require
subsequent or additional oral explanation.
2. Working paper should be factual, accurate and free from clerical
and/or computational errors.
3. Working papers should clearly indicate the nature and extent of audit
work performed.
4. Working papers should be concise and limited only to essentials.
5. Working papers should be prepared in a neat and orderly manner to
facilitate review of work done.
 Audit Documentation 494
Working papers in general should provide:
a. Evidence of compliance/with the standards of auditing.
b. Sufficient data to demonstrate that the financial statements or other
information being reported on by the puditor were in agreement or
reconciled with the client's records.
c. Clear indication of the work performed. This may require (l) writing a

memorandum, (2) initializing the appropriate steps in the audit program,

or (3) making notations called tick marks directly on the working papers
and explaining the notations.

d. Indication as to how the auditor resolved any exception or unusual matter

disclosed by his examination.

e.. Appropriate connections of the auditor on significant aspects of the

engagement.

COMPUTER-GENERATED WORKING PAPERS

Working papers have been traditionally prepared in pencil by auditors on columnar

paper. Today, many working papers are prepared on portable personal computers
carried by the auditors to the work site. Auditors use software when an adjustment
is entered on computer-based working papers, it appears instantly on the
appropriate lead schedules, the adjustments schedule, and the working trial balance.
The necessary cross-references are automatically entered on each schedule. If the
adjustment affects taxable income, the income tax expense account and the tax
liability are automatically adjusted using the client's marginal tax rate. In addition,
all of the subtotals, column totals, and crossfootings in the working papers are
instantly adjusted.
When working papers are maintained manually, all of these entries and
changes must be made by hand with a pencil, an eraser, and a calculator. With
a personal computer, an •adjustment that might take a half hour or more to
"push through„ manual working papers can be entered in a few seconds. Thus,
personal computers have taken much of the "pencil pushing" and the "number
crunching" out of working paper preparation.

OWNERSHIP AND CUSTODY OF WORKING PAPER

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The Philippine Accountancy Act of 2004, Section 29 specifies the legal
provision on ownership of audit working papers. It provides:

"All working papers, schedules and memoranda made by a certified public

accountant in public practice and his staff in the course of an examination,
including those prepared and submitted by the client, incident to or in the
course of an examination, by such certified public accountant, except reports
submitted by a certified public accountant to a client shall be treated
confidential and privileged and remain the property of such certified public
accountant in the absence of a written agreement between the certified public
accountant and the client, to the contrary, unless such documents are required
to be produced through subpoena issued by any court, tribunal, or
government regulatory or administrative body."

CONFIDENTIALITY OF WORKING PAPERS

PSA 230 requires the auditor to adopt appropriate procedures for maintaining
the confidentiality and safe custody of the working papers and for retaining
them for a period sufficient to meet the needs of the practice and ill
accordance with legal and professional requirements of record retention.
Section 140 of the Revised Code of Ethics for Professional Accountants in the
Philippines enumerates the rules that should be observed relative to the CPAs
observance of confidentiality of information. These are as follows:
• The principle of confidentiality imposes an obligation on professional
accountants to refrain from:
(a) Disclosing outside the firm or employing organization confidentia l
information acquired as a result of professional and business
relationships without proper and specific authority or unless there is
a legal or professional right or duty to disclose; and

(b) Using confidential information acquired as a result of professional and

business relationships to their personal advantage or the advantage of
third parties.
A professional accountant should maintain confidentiality even in a social
environment. The professional accountant should be alert to the possibility of
inadvertent disclosure, particularly in circumstances involving long association
with a business associate or a close or immediate family member.
 Audit Documentation 496
A professional accountant should also maintain confidentiality of information
disclosed by a prospective client or employer.
A professional accountant should also consider the need to maintain
confidentiality of information within the firm or employing organization.
e A professional accountant should take all reasonable steps to ensure that staff
under the professional accountant s control and persons from whom advice and
assistance is obtained respect the professional accountant's duty of
confidentiality.

