Chapter-13-Audit-Communication-and-Documentation
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School
University of Saint Anthony - San Miguel, Iriga City**We aren't endorsed by this school
Course
ACCOUNTING 101
Subject
Accounting
Date
Dec 17, 2024
Pages
20
Uploaded by CaptainBoarMaster176
chapter 13 — Audit Communication and Documentation CHAPTER 13 This page is intentionally left blank. | AUDIT COMMUNICATION AND DOCUMENTATION Chapter Overview and Objectives: This chapter discusses the communication and documentation being made by the auditor during the course of the engagement. At the end of this chapter, readers should be able to discuss 1. The matters to be communicated to those charged with governance 2. The process, form, timing, and documentation of communication with those charged with governance The purpose and elements of written representations The communication of the management letter The purpose, form, content, and extent of audit documentation The classifications and examples of audit working papers The guidelines for the preparation of working papers The ownership, assembly, retention, and confidentiality of working papers PNV AW Relevant references: PSA 230 - Audit Documentation PSA 260 (Revised) - Communication with Those Charged with Governance ; PSA 265 - Communicating Deficiencies in Internal Control to Those Charged with Governance and Management PSA 580 - Written Representations Aim... Believe... Claim... Page 563 CamScanner
Chapter 13 — Audit Communication and Documentation INTRODUCTION . " . Clear communication between the auditor and the client is crycjy success of an audit engagement. With t!\is, there will Pe multiple instances that which the auditor connects with the client to sha.re its progress, findings, 4, d results. Through these communications, relevant information is obtaineq from those charged with governance that may be helpful for t.he performance of the audit. This would also enable the client to take appropriate actions in manner on any issues or findings noted. 10 the a timely Furthermore, to serve as principal support to the audit opinion, the auditor prepares and retains documentation of information gathered in the audit including internal and external communications. AUDIT COMMUNICATION Throughout the engagement, there will be multiple communications between the auditor and the client. These communications may be done in writing or through verbal communications. These communications aim to address multiple audit areas including planning and performance of the audit, internal control, findings, adjustments, and recommendations. The table below presents a summary of common communications in the audit: Engagement letter The auditor shall agree on the terms of the audit engagement with management or those charged with governance, as appropriate. The agreed terms are documented in an audit engagement letter or other suitable form of written agreement. Refer to Chapter 4 for the full discussion. Communication with The auditor shall establish an effective two-way those charged with communication with those charged with governance governance and provide updates regarding the auditor’s responsibilities in the audit, planned scope and timing of the audit, significant findings, and independence. ] Communication of The auditor shall communicate in writing significa internal control deficiencies in internal control identified during the matters audit to those charged with governance on 3 timely basis, ¢ interndl Refer to Chapter 6 for the full discussion of intern? control and deficiencies. _ _/ Page 564 — Aim... Believe... Claim. Chapter 13 = Audit Communication and Documentation ———ament i : Management The auditor shall request written representations ,epresentatlon letter from management with appropriate responsibilities for the financial statements and knowledge of the matters concerned. mt letter ’Ithe. auditor may communicate to the client any (optional) findings, issues, and recommendations that are considered value-adding in addition to other required communications. These remarks are communicated to management or those charged with governance through a management letter. COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE The auditor shall promote effective two-way communication with those charged with governance and aim to clearly communicate the following: Auditor’s The responsibilities to be communicated shall include that: responsibilities a. the auditor is responsible for forming and in the audit expressing an opinion on the financial statements that have been prepared by management with the oversight of those charged with governance, and b. the audit of the financial statements does not relieve management or those charged with governance of their responsibilities. Planned scope This shall present an overview of the planned scope and and timing of the | timing of the audit. audit Significant The auditor shall communicate with those charged with findings governance: a. The auditor's views about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates, and financial statement disclosures. b. Significant difficulties, if any, encountered during the audit. c. Unless all of those charged with governance are involved in managing the entity: e Significant deficiency, if any, in the design, implementation, or operating effectiveness of internal control that has come to the auditor’s attention, \ Aim.,, Believe... Claim... Eaje k5 CamScanner
Chapter 13 = Audit Communication and Documentation =t . bW « Significant matters, if any, m audit that were discussed, or Subject te correspondence with management, ang 0 « Written representations the audito, | requesting, and d. Other matters arising from the audit that, i, the auditor’s professional judgment, are significant to the oversight of the financial reporting process. in the case of listed entities, the auditor shall communicatg | S Independence (for listed with those charged with governance of its compliance wit, entities) relevant ethical requirements regarding independence, Definition L ST Those charged with governance are the person(s) or organization(s) (e.g, a corporate trustee) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process. For some entities in some jurisdictions, those charged with governance may include management personnel, for example, executive members of a governance board of a private or public sector entity, or an owner-manager. Management is composed of the person(s) with executive responsibility for the conduct of the entity’s operations. For some entities in some jurisdictions, management Includes some or all of those charged with governance, for Identification of those charged with governance The auditor shall determine the appropriate person(s) within the entity’s governance structure with whom to communicate, When the auditor communicates with a subgroup of those charged with governance, for example, an audit committee, or an individual, the auditor s??a" determine whether the auditor also needs to communicate with the governing body. Pag e e.. Cloim- Aim... Believ example, executive members of a governance board, or an owner-manager. chapter 13~ Audit Communication and Documentation The Communlcatlon Process The auditor shall communicate with those charged with governance the form timing, and expected general content of communications. Forms of communication The auditor shall communicate in writing with those charged with governance regarding significant findings from the audit when, in the auditor’s professional judgment, oral communication would not be adequate. Written communications need not include all matters that arose during the course of the audit. b. Timing of communication The auditor shall communicate with those charged with governance on a timely basis. a. Adequacy of the Communication Process The auditor shall evaluate whether the two-way communication between the auditor and those charged with governance has been adequate for the purpose of the audit. If it has not, the auditor shall evaluate the effect, if any, on the auditor’s assessment of the risks of material misstatement and ability to obtain sufficient appropriate audit evidence, and shall take appropriate action. Documentation Where matters required by this PSA to be communicated are communicated orally, the auditor shall document them, and when and to whom they were communicated. Where matters have been communicated in writing, the auditor shall retain a copy of the communication as part of the audit documentation. Aim... Belieye,. Page 567 . Claim... CamScanner
