AU Section 339

Audit Documentation ^fn 1

(Supersedes SAS Nos. 1, section 338, and 41)

Source: SAS No. 96.

See section 9339 for interpretations of this section.

Effective for audits of financial statements for periods beginning on or after May 15, 2002. Earlier application is permitted.

Introduction

.01

The auditor should prepare and maintain audit documentation, the form and content of which should be designed to meet the circumstances of the particular audit engagement. Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement. The quantity, type, and content of audit documentation are matters of the auditor’s professional judgment.

.02

Other Statements on Auditing Standards contain specific documentation requirements (see Appendix A [paragraph .15]). Additionally, specific documentation requirements may be included in other standards (for example, government auditing standards), laws, and regulations applicable to the engagement.

.03

Audit documentation serves mainly to:

1. Provide the principal support for the auditor’s report, including the representation regarding observance of the standards of fieldwork, which is implicit in the reference in the report to generally accepted auditing standards. ^fn 2
2. Aid the auditor in the conduct and supervision of the audit.

Content of Audit Documentation

.04

Audit documentation should be sufficient to show that standards of fieldwork have been observed as follows:

1. The work has been adequately planned and supervised.
2. 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.
3. Sufficient competent evidential matter has been obtained through the auditing procedures applied to afford a reasonable basis for an opinion.

.05

Examples of audit documentation are audit programs, ^fn 3 analyses, memoranda, letters of confirmation and representation, abstracts or copies of entity documents, and schedules or commentaries prepared or obtained by the auditor. Audit documentation may be in paper form, electronic form, or other media.

.06

Audit documentation should be sufficient to (a) enable members of the engagement team with supervision and review responsibilities to understand the nature, timing, extent, and results of auditing procedures performed, and the evidence obtained; ^fn 4 (b) indicate the engagement team member(s) who performed and reviewed the work; and (c) show that the accounting records agree or reconcile with the financial statements or other information being reported on.

.07

In determining the nature and extent of the documentation for a particular audit area or auditing procedure, the auditor should consider the following factors:

• Risk of material misstatement associated with the assertion, or account or class of transactions
• Extent of judgment involved in performing the work and evaluating the results
• Nature of the auditing procedure
• Significance of the evidence obtained to the assertion being tested
• Nature and extent of exceptions identified
• The need to document a conclusion or the basis for a conclusion not readily determinable from the documentation of the work performed

.08

Audit documentation should include abstracts or copies of significant contracts or agreements that were examined to evaluate the accounting for significant transactions. Additionally, audit documentation of tests of operating effectiveness of controls and substantive tests of details that involve inspection of documents or confirmation should include an identification of the items tested. ^fn 5

.09

In addition, the auditor should document audit findings or issues that in his or her judgment are significant, actions taken to address them (including any additional evidence obtained), and the basis for the final conclusions reached. Significant audit findings or issues include the following:

• Matters that both (a) are significant and (b) involve issues regarding the appropriate selection, application, and consistency of accounting principles with regard to the financial statements, including related disclosures. Such matters often relate to (a) accounting for complex or unusual transactions or (b) estimates and uncertainties and, if applicable, the related management assumptions.
• Results of auditing procedures that indicate that (a) the financial statements or disclosures could be materially misstated or (b) auditing procedures need to be significantly modified.
• Circumstances that cause significant difficulty in applying auditing procedures the auditor considered necessary. ^fn 6
• Other findings that could result in modification of the auditor’s report.

Ownership and Confidentiality of Audit Documentation

.10

Audit documentation is the property of the auditor, and some states recognize this right of ownership in their statutes. The auditor should adopt reasonable procedures to retain audit documentation for a period of time sufficient to meet the needs of his or her practice and to satisfy any applicable legal or regulatory requirements for records retention. ^fn 7

.11

The auditor has an ethical, and in some situations a legal, obligation to maintain the confidentiality of client information. ^fn 8 Because audit documentation often contains confidential client information, the auditor should adopt reasonable procedures to maintain the confidentiality of that information.

