UNIT II

AUDIT PLANNING PROCEDURES AND DOCUMENTATION

2.1 AUDIT PLANNING

INTORDUCTION

Audit planning is an important area which is an essential process of systematic verification and organised examination. Before commencing audit, an auditor must prepare himself well. Preparation for an audit relates to audit planning, preliminary preparations by the auditor, audit programme, audit note book, audit working papers, audit evidence, commencement of a new audit, test checking and routine checking. In this unit you will learn the concept of audit planning and the basic consideration in getting ready for an audit.

MEANING OF AUDIT PLANNING

Planning is required to complete the audit effectively within the specified time. Audit planning is a process of deciding in advance what is to be done, who is to do it, how it is to be done and when it is to be done by the auditor in order to have efficient and effective completion of work.

This given an opportunity to organise the different aspects of audit work including vouching, verification, valuation, expression of opinion n financial statements and submission of auditor’s report. Audit plans should cover knowledge about client’s accounting systems and policies, internal control procedures and coordinating the work to be performed.

OBJECTIVES OF AUDIT PLANNING

Planning is an aid to good management. Adequate audit planning:

• Establishes the intended means of achieving the objectives of the audit.
• Assists in the direction and control of the work.
• Ensures that attention is devoted to critical aspects of the audit.
• Ensures that the work is completed expeditiously.

FACTORS TO BE CONSIDERED IN AUDIT PLANNING

The auditing Standards and Guidelines have placed considerable emphasis on audit planning. It states that the auditor should adequately plan, control and record his work at each stage of its progress. This is mainly ensured that the audit is carried out effectively and efficiently. The aim is to provide an efficient and economic service within an appropriate time scale. The exact form and nature of audit planning, however, should be governed by the following considerations:

1. The size and complexity of the company;
2. The commercial environment in which it operates;
3. The method of processing transactions
4. Previous experience with the client and
5. The reporting requirements to which it is subject to.

A proper consideration of these factors will enable the auditor to appreciate the events and transactions likely to have a significant effect on the financial statements. All this helps in designing an appropriate audit approach to the assigned responsibility.

SOURCES OF OBTAINING INFORMATION

When planning the audit, the auditor should have knowledge of the client’s operations, other than macroeconomic and client’s industry. For a new client, the primary sources of information are discussions with the predecessor auditor and inquiries of client management. During the discussion, the auditor should obtain enough knowledge about the client’s business, organization and operations to understand the events, transactions and practices that may have an effect on financial statements.

The auditor should obtain knowledge of matters such as: type of business, types of products and services, capital structure, related parties, business locations, production and distribution methods and compensation methods. In more detail, the auditor should learn about the client and plan the audit by doing the following:

1. Communicate with predecessor auditor: The successor auditor should obtain sufficient competent evidence to afford a basis for expressing an opinion. The audit evidence used to analyze the impact of the opening balances can the current year financial statements and consistency of accounting principles is a matter of professional judgement.
2. Visit to administrative office: During his or her visit to the client’s administrative office, the auditor should do the following:

1. Meet with financial and administrative  officers and obtain or determine the following:

• The functions of each executive
• The executive responsible for the audit
• Organization chart
• Locations and relative importance of all offices, showrooms etc
• Obtain corporate  manuals or memorandum
• Methods of financing the entity’s operations
• Schedule of long-term debt
• Purchase terms, sales terms, Most Recent Trial Balance etc... 

b.     Obtain the entity’s forms and documents

c.      Examine work area that will be allocated to the auditor

d.     Walk through the accounting area

3.     Visit to Facility: During the visit of the client’s facility the auditor should do the following:

• Initiation of order
• Requisition of materials
• Movement of production
• Complete of production etc...

4.     Review year- end and Interim Report: Review year- end financial statements of prior year and interim financial statements of current and prior year

5.     Review predecessor Audit Report : Review auditor’s Report on prior year’s financial statements

6.     Review Income Tax: Review prior year’s income tax returns and obtain the results of the most recent income tax examination

7.     Review Agencies Report: Review reports issued to agencies such as the following;

• Securities  and Exchange Commission
• Federal Housing Administration, Small Business Administration and Department of labour
• Credit agencies and banks.