Chapter 13 — Audit Communication and Documentation NTATION LETTER ENT REPRESE g A et ntations requires the auditor to obtajn PSA 580 Written Represe sentations from the entity’s . 1era reprf, management with appropriate responsibilities for the f statements and knowledge of the matters concerned, and v those charged with governance when appropriate. Wriflen Nancia) \ Definition _ Written representation refers to a written statement by management Provideg to the auditor to confirm certain matters or to support other audit evidence, Written representations in this context do not include financial statements, the assertions therein, or supporting books and records. Other terms used to describe written representations include written representation letter, management representation letter, client representation letter, and representation letter. Purpose of management representation letter The representation letter provided by the client has the following purposes: A. Todocument management’s acknowledgment of its responsibilities The auditor shall request management to provide a written representation that 1. It has fulfilled its responsibility for the preparation and presentation of the financial statements as set out in the terms of the audit engagement and, in particular, whether the financial statements are prepared and presented in accordance with the applicable financial reporting framework. 2. It has provided the auditor with all relevant information agreed in the terms of the audit engagement, and that all transactions have been recorded and are reflected in the financial statements. Audit evidence obtained during the audit that management is fulfilling the responsibilities that it agreed to in the terms of the audit engagement is not sufficient without obtaining confirmation from management that it believes that it has fulfilled those responsibilities. Simply stated, such letter is used as evidence that management . ial acknowledges its responsibility for the fair presentation of the finanfg statements in accordance with the applicable financial report ded all the _ff amewo'rk, has approved the financial statements, and has provi information relevant to the audit engagement. Page 568 Claim-- Aim... Believe-- | ? i chapter 13— Audit Communication and Documentation Furthermore, in addition to written representations, the auditor can obtain such acknowledgment of management’s responsibility thru the following: v from relevant minutes of meetings of the board of directors or simi.lar body; or v by obtaining a signed copy of the financial statements. To support other audit evidence relevant to the financial statements Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal. Written representations provide support to audit evidence obtained by the auditor and may contribute to enhancing the quality of the representations. Example: A request for written, rather than oral, representations in many cases may prompt management to consider such matters more rigorously, thereby enhancing the quality of the representations. Furthermore, the fact that management has provided reliable written representations does not affect the nature or extent of other audit evidence that the auditor obtains about the fulfillment of management’s responsibilities, or about specific assertions. This means that, written representations may complement, but not replace, evidence that may be obtained from the performance of audit procedures. To respond appropriately to written representations received from management If management modifies or does not provide the requested written representations, it may alert the auditor to the possibility that one or more significant issues may exist. The table below presents : Circumstance Auditor’s Response The auditor has concerns about the | Determine the effect that such Competence, integrity, ethical values, | concerns may have on the or diligence of management. reliability of representations and —_— audit evidence in general. The auditor concludes that the | Take appropriate actions, including Aim... Believe,.. Claim... wrftten representations are not | determining the possible effects on reliable. the opinion (i.e. Disclaimer of i A opinion) Page 569 CamScanner
Chapter 1 Management doe or mgre of the requested written management e Reevaluate the management and evalya effect that this may p, the reliability representations 3 = Audit Communication and Documentation representations s not provide one | ® Discuss the matte, evidence in general, and e Take appropriate actions including determining thé possible effects on the Opinion (i.e. Disclaimer of opinion) B ? With Integrity o te the ve on of Basic elements of management representation letter presented below is an illustrative management representation letter lifted from PSA 580. The basic elements of the letter were labeled accordingly. (Entity Letterhead) (Date) (To auditor) This representation letter is provided in connection with your audit of the financial statements of ABC Company for the year ended December 31, 20XX for the purpose of expressing an opinion as to whether the financial statements are presented fairly, in all material respects, (or give a true and fair view) in accordance with Philippine Financial Reporting Standards. We confirm that (, to the best of our knowledge and belief, having made such inquiries as we considered necessary for the purpose of appropriately informing ourselves): Financial Statements Page 570 We have fulfilled our responsibilities, as set out in the terms of the audit engagement dated [insert date], for the preparation of the financial statements in accordance with Philippine Financial Reporting Standards; in particular the financial statements are fairly presented (or give a true and fair view) in accordance therewith. Significant assumptions used by us in making accounting estimates, including those measured at fair value, are reasonable. (PSA 540) Related party relationships and transactions have been appropriately accounted for and disclosed In accordance with the requirements of Philippine Financial Reporting Standards. (PSA 550) i ’ Part Letterhead Date Addressee preparation of financial statements measurement: and disclosure Aim... Belie ve... Claim- - chapter 13 - Audit Communication and Documentation The effects of uncorrected misstatements are Im poth Individually and In the aggregate, to the ';;:;i':‘l’a'; statements tisl a t\twhgle& A list of the uncorrected misstatements s attached to the representation . [Any other matters that the auditor may consider appropriate.] 5 . Al events subsequent to the date of the financi statements and for which Philippine Financial Repo?t?nag' standards require adjustment or disclosure have been adjusted or disclosed. (PSA 560) Information Provided We have provided you with: + Access to all information of which we are aware that Is relevant to the preparation of the financial statements such as records, documentation, and other matters; ' « Additional information that you have requested from us for the purpose of the audit; and + Unrestricted access to persons within the entity from whom you determined it necessary to obtain audit evidence. + Al transactions have been recorded in the accounting records and are reflected in the financial statements. « We have disclosed to you the results of our assessment of the risk that the financial statements may be materially misstated as a result of fraud. (PSA 240) + We have disclosed to you all information in relation to fraud or suspected fraud that we are aware of and that affects the entity and involves: * Management, * Employees who have significant roles in internal control, or * Others where the fraud could have a material effect on the financial statements. (PSA 240) * We have disclosed to you all information in relation to allegations of fraud, or suspected fraud, affecting the entity’s financial statements communicated by employees, ;:rg;er employees, analysts, regulators or others. (PSA * We have disclosed to you all known instances of non- compliance or suspected non-compliance with laws and regulations whose effects should be considered when Preparing financial statements. (PSA 250) We have disclosed to you the identity of the entity’s related Parties and all the related party relationships and transactions of which we are aware. (PSA 550) [Any other matters that the auditor may consider necessary. ) f“‘/"w«d Rein hief Executive Officer Chief Financial Officer Aim,,, Believe... Claim... Subsequent events Completeness of information provided to auditors Signature of management Page 571 CamScanner
S G N Chapter 13 = Audit Communication and Documentation tation letter present The parts of the management represen p ed aboye ire discussed as follows: 1. Client's letterhead The letter of representation is prepared by the client on its letterheaq. 2. Dateofand period(s) covered by wrftten representations " The date of the written representations shall be as near as Practicable to, but not after, the date of the auditor’s report on the financial statements. Simply stated, the letter may be dated on or beff)re. the c.iate of the auditor’s report. In practice, the date of the letter coincides with the date of the auditor’s report. Moreover, the written representations shall be for all financial statements and period or periods referred to in the auditor’s report. 3. Addressee . . The written representations shall be in the form of a representation letter addressed to the auditor. 4. Representations on financial statements preparation These representations relate to management’s responsibility for the fair presentation of financial statements in accordance with the applicable financial reporting framework (e.g. PFRS). 5. Representations on recognition, measurement, and disclosure These representations pertain to management’s application of judgmentin properly presenting the elements of its financial statements. Examples of these representations include: * Information concerning fraud involving management and employees * Information concerning related party transactions and balances * Unasserted litigations, claims, and assessments * Management’s understanding that the effects of any uncorrected misstatements are immaterial to the financial statements. The surnmary of uncorrected misstatements may be included in the body of the letter or attached as an appendix. 6. Representations of subsequent events These representations are intended to obtain confirmation fro.n: management that all events subsequent to the date of the financid staternents have been adjusted or disclosed. claim.- Page 572 Aim... Bclfcve--' { chapter 13~ Audit Communication and Documentation 7 pepresentations of completeness of the information provided to auditors These representations are intended to seek management’s confirmation that all necessary information that is needed for the audit was duly provided to the auditor. Signature The auditor requests written representation from the management who is responsible for the preparation and presentation of the financial statements. The specific individuals who will prepare and sign the letter may vary depending on the governance structure of the entity, and relevant law or regulation Ordinarily, the letter will be signed by the entity’s chief executive officer and chief financial officer, or other equivalent persons in entities that do not use such titles (e.g. President for CEO and Treasurer for CFO). In some cases, other parties, such as those charged with governance may also be responsible for the preparation and presentation of the financial statements. In the event that the signatories of the letter were not present during all periods referred to in the auditor’s report, they may assert that they are not in a position to provide some or all of the written representations because they were not in place during the period. However, this condition does not reduce their responsibilities for the financial statements as a whole. Accordingly, the requirement for the auditor to request from them written representations that cover the whole of the relevant period(s) still applies. Alm.., Believe.., Claim.., Page 573
