Peer Review documentation-Auditees prespective

Documentation by PU for peer review process

The Peer Review Statement does not lay down any requirement for maintaining documents by the practicing unit.

However, Standard on Auditing (SA) -230 “Documentation” which is mandatory from 1st April, 2009 (earlier AAS 3 w.e.f 1^st April 1985) for a practicing unit performing audit and assurance services. It prescribes documentation of matters that are important in providing evidence that, the audit was carried out in accordance with the basic principles and standards of auditing. 

Objective:

The objective of the auditor is to prepare documentation that provides:

• A sufficient and appropriate record of the basis for the auditor’s report; and
• Evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements.

Factors which determine the form and content of documentation for a particular engagement

·         The status of the auditee’s (Client).

·         The nature of engagement,

·         The nature and complexity of auditee’s business,

·         Relevant legislations applicable to the auditee,

·         Form of auditor report,

·         Nature and condition of auditee’s records,

·         Degree of reliance the auditor can place on internal controls in operation,

·         Quality of audit assistant and audit supervisor assigned to the particular engagement.

·         The nature of the audit procedures to be performed.

·         The identified risks of material misstatement.

·         The significance of the audit evidence obtained.

·         The nature and extent of exceptions identified.

·         The need to document a conclusion or the basis for a conclusion not readily determinable from the documentation of the work performed or audit evidence obtained.

·         The audit methodology and tools used.

Nature and Purposes of Audit Documentation:

Audit documentation that meets the requirements of SA 230 and the specific documentation requirements of other relevant SAs provides:

(a) Evidence of the auditor’s basis for a conclusion about the achievement of the overall objective of the auditor; and

(b) Evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements.

Audit documentation serves a number of additional purposes, including the following:

• Assisting the engagement team to plan and perform the audit.
• Assisting members of the engagement team responsible for supervision to direct and supervise the audit work, and to discharge their review responsibilities in accordance with Proposed SA 220 (Revised).
• Enabling the engagement team to be accountable for its work.
• Retaining a record of matters of continuing significance to future audits.
• Enabling the conduct of quality control reviews and inspections in accordance with SQC 1.
• Enabling the conduct of external inspections in accordance with applicable legal, regulatory or other requirements.

In documenting the nature, timing and extent of audit procedures performed, the auditor shall record:

(a) The identifying characteristics of the specific items or matters tested

(b) Who performed the audit work and the date such work was completed; and

(c) Who reviewed the audit work performed and the date and extent of such review.

Principle requirements of Audit Working Papers can be summarized as under:

Ø  Audit working papers should record the audit plan, the nature, timing and extent of auditing procedures performed, and the conclusions drawn from the evidence obtained.

Ø  Audit working papers should be sufficiently complete and detailed for an auditor to obtain an overall understanding of the audit.

Ø  All important and material matters, which require the exercise of judgment, together with the auditor’s conclusion thereon, should be included in the audit working papers.

Ø  Audit working papers should be designed and properly organized to meet the circumstances of each audit and the auditor’s needs in respect thereof.

Ø  An auditor should adopt reasonable procedures for custody and confidentiality of his working papers and should retain them for a period of time sufficient to meet the needs of his practice and satisfy any pertinent legal or professional requirements of records retention. 

Documents should reflect compliance of technical standards.

While reviewing the performance of attestation service engagements of a practicing unit, the reviewer’s Prime focus will on compliance of technical standards.

According to Para 3.7 of the Statement of on Peer Review ‘Technical Standards’ include:

1. Accounting Standards issued by ICAI;

2. Standards of Auditing (Audit and Assurance Standards) & SQC, etc issued by ICAI:

3. Framework for the preparation and presentation of financial statement issued by ICAI;

4. Framework of statements on standard auditing practices and guidance notes on related services issued by ICAI’

5. Statements issued by ICAI;

6. Guidance Notes issued by ICAI;

7. Notifications / Directions  including those of self-regulatory nature issued by ICAI; and

8. Various relevant statutes and / or regulations which are applicable in the context of the specific engagements being reviewed.

A Practicing unit has to ensure compliance of the above-said technical standard while performing its attest services engagements.

Comprehensive Checklist for Audit assignments should be prepared and followed for compliance of Technical standards.

Illustrative table of documentation required as per SA, peer review questionnaire and other documents issued by ICAI.

FREQUENTLY ASKED QUESTIONS REGARDING DOCUMENTATION WHILE PEER REVIEW:

Issue No1:

Scope and Obligation of practicing units (PU) under review against Documentation:

v  To provide access to the reviewer any record or document specified by him, which is in PU’s possession or is under his control?

v  To provide to the reviewer, explanations and particulars with reference to any records or documents specified by him.

v  To provide assistance in connection with peer review.

Issue No.2:

If PU has more than one office, shall the reviewer have access to any related document kept at such other office?

v  The PU has to ensure that access is given to all the relevant documents wherever kept in his possession or control in whichever office the PU maintains.

Issue No.3:

Can the reviewer take photocopies of any documents or records maintained by the PU?

The reviewer can only:

v  Examine;

v  Inspect; or

v  Take any abstract of or take any extract from a record or document which is relevant for the review process.

v  Photocopies are not allowed to reviewer of any documents, with permission of reviewer.               

Issue No.4

What can be the general deficiencies a reviewer observe while reviewing?

