Documentation Requirements for Audit and Accounting Engagements

Peer Review Guide

Peer Review Guide > Documentation Requirements

Documentation Requirements
for Audit and Accounting Engagements

(Updated as of May 28, 2006)

CONTENTS:

Documentation of nonattest services performed for attest clients
Audit Documentation Requirements
Audit Documentation - Areas Where the Form or Extent of Documentation Is Not Specified
Compilation and Review Documentation Requirements

Overview

The charts below outline common documentation requirements based on references within the auditing and accounting standards. The section references identify the location in AICPA Professional Standards where the requirement is located.

Each chart lists critical documentation requirements and shows the related citation where you can research the matter in greater detail. The charts are not intended to establish a safe harbor of minimum documentation. An adequately documented audit requires more documentation than just the items listed. The nature and extent of this documentation is a matter of auditor judgment. The ultimate measure for the adequacy of documentation is whether the auditor has sufficient documentation to support the critical audit procedures performed and conclusions reached.

For peer review purposes, due to the extensive requirements of SAS No. 96 and SAS No. 99, an audit that does not contain sufficient documentation to meet the requirements of SAS No. 96 or SAS No. 99 will ordinarily be considered to be substandard—even if the peer reviewer concludes that the underlying procedures were performed. As such, this situation will ordinarily be included in Section IV. J of the peer reviewer's Summary Review Memorandum.

AU and AT § references are to AICPA Professional Standards, Vol. 1.

Consideration of New Auditing Standards. The charts below do not reflect the new documentation requirements of SASs No. 103 -111 since these will not become effective until audits performed for periods ending on or after December 31, 2006. This page will be updated during 2006 to summarize the new requirements.

Documentation of Nonattest Services Performed for Attest Clients

AICPA Ethics Interpretation 101-3 added documentation requirements with respect to nonattest engagements performed for attest clients. The documentation requirement is effective for any nonattest services performed for an attest client on or after January 1, 2005, including services already in progress at that date. Prior to beginning a nonattest service engagement the member must be satisfied that the client is both willing and able to perform all management functions related to the engagement. Specifically the client must:

Assign a competent individual to be responsible for overseeing the services.

Set the scope of the services.

Evaluate and accept responsibility for the results of the services.

Establish and maintain internal controls over the services.

Once the client’s willingness and ability to perform these duties are assessed, the member must document his or her understanding with the client, a new requirement under the rules. The documentation must include a description of the services, the engagement objectives, any limitations of the engagement, the member’s responsibilities, and the client’s agreement to accept its responsibilities. In addition to the AICPA rules, members are now required to comply with more restrictive nonattest services independence rules of other authoritative regulatory bodies, where applicable (e.g. state boards of accountancy and the Securities and Exchange Commission).

Audit Documentation Requirements

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Audit Area	AU §	Comments
Understanding with the client	310
Written audit programs	311.05
Understanding of internal control components	319.61	The understanding of the entity’s internal control components necessary to plan the audit and the basis for conclusions about the assessed level of control risk should be documented.
Assessed level of control risk	319.83	Where control risk is assessed at the maximum for a given assertion, that conclusion should be documented, but the basis for the conclusions need not be. When control risk is assessed at a level below the maximum level, auditors should document the basis for the conclusion that the effectiveness of the design and operation of controls supports that assessed level. The nature and extent of the documentation are influenced by the assessed level of control risk, the nature of the entity's internal control, and the nature of the entity's documentation of internal control.
Consideration of fraud: Audit planning discussion among engagement personnel regarding the susceptibility of material misstatement due to fraud, including how and when the discussion occurred, the audit team members who participated, and the subject matter discussed. Procedures performed to obtain information to identify and assess the risks of material misstatement due to fraud. Specific risks of material misstatement due to fraud that were identified, and a description of the auditor’s response to those risks. If the auditor has not identified in a particular circumstance, improper revenue recognition as a risk of material misstatement due to fraud, the reasons supporting the auditor’s conclusion The results of procedures performed to address the risk of management override of controls. Other conditions and analytical relationships that caused the auditor to believe that additional auditing procedures or other responses were required and any further responses the auditor concluded were appropriate, to address such risks or other conditions. Nature of the communications about fraud made to management, the audit committee, and others.	316.83	(SAS No. 99)
Confirmation process: Oral confirmations Accounts receivable Long-term investments	330.29 330.35 332.21	(SAS No.67) The decision not to request confirmations in the examination of accounts receivable should be documented as to how the auditor overcame the presumption that the auditor will request the confirmation of accounts receivable, since this is a generally accepted auditing procedure.
Confirmation of inventory in public warehouses	331.14	(SAS No. 1)
Management representation letter	333.13	(SAS No. 85) Refusal to issue a representation letter is generally a scope limitation.
Attorney representation letter, if corroboration of management's assessment about litigation, claims and assessments is necessary.	337.09-.10 337.13	(SAS No.12) Documentation is also required if the lawyer’s response is oral rather than written. (Refusal to furnish information is generally considered a scope limitation)
Audit documentation to show: Work has been adequately planned and supervised. Sufficient understanding of internal control has been obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed. Sufficient audit evidence obtained, procedures applied and testing performed to provide sufficient, competent evidential matter to afford a reasonable basis of opinion.	339.04	(SAS No. 96)
Engagements subject to Government Auditing Standards (Yellow Book section 4 with specific references at 4.24.) The general requirement is: Audit documentation related to planning, conducting, and reporting on the audit should contain sufficient information to enable an experienced auditor who has had no previous connection with the audit to ascertain from the audit documentation the evidence that supports the auditors’ significant judgments and conclusions. Audit documentation should contain support for findings, conclusions, and recommendations before auditors issue their report.		Specific requirements: Objectives, scope, and methodology of the audit. Auditors’ determination that certain additional government auditing standards do not apply or that an applicable standard was not followed, the reasons therefore, and the known effect that not following the applicable standard had, or could have had, on the audit. Auditors’ consideration that planned audit procedures are designed to achieve audit objectives when evidential matter obtained is highly dependent on computerized information systems and is material to the objective of the audit and that the auditors are not relying on the effectiveness of internal control over those computerized systems that produced the information. The audit documentation should specifically address (1) the rationale for determining the nature, timing, and extent of planned audit procedures; (2) the kinds and competence of available evidential matter produced outside a computerized information system and/or plans for direct testing of data produced from a computerized information system; and (3) the effect on the audit report if evidential matter to be gathered does not afford a reasonable basis for achieving the objectives of the audit. Evidence of supervisory review, before the audit report is issued, of the work performed that supports findings, conclusions, and recommendations contained in the audit report.
Documentation of significant contracts or agreements	331.08	(SAS No. 96)
Documentation of items tested in tests of operating effectiveness of controls or substantive tests of details that involve inspection of documents or confirmation.	331.08	(SAS No. 96)
Documentation of significant audit findings or issues, actions taken to address them and basis for final conclusions reached.	331.09	(SAS No. 96)
Aggregated misstatements.	312.40	(SAS No. 96)
Substantive analytical procedures.	329.22	(SAS No. 96)
Documentation of indicators of substantial doubt about an entities ability to continue as a going concern.	341.17	(SAS No. 96)
Documentation of communicating reportable conditions.	325.09	(SAS No. 60) If information of reportable conditions is communicated orally, the communications should be documented by appropriate memoranda or notations in the audit documentation.
Documentation of communication with audit committees or equivalent formally designated group.	380.03	(SAS No. 61) If communication is oral, the communication should be documented by appropriate memoranda or notations in the audit documentation.
Representation to predecessor auditor from management of a former client and successor auditor regarding reissuance of a report previously issued on financial statement of a prior period.	508.71	(SAS No. 58)
Representation from management regarding purpose and use of financial statement prepared in conformity with the accounting principles of another country.	534.02	(SAS No. 51)
Documentation of communication to management and audit committee or equivalent when auditor becomes aware of an audit requirement not encompassed in the terms of the engagement,	801.23	(SAS No. 74)