DISCUSSIONS WITH CLIENT

The auditor should learn about the client and plan the audit by doing the following:

1. Communicate with predecessor auditor – The successor auditor should obtain sufficient competent evidence to afford a basis for expressing an opinion. The audit evidence used to analyze the impact of the opening balances on the current year financial statements and consistency of accounting principles is a matter of professional judgment. Audit evidence may include:

(a). The most recent audited financial statements.

(b). The predecessor auditor’s report.

(c). The results of inquiries of the predecessor auditor.

(d). The results of the successor auditor’s review of the predecessor’s audit documentation for to the most recently completed audit.

(e). Audit procedures performed on the current period’s transactions.

The successor auditor may wish to make inquiries about the professional reputation and standing of the predecessor auditor.

2. Visit to Administrative Office – During his or her visit to the client’s administrative office, the auditor should do the following:

(a) Meet with financial and administrative officers and obtain or determine the following:

1. The functions of each executive.
2. The executive responsible for the audit.
3. Organization charts.
4. Locations and relative importance of all offices, showrooms, warehouses and factories.
5. Obtain corporate manuals or memoranda that provide information about the following: (1) Nature and description of the entity’s products; (2) Production and distribution methods; (3) Internal control; and (4) General ledger chart of accounts.
6. Methods of financing the entity’s operations.
7. Schedule of long-term debt.
8. Names of banks and account executive at each bank. For each bank, determine the following: (1) Outstanding indebtedness and terms of payment; (2) Lines of credit; and (3) Other banking services.
9. For nonpublic companies, a schedule of stockholders with the following information: (1) Names; (2) Addresses; (3) Certificate numbers; (4) Number of shares held; (5) Shareholder function in the business.
10. Purchase terms. (1) Terms of payment; and (2) Are letters of credit used for foreign purchases?
11. Sales terms; (1) Terms of payment; and (2) Are letters of credit used for foreign sales?
12. The existence of related-party transactions such as the following: (1) Purchases and sales; (2) Loans; and (3) Receiving or providing services, such as management, legal, and administrative.
13. Schedule of all affiliates and non-consolidated subsidiaries.
14. Customers and suppliers on whom the entity is economically dependent.
15. Most recent trial balance.
16. General ledger and books of original entry; (1) Are accounting records up-to-date?; (2) What is the quality of accounting records?
17. Extent of client responsibility for preparation of the following: (1) Trial balance; (2) Schedules; (3) Adjustments and accruals; (4) Confirmations; (5) Inventory instructions; (6) Financial statements; (7) Income tax returns.
18. Tentative audit schedule. Agree to dates for the following: (1) Physical inventory; (2) Cash and securities count; (3) Mailing and confirmations; and (4) Start of fieldwork.

(b). Obtain the entity’s forms and documents, such as the following:

• Purchase requisitions.
• Purchase orders.
• Sales authorizations.
• Sales orders.
• Sales invoices.
• Production orders.
• Production requisitions.
• Receipts.
• Checks.
• Payroll cards.
• Sales returns and credits.
• Purchase returns and credits.

(c). Examine work area that will be allocated to the auditor.

(d). Walk through the accounting area. 

• Observe work conditions.
• Meet employees.
• Determine employee functions.

3. Visit to Facility – During the visit to the client’s facility, the auditor should do the following:

(a). Meet with management.

(b). Walk through a production cycle and note the following:

• Initiation of order.
• Requisition of materials.
• Movement of production.
• Completion of production.
• Storage of completed product.
• Shipment to customer.

(c). Document flow of production.

(d). Note conditions of facility and equipment.

(e). Visit materials stockroom, observe condition of the inventory, and review the following:

• Inventory records.
• Receiving reports.
• Inventory reports.

4. Review Year-end and Interim Report – Review year-end financial statements of prior year and interim financial statements of current and prior year.

5. Review Predecessor’s Audit Report – Review auditor’s report on prior year’s financial statements—to get know about:

• Was there a scope limitation?
• Were certain matters emphasized?
• Did the auditor disclaim an opinion or issue an adverse opinion?
• Were there other modifications of the auditor’s standard report?

6. Review Income Tax – Review prior year’s income tax returns and obtain the results of the most recent income tax examination.

7. Review Agencies’ Report – Review reports issued to agencies, such as the following:

• Securities and Exchange Commission.
• Federal Housing Administration, Small Business Administration, and Department of Labor.
• Credit agencies and banks.