Chapter 13 — Audit Communication and Documentation MANAGEMENT LETTER Definition A management le tter is a communication prepared by the auditor 0 addressed to management and those charged with governance containing issues, findings, and points for improvement that were noted during the audit This letter is not required by professional standards but is commonly Provide& as a value-added service to the client. As discussed in Chapters 5 and 6, the auditor is required to obtain an understanding of the client’s internal controls to properly plan and perform the audit. As part of this procedure, the auditor may identify deficiencies (see Chapter 6) that can adversely affect the attainment of the client of jts objectives. The communication requirement for these deficiencies depends on their classification and is summarized as follows: Type Communication PR T eI —_— — and those charged with governance Significant deficiency (Required) Communicate in writing to management (Optional) May be communicated through a management letter Other deficiencies The auditor may opt to communicate deficiencies that are not considered significant through a management letter. Aside from internal control deficiencies, the management letter may also contain other issues or findings that the auditor believes are helpful to management in fulfilling its role and responsibilities. The auditor may also include a suggested solution/recommendation to properly address the findings. Illustrative management letter o N (Auditor letterhead) MANAGEMENT LETTER FOR THE YEAR ENDED DECEMBER 31, 20XX (Date) (To management and/or those charged with governance) We have audited the financial statements of ABC Company for the year e"dfd December 31, 20XX in accordance with Philippine Standa‘:dsyon Auditing ("PSAS’) Our responsibilities under these standards include planning and performing the audit to obtain reasonable assurance that the financial statements aré free fro material misstatements. Our responsibilities do not include an expression of opinio" on the effectiveness of the entity’s internal control. e On the other hand, we would like to draw your attention to certain matters that e have identified durin t . g the A resen e | Appendix A of this letter, audit. These matters are P chapter 13 —Audit Communication and Documentation B f management e respective responses o g nt on these issues i the coordination of the Accounting and Finance departments.were SRS homa) uld you need any help or clarifications on these flr::ily do not hesitate to reach us. e respectfully yours, (Auditor) Appendix A UNAUTHORIZED PURCHASE TRANSACTION Condition During our evaluation of the company’s three-way match control in the purchase to pay business process, we have noted that a purchase transaction last September 16, 20XX with purchase order number 20XX-0123 didn't contain the signature of the appropriate approver. Criteria A;lfpurchase transactions must be duly approved before placing an order. Effect A purchase transaction that is not properly reviewed and approved may create an opportunity to transact with unauthorized vendors or may lead to an unapproved rice or quantity. | Recommendation Management should ensure that all purchase transactions area appropriately approved before an order is placed to prevent any fraudulent or invalid transactions from taking place. Significance Critical, | Management response The purchase order didn't contain the signature of the approver as he Is not Present in the office during the said date. On the other hand, the purchase transaction was still reviewed and approved as evidenced by an electronic mail sent by the approver last September 16, 20XX. Moving forward, management Will ensure to properly document all approvals in the purchase order to prevent LL 2Ny unauthorized purchase transactions. A&fm Im... Beljeye... Claim... CamScanner
Chapter 13 = Audit Communication and Documentation t letter en representations Vs. Managemen Written representations Management lettor cTent letter ™ Prepared gy appropriate level of | By the auditor and signed management (€.g. CEO and Writt Addressee izgi)tor Client's manag@ Required | Yes. Required to be obtained by | No. Optional and no stangyyg preparation | the auditor : forn.\at or approach\ Date Concurrent with the auditor’s | As timely as practicable report date Content « Confirmation of various [ ¢ May m representations ~ made by | recommendations that are management to the auditor | intended to help the client and reduces the possibility of | operate its business misunderstanding between | effectively the client and the auditor Importance | e Reminder of management of | e Encourage a better its primary responsibility for relationship between the the financial statements auditor and the e Can serve as audit evidence management when such representation | » Suggest additional tax and may be the only evidence that management services that can reasonably be expected the auditor can provide. to be available AUDIT DOCUMENTATION PSA 230 Audit Documentation requires the auditor to prepare, on a timely basis, audit documentation that provides: a. A sufficient and appropriate record of the 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 PSAs and applicable legal and regulatory requirements. Audit documentation helps the auditor to v' enhance the quality of the audit; and v facilitates the effective review and evaluation of the audit evidence obtained and conclusions reached before the auditor’s report is finalized. een Furthermore, documentation prepared after the audit work has bthe p.erformed is likely to be less accurate than documentation pfepa’ed 4 time such work is performed. Page 576 ve... Claim-: Aim... Belie chapter 13— Audit Communication and Documentation pefinition Audit documentation pertains to the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached. other terms such as working papers and workpapers are also sometimes used. purpose of audit documentation Audit documentation (working papers) is the principal support for the representation that the audit is performed in accordance with PSAs and for the opinion. In addition, audit documentation serves a number of purposes, including: a. Assisting the audit team to plan and perform the audit; b. Assisting members of the audit team responsible for supervision to direct and supervise the audit work, and discharge their review responsibilities in accordance with PSA 220 (Redrafted), “Quality Control for an Audit of Financial Statements;” Enabling the audit team to be accountable for its work; Retaining a record of matters of continuing significance to future audits; e. Enabling the conduct of quality control reviews and inspections in accordance with PSQC 1 (Redrafted); f. Enabling the conduct of external inspections in accordance with applicable legal, regulatory, or other requirements. oo NOTE: Audit documentation may also be used as a reference when reconstructing a client’s accounting records. However, it is not a substitute for the entity’s accounting records. Form, content, and extent of audit documentation The auditor should prepare the audit documentation so as to enable an experienced auditor, having no previous connection with the audit, to understand: a. The nature, timing, and extent of the audit procedures performed to comply with PSAs and applicable legal and regulatory requirements; * The identifying characteristics of the specific items or matters tested. * Who performed the audit work and the date such work was completed. * Who reviewed the audit work performed and the date and extent of such review, b. The resuits of the audit procedures and the audit evidence obtained; and C. Significant matters arising during the audit and the conclusions reached thereon. Aim... Believe... Claim... Page 577