The general deficiencies a reviewer may observe while reviewing compliance with technical standards may be as under:

v  PU does not have any set procedures to ensure proper documentation with regard to attestation services.

v  Standardization of working papers like checklists, specimen letters, and standard organization of working papers not kept.

v  Separate permanent and current files for attestation services not maintained.

v  Working papers not properly organized.

v  PU does not have any system of documentation of obtaining sufficient and appropriate audit evidence through substantive tests.

v  No audit programme is prepared for conducting audit.

v  Working papers not maintained in certain cases as per audit programme designed.

v  Management Representation letter form the clients not obtained.

v  Engagements letters not issued to clients.

v  Record of audit plan, the nature, timing and extent of auditing procedures performed not maintained.

v  No proper system of indexation and crossed-referencing of the working papers in audit files of client.

v  Appointment letters not obtained or renewed.

v  Organization chart of the client not available.

v  The PU does not obtain direct evidence from parties and business associates of the clients.

v  Documentation of Assessment of audit risk and its components not done.

v  Written statements in questionnaire form or flow chart from not available regarding internal control system.

v  PU does not have any system of performing analytical review.

v  No documentation showing use of either statistical or non-statistical sampling methods to design and select an audit sample.

v  Work assigned to staff is regardless of the qualification required.

v  There is no system for scheduling and staffing for carrying out the audit engagement.

v  The practice unit has not established system for second person review. 4 eyes concept.

v  AS-1 “Disclosure of Accounting Policies” not complied with in cases of non-corporate clients, which is mandatory for all enterprises.

v  AS-22 regarding “Deferred Tax” not followed.

v  No policies found in place to ensure independence.

v  No written policies for independence of staff members maintained.

v  For acceptance of audit in company cases acknowledged copy of Form No.23B [intimation to the ROC] not in file.

v  No system to evaluate staff performance and communicate to staff on periodical basis.

Issue No.5:

Whether minor documents can be obtain later and handed over to Peer Review team?

v  Minor deficiencies in documentation can be rectified, subject to approval of Peer Reviewer, as Peer Review is a friendly advice or audit process.

Issue No.6:

Whether it is necessary to carry on Peer Review at Office only?

v  Peer Review in not only documentation audit, but a process to know systems of audit and office administration also. Hence, office should be clean, neat and fully equipped with relevant infrastructure before Peer Review.

Issue No.7:

What should be approach of PU and its Staff while Peer Review?

v  As Peer Review is friendly Exercise, approach of PU should be Straight, Constructive and co-operative. No hasty or wrong promises or commitments to be made without having proper documentation. It should be kept in mind that Peer Reviewer is also sailing in same boat.

Issue No 8:

Whether documentation once followed while Peer Review should be continued thereafter also?

v  It is mandatory to maintain the documentation process adopted while Peer Review. Rather the process should be strengthen and updated time to time.

Issue No.9:

What are the instructions given by ICAI to Peer reviewer for review of documentation?

While conducting peer review ensure adherence with AAS wherever applicable. Few examples are given hereunder: -

1. Document working papers of the review performed and findings, including matters that indicate deficiencies in the PU's policies and procedures relating to quality control and significant lack of compliance therewith. (AAS3 – Documentation)
2. Obtain written representations from the PU, wherever required. (AAS 11 – Representations by Management)
3. A Letter of engagement may be sent to the PU. (AAS 26 – Terms of Audit Engagement)

Issue No.10:

What are major areas of focus as per ICAI to peer reviewer for review?

Four focus areas mentioned below should be seen by reviewer:

a.     Compliance with Technical standards

b.    Quality of reporting

c.     Office systems and procedures

d.    Training programs for staff

Issue No.11:

What are the documents that should not be included in working papers?

The auditor need not include in audit documentation superseded drafts of working papers and financial statements, notes that reflect incomplete or preliminary thinking, previous copies of documents corrected for typographical or other errors, and duplicates of documents.

Issue No.12:

Can working papers be generated post audit?

Preparing sufficient and appropriate audit documentation on a timely basis helps to enhance the quality of the audit and facilitates the effective review and evaluation of the audit evidence obtained and conclusions reached before the auditor’s report is finalized. Documentation prepared after the audit work has been performed is likely to be less accurate than documentation prepared at the time such work is performed.

Issue No.13:

What is time limit for compilation of audit documentation?

Standards of Quality Control: SQC 1 requires firms to establish policies and procedures for the timely completion of the assembly of audit files. An appropriate time limit within which to complete the assembly of the final audit file is ordinarily not more than 60 days after the date of the auditor’s report.

Issue No.13:

What is time limit for retention of audit documents?

SQC 1 requires firms to establish policies and procedures for the retention of engagement documentation. The retention period for audit engagements ordinarily is no shorter than ten years (now Seven years) from the date of the auditor’s report, or, if later, the date of the group auditor’s report.

Issue No.14:

Is there any Considerations Specific to Smaller Entities?

The audit documentation for the audit of a smaller entity is generally less extensive than that for the audit of a larger entity. Further, in the case of an audit where the engagement partner performs all the audit work, the documentation will not include matters that might have to be documented solely to inform or instruct members of an engagement team, or to provide evidence of review by other members of the team (for example, there will be no matters to document relating to team discussions or supervision). Nevertheless, the engagement partner complies with the overriding requirement to prepare audit documentation that can be understood by an experienced auditor, as the audit documentation may be subject to review by external parties for regulatory or other purposes.

When preparing audit documentation, the auditor of a smaller entity may also find it helpful and efficient to record various aspects of the audit together in a single document, with cross references to supporting working papers as appropriate. Examples of matters that may be documented together in the audit of a smaller entity include the understanding of the entity and its internal control, the overall audit strategy and audit plan, materiality, assessed risks, significant matters noted during the audit, and conclusions reached.