• The need to comply with the principle of confidentiality continues even after
the end of relationships between a professional accountant and a client or
employer. When a professional accountant changes employment or acquires a
new client, the professional accountant is entitled to use prior experience. The
professional accountant should not, however, use or disclose any confidential
information either acquired or received as a result of a professional or
business relationship.
• The following are circumstances where professional accountants are or may
be required to disclose confidential information or when such disclosure may
be appropriate:
(a) Disclosure is permitted by law and is authorized by the client or the
employer;
(b) Disclosure is required by law, for example:
(i) Production of documents or other provision of evidence in the course
of legal proceedings; or
(ii) Disclosure to the appropriate public authorities of infringements of the
law that come to light; and

(c) There is a professional duty or right to disclose, when not prohibited by

law:
(i) To comply with the quality review Of a member body Or • professional
body;
(ii) To respond to an inquiry or investigation by a member body or
regulatory body;
(iii) To protect the professional interests of a professional accountant in legal
proceedings; or
 497 Chapter 18
(iv) To comply With technical standards and ethics requirements.
In deciding whether to disclose confidential information, professional

accountants should consider the following points:

(a) Whether the interests of all parties, including third parties whose interests
may be affected, could be harmed if the client or employer consents to the
disclosure of information by the professional accountant;
(b) Whether all the relevant information is known and substantiated, to
the extent it is practicable; when the • situation involves
unsubstantiated facts, incomplete information or unsubstantiated
conclusions, professional judgment should be used in
determining the pe of disclosure to be made, if any; and

(c) The type of communication that is expected and to whom it is

addressed; in particular, professional accountants should be satisfied that the
parties to whom the communication is addressed are appropriate

recipients.

REVIEW QUESTIONS AND EXERCISES

Questions

What is meant by "documentation" in the context of the audit of financial

statements?
2. What are the major functions of audit workpapers?
3. PSA 230, Audit Documentation, requires that the auditor should prepare
working papers which are sufficiently complete and detailed to provide an
overall understanding of the audit. Give examples of what should the
working papers show that would indicate that there has been proper
documentation done.
 Audit Documentation 498
4. What are the factors that affect the form and content of working papers?

5. How do electronic spreadsheets facilitate the linking of audit workpapers?

6. Distinguish between working papers contained in a permanent

file and those contained in a current-year file.
7. Explain why a client may assist in the preparation of working papers, and
describe the steps an auditor follows when client assistance is provided.
8. What.are the purposes of lead schedules and supporting schedules?
9. What are the characteristics of a properly prepared working paper?

10. Why are the prior year's audit working papers a useful reference to
staff assistants during the current examination?

l l . List the major types of audit working papers and give a brief
explanation Of each. For example, one type of audit working paper is an
account analysis. This working paper shows the changes that occurred in a
given account during the period under audit. By analyzing an account, the
auditors determine its nature and content.
12. "Audit working papers are the property of the auditors, who may destroy
the papers, sell them, or give them away." Criticize this quotation.

13. State the legal provisions on ownership of and it working papers.

14. Under what conditions may confidential information be disclosed.
 499 Chapter 18

2.
Which of the following need not be required by PSA 230?
a. Audit evidence obtained, the audit procedures applied and the.testing
performed have provided sufficient competent evidential matter to afford
a reasonable basis for an opinion.
b. The work has been adequately planned and supervised.
c. A sufficient understanding of the internal control structure had been
obtained to plan the audit and to determine the nature, timing and extent
of tests to be performed.
d. Basis in choosing the members ofthe audit engagement team.
3. When planning an audit, which of the following is not a factor that affects
auditors' decisions about the quantity, type, and content of audit
working papers?
a. The auditors' need to document compliance with financial reporting
standards.
b. The existence of new sales contracts important for the client's business.

c. The auditors' judgment about their independence with regard to the

client.
d. The auditors' judgments about materiality.

4. An audit working paper that shows the detailed evidence and procedures
regarding the balance in the accumulated depreciation account for the year
 Audit Documentation 500
under audit will be found in the:

a. Current file evidence working papers.

b. Permanent file working papers.

c. Administrative working papers in the current file.

d. Planning memorandum in the current file.
5. The audit working paper that reflects the major components of an amount
reported in the financial statements is the
a. interbank transfer schedule.
b. carryforward schedule.

c. supporting schedule.
d. lead schedule.

6. The current file of the auditor's working papers generally should include
a. a flowchart of the internal controls.
b. organization charts.
c. a copy of the financial statements.
d. copies of bond and note indentures.