OVERALL AUDIT PLAN

Planning means development of the audit strategy and development of the audit program. The audit plan helps to ensure that the audit process may be conducted in a targeted, effective and timely manner. The auditor should develop and document an audit plan that includes a description of:

1. The planned nature, timing and extent of the risk assessment procedures.
2. The planned nature, timing and extent of tests of controls and substantive procedures and
3. Other planned audit procedures required to be performed so that the engagement complies.   

The audit plan is a detailed programme giving instructions as to how each area of the audit will be conducted. In other words, the audit plan details the specific procedures to be carried out to implement the strategy and complete the audit.

KEY TAKEAWAYS:

1. Audit planning is an important area which is an essential process of systematic verification and organised examination.
2. Planning means development of the audit strategy and development of the audit program.

2.2 AUDIT PROGRAMME

MEANING OF AUDIT PROGRAMME

Audit programme is an outline of procedures to be followed in order to arrive at an opinion concerning the financial statements of a company. An audit programme is a detailed, written statement designed by the auditor indicating the work to be performed by the audit assistance, specifying the time limit for completion of work, introductions and guidance to the audit staff. In short, it is a tool for planning, directing and controlling the audit work.

An audit programme is a detailed plan of the auditing work to be performed. It specifies the procedures to be followed in the conduct of audit more efficiently. The auditor outlines the whole procedure of audit from beginning till the finalization of audit report. Audit programme is generally contained in the audit notebook.

FACTORS TO BE CONSIDERED IN AUDIT PROGRAMME

The factors which should be considered in preparing an audit programme are:

1. The effectiveness of the system of internal control being followed by the company.
2. The adequacy and reliability of the accounting procedures in the company.
3. The relevance and reliability of evidences available in the company.
4. The possibilities of errors and frauds in the company.
5. The procedures which may be appropriate for the purposes of verification.
6. The timing of the work in relation to the date of balance sheet.
7. Any special features of audit relating to the particular company; and
8. Size, nature and extent of operations of the company.

It is thus obvious that separate audit programmes have to be prepared for different companies.

ADVANTAGES OF AUDIT PROGRAMME

The main advantages of audit programme are as follows:

1. Gives a clear set of instructions to the audit staff on the work to be carried out.
2. Provides an up-to-date record of the progress of the work.
3. Documents the names of the staff that performed the different sections of the audit.
4. Offers an opportunity to the supervisors, auditors or their partners to review the work done.
5. Avoids duplication of work.
6. Reduces the possibilities of getting a work overlooked.
7. Keeps an evidence of work performed against the charge of negligence.
8. Distributes the work among different levels of staff commensuration their qualifications with the nature of the job to be done.
9. Enhances the efficiency of the audit staff.
10. Maintains continuity of audit work despite changes in the placement of the audit staff.
11. Promotes uniformity in the audit work.
12. Serves as guide to audits in subsequent years.
13. Shows a total perspective of the work to be performed.
14. Allows an easier planning, identification and segregation of the job and the personnel needed to complete them.
15.  Minimises the risks of audit and makes it a systematic, organised, coordinated and planned exercise.
16. Assigns responsibility to audit staff.
17. Helps control of various audit assignments at a time and
18. Facilitates the final review of the audit work before the report is signed.

DISADVANTAGES OF AUDIT PROGRAMME

Audit programme, however, has the following disadvantages:

1. Makes the work almost mechanical: Sometimes the work is done without understanding the objectives behind it.
2. Gives rigidity of approach: The required flexibility to devote additional attention to some critical areas becomes difficult.
3. Discourages personal initiatives or efficiency on matters which demand some more time or energy.
4. Disclose to the company’s staff the tests being performed and the part of the work which has already been completed.

Yet it must be appreciated that the concept of Audit programme has enough usefulness in the process of audit. A realistic assessment of the situation and a careful planning of affairs, therefore, can very well remove the above disadvantages of the Audit programme.

HOW TO OVERCOME THE DISADVANTAGES OF AUDIT ROGRAMME

1. The audit programme should be altered as per the internal control system to be reviewed from time to time and from firm to firm.
2. The auditor should also revise it when his client has adopted a new line of action.
3. The assistants should be consulted while preparing the audit programme.
4. A rigid and stereotyped programme should be avoided.
5. Audit assistants while they actually using the audit programme should really feel that they have actually some discretion in practice.

Hence, to guard against the is advantages, it is usually suggested that an audit programme should be divided into two parts, they are,

1. Work common to all types of audit and
2. Work relating to a particular audit.

This will, therefore, leave some scope for modification to be made in the audit programme whenever necessary.