\‘ i Chapter 13- Audit Communication and Documentation chapter 13- Audit Communication and Documentation Definition An experlenced audito firm) who has practica of a. audit process; b. PSAs and applicabl c. the business environment d r Is an individual (whether internal or externa| ¢4 the | audit experience, and a reasonable understanding e legal and regulatory requirements; in which the entity operates; and It is neither necessary nor practical to document every matter considereg during the audit. The form, content, and extent of audit documentation depenq on factors such as: . The size and complexity of the entity. 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 were 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. v The audit methodology and tools used. A N N N N Moreover, oral explanations by the auditor, on their own, do not represent adequate support for the work the auditor performed or conclusions the auditor reached, but may be used to explain or clarify information contained in the audit documentation. Also, audit documentation may be recorded on paper or on electronic or other media and may include abstracts or copies of the entity’s records (for example, significant and specific contracts and agreements). The auditor need not include in audit documentation superseded drafts of working papers and financial statements, notes that reflect incomplete of preliminary thinking, previous copies of documents corrected for typographica! or other errors, and duplicates of documents. Significant matters The'au.ditor should document findings or issues that are significant. significant audit findings or issues involve a. Y Selection, application, and consistency of accounting principles Results of audit procedures indicating information could be materiall mlssta.ted or a need to revise the auditor’s previous assessment of risks 0 material misstatement Page 578 Aim... Believe... Claim-- i ing i vant to ; auditing and financial reporting issues relevant to the entity M T — ¢, Circumstances causing auditor significant difficulty in applying audit procedures (e.g., lack of responsiveness, lack of original documents) d. Findings that could result in modification of the auditor’s report e. Audit adjustments An important factor in determining the form, content, and extent of audit documentation of significant matters is the extent of professional judgment exercised in performing the work and evaluating the results. Documentation of the professional judgments made, where significant, serves to explain the auditor’s conclusions and to reinforce the quality of the judgment. If the auditor has identified information that contradicts or is inconsistent with the auditor’s final conclusions regarding a significant finding or issue, the auditor should document how the auditor addressed the contradiction or inconsistency in forming the conclusion v The documentation of how the auditor addressed the contradiction or inconsistency does not imply that the auditor needs to retain documentation that is incorrect or superseded. v Documentation of the contradiction or inconsistency may include, but is not limited to, procedures performed, records documenting consultations, or differences in professional judgment among team members or between team members and others consulted Classification of audit documentation In a continuing engagement, working papers are typically classified into permanent file or current working paper file. 1. Permanent Working papers These working papers normally contain information contains historical data about the client that is of continuing relevance to the audit and may include: a. Articles of incorporation and by-laws b. Extracts or copies of minutes and important legal documents and agreements such as bond indentures, pension plans, leases, stock options, contracts, etc. C. Information concerning the industry, economic environment, and legislative environment within which the entity operates d. Information related to the understanding of internal control and assessment of control risk; organization charts, flowcharts, questionnaires, and other internal control information e. Copies of communications with other auditors, experts, and other third parties Aim,.. Believe... Claim... Page 579 CamScanner
Chapter 1 f. h. 3 - Audit Communication and Documentation Copies of letters or notes concerning audit matters communicateq 1, or discussed with the entity, including the terms of the engagement o, discussed with the entity, including the material weaknesses in internal control Analysis from previous years, of accounts that have continuing importance to the auditors; long-term debt, stockholders’ equity, goodwill, property, plant, and equipment. ' The results of analytical procedures from previous years’ audits 2. Current working papers ’ The working papers for the current year include all audit documentation applicable to the period under audit, such as: a. b. Page 580 A copy of the financial statements Overall audit strategy — contains the strategy to be followed by the auditor in conducting the audit (understanding of the client and potential audit risks, allocation of audit resources on various parts of the engagements) Audit plan - contains the audit procedures to be conducted by the auditor Audit program - describes how the audit approach is to be implemented. Auditors develop an audit program for each material account balance or account balance assertion. An audit program describes what and how much evidence is required to be gathered and evaluated, and how, when, and by whom it is to be gathered and evaluated during the interim and final fieldwork. The audit program is ordinarily maintained in a separate file to improve the coordination and integration of all parts of the audit. General information - which is of a general nature rather tha_n designed to support specific financial statement amounts; audit planning memos, abstract or copies of minutes of meetings not included in permanent file, notes on discussions with the client, supervisor's review comments, and general conclusions. Working trial balance - represents a listing of ending balance in ?he entire client’s accounts prior to preparing adjusting and reclassification of journal entries and contains the following information: Reference to assembly sheets and lead schedules Current year’s ending balances (per client) Reference for adjustments/reclassifications Adjustments/reclassifications Current year's financial statement balances (per audit) Prior year’s ending balances Aim... Believe.. Claim- Aim... Believe.., Claim... chapter 13 — Audit Communication and Documentation g. Assembly sheets or Lead schedules or Lead sheets - summarize the major components of the account balance or class of transactions in support of financial statement items such as Cash and cash equivalents Inventories and Property, plant and equipment ' Adjusting and reclassification entries - documentation for the adjustment and reclassifications identified by the auditor or client. Adjustments are made to correct errors while reclassifications are made to properly present information in the financial statements. Reclassification entries are not posted in the client’s records. Audit memoranda - much of the auditor’s work is documented in written memoranda including discussions of items such as internal controls, inventory observation, errors identified, and problems encountered in the audit. Supporting schedules - comprise the largest portion of audit documentation that is prepared by the client or the auditor in support of specific amounts on the financial statements, which include: e Analysis - designed to show the activity in a general ledger account during the entire period under audit, tying together the beginning and ending balances. Examples: marketable securities, notes receivable, allowance for doubtful accounts, property, plant and equipment, long-term debt, and all equity accounts. e Trial balance or list — consists of the details that make up a year- end balance of a general account. Examples: trial balance or lists in support of trade accounts receivable, trace accounts payable, repairs and maintenance expense, legal expense, and miscellaneous expense. * Reconciliation of amounts — supports a specific amount and is normally expected to tie the amount recorded in the client’s records to another source of information. Examples: bank balances with bank statements, subsidiary accounts receivable balance with confirmations from customers, and accounts payable balances with vendors’ statements. * Tests of reasonableness - contains information that enables the auditor to evaluate whether the client’s balance appears to include a misstatement considering the circumstances of the engagement. Examples: depreciation expense, interest expense or finance cost, and allowance for doubtful accounts. * Summary of procedures — summarizes the result of a specific audit procedure performed. Examples: results of accounts receivable confirmation and summary of physical inventory observation. * Examination of supporting documents - show the detailed tests performed such as examination of documents during cutoffs, tests Page 581 CamScanner
Chapter 13- Audit Communication and Documentation of controls, and substantive tests'of’ transactions. These gche dule <how no totals and they do not tie into the general ledge, balange because they document only the tests performed and the resyles found. ) Informational - contzins informatpn as oppo§ed to evidence Such 25 tax returns, time budgets, and client’s working hours, Outside documentation - although not “schedules” in the rez cense, they are indexed and interfiled and procedures are indicated in them such as confirmation replies from banks zn4 customers. Guidelines for the preparation of working p?pers - : Working papers should be properly organized to facilitate their review. The following technigues may be used by the auditor when preparing wiorking papers. i Heading . ; Each working paper must be properly identified with such information 25 the nzme of the client, type of working paper, a2 description of its content, and the date or period covered by the examination. Indexing Indexing refers to the use of lettering or numbering system (for example “A" for Cash lead schedule). Each working paper must be indexed to aid in cross-referencing essential information. Cross-indexing / cross-referencing . Cross-referencing is important to provide a trail useful to supervisors in reviewing the working papers. Tick marks Working papers must include symbols that describe the audit procedures performed. Ownership, assembly, retention, and confidentiality of audit documentation A. Ownership Page 582 Audit documentation is the property of the auditor. This documentation may serve as a reference source for the client but it should not b2 considered as part or as a substitute for the client’s records. Assembly of the final audit file Audit file refers to one or more folders