7. Working papers that record the procedures used by the auditor to

gather evidence should be
a. considered the primary support for the financial statements being
examined.
b. viewed as the connecting link between the books of account and the
financial statements.
c. designed to meet the circumstances of the particular engagement.
d. destroyed when the audited entity ceases to be a client.

8. The primary reason auditors cross-index their working papers is to

a. give the working papers of a professional appearances
b. explain the use of tick marks.

c. provide an explanation of the audit steps performed.

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d. provide a trail for the auditor and the reviewer.

9. When reviewing working papers, an audit supervisor will be concerned

primarily with determining whether the
a. audit programs have been carried out without deviation.
b. working papers adequately, support the audit findings, conclusions,
and reports.
 Audit Documentation 502

10. Which of the following is required documentation in an audit in

accordance with Standards on Auditing?
a. A flowchart or narrative of the accounting systetn describing the
recording and classification of transactions for financial reporting.
b. An audit program setting forth in detail the procedures necessary to
accomplish the engagement's objectives.
c. A planning memorandum establishing the timing or the audit
procedures and coordinating the assistance of entity personnel.
d. An internal control questionnaire identifying policies and
•procedures that ensure the achievement of specific objectives.

I l . Which of the following is not a factor that affects the independent

auditors' judgment as to the quality, type, and content of working papers?

a. The timing and the number of personnel to be assigned to the

engagement.

b. The nature of the financial statements, schedules, or other

information upon which the auditor is reporting.
c. The need for supervision of the engagement.
d. The nature of the auditors' report.

12. Audit working papers •should be:

a. kept on the client'S premises to allow client access to them for
leference purposes.
b. the primary support for the finpncial statements being examined.
c. cÖnsidered as part of the client's accounting records that is retained
by the auditors.
d. designed to meet the circumstances and the auditors' needs on each
engagelnent.

13. A primary purpose of the audit working papers is to:

a. aid •the auditors in adequately planning their work.
b. provide a point of refelence for future audit engagements.
 Chapter 18

c. support -the underlying concepts included in the

preparation of the basic financial statements,
support the auditors' opinion.

14. An auditor should examine the minutes of board ofdirectors'

meetings:
a. through the date of the financial statements.
b. through the date of the audit report.
c. on a test basis.
d. only at the beginning of the audit.

15. A .different opinion conceming accounting ånd auditing matters relative

to a particular phase of the audit arises between an assistant auditor and
the auditor responsible for the engagement. After appropriate
consultation, the assistant auditor asks to be disassociated from the
resolution of the matter. The working papers would probably:
a. remain silent on the matter since it is an internal matter of the auditing
firm.
b. note that the assistant auditor is completely dissociated from
responsibility for the auditor's opinion.

c. document the additional work required, since all disagreements of this

type will require expanded substantive testing.
d. document the assistant auditor's position and how the difference of

opinion was resolved.

16. Which of the following statements most accurately summarizes the

auditor's responsibility for reviewing the client's correspondence files?
a. The auditor should review all correspondence for items relevant to the
audit.
b. The auditor should not review any correspondence; to do so would
waste time more productively spent on gathering other evidence.
 Audit Documentation 504

c. The auditor should apply statistical selection techniques to draw a

random sample of correspondence for review.

d. The auditor should review correspondence with banks, other lending

institutions, attorneys, and governmental agencies.

17. Which of the following would not be included in the auditor's working
papers?
a. A time budget for the various audit areas.
b. The results of the preceding year's audit.
c. Descriptive information about the internal control structure.

d. The accounting manual.

18. The working papers are

a. the property of client.
b. property of the auditor although prepared by client.
c. the primary means of documenting that an adequate audit was
conducted in accordance with Standards on Auditing.
d. used primarily as a basis for the partners to review and reward the
work of the managers seniors. and staff.

19. Permanent files contain all the data

a. about the most recent audits

b. about the current audit and financial statetnents
c. of a historical or continuing nature pertinent to the current audit.
d. of a historical or continuing nature about the client.
20. Which of the following items would not normally be included, in whole
or in part, in the auditor's permanent file on a client?
a. The articles of incorporation and by-laws.
 Chapter 18
b. Analyses of accounts such as long-term debt and stockholders'
equity.
c. Organization charts and internal control questionnaires.
d. The audit program.