METHODS OF WORK

An audit programme offers a basic plan for the audit team concerning the entity’s business, its size, the procedure to conduct the audit, allocation of work amongst the team members and the time estimate within which the audit must be completed.  Therefore, audit programmes are created to enhance the accountability of the audit team and its members for the work performed by them.

An auditor may choose to revise the audit programme if it seems necessary due to prevailing circumstances. An audit programme would be influenced by the size of the entity, type of business or services the entity operates in, the effectiveness of internal controls, applicable laws, and other multiple relevant factors. Thus, an audit programme is prepared by an auditor as per the scope of the work.

The minimum essential work that is to be performed is the Standard Programme. However, a set audit standard programme applicable to all the circumstances does not exist. The Audit Working Papers document the activities that are performed by the audit programme. Audit Working Papers support the work performed by an auditor and provides assurance that the audit was conducted in accordance with all the appropriate and applicable standards on auditing. It assists the auditor for the proper execution of the audit work.

Therefore, an audit programme includes various steps of auditing in an audit programme such as the assessment of internal control, ascertaining accuracy and the reliability of books of accounts, vouching and verification, inspection, valuation of assets and liabilities, presentation of financial statements, scrutiny of accounts and the submission of reports and related disclosures.

INSTRUCTIONS BEFORE COMMENCING WORKS OF AUDIT

Before the commencement of a new audit the auditor should go through the minutes of the directors and note down the important decisions. The auditor should prepare himself before the commencement of a new audit; he should consider the following points:

1. Appointment

First of all auditor should confirm his appointment letter that it is in order from every respect and fulfilling all its legal requirements.

2.     List of Books of account

The auditor should obtain a list of all the books of account and should see that all books have been kept in accordance with company ordinance.

3.     Legal Documents

The auditor should take the copy of the legal documents of the company and should study them carefully before the commencement of audit. Such documents may be memorandum and articles of association, prospectus and contract with vendors etc...

4.     Nature of Audit

Auditor should know regarding the nature of audit so that he may prepare himself accordingly.

5.     System of Internal Audit

The auditor should also study the internal control system in the business concern. He should make detailed inquiries, inspect records and wherever possible, observe the actual procedure in operation.

6.     Accounting System

Before the commencement of audit the auditor must know the system of accounting adopted by the business concern. He should thoroughly investigate the whole system of book keeping and accounting.

7.     Name of Principal Officers

The auditor should obtain the list of the principal officers with their financial and other powers.

The auditor has to develop and document an audit program which comprises the type, time and scope of audit procedures required by the audit strategy

• The audit program serves as a guidance for involved auditors and as a means of control and documentation of adequate and necessary auditing procedures

• When developing the audit program, the external auditor regards the respective evaluation of inherent risk and control risk as well as the degree of persuasiveness of evidence

• Furthermore, the external auditor takes account of the point of time on which tests of controls and substantive tests of transactions are conducted, the availability of employees involved in the audit, the coordination with the audited client, and the possible involvement of experts or other auditors.

KEY TAKEAWAYS:

1. Audit programme is an outline of procedures to be followed in order to arrive at an opinion concerning the financial statements of a company.
2. Before the commencement of a new audit the auditor should go through the minutes of the directors and note down the important decisions.

2.3 AUDIT WORKING PAPERS

MEANING OF AUDIT WORKING PAPERS

Papers and documents which contain important facts about accounts which are under audit are called as Audit Working Papers. Working papers provide the basis of conclusions and summarizations of the report prepared by the auditor at the end of the audit work. The term audit ‘Audit Working paper’ mean the written paper and document containing details about accounts which are under audit, analysis, summaries and comments built up by an auditor during the course of a particular audit engagement.

Thus, all the documents gathered or prepared by auditors during the course of an audit constitute audit working papers, but broadly these are two types:

• Working papers prepared by the auditor himself, like audit note book, audit program, details of queries made and their explanations thereof.
• Working papers collected by the auditor from the client, like schedule of debtors and creditors, management representations, confirmations etc...

