Audit Documentation and Quality Management

1 The purpose of audit documentation

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Audit documentation fulfils the following very important purposes:

• To show that the audit work has been done properly. An audit really means collecting sufficient appropriate evidence that will support the auditor’s opinion on the financial statements. It is essential that this evidence is recorded so that, if need be, the auditor can demonstrate that a proper audit was carried out.
  

• To enable senior staff to review the work of junior staff. The review process is essential in carrying out a competent audit: the work of junior staff is reviewed by their supervisor, the supervisor’s work is reviewed by the manager, and finally the engagement partner, who will sign the auditor’s report, will review documentation (see s.5.3). Review is not possible without recording the work carried out and evidence obtained.
  

• To help the audit team in future years. An immensely useful planning exercise at the start of the audit is to examine last year’s file. Were there problems? Were there any errors? How did last year’s audit team go about gathering evidence?
  

• To encourage a methodical, high-quality approach. The audit documentation contains information documenting the client’s accounting system, the tests that have to be performed (e.g. select 20 invoices at random and ensure that they are authorised). As each part of the audit is completed the audit program is signed off by the person who carried it out. Outstanding matters are easy to see.
  

2 The types of audit file

There are two types of audit file:

• Permanent audit file: this contains information that does not change a lot such as a description of the accounting system, names and addresses of the company’s bankers and lawyers, organisation charts, memoranda and articles of association (the company’s constitution). Also a history of the ratios used in analytical procedures will be maintained so that trends can be seen.
  

• Current audit file: this contains the financial statements being audited and details all the audit work that has been carried out to collect sufficient appropriate audit evidence about those financial statements.
  

3 Structure of the current audit file

The amounts on the financial statements are referenced to section of the file (separate sections for non-current assets, inventory, receivables, payables etc). Within this section the make-up of the figures are examined and the work carried out on each figure is recorded in detail on working papers.

Schedule F2 would show the work done to verify additions

Schedule F3 would show the work done to verify disposals

Schedule F4 would show the work done to verify depreciation on disposals

Schedule F5 would show the work done to verify the depreciation charge

4 Typical contents of working papers

• Title
  

• Date prepared
  

• Person who prepared the paper and their signature
  

• References to other schedules
  

• Purpose of the audit tests being performed
  

• Precise details of work performed, such as invoices examined, assets inspected, calculations re-performed.
  

• Conclusion from the work performed
  

• Reviewers signatures and date of review
  

5 Quality Management

ISA 220 Quality Management for an Audit of Financial Statements deals with quality management at the "engagement level" for an audit of financial statements and the related responsibilities of the engagement partner.

Quality must be managed at the engagement level to obtain reasonable assurance that:

1. The audit has been conducted in compliance with professional standards and applicable legal and regulatory requirements; and
   

2. The auditor's report issued is appropriate in the circumstances.
   

5.1 The Engagement Partner (EP)

The EP is responsible for managing and achieving quality (leadership) including the nature, timing and extent of direction, supervision and review. The EP must demonstrate sufficient and appropriate involvement throughout the audit.

5.2 Component of quality management

The EP has specific responsibility for the following components of quality management:

• Leadership – actions reflect the firm’s commitment to quality and communicate the expected behaviour of engagement team members;
  

• Relevant ethical requirements – determining, prior to dating the auditor’s report, whether these have been fulfilled;
  

• Acceptance and continuance – determining that the firm’s policies or procedures have been followed and the conclusion reached is appropriate;
  

• Engagement resources – determining that resources assigned are sufficient, appropriate and timely;
  

• Engagement performance – responsibility for:
  

  • direction, supervision and review (s.5.3);
    

  • consultation on difficult or contentious matters;
    

  • engagement quality (EQ) review (s.5.4)
    

• Monitoring and remediation – remaining alert to information that may be relevant to the design, implementation and operation firm’s system of quality management and responding appropriately to identified deficiencies (s.5.5).
  

5.3 Direction, supervision and review

Direction involves informing team members (e.g. in team briefing meetings) of their responsibilities, such as:

• Maintaining a questioning mind and exercising professional scepticism;
  

• Fulfilling relevant ethical requirements;
  

• Perform auditing procedures;
  

• Understanding the nature, timing and extent of planned audit procedures.
  

Supervision may include matters such as:

• Monitoring the progress of the audit (e.g. against the audit plan);
  

• Addressing issues arising (e.g. reassigning audit procedures to more experienced team members if more complex than initially thought);
  

• Identifying matters for consultation;
  

• Providing on-the-job training to team members.
  

Review of documentation by the EP must be timely, at appropriate stages throughout the audit, to ensure that all significant matters are resolved before the date of the auditor’s report. The EP need not review all audit documentation. Areas of significant judgment are likely to include, for example:

• The determination of materiality;
  

• The decision to involve an auditor’s expert;
  

• The response to significant risks;
  

• Conclusions on significant areas such as going concern;
  

• The significance of corrected and uncorrected misstatements identified;
  

• The proposed audit opinion.

5.4 Engagement Quality (EQ) Review

Public interest audits, such as the audit of listed companies, should undergo an Engagement Quality (EQ) Review. Here, an independent reviewer (normally another partner) will be appointed to perform an objective evaluation of the significant judgments made by the engagement team, and the conclusions reached in formulating the auditor’s report.

This evaluation involves:

1. Discussion of significant matters with the EP;
   

2. Review of the financial statements and the proposed auditor’s report;
   

3. Review of selected audit documentation relating to the significant judgments the engagement team made and the conclusions it reached; and
   

4. Evaluation of the conclusions reached in formulating the auditor’s report and consideration of whether the proposed auditor’s report is appropriate.
   

For audits of listed entities, the EQ reviewer must also consider:

1. The engagement team’s evaluation of the firm’s independence in relation to the audit engagement;
   

2. Whether appropriate consultation has taken place on matters involving differences of opinion or other difficult or contentious matters, and the conclusions arising from those consultations; and
   

3. Whether audit documentation selected for review reflects the work performed in relation to the significant judgments and supports the conclusions reached.
   

An EQ review is an example of a pre-issuance ('hot') review - i.e. it is carried out before the auditor’s report is signed.

Any reviews carried out after the auditor’s report is signed are known as post-issuance ('cold') reviews. They will not affect the audit for the year being reviewed, but they will help maintain or improve quality standards in the future.

An audit firm may choose to carry out reviews ('hot' or 'cold') where an EQ review is not required.

5.5 Quality management deficiencies

Deficiencies in quality management are identified through the evaluation of finding(s) for example, from monitoring activities.

Given the inherent limitations of a system of quality management, the identification of deficiencies is not unusual; prompt identification:

• enables the firm to remediate them in a timely and effective manner; and
  

• contributes to a culture of continual improvement.
  

If an identified deficiency does not affect the quality of the audit (e.g. it relates to a technological resource that the engagement team did not use), no further action may be needed.

However, the EP must respond appropriately to any threat to the achievement of quality (e.g. budget or resource constraints should not result in team members modifying or failing to perform planned audit procedures). The EP may determine that:

• An auditor’s expert is needed; or
  

• The nature, timing and extent of direction, supervision and review need to be enhanced in an area of the audit where deficiencies have been identified.