.12

The auditor also should adopt reasonable procedures to prevent unauthorized access to the audit documentation.

.13

Certain audit documentation may sometimes serve as a useful reference source for the client, but it should not be regarded as a part of, or a substitute for, the client’s accounting records.

Effective Date

.14

This section is effective for audits of financial statements for periods beginning on or after May 15, 2002. Earlier application is permitted.

Appendix A

Audit Documentation Requirements in Other Statements on Auditing Standards

.15

1.    Documentation requirements are included in other Statements on Auditing Standards. This section does not change the requirement in:

1. Section 310, Establishing an Understanding With the Client, paragraph .05, to document the understanding with the client.
2. Section 337, Inquiry of a Client’s Lawyer Concerning Litigation, Claims, and Assessments, paragraph .05d, to document in either the audit inquiry letter or a separate letter to the client’s lawyer, that the client has assured the auditor that it has disclosed all unasserted claims that the lawyer has advised the client are probable of assertion and must be disclosed in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 5, Accounting for Contingencies. Also, this section does not change the requirement in section 337.10 to document the conclusions reached as a result of responses obtained in a conference relating to matters covered by the audit inquiry letter.
3. Section 311, Planning and Supervision, paragraph .05, to prepare a written audit program (or set of written audit programs) for every audit.
4. Section 312, Audit Risk and Materiality in Conducting an Audit, paragraph .40, to document the nature and effect of aggregated misstatements and the auditor’s conclusion as to whether the aggregated misstatements cause the financial statements to be materially misstated.
5. Section 534, Reporting on Financial Statements Prepared for Use in Other Countries, paragraph .02, to obtain written representations from management regarding the purpose and uses of financial statements prepared in conformity with the accounting principles of another country.
6. Section 317, Illegal Acts by Clients, paragraph .17, to document oral communications to the audit committee or others with equivalent authority and responsibility regarding illegal acts that come to the auditor’s attention.
7. Section 319, Consideration of Internal Control in a Financial Statement Audit, paragraph .61, to document the understanding of the entity’s internal control components obtained to plan the audit. Also, this section does not change the requirement in section 319.83 for the auditor to document his or her conclusions about the assessed level of control risk.
8. Section 329, Analytical Procedures, paragraph .22, to document (1) the expectation, where that expectation is not otherwise readily determinable from the documentation of the work performed, and factors considered in its development; (2) the results of the comparison of the expectation to the recorded amounts or ratios developed from recorded amounts; and (3) any additional auditing procedures performed in response to significant unexpected differences arising from the analytical procedure and the results of such additional procedures.
9. Section 508, Reports on Audited Financial Statements, paragraph .71, for the predecessor auditor to obtain representation letters from management of the former client and from the successor auditor before reissuing (or consenting to the reissue of) a report previously issued on the financial statements of a prior period.
10. Section 341, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, paragraph .17, to document (1) the conditions or events that led him or her to believe that there is substantial doubt about the entity’s ability to continue as a going concern; (2) the work performed in connection with the auditor’s evaluation of management’s plans; (3) the auditor’s conclusion as to whether substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time remains or is alleviated; and (4) the consideration and effect of that conclusion on the financial statements, disclosures, and the audit report.
11. Section 325, Communication of Internal Control Related Matters Noted in an Audit, paragraph .09, to document oral communications with the audit committee or others with equivalent authority and responsibility of conditions noted by the auditor that are considered reportable or that are the result of agreement with the client.
12. Section 380, Communication With Audit Committees (AICPA, Professional Standards, paragraph .03, to document any oral communications with the audit committee, made pursuant to the SAS, regarding the scope and results of the audit.
13. Section 330, The Confirmation Process (AICPA, Professional Standards, paragraph .29, to document oral confirmations. Also, when the auditor has not requested confirmations in the examination of accounts receivable, this section does not change the requirement in section 330.35 to document how the auditor overcame this presumption.
14. Section 801, Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance, paragraph .23, to document the oral communications to management and the audit committee or others with equivalent authority and responsibility when the auditor becomes aware during an audit in accordance with generally accepted auditing standards that the entity is subject to an audit requirement that may not be encompassed in the terms of the engagement.
15. Section 316A, Consideration of Fraud in a Financial Statement Audit, paragraph .37, to include in audit documentation evidence of the performance of the assessment of the risk of material misstatement due to fraud and the auditor’s response to risk factors identified. Also, this section does not change the requirement to document any fraud risk factors or other conditions identified during the audit and any further response that the auditor concluded was appropriate.
16. Section 333, Management Representations, to obtain written representations from management.