IMPORTANCE OF AUDIT WORKING PAPERS

1. Planning the Audit Work: It acts as the process of planning for the auditor so that he can estimate the time that is required for conducting the audit work.
2. Helps in Fixing Responsibility: It helps in fixing responsibility and to measure the work being performed by the audit assistants.
3. Helps in Drawing Conclusions: Working papers are necessary to draw conclusion from the evidence obtained.
4. Helps in Preparing Audit Report: The auditor prepares and finalises the audit report taking into account the information’s or extracts contained in the working papers.
5. Documentary Evidence: It is valuable documentary evidence in the Court or Tribunal of law when a charge of negligence is brought against the auditor.
6. Permanent Record: Working papers are the permanent record of the work done by the auditor during a particular period of time.

FACTORS DETERMINING FORMS AND CONTENTS

Working papers are records kept by the auditor of the procedures applied, the tests performed, the information obtained and the pertinent conclusions reached in the engagement. Examples of audit working papers are audit programs, analyses, memoranda, letters of confirmation and representation, abstracts of company documents and schedules or commentaries prepared or obtained by the auditor. Working papers also may be in the form of data stored on tapes, films or other media.

Factors affecting the auditor’s judgement about the quantity, type and content of the working papers for a particular engagement include (a) the nature of the engagement, (b) the nature of the auditor’s report, (c) the nature of the financial statements, schedules or other information on which the auditor is reporting, (d) the nature and condition of the client’s records, (e) the assessed level of control risk and (f) the needs in the particular circumstances for supervision and review of the work.

The quantity, type and content of working papers vary with the circumstances but they should be sufficient to show that the accounting records agree or reconcile with the financial statements or other information reported on and that the applicable standards of field work have been observed. Working papers ordinarily should include documentation showing that- the work has been adequately planned and supervised, indicating observance of the first standard of field work. A 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 have provided sufficient competent evidential matter to afford a reasonable basis for an opinion, indicating observance of the third standard of field work.

MAJOR FUNCTIONS OF AUDIT WORK PAPERS

Other than for internal management reporting purpose, the audit workpapers maybe—in some situations—submitted to some legal institutions, regulatory authorities, or governments, through court orders, as supporting evidence.

The major functions of auditor workpapers include:

1. As Basis for planning of an Audit

Workpapers from a prior audit provide an auditor with background information for conducting a current review in the same overall area. They may contain descriptions of the entity, evaluations of internal control, time budgets, audit programs used, and other results of past audit work.

2.     As Record of Audit-Work Performed

Workpapers describe the current audit work performed and also provide a reference to an established audit program. Even if the audit is of a special nature, such as a fraud investigation where there may not be a formal audit program, a record should be kept of the auditing work carried out. This workpaper record should include a description of activities reviewed, copies of representative documents, the extent of the audit coverage, and the results obtained.

3.     Use during the Audit

In many instances, the workpapers play a direct role in carrying out the specific audit effort. A flowchart might be prepared and then used to provide guidance for a further review of the actual activities in some process. Each of these elements would have been included in the workpapers in a previous audit step.

4.      As Description of Situations of Special Interest

As the audit work is carried out, situations may occur that have special significance in such areas as compliance with established policies and procedures, accuracy, efficiency, personnel performance, or potential cost savings.

5.     As Support for Specific Audit Conclusions

The final product of most internal audits is a formal audit report, containing audit findings and recommendations. The documentation supporting the findings may be actual evidence, such as a copy of a PO lacking a required signature, or derived evidence, such as the output report from a computer-assisted procedure against a data file or notes from an interview. The workpapers should provide sufficient evidential matter to support the specific audit findings that would be included in an audit report.

6.     As Reference Source

Workpapers can answer additional questions raised by management or by external auditors. Such questions may be in connection with a particular audit report finding or its recommendation, or they may relate to other inquiries. For example, management may ask internal audit if a reported problem also exists at another location that is not part of the current audit. The workpapers from that review may provide the answer. Workpapers also provide basic background materials that may be applicable to future audits of the particular entity or activity.

7.     For Audit Coordination

An auditor may exchange workpapers with external auditors, each relying on the other’s work. In addition, government auditors, in their regulatory reviews of internal controls, may request to examine the internal auditor’s workpapers.

FEATURES OF AUDIT WORKING PAPERS 
•• All working papers (without exception) should show by whom they were prepared and when, and when they were reviewed and/or updated, and by whom, by means of signatures and dates – these may be electronic in the case of electronic working papers.

•• Audit planning documentation should include the risk assessment which should be cross referenced to the audit program, and the audit program should be cross referenced to the audit working papers and vice versa.