21. An example ofa reclassification of entry would be an entry

a. to reduce inventory when client failed to write down its obsolete, raw
materials.
b. to change material credit balances in accounts receivable accounts to
accounts payable accounts.
c. to increase the allowance for doubtful accounts when it was
discovered that a customer had filed for bankruptcy protection
d. to increase the income tax liability account when it was discovered that
client would be in a higher tax bracket than originally estimated.

22. Reclassification entries are recorded in the

a. sales journal.
b. cash receipts journal.

c. general journal.
d. financial statements but not in the general ledger.

23. The largest portion of the auditor's working papers are the
a. supporting schedules.
b. adjusting and reclassification entries.
c. lead schedules.
d. working trial balance.

24. An analysis schedule is designed to show the activity in

a. a statement of financial position account at the end of the period
under audit.
 Audit Documentation 506

b. a statement of financial position account during the entire period

under audit, tying together the beginning and ending balances.
c. an income statement account at the end of the period under audit.
d. an income statement account during the entire period under audit,
tying together the beginning and ending balances.

25. The working papers prepared during the engagement are the property of
a. the auditor, but do not include the working papers prepared by client
for the auditor.
b. the auditor, even including those prepared by client for auditor.
c. the client.
d. the auditor and clientjointly.

26. Ordinarily, the working papers cannot be provided to someone else

without the express permission of the client unless
a. the papers are subpoenaed by a court.
b. the papers are used as part of a PICPA quality review program.
c. the papers are requested as evidence in a PICPA Trial Board hearing.
d. the papers are transferred as a result of a CPA selling his/her practice
to another CPA firm.

27. Which of the following eliminates voluminous details from the

auditor's working trial balance by classifying and summarizing similar or
related items?
a. Account analyses.
b. Supporting schedules.
c. Control accounts.
d. Lead schedules.
502

28. The current file of the auditor's working papers generally should include
a. a flowchart of the internal controls.
b. organization charts.
c. a copy of the financial statements.
 Chapter 18
d. copies of the bond and note indentures.

29. The permanent section of the auditOr's working papers generally should
include
a. time and expense reports.
b. names and addresses of all audit staff personnel on the engagement.
c. a copy of key customer confirmations.
d. a copy of the engagement letter.

30. Working papers that record the procedures used by the auditor to gather
evidence should be
a. considered the primary support for the financial statements being a.
examined.
b. viewed as the connecting link between the books of account and the
financial statements

c. designed to meet the circumstances of the particular engagement.

d. destroyed when the audited entity ceases to be a client.

31. A written understanding between the auditor and the client concerning
the auditor's responsibility for the discovery of illegal acts is usually set
forth in a(an)
a. client representation letter.
b. letter of audit inquiry.
c. management

d. engagement letter.
32. The permanent tile section of the working papers that is kept

foræach audit client most likely contains

a. review notes pertaining to questions and comments regarding the

audit work performed.

 Audit Documentation 508

b. a schedule of time spent on the engagement by each individual

auditor.
c. correspondence with the client's legal counsel concerning
pending litigation.
d. narrative description of the client's internal control structure.

Cases

Case 1

The preparation of working papers is an integral part of a CPA's audit of

financial statements. On a recurring engagement, CPAs review their audit
programs and working papers from their prior audit while planning the
current audit to determine usefulness for the current year work.

Required:
a. (I) What are the purposes or functions of audit working papers?
(2) What records may be included m audit working papers?
b. What factors affect the CPA's judgment of the type and
content of the working papers for a particular engagement?
c. To comply with financial reporting standards, a CPA includes certain
evidence •in his working papers, for example, "evidence that the
audit was planned and work of assistants was supervised and
reviewed." What other evidence should a CPA include in audit
working papers to comply with financial reporting standards?
d. How can a CPA make the most effective use of the
preceding year's audit programs in a recurring audit?

Case 2
Do the following with regard to the working paper for the Fourth Pacific
Co.
shown below:
a. List of deficiencies in the working paper.
Chapter 18

b. For each deficiency, state how the working paper could be

improved.

c. Prepare an improved working paper, using an electronic spreadsheet

software program. Include an indication of the audit work done as
well as the analysis of the client data. (Instructor's option).
 Dale

1-21-14

2.1514
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TOTALS

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21580 tb

P43,780 tb

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1.589 *
1,116
P 601 afr
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