1. BBA Degree Programme - 3rd Year, Semester II
Auditing
ACM 31073
BBA Degree Programme - 3rd Year, Semester II
Lecturer in Charge
A L Sharifudeen. Lecturer (Prob) in Finance
B.Com (Spl. in Acc and Fin. Mgt) (SEUSL), MBA (WUSL), MAAT (SL) , ACPM (SL)
Department of Accountancy and Finance
South Eastern University of Sri Lanka

2. Audit planning and Documentation SRI LANKA AUDITING STANDARD 230 DOCUMENTATION SRI LANKA AUDITING STANDARD 300 PLANNING AN AUDIT OF FINANCIAL STATEMENTS

3. Audit Planning
The auditor should plan the audit so that the engagement will be performed in an effective manner.
Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan, in order to reduce audit risk to an acceptably low level. Planning involves the engagement partner and other key members of the engagement team to benefit from their experience and insight and to enhance the effectiveness and efficiency of the planning process.
“Planning” entails developing a general strategy and a detailed approach

4. Planning objectives
Appropriate attention devoted to important areas
Potential problems are identified
Work is completed expeditiously
Proper assignment of work to assistants
Coordination of work done by other auditors and experts
Facilitate review
Preliminary Engagement Activities
The auditor should perform the following activities at the beginning of the current audit engagement:
• Perform procedures regarding the continuance of the client relationship and the specific audit engagement (see SLAuS 220, “Quality Control for Audit Work” for additional guidance).

5. Preliminary Engagement Activities ...
Evaluate compliance with ethical requirements, including independence (see SLAuS 220 for additional guidance).
Establish an understanding of the terms of the engagement (see SLAuS 210, “Terms of Audit Engagements” for additional guidance).
Planning Activities
The Overall Audit Strategy
The auditor should establish the overall audit strategy for the audit.

6. The audit strategy and the audit plan
General strategy
Guidance for development of plan
Audit strategy
Instructions to team
Sets out the audit procedures
Audit plan

7. Audit Documentation &Working Papers
The auditor should document matters which are important in providing audit evidence to support the auditor’s opinion and evidence that the audit was carried out in accordance with SLAuSs
“Documentation means the material (working papers) prepared by and for, or obtained and retained by the auditor in connection with the performance of the audit. Working papers may be in the form of data stored on paper, film, electronic media or other media.” SLAuS 230
Audit documentation includes records on the planning and performance of the work, the procedures performed, evidence obtained, and conclusions reached by the auditor.
Page 473
Audit documentation also facilitates the planning, performance, and supervision of the engagement and provides the basis for the review of the quality of the work by providing the reviewer with written documentation of the evidence supporting the auditor’s significant conclusions.
ISA 230 para 2 “Documentation” means the material (working papers) prepared by and for, or obtained and retained by the auditor in connection with the performance of the
audit. Working papers may be in the form of data stored on paper, film, electronic media or other media.

8. Working Papers
Are a direct aid in the planning, performance, and supervision of the audit;
Record the audit evidence resulting from the audit work performed to provide support for the auditor’s opinion including the representation.
Assist in review of the audit work.
Provide proof of the adequacy of the audit
working papers
Page 473
The papers include a variety of planning information such as descriptive information about the internal control, background information about the client, a time budget for individual audit areas, the audit program, and the results of the preceding year’s audit.
Work papers are also necessary for coordination of the work leading to an opinion. Final decisions concerning opinion given on the financial statements are made by supervisors who perform few, if any actual audit tests. The supervisors use the work papers as a basis for evaluating the evidence gathered.
The working papers are used not only by supervisory personnel to evaluate whether sufficient competent evidence was accumulated, but also for other auditing and consulting work. Work papers are used by the consulting arm of accounting firms as a basis for income tax preparation, required government regulatory filings, and other reports. They are a source of information for communications between auditors and board of directors concerning internal control weaknesses. They are often used to train personnel.
After the opinion has been given, work papers are the main physical proof that an adequate audit was conducted. The work papers act as an index to original documents and accounting records which must be left with the client.
If the auditor is called upon to prove the adequacy of the audit in a court of law or to regulatory agencies, the workpapers are his basis of proof.
Isa 230 PARA 4 Working papers:
(a) Assist in the planning and performance of the audit;
(b) Assist in the supervision and review of the audit work; and
(c) Record the audit evidence resulting from the audit work performed tosupport the auditor’s opinion.

9. Significant Matters
The auditor should prepare working papers which are sufficiently complete and detailed to provide an overall understanding of the audit.
SLAuS 230 states: “The auditor should record in the working papers information on planning the audit, the nature, timing and extent of the audit procedures performed and the results thereof, and the conclusions drawn from the audit evidence obtained.”
P 475, See Illustration 11.A.1 Significant Findings or Issues Documented, page 474
ISA 230 para 5. The auditor should prepare working papers which are sufficiently complete and detailed to provide an overall understanding of the audit.
6. The auditor should record in the working papers information on planning the audit, the nature, timing and extent of the audit procedures performed
and the results thereof, and the conclusions drawn from the audit evidence obtained. Working papers include the auditor’s reasoning on all significant
matters which require the exercise of j udgment, together with the auditor’s
conclusion thereon. In areas involving difficult questions of principle or
judgment, working papers record the relevant facts that were known by the
auditor at the time the conclusions were reached.