•• Working papers showing the work performed should be cross referenced to the audit program and the lead schedule on that particular section of the audit file, and should describe the nature of the work performed, the evidence obtained, and the conclusions reached.

•• Each section of the audit file should have a lead schedule which should be cross referenced back to the relevant working papers.

•• Trial balances should be cross referenced back to the relevant section of the audit file, and cross referenced forward to the financial statements.

•• The financial statements should be cross referenced to the trial balance.

•• Schedules of unadjusted differences should be cross referenced to the sections of the file to which they relate.

•• Schedules of review points should all be ‘cleared’ to show that all outstanding matters have been dealt with.

PERMANENT AUDIT FILE

Permanent audit files are the files that use to keep the information that uses by auditors continuously. That information includes engagement later, client’s M&A, long term contract or agreement as well as board meeting minute. It is very important for the auditor to keep the documents or events based on nature and classification. And make sure that all information and documents that they obtain from their clients are safe and not leak to the person or party that should not access.

A permanent audit file is different from the current audit file because of the current audit file only the current year audit. Yet, the permanent file keeps information or documents that subject to be used in the next audit period.

CONTENT OF PERMANENT AUDIT FILE

(a) Copy of initial appointment letter if the engagement is of recurring nature.

(b) Record of communication with the retiring auditor, if any, before acceptance of the appointment as auditor.

(c) NOC from previous auditor.

(d) Information concerning the legal and organisational structure of the entity.

(e) Organisational structure of the client.

(f) List of governing body including Name, Address and contact details. For instance, the list of directors in case of a company, list of partners in a partnership and list of trustees in a trust.

(g) Extracts or copies of important legal documents, agreements and minutes relevant to the audit.

(h) A record of the study and evaluation of the internal controls related to the accounting system. This might be in the form of narrative descriptions, questionnaires or flow charts, or some combination thereof.

(i) Copies of audited financial statements for previous years

(j) Analysis of significant ratios and trends

(k) Copies of management letters issued by the auditor, if any.

(l) Notes regarding significant accounting policies.

(m) Significant audit observations of earlier years.

(n) Assessment of risks and risk management

(o) Major policies related to Purchases and Sales

(p) Details of sister concerns

(q) Details of Bankers, Registrars, Lawyers etc

(r) Systems and Data Security policies

(s) Business Continuity Plans

TEMPORARY AUDIT FILES

Temporary audit files are the files that keep all information related to current year auditing. Those documents include the current year financial statements, general ledger, management accounts, and supporting documents. These files also include the documents related to audit planning, audit program, and key internal control of the current year.

Temporary audit files also contain information like current year adjustments or propose an adjustment, significant audit findings, as well as significant mater that require partner attention. Current year audit working papers like risks assessment, audit sampling, audit analytical review, as well as internal control documents should also include in these files.

OWNERSHIP AND CUSTODY OF AUDIT WORKING PAPERS 

Audit working papers are the property solely of the auditor or firm. The AGSA is the owner of all information, documentation, advice, recommendations and reports furnished and/or compiled during an audit performed by or on behalf of the AGSA in terms of the Public Audit Act. These working papers do not form part of the information of the audited.

Working papers are those papers that contain essential facts about accounts so that the auditor may not have again to go over the accounts of his clients in case he wants to refer to them later on during the course of his audit. The working papers are the matters documented by the auditor, and some states have statutes that assign the auditor as the holder of the working papers.

The auditor’s privileges of ownership, however, are subject to moral limitations relating to the classified relationships with clients. Ensure safe custody and secrecy of his working papers.

Working papers belong to the auditor. The auditor’s ownership rights, however, are subject to constraints imposed by the auditor’s own profession. Rule 301 of the AICPA’S Code of Professional Conduct stipulates that a CPA shall not disclose any confidential information obtained during the course of professional engagement, without the consent of the client, except for certain circumstances as stated in the rule.

Custody of the working papers rests with the auditor and he or she is responsible for their safekeeping. Working papers include in the permanent file are retained indefinitely. Current working papers should be retained for as long as they are useful to the auditor in servicing a client or are needed to satisfy legal requirements for record retention. The statute of limitations rarely extends beyond 6 years.

Working papers are the property of the auditor and he might, at his judgment, make portions of or extracts from his working papers to his client. Certain of the auditor’s working papers might sometimes serve as a helpful orientation source for his customer, but the working papers should not be regarded as a division of, or an alternative form, the client’s accounting records. Although the client might assert them as a record of his business matters, the auditor cannot division with them as his conclusions are based on them and as they present confirmation of the audit work carried out according to the essential principles.

