In these videos, we walk through 5 AUD practice questions in each to teach about sufficient appropriate documentation. These questions are from AUD content area 1 on the AICPA CPA exam blueprints: Ethics, Professional Responsibilities, and General Principles.
The best way to use each video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
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Sufficient Appropriate Documentation
Sufficient appropriate documentation is a cornerstone of a high-quality audit. It not only supports the auditor’s opinion but also demonstrates that the audit was conducted in accordance with professional standards (often referred to as GAAS). Good documentation should provide a clear trail of how the auditor planned and performed the audit, what evidence was gathered, and how conclusions were reached.
Reconciliation with the Financial Statements
One of the most critical aspects of audit documentation is demonstrating how the accounting records agree or reconcile with the financial statements. This verifies the completeness and accuracy of the financial information.
Why It Matters
- Ensures no material discrepancies between internal records and published financial statements.
- Helps prevent errors or omissions that could mislead financial statement users.
Evidence of Review and Supervision
Audit documentation must include indications of supervisory review. This shows that someone with appropriate experience has reviewed the work to ensure quality and adherence to the audit plan.
Key Points
- Working papers typically feature reviewer initials or sign-offs.
- Review is part of the quality control process, ensuring accurate procedures and conclusions.
Tailoring Documentation to the Entity’s Risk Profile
The extent and detail of documentation are influenced by the nature, size, and complexity of the entity, as well as assessed risks of material misstatement.
Examples
- A multinational corporation with complex operations and higher inherent risks requires more extensive documentation.
- A small, less complex entity may need fewer detailed procedures—but must still meet required standards.
Support for Estimates and Significant Findings
When management uses accounting estimates, auditors must document how they evaluated the reasonableness of those estimates. Additionally, any findings that could lead to a modification of the auditor’s report should be clearly documented.
What to Include
- The rationale behind the methods used to test estimates.
- Evidence supporting the conclusions on those estimates.
- Any significant findings that could impact the auditor’s opinion.
Core Required Documents
Certain documents form the backbone of the audit file, ensuring that planning, risk assessment, and responsibilities are clearly defined.
a) Written Audit Program
Outlines the nature, timing, and extent of planned procedures, keeping the audit organized and on track.
b) Assessment of Material Misstatement
Identifies areas of higher risk so that the audit focuses on the most critical parts of the financial statements.
c) Written Engagement Letter
Specifies the responsibilities of both the auditor and management, clarifying the terms and scope of the engagement.
Purpose of Audit Documentation
At its core, audit documentation serves two main purposes:
- Support the Audit Opinion: Demonstrates how the audit procedures lead to the conclusions that form the basis of the auditor’s report.
- Demonstrate Compliance with GAAS: Ensures the audit is planned and executed in line with professional standards.
Ownership and Confidentiality
Working papers belong to the auditor, not the client. They are not intended to serve as a guide for the client’s operational improvements or as a repository for all client documents. Instead, they strictly support the audit work and conclusions.
Conclusion
Sufficient, appropriate documentation underpins a successful audit. It reconciles the client’s records to the financial statements, includes evidence of supervisory review, and reflects the auditor’s response to identified risks. From having a written audit program to clearly documenting any significant findings, proper documentation fortifies the quality of the auditor’s opinion and the overall integrity of the auditing process.