or other storage media, in ph or electronic form, containing the records that comprise the 2 documentation for a specific engagement. ysical ydit Aim... Believe... Claim-- \/ chapter 13 - Audit Communication and Documentation Audit documentation should be completed within 60 days after the date of the auditor’s report date The completion of the assembly of the final audt file after the date of the auditor’s report is an administrative process that does not involve the performance of new audit procedures or the drawing of new conclusions. Changes may, however, be made to the audit documentation during the final assembly process if they are administrative in nature. Examples of such changes include: v Deleting or discarding superseded documentation. v Sorting, collating, and cross-referencing working papers. v Signing off on completion checklists relating to the file assembly process. v Documenting audit evidence that the auditor has been obtained, discussed, and agreed with the relevant members of the engagement team before the date of the auditor’s report. Moreover, after the assembly of the final audit file has been completed, the auditor shall not delete or discard audit documentation of any nature before the end of its retention period. Retention PSA 230 requires audit documentation to be retained for a period of time sufficient to meet the auditor’s needs and to satisfy applicable legal and regulatory requirements, normally, not shorter than 5 years from the date of the auditor’s report, or, if later, the date of the group auditor’s report. However, Securities Regulations Code No. 68 of the Securities and Exchange Commission (SEC) requires that audit working papers be kept for at least 10 years. - Confidentiality The auditor should apply appropriate and reasonable controls for audit documentation to ¥ Clearly determine when and by whom audit documentation was created, changed, or reviewed Protect the integrity of information at all stages of the audit Prevent unauthorized changes Allow access to the audit team and other authorized parties e W e e ———————————————— Aim... Belieye._ Claim... Page 583
Chapter 13 - Audit Communication and Do Revisions to audit documentation after the cumentation date of the auditor’s report of new information chapter 1 3 — Audit Communication and Documentation CHAPTER 13: SELF-TEST EXERCISES i5sCUSSION QUESTIONS mentation i . . A. Doct‘lN hen new information is received after the date of the auditor’s report 1. What are the common instances of communications between the auditor > (e.g., a late third-party confirmation) the auditor should consider and those charged with governance? w,',g;{he, to perform an audit procedt.nre on th.e new information baseg 2. What responsibilities of the auditor should be communicated to those on the nature and significance of the information. charged with goverr.iance? e If new information suggests necessary procedures were not 3. When is the auditor required to communicate its compliance with performed. independence requirements? « If the auditor becomes aware of a subsequent event. 4. What is the proper form of communication of significant findings? b. If new information is added to working papers, documentation should 5. What is the purpose of obtaining a management representation letter? . include 6. What are the basic elements of a management representation letter? e When and by whom changes were made and reviewed (if 7. Who are the signatories of the management representation letter? applicable). 8. What is the purpose of sending a management letter? e Specific reasons for changes. 9. Why is it important to maintain an experienced auditor mindset when e Effect, if any, of changes on auditor’s conclusions. documenting audit procedures? 10. What are the categories of audit documentation? B. Changes resulting from the process of assembling and completing the audit file At any time prior to the documentation completion date, the auditor may 13- 1TRUE OR FALSE make changes in the audit documentation to 1. Written representations are considered audit evidence. = CPmplete the documentation and assemblytl) G au;iltthewdedrfi obtalng:; 2. If written management representations are not provided, the auditor shall discussed, and agreec! Siith fresEmt e Er o Rie AU taaty assess its possible effects on the auditor’s opinion. to the date of the auditor’s report b. Perform routine file-assembling procedures such as deleting or 3. The addressee of the representation later is the intended users of the discarding superseded documentation, and sorting, collating, and financial statements. : ;;'o:isr;re;:;:leu::nf‘inr; t\i’;fir:;,li Ifl?si Ers 4. For recurring audits, management letters may include a follow-up of the d. Agd ignformation F:eceived after the audit report date (e, 3 prior year's recommendations and the status of their resolutions. confirmation that was previously faxed) 5. Audit documentation should be done after the last day of audit fieldwork and itor’ C. Changes after the documentation completion date before the auditor’s report date. a. After the documentation completion date, the auditor must not dglete 6. Working papers serve as the basis for the formation and expression of the or discard audit documentation before the end of the specified opinion of the auditor. retention period. 7 : : i g i d b. When the auditor finds it necessary to make an addition (including * Audit documentation should be accomplished with an “experience . N " H amendments) to audit documentation after the documentation auditor” mindset. completion date the auditor should document the addition as - 8. Proper documentation of significant professional judgments exercised by . Whep and by whom such changes were made and (W the auditor reinforces the quality of the judgment. applicable) reviewed 9 * The specific reasons for the changes * Theeffect, if any, of the change on the auditor’s conclusions Audit programs document the audit procedures to be conducted by the auditor while audit plans detail the procedures for each significant account balance, classes of transactions, and disclosures. Page 585 Page 584 Aim... Believe... Claim- Aim.. Believe... Claim...
Chapter 13 - Audit Communication and Documentation 10. Audit documentation should be completed within 60 days after the Oate ¢ the financial statements. 11. Working papers are not permitted to be used as a reference source the client. 12. The auditor should document the understanding of the client's interns) control obtained to plan the audit. 13. Working papers may be regarded as a substitute for the client's accounting records. 14. When reporting on comparative financial statements, the independent auditor may discard working papers after two years. 15. Audit working papers should not include any client-prepared papers or documents other than those prepared by the CPA or his assistant, 13 -2 TRUE OR FALSE . 1. One of the key communications to those charged with governance is the audit timetable, key milestones, and deadlines. 2. The auditor shall communicate with those charged with governance on a quarterly basis. 3. Effective communication may involve structured presentations and written reports but not less structured communications such as discussions. 4. The communication of findings from the audit may include requesting further information from those charged with governance in order to complete the audit evidence obtained. 5. The identity and role of the engagement partner must be communicated to key members of client management and those charged with governance. 6. All identified control deficiencies must be communicated to those charged with governance. 7. The auditor is permitted to communicate value-adding observations and recommendations in connection with the audit to management. . . ith 8. The auditor is required to communicate with those charged Wi governance its compliance with independence requirements. . ith 9. Significant findings must be communicated to those charged ¥ governance in writing. M Aim... Believ chapter 13 - hudit Comrmunication and Doturnentation 10, The auditor’s viewss about significant Gualitative aspects of the emtinys accounting practices may lead to significans findings. 11, Written representations enhance the quality of managerment assertions 12, Written repr'esentations may include matters related to required financial statement disclosures but not on subsequent events, 13. udit documentation may not be used as 3 refer —d ‘ ence when reconstructing a client’s accounting records, 14, Itis not required to document every matter considered during the audit. 15. Current working papers contain historical data about the client that is of continuing relevance to the audit. 13 -3 MULTIPLE CHOICE QUIZZERS 1. It is the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached A. Audit report C. Working papers B. Audit programs D. Audit memoranda 2. Audit documentation serves a number of purposes except for A. Assisting the engagement team to plan and perform the audit. B. Assisting members of the engagement team responsible for supervision to direct and supervise the audit work, and to discharge their review responsibilities C. Enabling the engagement team to be accountable for its work D. Retaining a record of matters of continuing significance to prior audits 3. The objective of the auditor is to prepare documentation that provides .~ A sufficient and appropriate record of the basis for the auditor’s report Il. Evidence that the audit was planned and performed in accordance with PSAs and applicable legal and regulatory requirements A. lonly C.Bothland Il B. llonly D. Neither | nor Il An auditor’s working papers serve mainly to A. Provide the principal support for the auditor’s report. B. Satisfy the auditor’s responsibilities concerning the Code of Ethics. C. Monitor the effectiveness of the CPA firm's quality control procedures. D. Document the level of independence maintained by the auditor. Aim, ., Believe... Claim... Page 587 CamScanner
