EVALUATING THE QUALITY OF THE AUDIT AND MAINTAINING ADEQUATE WORKING PAPERS

APB Statement of Accounting Standard 230 covers “Working papers”. IFAC
International Standard on Auditing 230 also covers “Documentation”. APB SAS
230 states that “auditors should document in their working papers matters
which are important in supporting their report”. In this context, Working papers
are the material that auditors prepare or obtain, and retain 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.
Working papers support, amongst other things, the statement in the auditors’
report as to the auditors’ compliance or otherwise with auditing standards,
and thus record compliance with auditing standards to the extent that it is
important in supporting their report.
Working papers are the record of:
(a) The planning and performance of the audit;
(b) The supervision and review of the audit work; and
(c) The audit evidence resulting from the audit work performed which the
auditors consider necessary and on which they have relied to support
their report.

Form and Content of Working Papers

APB SAS 230 states that “working papers should record the auditors’ planning,
the nature, timing and extent of the audit procedures performed, and the
conclusions drawn from the audit evidence obtained.” Auditors should record
in their working papers their reasoning on all significant matters which require
the exercise of judgement, and their conclusions thereon.
The extent of working papers is a matter of professional judgement since it is
neither necessary nor practical to document every matter auditors consider.
Auditors base their judgement as to the extent of working papers upon what
would be necessary to provide an experienced auditor, with no previous
connection with the audit, with an understanding of the work performed and
the basis of the decisions taken. Even then, that experienced auditor may only
be able to obtain a comprehensive understanding of all aspects of the audit by
discussing them with the auditors who prepared them.
It is in those areas of the audit that involve difficult questions of principle or
judgement that auditors’ judgement may be questioned subsequently,
particularly by a third party who has the benefit of hindsight. In such
circumstances it is important to be able to demonstrate the relevant facts that
were known at the time the auditors reached their conclusion.
Auditors draw conclusions relating to specific financial statement assertions.
However, all such conclusions are arrived at within the context of their report.
That report relates to the financial statements taken as a whole, and not to the
individual assertions embodied in the financial statements’ (Chitty, 2004).
The following matters may affect the form and content of working papers:
(a) The nature of the engagement;
(b) The form of the auditors’ report;
(c) The nature and complexity of the entity’s business;
(d) The nature and condition of the entity’s accounting and internal control
systems;
(e) The needs in the particular circumstances for direction, supervision and
review of the work of members of the audit team; and
(f) The specific methodology and technology the auditors use.
‘Working papers are designed and organised to meet the circumstances and
the auditors’ needs for each individual audit. The use of standardised working
papers (for example checklists, specimen letters, standard organisation of
working papers) may improve the efficiency with which, such working papers
are prepared and reviewed. While they facilitate the delegation of work and
provide a means to control its quality, it is never appropriate to follow
mechanically, a standard approach to the conduct and documentation of the
audit without regard to the need to exercise professional judgement (Chitty,
2004).
The auditors may utilise schedules, analyses and other documentation prepared
by the entity, to improve audit efficiency. In such cases, the auditors must see
evidence that such information is properly prepared.
Detailed contents of Permanent and Current audit working papers were
discussed earlier in Chapter I of this Study Pack.
Generally, working papers may include the following, where relevant:
(a) Information concerning the legal and organisational structure of the
entity;
(b) Extracts or copies of important legal documents, agreements and
minutes;
(c) Information concerning the industry, economic environment and
legislative environment within which the entity operates;
(d) Evidence of the planning process and any changes thereto;
(e) Evidence of the auditors’ understanding of the accounting and internal
control systems;
(f) Evidence of inherent and control risk assessments and any revisions
thereof;
(g) Evidence of the auditors’ consideration of the work of internal audit and
their conclusions thereon;
(h) Analyses of transactions and balances;
(i) Analyses of significant ratios and trends;
(j) A record of the nature, timing and extent of auditing procedures
undertaken and the results of such procedures;
(k) Details of procedures regarding components whose financial statements
are audited by other auditors;
(l) Copies of communications with other auditors, experts and other third
parties;
(m) Copies of correspondence with the entity, reports to directors or
management and notes of discussions with the entity’s directors or
management concerning audit matters;
(n) Letters of representation from the entity’s directors or management;
(o) A summary of the significant aspects of the audit including details of
the information available, the amounts involved, management’s views,
the conclusions reached and how these matters are resolved or treated;
and
(p) Copies of the approved financial statements and auditors’ reports. (Chitty,
2004; IFAC ISA 230).
Working papers typically records:
(a) When and by whom audit procedures are undertaken; and
(b) When and by whom working papers are reviewed.
Points raised during the review of working papers need not be retained providing
the working papers demonstrate evidence of the extent of the review process
and are updated to record the resolution of any significant matters noted.
In the case of recurring audits, some working paper files may be classified as
‘permanent’ audit files which are updated with new information of continuing
importance, as distinct from ‘current’ audit files which contain information
relating primarily to the audit of a single period.

Confidentiality, Safe Custody and Ownership of Working Papers

APB SAS 230 states that “auditors should adopt appropriate procedures for
maintaining the confidentiality and safe custody of their working papers”.
Auditors comply with ethical guidance as to the confidentiality of working
papers. Portions of, or extracts from, the working papers may be made available
to the entity at the discretion of the auditors, provided such disclosure does not
undermine the independence or the validity of the audit process. Information
is generally not made available to other third parties (including parent
companies or subsidiary undertakings or their auditors) without the permission
of the entity (Chitty, 2004).
The auditors should exercise judgement to determine the appropriate period
of retention bearing in mind the following:
(a) Possible needs of their client, for example that audited information may
need to be included in a prospectus at some future date;
(b) Their own needs, including any regulatory requirements; and
(c) Prior to their destruction, auditors consider whether there is likely to be
a need to refer to them again.
Working papers are the property of the auditors. 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 (IFAC
ISA 230).

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