AUDIT DOCUMENTATION AND RECORDS RETENTION
Transcript of AUDIT DOCUMENTATION AND RECORDS RETENTION
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
AUDIT DOCUMENTATION AND RECORDS RETENTION
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LEARNING OBJECTIVES
After you complete this course, you should be able to:
Describe the basic provisions of AS 1215 and AU-C sec. 230 Apply Firm policies regarding audit documentationDescribe the basic provisions of Rule 2-06Apply Firm policies regarding records retention
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INTRODUCTION
PCAOB AS 1215 (formerly AS 3)
AICPA Clarified Statement on Auditing Standards 103 (AU-C sec. 230)
Firm documentation policies
Rule 2-06 of Regulation S-X
Firm records retention policies
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AUDIT DOCUMENTATION
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GUIDANCE AND TERMINOLOGY
Auditing Standard No. 3 AU-C sec. 230 PCAOB Rule 3101: Certain Terms Used in Auditing and
Related Professional Practice Standards
Must, Shall, Is Required = Unconditional
Should = Presumptively Mandatory
May, Might, Could = Responsibility to Consider
AU-C sec. 200: Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards
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GUIDING PRINCIPLES
Must document
Procedures performed
Evidence obtained
Conclusions reached
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WHAT IS “AUDIT DOCUMENTATION”?
“Audit documentation is the written record of the basis for
the auditor’s conclusions.” Examples of audit documentation
include: Memoranda Confirmation and representation letters Correspondence Schedules Audit programs
May be on paper, in electronic files, or on other media
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ORAL EXPLANATIONS NOT PERSUASIVE
Oral explanation alone does not constitute persuasive evidence, but, it may be used to clarify other written evidence
Must exercise professional skepticism and care
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Actual Documentation
There were few instances of management investigation of
inappropriate practices.Potential employees that indicate a criminal record
are scrutinized closely. The individual’s background is
checked thoroughly.
CLEAR AS A BELL?
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Actual Documentation
There were few instances of management investigation of
inappropriate practices.Potential employees that indicate a criminal record
are scrutinized closely. The individual’s background is
checked thoroughly.
CLEAR AS A BELL?
Improved Documentation
Managers are responsive to signs of inappropriate
practices.
Hiring policies require a background check for
applicants with a criminal record.
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WHO IS THE AUDIENCE?
An Experienced Auditor has:
No previous connection with the engagement
Reasonable understanding of audit activities and has studied the company's industry as well as the accounting and auditing issues relevant to the industry
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Engagement Team Members
DOCUMENTATION CONTENT
Procedures performed Evidence obtained Results Conclusions
Who performed and when?
Who reviewed and when?
Engagement Team Members
Show that accounting records reconcile with financial statements
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NATURE AND EXTENT OF DOCUMENTATION
Nature of procedure
Risk associated with assertion, account, or class of transactions,
including disclosures
Extent of judgment
Significance of evidence
Nature and extent of exceptions identified
Need to document a conclusion not readily determinable from the
documentation of work performed or evidence obtained
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WHAT TO DOCUMENT
Significant findings or issues
Actions taken to address them
Additional evidence obtained
Basis for conclusions reached
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WHAT IS “SIGNIFICANT”?
Significant matters include: Accounting principles and disclosure Complex or unusual transactions Estimates and uncertainties Changes in planned procedures/risk assessment Audit adjustments Internal control weaknesses Disagreements Difficulty applying audit procedures Matters affecting audit report
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ENGAGEMENT COMPLETION DOCUMENT
AS 1215 requires an engagement completion document for all public engagements
A properly completed highlights summary and Form A-20 are sufficient
Include:All significant findings or issues Matters identified during interim reviews
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ENGAGEMENT COMPLETION DOCUMENT
Compliance with Independence Rules
Training and Proficiency
Client Acceptance and Continuance
Outside Resources
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WHAT TO RETAIN?