Chapter 13 — Audit Communica Page 588 tion and Documentation During an audit engagement, data are compiled and included in the ik working papers. The working papers are A A dient-owned record of conclusions reached by the auditors e performed the engagement. B. Evidence supporting financial statement:s. C. Support for the suditor’s compliance with generzally accepted ay diting standards. 2 y D. A record to be used as 2 basis for the following year's engagement. Which of the following is not 3 primary purpose of audit working papers? A To coordinate the examination. 8. To assist in the preparation of the audit report. C. Tosupport the financial statements. D. To provide evidence of the audit work performed. According to PSA 230 “Audit Documentation”, working papers do not A Assist in the planning and performance of the audit. B. Assist in the supervision and review of the audit work. C. Record the audit evidence resulting from the audit work performed to support an auditor’s opinion. D. Prove the independence of the auditor. Which of the following does not describe one of the functions of audit workpapers? A. Facilitates third-party reviews. B. Aidsin the planning, performance, and review of audits. C. Provides the principal evidential support for the auditor's report. D. Aidsin the professional development of the operating staff. Under the requirements of PSA 230, audit documentation must contain sufficient information to allow what type of auditor to understand the nature, timing, extent, and results of procedures performed? A. An experienced audit team member. B. An experienced auditor having no previous connection wit engagement. C. Any certified public accountant. D. An auditor qualified as a peer review specialist. h the 10. Audit documentation may be recorded on paper or electronic Of other media. The following are examples of audit documentation, except A. Audit programs B. Letters of confirmation and representation C. Correspondence (including e-mail) concerning significant matters D. The entity’s accounting records Aim... Believe- claim. A chapter 13 = Audit Communication and Documentation 11. 12. 13, 14, If working papers are to have the characteristics that will ensure that they achieve their primary purposes, which of the following is the most important? A. Working papers must be of standard format and standard content. B. Working papers must be properly indexed and cross-referenced to the draft audit report. C. Working papers must provide sufficient, competent, and useful information to support the audit report. D. Working papers must be arranged in 2 logical order following the audit program sequence. Audit working papers are used to record the results of the auditor's evidence-gathering procedures. When preparing working papers, the auditor should remember that working papers should be A. Kept on the client’s premises so that the client can have access to them for reference purposes. B. The primary support for the financial statements being examined. C. Considered as a part of the client's accounting records that are retained by the auditor. D. Designed to meet the circumstances and the auditor's needs on each engagement. During the course of an audit engagement, an auditor prepares and accumulates audit working papers. The primary purpose of the audit working papers is to A. Aid the auditor in adequately planning his work. B. Provide a point of reference for future audit engagements. C. Support the underlying concepts included in the preparation of the basic financial statements. D. Support the auditor's opinion. Working papers prepared by a CPA in connection with an audit engagement are owned by the CPA, subject to certain limitations. The rationale for this rule is to A. Protect the working papers from being subpoenaed. B. Provide the basis for excluding admission of the working papers as evidence because of the privileged communication rule. C. Provide the CPA with evidence and documentation which may be helpful in the event of a lawsuit. D. Establish a continuity of relationship with the client whereby indiscriminate replacement of CPAs is discouraged. w im.., Believe... Claim...
Chapter 13 — Audit 15. Documentati Communication and Documentation on is a form of evidence . Used in every financial statement auqut Used in most financial statement au.duf ‘ | Used on the rare occasions when it is both readily available ang - costly than other procedures - Usedywhen nothing is available that is more competent N 13 — 4 MULTIPLE CHOICE QUIZZERS I In the case of recurring audits, some working p?per file.f, may be classifieg as audit files that are updated with new information of continuing importance. This type of audit file is known as: . . A. Current audit file C. Electronic audit file 8. Permanent audit file D. Planning memorandum file Working papers which contain information relating primarily to the audit of a single period. A. Temporary files B. Current audit files C. Permanent audit files D. Correspondence files The current file of the auditor’s working papers generally should include A. A flowchart of the internal controls B. A copy of the financial statements C. Organization charts D. Copies of bond and note indentures The permanent file portion of the auditor's working papers generally should include A. A copy of the engagement letter. B. A copy of key customer confirmation. C. Names and addresses of audit staff personnel on the engagements. D. Time and expense reports. The permanent file section of the working papers that are kept for each audit client most likely contains A. Review notes pertaining to questions and comments regarding the audit work performed. o 1t al B. A schedule of time spent on the engagement by each individu? auditor. . C. Correspondence with the client's legal counsel concerning pending litigation. ' P D. Narrative descriptions of the client's internal control policies an procedures. Aim... Believe... Chapter 13— Audit Communication and Documentation 10. 11. 12, 13, Aim... Believe... Claim... The audit working paper that reflects the maj reported in the financial statements is the A. Inter-bank transfer schedule C. Carry-forward sche dule g. Supporting schedule D. Lead schedule Or components of an amount A schedule set up to combine similar general ledger accounts, the total of which appears on the working trial balance as a single amount, is referred to as a: A. Supporting schedule. C. Corroborating schedule. B. Lead schedule. D. Reconciling schedule. A schedule listing account balances for the current and previous years, and columns for adjusting and reclassifying entries proposed by the auditors to arrive at the final amount that will appear in the financial statements, is referred to as a A. Working trial balance B. Summarizing schedule C. Lead schedule D. Supporting schedule Which of the following workpapers would one normally expect to find in the permanent file? A. A copy of a long-term bond indenture. B. The working trial balance. C. Ananalysis of additions and disposals relating to marketable securities. D. A workpaper analyzing customer replies to confirmation requests. The understanding between the client and the auditor as to the degree of responsibility to be assumed by each is normally set forth in a(n) A. Representation letter. C. Engagement letter. B. Management letter. D. Comfort letter. The permanent (continuing) file of an auditor’s working paper most likely would include copies of the A. Lead schedules B. Attorney’s letter C. Bank statements D. Debt agreements What do you call the type of working paper where matters of importance are noted down for further verification? A. Summary sheet C. Agenda sheet B. Supporting schedules D. Audit program Which of the following is a basic tool used by the auditor to control the audit work and review the progress of the audit? A. Time and expense summary. C.Progress flowchart. B. Engagement letter. D. Audit program. Page 591
Chapter 13 - Audit Communication and Documentation a working trial balance resembling the fjp, but contalning columns for C. Reclassifications and adjustmenys D. Cash flow Increases and decregge 14. An auditor ordinarlly uses dosa statements without footnotes, A, Audit objectives and assertions B. Reconciliations and tick marks 15. The audit time budget is an example of: A. Alead schedule. C. A corroborative working paper, B. A supporting schedule. D. An administrative working paper, 13 - 5 MULTIPLE CHOICE QUIZZERS 1. Which of the following documentation Is required for an audit i, accordance with PSA? A. Aninternal control questionnaire B. Aclient engagement letter C. Aplanning memorandum or checklist D. Aclient representation letter 2. Which of the following documentation is required for an audit in accordance with PSAs? A. A flowchart or an internal control questionnaire that evaluates the effectiveness of the entity’s controls. B. A client engagement letter that summarizes the timing and details of the auditor’s planned fieldwork. C. Anindication in the working papers that the accounting records agree or reconcile with the financial statements. D. The basis for the auditor's conclusions when the assessed level of control risk is at the maximum level for all financial statement assertions, 3. During the working paper review, an audit supervisor finds that the auditor's reported findings are not adequately cross-referenced 10 supporting documentation. The supervisor will most likely instruct the auditor to A. Prepare a working paper to indicate that the full scope of the audit W3 carried out, B. Familiarize him/herself with the sequence of working papers s that he(she) will be able to answer questions about the conclusions stated in the report. C. Himinate any cross-references to other working papers Since the system is unclear, D. Provide a workpaper indexing system that shows the relationshiP between findings, conclusions, and the related facts. Page 592 ve... Claim- Aim... Belie chapter 13— Audit Communication and Documentation The main advantage of properly indexed working papers is to A, Reduce the size of the file, g, Allow division of labor within the audit team, c. Better organize the working papers, p, Facilitate the efficient use of audit staff, A, 5, The principal purpose for cross-indexing audit working papers is to A. Give the working papers a professional appearance. . Explain the use of tick marks. C. Provide an explanation of the audit steps performed. D. Provide a trail for the auditor and the reviewer. 