10. All auditing firms around the world have their own work paper formats.
The working papers should convey the auditor’s reasoning on all matters which require the exercise of judgment and the auditor’s conclusions.
The extent of what is included in working papers is a matter of professional judgment.
All auditing firms around the world have their own work paper formats.
Working papers are designed and organized to meet the circumstances and the auditor’s needs for each individual audit.
Page 475
The working papers should convey the auditor’s reasoning on all matters which require the exercise of judgment and the auditor’s conclusions. Where the auditor encounters difficult questions of principle or judgment, working papers record the relevant facts that were known by the auditor at the time the conclusions were reached.
The extent of what is included in working papers is a matter of professional judgment. It is neither necessary nor practical to document every matter the auditor considers. In assessing the extent of working papers to be prepared and retained, the auditor should think about what would be necessary to provide another auditor, who has no previous experience, an understanding of the audit work performed. The work papers should convey the basis of the principle decisions taken.
All auditing firms around the world have their own workpaper formats, and these formats are modified from time to time. There is no one, standard, format. Format is influenced by audit requirements for direction, supervision and review of work performed by assistants as well as differences in audit firm methodology and technology.
Working papers are designed and organized to meet the circumstances and the auditor’s needs for each individual audit. The use of standardized working papers (for example: checklists, specimen letters, standard organization of working papers) may improve the efficiency with which such working papers are prepared and reviewed. They facilitate the delegation of work while providing a means to control its quality.

11. The working papers should contain at a minimum:
Information on planning the audit work;
The nature, timing, and content of the audit procedures performed;
The results of the audit procedures; and
The conclusions drawn leading to an opinion.
working papers
Page

12. SLAuS 230 states Document Retention
‘The auditor should 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 in accordance with legal and professional requirements of record retention.’
Working papers are the property of the auditor.
Pages 447, 448; Quote ISA 230 para 13
During the audit a considerable amount of information of a confidential nature is gathered, including officer salaries, product cost, and product plans. This information can be damaging to the client and useful to competitors if it gets out of the hands of the auditors. Therefore, auditors must take care to protect the working papers at all times.
ISA 230 suggests that working papers are the property of the auditor. Although portions of, or extracts from, the working papers may be made available to the entity at the discretion of the auditor, they are not a substitute for the entity’s accounting records. In international practice generally the only time anyone, including the client, has a legal right to examine the papers is when they are subpoenaed by a court as legal evidence.
PCAOB Audit Standard #3 Documentation on Subsequent Changes to Audit Documentation
This standard requires that changes to audit documentation after the documentation completion date be documented without deleting or discarding the original documents. Such documentation must indicate the date the information was added, who added it, and the reason for adding it. The SEC has articulated its position on working papers, as well as the importance of documenting any subsequent changes to the working papers.
Working papers prepared or collected by auditors in the course of an audit provide the single most important support for their representation regarding compliance with generally accepted auditing standards. They serve as the repository for the competent evidential matter necessary to afford the auditors with a reasonable basis for opining on an issuer's financial position. Transactions or events occurring long after the balance sheet date often require reference to prior working papers, and such working papers may have significant usefulness in future audits. It is therefore imperative that auditors preserve their working papers in a complete and unaltered form.

13. Permanent File
The permanent file is audit work papers containing all the data which are of continuing interest from year to year.
The permanent file is intended to contain data of historical or continuing nature pertinent to the current audit. This file provides a convenient source of information about the audit that is of continuing interest.
Pages 478, See Illustration 11.A.2 Sample Work Papers – Permanent File Contents, page 479

14. The permanent file usually includes the following:
Copies or excerpts of company documents
Prior year analysis
Internal control information including: internal control questionnaires, flow charts, organization charts , and a listing of controls and control weakness.
See Illustration 11.A.2 Sample Work Papers – Permanent File Contents, PAGE 479.
The illustration includes items in addition to those mentioned above.

15. Current Work Paper Files
The current work paper file contains all documentation applicable to the year under audit.
The current file ordinarily includes client summary information such as description of the client, client industry, client internal controls and the auditor’s materials.
Page 480. See Illustration 11.A.3 Sample Work Papers –Current File, Page 481