Sufficient detail to identify specific items examined
Copies of original documents should be retained:
If not likely to be retained by company, or
If retaining copies would facilitate understanding of
Procedures performed
Evidence obtained
Conclusions reached
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IDENTIFICATION OF SPECIFIC ITEMSINSPECTED
Documentation should be sufficiently detailed to identify the specific items examined.
Document the identifying characteristics of the sampled items Check number Check date Invoice number Vendor
Example: Auditor selected Check #4782 dated 5/4/2016.
Example: Auditor inspected invoice #SP254-2 from Smith’s Manufacturing.
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IDENTIFICATION OF SPECIFIC ITEMSINSPECTED
Documentation should be sufficiently detailed to identify the specific items examined.
Identify the population and scope of the sample
Identify the population and indicate the starting point and sampling interval for systematic samples
Example: Selected all invoices over $20,000 from the July sales register.
Example: Tested all checks over $100K from the May cash receipts log.
Example: Sampled every 40th invoice from the July sales register, starting with invoice #452.
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IDENTIFICATION OF SPECIFIC ITEMSINSPECTED
Documentation should be sufficiently detailed to identify the specific items examined.
Does this sentence provide sufficient documentation?
Example: Auditor scanned all year-end AJE’s in the G/L and selected all items over $100,000 and any unusual items for review.
How might you better document the specific items inspected?
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IDENTIFICATION OF SPECIFIC ITEMSINSPECTED
Documentation should be sufficiently detailed to identify the specific items examined.
Does this sentence provide sufficient documentation?
Example: Auditor scanned all year-end AJE’s in the G/L and selected all items over $100,000 and any unusual items for review.
How might you better document the specific items inspected?
Example: Auditor scanned all year-end AJE’s in the G/L and selected all items over $100,000 for review. Auditor also selected any unusual items including:
• Entries posted on Saturday
• Entries posted from 12:00 AM – 4:00AM
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IDENTIFICATION OF SPECIFIC ITEMSINSPECTED
Documentation should be sufficiently detailed to identify the specific items examined.
What if no items meet our scope?
Example: AJE’s consisted of normal year-end adjustments, none of which were over $100,000. No unusual adjusting journal entries meeting the criteria defined were noted.
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WORK OF EXPERTS
Experts include: Appraisers Actuaries Environmental consultants BDO Consulting – Valuation & Business Analytics (BDOC-VBA)
Document work performed in accordance with PCAOB AS 1210 and/or AS 2501 (AU-C 620 and/or AU-C sec. 540 for nonpublic engagements)
Review with professional skepticism
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WORK OF EXPERTS
FACTS: Audit team engages BDOC-VBA to review an external valuation firm
report supporting the value of an asset recorded by the client.
BDOC-VBA prepares a memo dated after the audit opinion which identifies errors in the external valuation firms’ report. These errors were also identified by the client and corrected prior to issuance of our audit opinion.
The audit working papers include a PBC memo documenting the corrections made to the external valuation firms’ report.
The audit team did not prepare a separate memo.
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WORK OF EXPERTS
Documentation should include: Evaluation of objectivity and competence of external experts Verification of data provided to the expert Factors considered in evaluating approach and assumptions* Recalculation of key computations
HOW THE ERRORS IDENTIFIED WERE ADDRESSED
Audits of public entities – expert’s final report and/or working papers will be obtained prior to issuing audit opinion
For audits of non-public entities: If report issuance is after June 30, 2017, expert’s final reports etc. will be
obtained prior to release of auditor’s report
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MULTI-LOCATION ENGAGEMENTS
The office issuing the auditor’s report must obtain, and review and retain, prior to the report release date, certain documentation related to the work performed by other auditors.
Other BDO offices or other firms not referred to in the audit report often assemble and submit a reporting package containing the required documentation.
