Why documentation is Important for Auditors?

In the wake of recent bank scams questions have been raised on the professional standards, quality, and commitments of Chartered Accountants. 

These allegations have seriously undermined the image of our CA profession in the eyes of corporate world and public at large. Generally, the Chartered Accountants try to work in most ethical ways with limitations of environment prevailing in the business work.

However, to display our work it is important to appropriately document the work done. Many of our professional colleagues faces the challenge to appropriately document their work.

Here are few statutory and standard requirements for Auditors to maintain documentation.

S. 143 (9) of the Companies Act, 2013 states that every auditor shall comply with the auditing standards. Let us analyze the various Auditing Standards prescribed by Institute of Chartered Accountants of India and the areas where documents are required to be maintained to prove to any regulating agency that the audit work was in compliance with the professional standards and our commitment to the work done. These documents would also help us to counter the various attacks faced by the profession.

SA 230 - Audit documentation is completely dedicated towards documentation of the audit procedures. The audit documentation starts from the stage of planning where the auditor is required to document as to how the complete audit was planned to take into various factors which can affect the audit. Documentation of the performance of the audit is also important. Let us go through various auditing standard and understand what is needed to be documented at various stages of the audit.

PLANNING STAGE

SA 210 - Agreeing to the terms of the audit engagement, emphasize on the 'Audit Engagement Letter'. The audit engagement letter clearly defines the responsibility of the auditor which is addressed to the Board of Directors. It also specifies the inherent limitation of the auditor in carrying out the audit and the audit procedure which will be applied by the auditor. The audit engagement letter is generally signed by the auditor and the management as a token of acknowledgment regarding the audit engagement.

SA 220 - Quality Control for an audit of financial statement specifically requires the auditor as well as the Quality Control reviewer to document the procedure adopted to reach at the audit conclusion with the consent of the Quality Control Reviewer.

SA 240 - The Auditor' s responsibilities relating to fraud in an Audit of Financial Statements. In the wake of various scams, this particular auditing standard plays a very pivotal role. As per the standard, it is important for the auditor to document the responses to the assessed risk of material misstatement and various discussions between the team members and the management. It is important for the auditor to document all the indications which may lead to fraud and steps taken by the auditor to arrive at the audit conclusion.

SA 250 - Considerations of Laws and Regulations in an Audit of Financial Statements. The auditor is expected to document the identified or suspected non - compliance with laws and regulations. The auditor is also required to document the discussion with the management regarding the non-compliance and responses obtained from the management.

SA 260 - In the standard, Communication with Those Charged with Governance, the auditor has to specifically communicate his responsibility in relation to the financial statement, an overview of the planned scope and timing of the audit, significant findings during the risk assessment and while performing the audit procedure. It has to be noted that even if the communication is done orally with the auditee, the communication is needed to be documented and kept in the audit file.

SA 315 - Identifying and assessing the risk of material misstatement through understanding the Entity and its Environment & SA 330 - The auditor' s response to Assessed Risk. As per the standard, the auditor needs to document the understanding the entity and the risk associated with it. The controls identified by the organization to address such risk. The auditor needs to document the extent of auditor procedure to be performed to address the assessed risk & the time required to perform the assessed risk.  The conclusion reached by the auditor on the performance of the audit procedure is also required to be documented.

SA 320 - Materiality in Planning and Performing an Audit states that the auditor is required to document the materiality of the financial statement as a whole, performance materiality and the materiality level for a particular class of transactions, accounts balances or disclosure.

EXECUTION STAGE

The standards in the execution stage may not be very specific regarding the documentation requirement. However, it is important to document the audit procedures.

SA 402 - Audit Considerations Relating to an Entity using a Service Organization. The auditor has to evaluate the controls of the service organization and issue Type 1 & Type 2 reports.

SA 505 - External Confirmation. The auditor is required to document the details of the external confirmations sent and the results of the external confirmation. The external confirmation may be positive or negative confirmation.

SA 510 - Analytical Procedure. The auditor needs to perform the various analytical procedure and document the results arrived from the various analytical procedure.

SA 530 - Audit Sampling. The auditor has to document the sample design, selection of items for testing and evaluation of the results of the Audit Sample.

SA 540 - Auditing Accounting Estimates including fair value Accounting estimates, and related disclosures. The audit documentation shall include possible management bias and auditor's conclusion regarding the reasonableness of accounting estimates and disclosure of significant risks.

SA 570 - Going Concern. The auditor should document the risks or the events which can affect the going and the conclusion reached by him.

SA 600 - Using the work of Another Auditor & SA 610 - Using work of Internal Auditors. The Principal auditor needs to document the scope of the component auditor / internal auditor, the competency of the component auditor / Internal Auditor and how the work of component auditor / Internal Auditor affects the work of the Principal Auditor.

AUDIT CONCLUSION

SA 450 - Evaluation of Misstatements Identified during the Audit. The audit documents shall include the list of trivial misstatements, list of misstatements accumulated during the audit and whether they have been corrected by the management and if not, the impact on the financial statement.

SA 700 - Forming an opinion and Reporting on Financial Statements. The auditor has to maintain adequate documents for the various opinion arrived like the emphasis of matters, qualified opinion or whether the financial statements are free from any material misstatements.

Also, It is generally said that if you do not document your work, it means that you have not done the work.

I hope we all now agree that documentation is really Important for auditors.