6. An auditor's working papers will generally be least likely to include documentation showing how the A. Client's schedules were prepared. B, Engagement had been planned. C. Client's internal control structure had been reviewed and evaluated. D. Unusual matters were resolved. N n documenting the nature, timing, and extent of audit procedures performed, the auditor should record I. Who performed the audit work and the date such work papers were completed Il. Who reviewed the audit work and the date and extent of such review A. lonly C.Bothlandl B. llonly D. Neither | nor Il 8. When reviewing audit working papers, the primary responsibility of an audit supervisor is to determine that: A. Each worksheet is properly identified with a descriptive heading. B. Working papers are properly referenced and kept in logical groupings. C. Standard departmental procedures are adhered to with regard to work paper preparation and technique. D. Working papers adequately support the audit findings, conclusions, and report. 9. Why must audit documentation be reviewed? A. To ensure that the audit meets the CPA firm's standard of performance. B. To evaluate the performance of inexperienced personnel. C. To counteract bias that often enters into the auditor’s judgment. D. Allof the above are reasons for review of audit documentation Aim.,, Believe.., Claim... Page 593 CamScanner
Chapter 13 — Audit Communication and Documentation 10. The in-charge auditor decides that work papers are complete ] A. When satisfied that the audit objectives have been met anqg - working papers support the conclusions. . When working papers make reference to the steps outlined in the audit B. program. ) ' C. Only after the auditor who prepared the working papers has signeq and dated them. : D. When proper cross-references to other working papers are noted. Under PSA 260, this term is used to describe the role of persons entrusteq 11. - - with the supervision, control, and direction of an entity. A. Oversight. C. Direction. D. Control. B. Governance. 12. PSA 260 requires the auditor to determine the relevant persons who are charged with governance and with whom audit matters of governance interest are communicated. For corporations covered by the SEC Code of Corporate Governance, which of the following is primarily responsible for corporate governance? A. President. C. Board of Directors. B. Controller. D. Management. 13. Those charged with governance and management have responsibility over Those charged with governance Management A Preparation of financial Oversight of the financial reporting statements process B Execution of business objectives Development of business objectives and plans and plans C Entity’s strategic direction Entity’s conduct of operations D Entity’s conduct of operations Entity’s strategic direction 14. According to PSA 260, those matters that arise from the audit of financial statements and, in the opinion of the auditor, are both important a',’d relevant to those charged with governance in overseeing the financial reporting and disclosure process are called A. Audit matters of governance interest. B. Significant audit matters. C. Auditor’s findings. D. Material misstatements in the financial statements. m’%fi age 594 Aim... Believe... chapter 13 - Audit Communication and Documentation 15. Audit matters of governance interest to be communicated to those charged with governance ordinarily include A. Audit adjustments, whether or not recorded by the entity that has, or could have, a material effect on its financial statements. ' g. Expected modifications to the auditor’s report. C. Material uncertainties related to events and conditions that may cast significant doubt on the entity’s ability to continue as a going concern. A. landll C.land Nl B. Ilandlll D.1,1l,and INI 13 - 6 MULTIPLE CHOICE QUIZZERS 1. The following are ordinarily excluded from audit documentation: I. Superseded drafts of working papers and financial statements Il. Notes that reflect incomplete or preliminary thinking lIl. Previous copies of documents corrected for typographical or other errors IV. Duplicates of documents A. I, llandlll C.11, 1, and IV B. IIl,and IV D.1, 10, 11I, and IV 2. The completion of the assembly of the final audit file after the date of the auditor’s report does not ordinarily involve A. The performance of new audit procedures or the drawing of new conclusions. B. Sorting, collating, and cross-referencing working papers. C. Deleting or discarding superseded documentation. D. Signing off on completion checklists relating to the file assembly process. 3. Which statement is correct concerning the deletion of audit documentation? A. Superseded audit documentation should always be deleted from the audit file. B. After the audit file has been completed, the auditor should not delete or discard audit documentation. ) ) C. Auditors should use professional skepticism in determining which audit documentation should be deleted. ' D. Audit documentation should never be deleted from the audit file. A T —— Page 595 im.,, Belieye, . Claim... i
Chapter 13 — Audit Communication and Do 4. The auditor sho w age 596 cumentation uld complete the assembly of the financial audit fjje on timely basis after the date of the §uditor's report. As P?QM 1 i"dicate: days after the date of the auditor’s report is ordinarily an appfopriate' — n which to complete the assembly of the financial audit file C.90 ' D. 120 time limit withi A. 30 B. 60 After the assembly of the final audit file has been completed, the auditor should not delete or discard audit documentation before the end of i retention period. In the Philippines, the retention period for ayg engagement ordinarily is no shorterthan ____years from the date of the auditor’s report A 3 C.7 B. S D.10 Which of the following statements is incorrect? A. Documentation prepared at the time the work is performed is likely to be more accurate than documentation prepared subsequently. B. The auditor ordinarily includes from 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. ' C. It is neither necessary nor practicable to document every matter the auditor considers during the audit. D. Oral explanations by the auditor, on their own, do not represent adequate support for the work the auditor performed or conclusions the auditor reached, but may be used to explain or clarify information contained in the audit documentation. Which of the following is generally included or shown in the auditor's working papers? A. The procedures used by the auditor to verify the personal financial status of members of the client's management team. B. Analyses that are designed to be a part of, or a substitute for, the client's accounting records. C. Excerpts from authoritative pronouncements that support the underlying generally accepted accounting principles used in preparing the financial statements. D. The procedures performed by the auditor to obtain sufficient appropriate evidence. Aim... Believe... Claim... chapter 13- Audit Communication and Documentation 10. 11 statement 1: Working papers are the property of the auditor statement 2: Although portions of or extracts from the w : be made available to the entity at the discretion of the be a substitute for the entity’s accounting records. A. Only statement one is correct C. Both statements are correct g. Only statementtwois correct D. Both statements are incorrect orking papers may auditor, they may In general, which of the following statements is correct with respect to ownership, possession, or access to working papers prepared by a CPA firm in connection with an audit? A. The working papers may be obtained by third parties where they appear to be relevant to issues raised in litigation. g. The working papers are subject to the privileged communication rule which, in a majority of jurisdictions, prevents third-party access to the working papers. C. The working papers are the property of the client after the client pay the fees. D. The working papers must be retained by the CPA firm for a period of ten years. Which of the following is incorrect? A. Working papers are the property of the auditor. B. Although portions of or extracts from the working papers may be made available to the entity at the discretion of the auditor, they may be a substitute for the entity’s accounting records. C. The auditor should prepare working papers that are sufficiently complete and detailed to provide an overall understanding of the audit. D. The auditor should record in the working papers information on planning the audit work, the nature, timing, and extent of the audit procedures performed, the results thereof, and the conclusions drawn from the audit evidence obtained. The auditor shall communicate with those charged with governance the responsibilities of the auditor in relation to the financial statement audit, including that l. The auditor is responsible for forming and expressing an opinion on the financial statements Il. The audit of the financial statements does not relieve management or those charged with governance of their responsibilities A. lonly C.Bothlandll B. llonly D. Neither I nor Il A ——— Page 597 im.,, Believe... Claim...