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REPORTING PACKAGE
Engagement completion document (highlights summary)
List of significant risks, the auditor’s responses, and the results of the auditor’s related procedures
Findings inconsistent with conclusions
Consolidation matters
Schedule of accumulated misstatements, including a description of nature and cause of each misstatement, and an evaluation of uncorrected misstatements (BDO Form A-53)
All significant deficiencies and material weaknesses in internal control
Representation letters
Audit committee communications
Memo summarizing risk brainstorming meeting
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Additional documentation required for: Reliance on system generated reports Auditing revenue Journal entry testing
PCAOB INSPECTION COMMENTS
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Additional documentation required for: Information produced by the entity (IPE) and reliance on system
generated reports Required to test accuracy and completeness of information or
testing controls over accuracy and completeness of information Required to evaluate whether information is sufficiently precise
and detailed for our purposes
Example – auditing completeness of allowance for doubtful accounts AR aging report should be tested for accuracy and completeness by:
Obtaining invoice copies Agreeing data back to aging (invoice #, date, customer) Recalculating age of invoice
REPORT RELIANCE
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Appropriate sample size for testing IPE depends on: Risk of material misstatement of FSA IPE’s volume, complexity, and inherent reliability TOCs reliance, if any Importance of IPE to planned audit procedure
IPE Sample Size Calculator Template Required for audits performed under PCAOB standards and
encouraged for other audits
Available Practice Aid, Audit Work on Information Produced by the Entity
REPORT RELIANCE
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Additional documentation required for: Auditing revenue
Example – auditing revenue recognition policies
PBC revenue recognition memo should be audited by: Ensuring that all revenue streams are considered Documenting the applicable authoritative guidance Evaluating the appropriateness of the accounting Testing transactions to ensure the correct accounting is
consistently applied
AUDITING REVENUE
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Additional documentation required for: Journal entry testing
Example – testing journal entries for evidence of management override Population of journal entries should be tested for completeness by:
Observing the download of entries from the system Rollforward all journal entries to the period end trial balance Reconcile trial balance to the financial statements Reconcile net effect of income statement impact to net income
Use of Journal Entry Testing Practice Aid expected for audits performed under PCAOB standards, and encouraged for other audits
JOURNAL ENTRY TESTING
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GOOD AUDIT DOCUMENTATION
Professional skepticismIdentify and reassess risk Document evidence to support conclusions Support oral explanationsComply with records retention rules
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HELPFUL TOOLS
Audit Manual
APT
Practice Aids in AKB
BDO FormsA-20, highlights
summary IndexSEC-6, SEC Reminder
Checklist
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Document work in sufficient detail to provide a clear indication of: Procedures performed Evidence obtained Conclusions reached
REMEMBER!
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RECORDS RETENTION
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INTRODUCTION
Congress adopted Section 802 of the Sarbanes-Oxley Act
SEC adopted Rule 2-06 of Regulation S-X
Overview of Rule 2-06
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CONSIDER 3 AUDITORS
Mr. Shredder – Discards anything that contradicts his final conclusion
Mr. Monkey – Doesn’t write anything down, has nothing to retain
Mr. C.Y.A – Documents everything in the working papers, pro and con
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SCOPE OF RULE 2-06
Applies to audits and reviews of public issuers By domestic accounting firms; and By foreign accounting firms
More stringent requirements apply in: Investigations Litigation
Retention, not creation
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PURPOSE OF RULE 2-06
To discourage the destruction, and assist in the availability, of records that may be relevant to investigations conducted under the securities laws, commission rules or criminal laws and:
Preserve evidence reflecting significant accounting judgments; and
Provide evidence of financial reporting improprieties or deficiencies in the audit process.
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PENALTIES FOR NON-COMPLIANCE
If one knowingly and willfully violates the Rule: Up to $750,000 fine Up to 10 years imprisonment
More severe penalties if one impedes a federal investigation or bankruptcy proceeding
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RETAIN RELEVANT RECORDS FOR 7 YEARS
Working papers
Other documents that form the basis of the audit or review; and
Memoranda, correspondence, communications and other documents, including electronic records
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TWO ADDITIONAL RETENTION CRITERIA
Retain records that:
1. Are created, sent or received in connection with the audit or review, and
2. Contain conclusions, opinions, analyses, or financial data related to the audit or review.
Reminder: Retain relevant documents, regardless of whether they are consistent or inconsistent with the auditor’s final conclusions.