16. Current Work Paper Files
The current file work papers will usually contain accounting-related information such as trial balances, lead schedules, analyses of transactions and balances and, if necessary, recommended journal entries to correct the accounts records.
The largest portion of working papers includes the detailed schedules prepared by the client or the auditors in support of specific amounts on the financial statements.
Page 480. See Illustration 11.A.3 Sample Work Papers –Current File
The current file work papers will usually contain accounting-related information such as trial balances , lead schedules , analyses of transactions and balances and, if necessary, recommended journal entries to correct the accounts. As early as possible after the balance sheet date, the auditor obtains a trial balance, a listing of the general ledger accounts and their year-end balances. Each line item in the trial balance is supported by a lead schedule, containing the detailed accounts from the general ledger making up the line item.
Each detailed account on the lead schedule is, in turn, supported by audit work performed and the conclusions drawn. Recommended journal entries to correct the accounts (i.e., adjusting and reclassification entries) are made when an auditor discovers material misstatements in the accounting records.
The largest portion of working papers includes the detailed schedules prepared by the client or the auditors in support of specific amounts on the financial statements. The major types of supporting schedules are account analysis, list schedules, reconciliation of amounts, tests of reasonableness, procedures description, informational, and outside documentation.
The current file work papers should include other important documents such as copies of important legal documents, agreements, minutes, financial statements, auditor’s report, and communications with other auditors and experts. Important letters incorporated in the current file are the engagement letter , management representation letter, confirmation letters, and letters or notes concerning audit matters communicated to or discussed with the entity (for example, material weaknesses in internal control).
Illustration 11.A.4 shows a account analysis schedule (here called ‘financial statement specification file’) that might be used in the audit.

17. Lead Schedules
Each line item in the trial balance is supported by a lead schedule, containing the detailed accounts from the general ledger making up the line item.
Each detailed account on the lead schedule is, in turn, supported by audit work performed and the conclusions drawn.
The major types of supporting schedules are account analysis, list schedules, reconciliation of amounts, tests of reasonableness, procedures description, informational and outside documentation.
Pages See Illustration 11.A.4 Sample Work Papers – Account Analysis Schedule for an example
The major types of supporting schedules are account analysis, list schedules, reconciliation of amounts, tests of reasonableness, procedures description, informational and outside
documentation. An account analysis schedule, normally used for fixed assets, liabilities and equity accounts, shows the activity in a general ledger account during the entire period under audit, tying together the beginning and ending balances. The list schedule shows the detail of those items that make up an end-of-period balance in a general ledger account. A reconciliation relates a specific amount in the accounting records to another source of information, for example a reconciliation of accounts payable balances with vendor’s statements. The test of reasonableness schedule contains information that enables the auditor to evaluate whether the client’s balance appears to include a misstatement considering the circumstances. A summary of procedures description schedule summarizes the result of audit procedures performed. Information schedules contain non-audit information such as tax information, regulatory information and time budgets. Outside documentation includes confirmation.

18. Preparation of work papers
Proper preparation of work papers requires structuring the information so that its is easy to interpret and gives the extent of the work in a concise form.
Individual work papers should be properly identified with the client’s name, the period covered, a description of contents of the work paper, the date of preparation, an index code, and the initials of the person who prepares it.
Pages 483 – 485

19. Tick Marks and Indexing
The preparation of work papers has strong traditional elements that indicate the audit work performed, cross references and suggested adjustment. These elements are:
Tick marks
Indexing
Adjusting journal entries
Page 483

20. Tick Marks
Tick marks are symbols used by the auditor to indicate the nature and extent of procedures applied in specific circumstance.
Tick marks are notations directly on the working papers schedules.
Tick marks are generally done by hand with a pen or pencil alongside a specific item.
Page 483 See Illustration 11.A.5 Sample Work Papers – Interest and Long-term Debt Work Paper p 484
Tick marks must be clearly explained at the bottom of the working paper in a ‘legend’. For example, the auditor indicates that he has examined supporting vouchers for items listed on a work paper by placing a tick mark or check mark (a symbol such as * ) beside each item on which the procedures have been carried out. The legend at the bottom of the page will say something like ‘ * = voucher and supporting documents examined’.
See interest and long-term debt work papers in Illustration 11.A.5. The illustration is from a computer spreadsheet, with check marks ( * ) added by hand later when the monthly balances were checked later against the trial balance.

21. Indexing
Work papers are indexed, i.e., cross referenced to aid in the organizing and filing. Indexing work papers requires coding the individual sheets of paper so that needed information may be found easily. Systems of indexing used include:
Sequential numbering
Combinations of letters and numbers, and
Digit position index numbers
Page 483 See Illustrations 11.A.2 Sample Work Papers – Permanent File Contents, page 479; 11.A.4 Sample Work Papers – Account Analysis Schedule, page 482; 11.A.5 Sample Work Papers – Interest and Long-term Debt Work Paper, page 484; and 11.A.6. Example of Digit-Position Indexing, page 485
Work papers are indexed and cross-referenced to aid in the organizing and filing. Indexing work papers requires coding the individual sheets of paper so that needed information may be found easily. The auditor prepares cross references creating a trail through the work papers. A variety of indexing systems are in use. These systems include (1) sequential numbering, (2) combinations of letters and numbers, and (3) digit-position index numbers. The workpapers in Illustrations 11.A.2 and 11.A.4 use sequential numbering. Illustration11.A.5 uses letters. Illustration 11.A.6 gives an example of the digit-position indexing system.

22. Adjusting journal entry
An adjusting journal entry is the correcting entry required at the end of the reporting period due to a mistake made in the accounting records; also called “correcting entry”.
The auditor does not make entries in the client’s records. The auditor makes the entries on the work papers and reviews their entry with the client.
Pages