Peer reviewers are saying, “If it’s not documented, it’s not done.” Why? Because standards require sufficient audit documentation. And if it’s not documented, the peer reviewer can’t give credit for performance.
But what does sufficient documentation mean? What should be in our work papers? How much is necessary? This article answers these questions.
In the AICPA’s Enhanced Oversight program, one in four audits is nonconforming due to a lack of sufficient documentation. This has been and continues to be a hot-button peer review issue. And it’s not going away.
But auditors ask, “What is sufficient documentation?” That’s the problem, isn’t it? The answer is not black and white. We know good documentation when we see it–and poor as well. It’s the middle that fuzzy. Too often audit files are poor-to-midland. Why?
First, many times it boils down to profit. Auditors can make more money by doing less work. So, let’s go ahead and state the obvious: Quality documentation takes more time and may lessen profit. But what’s the other choice? Poor work.
Second, the auditor may not understand what the audit requirements are. So, in this case, it’s not motive (more profit), it’s a lack of understanding.
Thirdly, another contributing factor is that firms often bid for work–and low price usually carries the day. Then, when it’s time to do the work, there’s not enough budget (time)–and quality suffers. Corners are cut. Planning is disregarded. Audit programs are poorly designed. Confirmations, walkthroughs, fraud inquiries are omitted. It’s easier, at least in the short run.
Even though these reasons may be true, we all know that quality is the foundation of every good CPA firm. And work papers tell the story–the real story–about a firm’s character. How would you rate your work paper quality? Is it excellent, average, poor? If you put your last audit file on this website and everyone could see it, would you be proud? Or does it need improvement?
First, let’s look at examples of poor documentation:
This list is not comprehensive, but it provides examples to consider. This list is based on my past experiences. Probably the worst offense (at least in my mind) is signing off on an audit program with no support.
Additionally, the AICPA has identified the following deficiencies. Work papers lack:
Now, let’s examine what constitutes sufficient documentation.
AU-C 230 Audit Documentation defines how auditors are to create audit evidence. It says that an experienced auditor with no connection to the audit should understand:
While most auditors are familiar with this requirement, the difficulty lies in how to accomplish this. What does it look like?
Here’s the key: When an experienced auditor reviews the documentation, does she understand the work?
Any good communicator makes it her job to speak or write in an understandable way. The communicator assumes responsibility for clear messages. In creating work papers, we are the communicators. The responsibility for transmitting messages lies with us (the auditors creating work papers).
So what creates fogginess in work papers? We forget we have an audience. Others will review the audit documentation to understand what was done. As we prepare work papers, we need to think about those who will read our work. All too often, the person creating a work paper understands what he is doing, but the reviewer doesn’t. Why? The message is not clear.
Just because I know why I am doing something does not mean that someone else will.
This is why most work papers should include the following:
When I make these suggestions, some auditors push back saying, “We’ve already documented some of this information in the audit program.” That may be true, but I am telling you–after reviewing thousands of audit files–the message (what is being done and why) can get lost in the audit program. The reviewer often (speaking for myself) has a difficult time tieing the work back to the audit program and understanding its purpose and whether the documentation provides sufficient audit evidence.
Remember, the work paper preparer is responsible for clear communication.
And here’s another thing to consider. You (the work paper preparer) might spend six hours on one document. So, you are keenly aware of what you did. The reviewer, on the other hand, might spend five minutes–and she is trying (as quickly as she can) to understand.
To help your less informed reviewers:
Here’s a sample work paper from the AICPA. What do I like about it?
It communicates (clearly):
I also note there is no extraneous information, no clutter.
So far, we’ve discussed insufficient documentation. Let’s take a minute to review an opposite problem, having too much.
It’s funny, but many CPAs say to me, “I feel like I do too much,” meaning they believe they are auditing more than is necessary. To which I often respond, “I agree.”
In looking at audit files, I see:
For whatever reason, clients usually provide more information than we request. And then–for some other reason–we retain those documents, even if not needed.
If auditors add purpose statements to each work paper, then they will discover that some work papers are unnecessary. In writing the purpose statement, we realize it has none. Which is nice–now, we can deep-six it.
One healthy exercise is to pretend we’ve never audited the company and that we have no prior year audit files. Then, with a blank page, we plan the audit. Once done, we compare the new plan to prior year files. If there’s any fat, start cutting.
The key to eliminating unnecessary work lies in performing the following steps (in the order presented):
Too often, we roll the prior year file forward and rock on. If the prior year file has extraneous audit procedures, then we repeat them. This creates waste.
In summary, audit documentation continues to be a significant peer review problem. We can enhance the quality of our work papers by remembering we are not just auditing. We are communicating. It is our responsibility to provide a clear message.
Though this article is about having too little documentation, you can have the opposite problem of having too much documentation.
Below is a short video summarizing this article.
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Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses.He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events.Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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