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THE THOUGHT PROCESS
Is the document a working paper?
For other documents, is it
relevant?
Does the document form the basis for the audit
or review?
Yes
Yes
Yes
Must retain document
Must retain document
Must retain document
Document can be discarded
No
No
No
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OUR POLICIES ARE TO RETAIN
Working papers
Other documents that form the basis for an audit or review
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“OTHER” DOCUMENTS
“Memoranda, correspondence, communications, and other documents and records (including electronic records)” could include: Review comments Superseded drafts of memoranda Superseded drafts of financial statements Notes Previous versions of working papers Duplicate documents Emails Voicemails Documentation of Instant Messages Consultation memoranda
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“OTHER DOCUMENTS”: CONSULTATION MEMO
Prepare a draft consultation memo before initiating consultation
Involve SEC reviewer during consultation process.
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WHICH RECORDS ARE RELEVANT?
Consider purpose of Rule 2-06
Relevant = Substantive = Significant matters Accounting principles Estimates Uncertainties Audit adjustments Unsatisfactory test results
Reasonable investor standard
Duplicate documents are not considered relevant
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DUPLICATE DOCUMENTS – AN EXAMPLE
Our audit file contains the following working papers: Debt modification memorandum Partner’s review comments , including the following:
“Did we consider the guidance in FASB ASC 470-50-40?”
Subsequent to receiving the review comment, the Senior amended the debt modification memo to document the engagement team’s consideration of the standard.
Do we have a duplicate document?
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DUPLICATE DOCUMENTS – AN EXAMPLE
While addressing the partner’s review comment, the Senior realizes the client’s accounting treatment is incorrect.
He revises the first draft of the memorandum to: Document the consideration of FASB ASC 470-50-40; and Revise his conclusion about the client’s accounting treatment.
Do we have a duplicate document?Which memo should we retain?
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POLICIES FOR NON-ISSUERS
Subtle differences – different purposes
Purpose of GAAS:Review the workSupport the report
Purpose of Rule 2-06:Evidence for investigations
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RULE 2-06 DOES NOT:
Intend for auditors to retain ALL documents created during an audit or review.
Ignore materiality
Overlook relevance
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PRACTICAL CONSIDERATIONS
Support the opinion
Create high quality work
Exercise care when creating instant messages, emails or voicemails
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ARCHIVING WORKPAPERS
In-charge auditor’s responsibility
Archive relevant emails
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Report Release
Date
Documentation Completion
Date
45 days to assemble a complete and final set of work
papers
Audit Documentation should be retained for 7 Years
60 days for private engagements not conducted
in New York
Best Practice – archive within 15 days of report release date
RECORDS RETENTION
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Complete all necessary auditing procedures
Clear all review notes
Obtain sufficient evidence to support report
PRIOR TO REPORT RELEASE DATE
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No earlier than the date on which the auditor has obtained sufficient, appropriate audit evidence to support the opinion.
Management representation letter should be dated the same as the auditor’s report.
REPORT DATING
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Within this period:
Documentation can be updated Superseded documents can be discarded If documentation is added, must indicate:
Date added Name of person making addition Reason for change
Report Release
Date
Documentation Completion
Date
45-60 days to assemble a complete and final set of
working papers
AFTER THE REPORT RELEASE DATE
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No deletions
Can only add documentation with explanation
Must be currently dated
AFTER THE DOUMENTATION COMPLETION DATE
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CONSIDER 3 AUDITORS
Mr. Shredder – Discards anything that contradicts his final conclusion
Mr. Monkey – Doesn’t write anything down, has nothing to retain
Mr. C.Y.A – Documents everything in the working papers, pro and con
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CONCLUSION
Priority is to comply with the retention standards
If in doubt, consult!