Types of Documentation of the Audit Evidence - dummies

Types of Documentation of the Audit Evidence

By Kenneth Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, Jill Gilbert Welytok

The audit file comes in many shapes and forms, all of which you classify as either permanent or current. Knowing the difference between the two is important, because correct allocation of audit evidence to the permanent or current file allows all CPA firm users to know exactly where to go if they need to access a specific document.

This is particularly important if you aren’t available that day or have left the firm.

The permanent audit file

You carry forward documents in the permanent file from year to year. They form the base for planning the subsequent year’s audit. Most of the info in the permanent file doesn’t change from one year to the next.

Here are documents for you to keep in the client’s permanent file:

  • Copies of the company’s incorporation documents: Incorporation is done with the Secretary of State for the main business location.

    The business has to file articles of incorporation, which cover the basics about the company including its name, address, the stock it issues (what type and how many shares), and the registered agent (the contact person if the Secretary of State has any questions). Your client should have a copy of this information on file.

    The type of information a state needs for the incorporation is a matter of state statute. The information requirements are available online by doing a search for the specific state’s name and the word statute. If you scroll through the various titles, you should find one called business organizations or something similar. You can find out all you need to know about your client’s incorporation requirements if you think some documents are missing.

  • Chart of accounts: You use this numerical listing of all the client’s asset, liability, equity, revenue, and expense accounts as a sort of road map to figure out where certain accounts should be showing up in your client’s general ledger.

    The general ledger shows all the accounts in the chart of accounts and lists what transactions affect them during the year under audit.

  • Organization chart: This document shows the levels of management from the head honcho all the way down to the lowest staff member.

  • Accounting procedures manual: The manual provides an overview of how the accounting functions of a company work. It provides a guide to the responsibilities of each accounting department and how accounting employees should do their jobs.

  • Copies of important leases or contracts: You should have a copy of the contracts for any property, plant, or equipment the company leases. You use this information to verify rent expense on the financial statements. Any major contracts with suppliers, customers, or unions are also kept in the permanent file.

  • Internal control documentation: Any records you keep or write-ups you do during the evaluation of the company’s internal controls are kept in the permanent file.

    Some CPA firms may keep this information with their current file, rather than in the permanent file. Verify correct placement with your audit supervisor.

  • Stock and bond issuances: Corporations bring in nonoperating cash in two different ways: They sell their stock, which is equity, or they enter into a loan agreement (debt). These documents list the number of shares outstanding and give information on the terms of any bonds or other company debt.

  • Prior years’ analytical procedures: Use these documents to see whether plausible and expected relationships exist in both financial and nonfinancial data from year to year. Use trend analysis, which compares current financial figures (like gross receipts) to the same figures in the prior year.

    Ratio analysis is also an analytical procedure. Ratio analysis compares certain balance sheet and income statement accounts — for example, inventory turnover, which is Sales / Average inventory.

The current audit file

You’ll also have a current file, which contains all your work on this year’s audit. Here are some examples of things you expect to see in the current file:

  • Audit plan: Your road map for conducting the current year audit is definitely included in the current file. This plan includes your understanding of the client, the allocation of firm resources, and your risk assessments.

  • Working trial balance and workpapers: A really simple explanation of a trial balance is that it’s a chart of accounts with ending balances for each account. The purpose of the trial balance is to show that the fundamental accounting equation (Assets = Liabilities + Equity) is satisfied.

    For now, just keep in mind that you tie the numbers on the trial balance to your workpapers. For example, if you’re auditing office supplies expense, you list the invoices you sampled and tested in your workpapers.

    If your sample pans out, you use a tick mark such as F T/B, which is an abbreviation for “footed trial balance.” This tick mark means that the marked sample item reconciled without discrepancy to the amount shown for office supplies expense in the working trial balance. That’s the best result you can hope for, which means you can then start working on your next account.

  • Journal entries for the client: You also keep track of all adjusting and reclassification entries you give to the client.

    Adjusting entries fix mistakes such as the transposition of numbers when the client enters an invoice into its accounting software.

    Reclassifications make sure information is properly shown on financial statements. Unlike adjusting entries, reclassifications affect only the income statement or balance sheet accounts — not both at the same time. An example of a reclassification would be to move the current portion of a mortgage payable from long-term to short-term debt. The current portion reflects any payments that will be made in the next 12 months.