Appendix B

Amendments to Statements on Auditing Standards

.16

Amendment to Section 312, Audit Risk and Materiality in Conducting an Audit

1.    This amendment adds a requirement to section 312 to document the nature and effect of misstatements that the auditor aggregates as well as the auditor’s conclusion as to whether the aggregated misstatements cause the financial statements to be materially misstated. The amendment adds the following paragraph to section 312:

.40     The auditor should document the nature and effect of aggregated misstatements. The auditor also should document his or her conclusion as to whether the aggregated misstatements cause the financial statements to be materially misstated.

2.     Section 312.40 and .41 will be renumbered as section 312.41 and .42, respectively, as a result of the paragraph added by this amendment.

Amendment to Section 329, Analytical Procedures

3.     The following amendment adds a documentation requirement to section 329. The new section and paragraph, which will immediately follow paragraph .21, are the following:

Documentation of Substantive Analytical Procedures

.22    When an analytical procedure is used as the principal substantive test of a significant financial statement assertion, the auditor should document all of the following:

1. The expectation, where that expectation is not otherwise readily determinable from the documentation of the work performed, and factors considered in its development
2. Results of the comparison of the expectation to the recorded amounts or ratios developed from recorded amounts
3. Any additional auditing procedures performed in response to significant unexpected differences arising from the analytical procedure and the results of such additional procedures

4.     Section 329.22 and .23 will be renumbered as section 329.23 and .24, respectively, as a result of the paragraph added by this amendment.

Amendment to section 341, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern

5.    The following amendment adds a requirement to section 341 for the auditor to document (a) the conditions or events that led him or her to believe that there is substantial doubt about the entity’s ability to continue as a going concern; (b) the work performed in connection with the auditor’s evaluation of management’s plans; (c) the auditor’s conclusion as to whether substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time remains or is alleviated; and (d) the consideration and effect of that conclusion on the financial statements, disclosures, and the audit report. The new section and paragraph, which will immediately follow paragraph .16, are the following:

Documentation

.17    As stated in paragraph .03 of this section, the auditor considers whether the results of the auditing procedures performed in planning, gathering evidential matter relative to the various audit objectives, and completing the audit identify conditions and events that, when considered in the aggregate, indicate there could be substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time. If, after considering the identified conditions and events in the aggregate, the auditor believes there is substantial doubt about the ability of the entity to continue as a going concern for a reasonable period of time, he or she follows the guidance in paragraphs .07 through .16. In connection with that guidance, the auditor should document all of the following:

1. The conditions or events that led him or her to believe that there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time.
2. The elements of management’s plans that the auditor considered to be particularly significant to overcoming the adverse effects of the conditions or events.
3. The auditing procedures performed and evidence obtained to evaluate the significant elements of management’s plans.
4. The auditor’s conclusion as to whether substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time remains or is alleviated. If substantial doubt remains, the auditor also should document the possible effects of the conditions or events on the financial statements and the adequacy of the related disclosures. If substantial doubt is alleviated, the auditor also should document the conclusion as to the need for disclosure of the principal conditions and events that initially caused him or her to believe there was substantial doubt.
5. The auditor’s conclusion as to whether he or she should include an explanatory paragraph in the audit report. If disclosures with respect to an entity’s ability to continue as a going concern are inadequate, the auditor also should document the conclusion as to whether to express a qualified or adverse opinion for the resultant departure from generally accepted accounting principles.

6.    Section 341.17 will be renumbered as section 341.18 as a result of the paragraph added by this amendment.