The auditor should accept sensible actions for the safe supervision of his working papers and should maintain them for a time enough to meet the needs of his observations and to persuade any pertinent legal requirements of records preservation.

ACCESS TO WORKING PAPERS

When a company becomes a target for potential purchasers, the purchaser’s investigating accountants will frequently want access to the audit working papers to assist in their investigations. The granting of access to working papers in these circumstances involves issues of confidentiality and also the possibility that the auditor may be alleged to have accepted an additional duty of care.

The Audit Faculty of the ICAEW issued Audit 4/03: Access to Working Papers by Investigating Accountants, to attempt to facilitate the agreement of access to working papers in these situations and update previous guidance. It recommends that access to papers is granted on the basis of client authorisation and ‘release’ letters. These seek to deal with confidentiality issues and limit as far as possible additional risks.

AUDITORS LIEN ON WORKING PAPERS AND CLIENT’S BOOK

The auditor can exercise his lien on client's books and records subject to the following conditions: (a) Document retained must belong to the client who owes the money. (b) Some work must have been done and fees for work performed must be outstanding.

KEY TAKEAWAYS:

1. Papers and documents which contain important facts about accounts which are under audit are called as Audit Working Papers.
2. Working papers are records kept by the auditor of the procedures applied, the tests performed, the information obtained and the pertinent conclusions reached in the engagement.

2.4 AUDIT NOTEBOOK

MEANING OF AUDIT NOTEBOOK

Audit note book is maintained by the audit assistant it note down to all those unclear matter which he may come across in the course of audit and on which he requires further clarification and explanation. It contains day to day work performed by the audit staff on any particular day. Notes about all types of errors, difficulties and uncleared point, etc. are recorded in audit notebook.

Audit notebook is a diary on which auditor scribble down all important inquiries to avoid the possibility of unquestioned material facts.

CONTENTS OF AUDIT NOTE BOOK

The audit note book is usually a bound note book in which a large variety of matters observed during the course of an audit are recorded. It is a complete record of doubts and their clarification. It helps the auditor in his subsequent audits.

The audit notebook contains information about the nature of the business. It may relate to manufacturing, trading, financial or services. Generally, the following information is incorporated into the audit note book:

(1) The name of the client and the audit year.

(2) A list of the account books normally used and maintained.

(3) Names of principal officers, their duties and responsibilities.

(4) Particulars of the accounting and financial system followed and the internal check-in operation in the business.

(5) Details regarding accounting and financial policies followed in the business. Nature of business carried on and important documents relating to the constitution of business like Memorandum of Association, Articles of Association, Partnership deed, etc.

(6) A copy of the audit program.

(7) Details of errors and frauds discovered during the course of the audit.

(8) Details of all important information to be used as a reference for future audits.

(9) Date of commencement and completion of audit.

(10) Information on permanent nature relating to the business and notes of all important technical transactions.

IMPORTANCE OF AUDIT NOTE BOOK

1. Audit note book shall be taken as reliable evidence even by the Court of law in case of dispute or if the auditor is charged with negligence.

2. It is useful for drawing the audit programmes.

3. Audit note book enables the auditor to record important points, which arise during the course of his audit; otherwise he might forget these points.

2. An auditor can produce this book as documentary evidence in a suit filed against him for negligence or misfeasance.

3. It facilitates the preparation of the audit report.

4. If the assistant in charge is changed before the completion of a particular work, it acts as a guide and makes the completion of balance work easier.

5. A credit note book makes the work of audit convenient because all the important details about audit can be recorded in this book and, as such, any change in the staff of the auditor does not disturb or dislocate the work of audit.

6. It can help in making an assessment of the work of audit clerks.

7. It provides a key to evaluate the efficiency of the audit staff.

KEY TAKEAWAYS:

1. Audit note book is maintained by the audit assistant it note down to all those unclear matter which he may come across in the course of audit and on which he requires further clarification and explanation.
2. The audit notebook contains information about the nature of the business. It may relate to manufacturing, trading, financial or services. 

REFERENCES:

1. ‘Auditing and Assurance services’ by Alvin A. Arens and Randal J. Elder
2. ‘The Why and How of Auditing’ by Charles B. Hall