Chapter 13 — Audit Communication and Documentation 12. The auditor shall communicate with those charged with governance A. On a timely basis B. Quarterly C. Annually D. At the start, middle, and end of the engagement 13. Which of the following statements relating to communication of audit matters of governance interest is incorrect? A. Audit matters of governance interest include only those matters that have come to the attention of the auditor as a result of the performance of the audit. B. In an audit in accordance with PSAs, the auditor should design audjt procedures for the specific purpose of identifying matters of governance interest. C. The auditor should identify relevant persons who are charged with governance and with whom audit matters of governance interest are to be communicated. D. The auditor's communications with those charged with governance may be made orally or in writing. 14. When considering communicating with a subgroup of those charged with governance, the auditor may take into account such matters as A B cC DO Responsibilities of the subgroup and the governing Yes No Yes Yes body Nature of the matter to be communicated Yes Yes Yes Yes Relevant legal or regulatory requirements Yes No Yes No Authority of the subgroup to take action in relation Yes Yes No Yes to the information communicated 15. Statement 1: Written communications need to include all matters that arose during the course of the audit. Statement 2: The auditor shall communicate with those charged with governance on a timely basis. A. Only statement one is correct C. Both statements are correct B. Onlystatement twois correct D. Both statements are incorrect 13 -7 MULTIPLE CHOICE QUIZZERS 1. Which of the following auditing procedures is ordinarily performed last? A. Reading of the minutes of the directors' meetings. B. Confirming accounts payable. C. Obtaining a management representation letter. D. Testing of the purchasing function. Page 598 Aim... Believe... Claim..- chapter 13 - Audit Communication and Documentation Aclient representation letter is; A, preparedon the CPA’s letterhead. g. addressed to the client. c. signed by high-level officials (e.g., the president officer). p. dated as of the client’s year-end. and chief financial The date the auditor grants the client permission to use th connection with the financial statements is the: A. Report cutoff date. C. Last day of significant fieldwork. B. Reportrelease date. D. Representation date. e audit report in 4. Apurpose of a management representation letter is to reduce A. Audit risk to an aggregate level of misstatement that could be considered material. B. Anauditor’s responsibility to detect material misstatements only to the extent that the letter is relied on. C. The possibility of a misunderstanding concerning management's responsibility for the financial statements, D. The scope of an auditor’s procedures concerning related-party transactions and subsequent events. 5. Arepresentation letter issued by a client A. s essential for the preparation of the audit program. B. Is a substitute for testing. C. Does not reduce the auditor's responsibility. D. Reduces the auditor's responsibility only to the extent it is relied upon. 6. Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer? A. "Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion." B. "There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed." . C. "We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.” D "No events have occurred subsequent to the balance sheet dete that would require adjustment to, or disclosure in, the financial statements." M’fi m... Believe... Claim...
i "l Chapter 13 - Audit Communication and Documentation 7. Which of the following statements regarding the letter of re”'ese"tatlonl - $ not correct? ' A. Itis prepared on the client's letterhead. B. Itisaddressed tothe CPA firm. C. Itis signed by high-level corporate officials, usually the pres; dert g chief financial officer. . . D. It is optional, not required, that the auditor obtain such a letter from management. 8. To which of the following matters would materiality limits not apply when obtaining written client representations? A. Violations of state labor regulations. B. Disclosure of line-of-credit arrangements. C. Information about related party transactions. D. Instances of fraud involving management. 9. Which of the following is not correct relating to representation letters? A. They are ordinarily dated as of the date of the audit report. B. They are signed by members of top management. C. They must be obtained for audits. D. They often serve as a substitute for the application of other procedures. 10. Management's refusal to furnish a written representation on a matter, which the auditor considers essential, constitutes A. Prima facie evidence that the financial statements are not presented fairly. B. Aviolation of the Foreign Corrupt Practices Act. C. Anuncertainty sufficient to preclude an unqualified opinion. D. Ascope limitation sufficient to preclude an unqualified opinion. 11. Which of the following statements is correct concerning an auditor'.s required communication with those charged with governance of an audit client? A. This communication is required to occur before the auditor’s report o the financial statements is issued. B. This communication should include a discussion of any significant disagreements with management concerning the financial statements: C. Any significant matter communicated to the audit committee als0 should be communicated to management. D. Significant audit adjustments proposed by the auditor and recorded ™ it management need not be communicated to those charged ¥ governance. Page 600 . Cloim- Aim... Believe- Aim... Belieye,.. Claim... chapter 13 - Audit Communication and Documentation 12. An auditor would least likely initiate a djscy governance of an audit client concerning A. The methods used to account for significant unusual transactions B. The fnaximur.n pes'o amount of misstatements that could exist “;itho t causing the financial statements to e materially misstated u ¢. Indications of fraud and illegal acts committed b : that was discovered by the auditor. L2 Sopacase ciiyeer D. Disagreements with management as to accounti resolved during the current year's audit. ssion with those charged with ng principles that were 13, Which of the following statements is correct about an auditor’s required communication with those charged with governance of an audit clientq7 A. Any matters communicated to the entity’s audit committee als;> are required to be communicated to the entity’s management. B. The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by management, C. Disagreements with management about the application of accounting principles are required to be communicated in writing to those charged with governance. D. Weaknesses in internal control previously reported to those charged with governance need not be recommunicated. 14. Which of the following matters is an auditor required to communicate to an entity’s audit committee? |. Disagreements with management about matters significant to the entity’s financial statements that have been satisfactorily resolved. Il Initial selection of significant accounting policies in emerging areas that lack authoritative guidance. A. lonly. B. llonly. C.Bothland Il D. Neither | nor Il 15. Should an auditor communicate the following matters to those charged With governance of an audit client? . Significant audit adjustments recorded by the entity Il. Management’s consultation with other accountants about significant accounting matters A. lonly. B. llonly. C.BothlandIl. D. Neither | nor Il. “Faith and hope work hand in hand, however, while hope focuses on the future, faith focuses on the now." DAVID ODUNAIYA End of Chapter Page 601 CamScanner