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I like this lesson a lot.
Why?
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Because as an accountant who has worked
both in public practice and in industry, the
discipline of preparing well documented,
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and organized working papers is equally
applicable.
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In public accounting, GAAS requires the auditor
to document all the evidence that supports the
audit opinion.
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As a reminder, this would include:
Risk assessments and the basis of such risk
assessments,
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the procedures or tests performed, information
obtained, and your conclusions reached.
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In public accounting, the auditors must
assemble the final version of the audit file within
60 days of the date of the audit report,
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at which time the firms initiate a what is called a
file freeze.
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New information received after this time would
be separately included at the front of the file.
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The reason for doing this is to help ensure the
integrity of the audit conclusions and to prevent
hindsight from playing a role in prejudicing the
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audit conclusions.
Different firms organize their
files using varying formats, but they all have the
same logical consistency.
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Files may be documented electronically or in
paper form.
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Permanent files maintain information that has
pertinence from year to year.
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Things like corporate bylaws, long term
contracts, lending agreements, and systems
documentations.
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Current files maintain all the working papers
supporting the current period.
These files will
include the risk assessments and materiality,
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planning information such as staffing plans and
budgets, and the audit programs, audit
evidence, and audit conclusions.
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Working papers have the a logical flow to them
that needs to be well understood, not only by a
preparer,
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but by those who come behind later including:
The audit senior, manager, and the partner.
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A second partner who may not have as much or
any familiarity with the client.
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Office inspectors who have no familiarity with the
client, the file or the firms file preparation
methodology.
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And finally future junior auditors with limited
experience who may be trying to follow along
with your work new year.
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In larger organizations, much of the working
paper file is prepared by the client,
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so the principles we talk about here are of equal
relevance for those who will ultimately work in
industry.
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Whether you are a public accountant or working
in industry,
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the preparation of strong working paper files is
the key to achieving strong controls over
financial reporting (if you are the client),
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and the audit (if you are the public accountant).
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Let’s take a moment to dive into the structure of
the current files.
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Most firms have some sort of standard indexing
system to organize the working paper file.
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It allows for a logical drill down beginning at the
financial statements with each section of the
working paper referenced...
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to the major sections of the balance sheet and
income statement.
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The financial statements get vouched to the trial
balance.
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The trial balance represents the ending balances
in the general ledger.
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The general ledger contains all the accounts and
the activity that has occurred throughout the
year.
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The trial balance is often grouped, like accounts
are aggregated first, and the subtotal carried
forward to the financial statements.
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For example, a company may have 5 bank
accounts which get aggregated together and
reported as one line, cash,
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on the balance sheet.
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Lead schedules are often the title page of each
section in the working paper file.
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So for instance, for cash we would have a lead
schedule with our 5 general ledger accounts that
comprise cash.
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Behind the lead schedules we would provide
support for each account balance.
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Support in this case would include a bank
reconciliation for each account
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Followed by a bank statement
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Followed by a bank confirmation
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On each working paper, you will document the
audit procedures performed
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You may initial a checklist either manually or
electronically on the audit program to signify
performance of the procedure.
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But you will also mark up the working papers
using audit tick marks
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Tick marks are simply a short hand notation for
documenting the work performed by the auditor
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Whether its footing (or adding) a column of
number
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or checking the extensions of inventory costing,
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the auditor makes little marks to show that
they’ve been there and done that for those who
later review the file.
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So the types working papers that are often found
in the current file include:
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A detailed listing of what makes up the balance,
such as an inventory listing or a receivables
listing.
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Reconciliations which agrees the balance in the
general ledger to the supporting evidence, for
example a bank reconciliation.
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Continuity schedules that ties together opening
and closing balances, such as the fixed asset
schedule,
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which tracks opening cost plus additions less
disposals to arrive at the ending cost.
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Tests of reasonableness, which are working
papers that attempts to predict the balance of
an account
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and then compares it to what has been
recorded.
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Procedure summaries would document the
results of any testing performed, either
substantive tests or tests of controls.
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These sorts of working papers don’t actually
have a subtotal or tie to a particular balance
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because their purpose is to document the
results of the sampling that has been performed.
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Referencing is an extremely important practice
that helps readers make their way through the
working paper file.
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A reader should be able to start at the financial
statements and drill into each and every number
to determine
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what it is composed of and what evidence has
been gathered to support it.
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Similarly, referencing also needs to enable a
reader to start with evidence
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and trace its inclusion through the working
papers to the financial statements.
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Other items that get documented on the working
paper include:
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Proper headers that identify the client’s name,
the period covered, a description of the
contents, the initials of the preparer,
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the date of preparation, and a legend for any tick
marks that were used.
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Whenever possible, the auditor should
document conclusions about the segment under
audit consideration.
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Such conclusions are like mini-judgements
about the application of each audit procedure.
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These conclusion should plainly state whether
the balance as presented is fairly stated.
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This is a personal opinion and very important for
the overall integrity of the file.
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Auditors will often import the client’s trial
balance into their own software.
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Audit software tracks the balances from year to
year to more efficiently automate the analytical
review procedures
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It also enables the auditors to make adjusting
journal entries as necessary when they come
across errors.
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If the errors identified are material, they may ask
the client to also make the adjustment.
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Reclassification entries are also common.
A
reclassification entry is necessary, even when
the general ledger is correct.
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For example, it’s not uncommon to have credit
balances in the accounts receivable.
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If these credit balances are material, the auditor
will often reclassify the amount to accounts
payable for presentation purposes only.
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Working papers are the property of the auditor,
even if they are a copy of the client prepared
working papers.
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However, the client owns the data contained on
the working papers.
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As such, the auditor has confidentiality
obligations to protect the privacy of the
information contained within these files.
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The working papers can only be shared with
another party with the express written consent
of the client.
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The tendency for inexperienced preparers is to
put a lot of support, some of it unnecessary or
irrelevant, in the current files.
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More paper or larger electronic files don’t
necessarily mean a better file.
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In fact, the objective is to put the right evidence
in the file and communicate the work performed
as efficiently as possible,
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without sacrificing the any sufficiency.
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The thicker the audit file is, the more challenging
it is for reviewers to really stand back
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and evaluate the key pieces of audit evidence.
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As I said at the outset, in my years subsequent
to working in public practice,
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I have continued to use these professional
documentation skills to support the financial
reporting process.
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It’s just as important that you do the little
documentation things we have talked about well,
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as it is the all the testing you perform to gather
the audit evidence in the first place.
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Think of this lesson as communication skills for
auditors.
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Until next time, Don’t stop until you get to the
top and when you get to the top, don’t stop.