Common Audit Areas Where the Form or Extent of Documentation Is Not Specified

Some documentation stems from "good practice," but is not specifically required in Professional Standards. Although the form and extent of documentation depends on judgment, sufficient documentation should exist to demonstrate the critical tests performed and conclusions reached.
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Audit Area	AU §	Comments
Audit risk	312 316.11-.15	Documentation is not addressed, except as noted on the previous page with respect to control risk.
Materiality	312.10	Judgments about materiality involve both quantitative and qualitative considerations; no documentation is specified.
Preliminary audit planning	311.04	The auditor may wish to prepare a memorandum setting forth the preliminary audit plan.
Communication of errors and fraud	316.79-.82	This is embodied within the documentation requirement for communication to audit committees and includes significant audit adjustments and all but inconsequential irregularities.
Communication of illegal acts	317.17	(SAS No. 54) The requirements are the same as for errors and fraud. If information of identified illegal acts is communicated orally, the communications should be documented by memoranda or notations in the working papers.
Analytical procedures	329	Documentation is not specified for preliminary or final analytical review procedures. SAS 96 establishes requirements for substantive analytical procedures..
Accounting estimates	342	No requirements specified beyond those incorporated within the communication with audit committees.
Confirmation of unusual transactions	330.08	The auditor should consider confirmation if transaction is associated with high inherent and control risk.
Audit sampling	350	Except for SAS No.96, which requires identification of items tested, neither the standards nor the AICPA guide, Audit Sampling, require specific forms of documentation. The guide lists examples of documentation items to consider for tests of controls and substantive tests.
Going concern	341	No documentation specified unless indicators of going concern are noted in which case the documentation guidelines under §341.17 should be followed.
Predecessor auditor communication	315.02	No documentation specified; communication may be oral or written.

Documentation Requirements for Compilations and Reviews

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Documentation Issues	AR §	Documentation Required?
Understanding with entity regarding the services to be performed If the engagement is to compile financial statements not expected to be used by a third party, a written communication is required (can be a compilation report or an engagement letter).	100.08 100.05; 100.20-.21	No, but preferable Yes
Understanding of the client and industry: Compilations Reviews	100.07-.08 100.26-.28	No No
Compilation procedures: Before submission, read financial statements and consider whether they appear to be appropriate in form and free from obvious material errors	100.10	No
Review procedures: Any findings or issues that in the accountant's judgment are significant Matters covered in the accountant's inquiry and analytical procedures The analytical procedures performed The expectations, where significant expectations are not otherwise readily determinable from the documentation of the work performed, and factors considered in the development of those expectations Results of the comparison of the expectations to the recorded amounts or ratios developed from recorded amounts Any additional procedures performed in response to significant unexpected differences arising from the analytical procedure and the results of such additional procedures Unusual matters that the accountant considered during the performance of the review, including their disposition	100.36 100.36 100.36 100.36 100.36 100.36 100.36	Yes Yes Yes Yes Yes Yes Yes
Management representation letters: Compilations Reviews	N/A 100.36	N/A Yes
Communication with predecessor accountants	400.03	Not required

Peer Review Guide > Documentation Requirements

Updated: May 28, 2006