PCAOB 3: Audit Documentation1

EFFECTIVE DATE AND APPLICABILITY

DEFINITIONS OF TERMS

Audit documentation (also referred to as workpapers or working papers). The written record that serves as the basis for the auditor’s conclusions that provide support for the auditor’s representations, whether the representations are contained in the auditor’s report or otherwise. Documentation includes records of the planning and performance of work, procedures performed, evidence obtained, and conclusions reached by the auditor. Such documentation may be in paper form, electronic form, or other media.

Examples of audit documentation include:

• Memoranda
• Confirmations
• Correspondence
• Schedules
• Audit programs
• Representation letters

Documentation completion date. The date the auditor should assemble a complete and final set of audit documentation for retention, which is not more than 45 days after the report release date.

Experienced auditor. An auditor who has a reasonable understanding of audit activities and has studied the entity’s industry as well as the industry’s relevant accounting and auditing issues.

Report release date. The date the auditor gives permission to use the auditor’s report in connection with issuing the company’s financial statements.

Significant findings or issues. Substantive matters that are important to the procedures performed, evidence obtained, or conclusions reached, and include but are not limited to:

• Significant matters and associated disclosures relating to selecting and applying accounting principles, and whether such accounting principles have been consistently applied (significant matters include, but are not limited to, accounting for complex or unusual transactions, accounting estimates, uncertainties, and related management assumptions)
• Results of auditing procedures that indicate a need for significant modification of planned auditing procedures, the existence of material misstatements, omissions in the financial statements, the existence of significant deficiencies, or material weaknesses in internal control over financial reporting
• Audit adjustments, which are corrections of a misstatement of the financial statement that was or should have been proposed by the auditor, whether or not recorded by management, that could, either individually or when aggregated with other misstatements, have a material effect on the company’s financial statements
• Disagreements among members of the engagement team or with others consulted on the engagement about final conclusions reached on significant accounting or auditing matters
• Circumstances that cause significant difficulty in applying auditing procedures
• Significant changes in the assessed level of audit risk for particular audit areas and the auditor’s response to those changes
• Any matters that could result in modification of the auditor’s report

OBJECTIVES OF PCAOB STANDARD 3

Audit documentation:

• Facilitates the planning, performance, and supervision of the engagement
• Serves as the basis for the review of the quality of the work because it provides evidence supporting the auditor’s conclusions
• Includes records of the planning and performance of the work, the procedures performed, the evidence obtained, and the conclusions reached

Audit documentation’s importance also stems from the fact that it is reviewed by engagement team members and might be reviewed by others, such as:

• Auditors new to the engagement
• Supervisors on the engagement
• Engagement quality reviewers
• Successor auditors
• Internal and external inspection team
• Advisors to the audit committee or representatives of an acquiring party

FUNDAMENTAL REQUIREMENTS

Basic Requirement

PCAOB Auditing Standard 3 sets forth the general documentation requirements that the auditor should prepare and retain for engagements governed by PCAOB standards; these engagements include financial statement audits, audits of internal control over financial reporting, and reviews of interim financial information.

The auditor must document, with respect to relevant financial statement assertions:

• Procedures performed
• Evidence obtained
• Conclusions reached

Audit documentation should:

• Have sufficient detail to provide a clear understanding of its purpose, source, and conclusions reached
• Be appropriately organized so that a clear link is provided to the significant findings or issues
• Demonstrate that the engagement complied with PCAOB standards
• Support the basis for the auditor’s conclusions about every relevant financial statement assertion
• Show that the underlying accounting records agreed or reconciled with the financial statements

Audit documentation must clearly demonstrate that the work was actually performed.

The information in the documentation must be sufficient to allow an experienced auditor (see the section “Definitions of Terms”), with no previous connection to the engagement, to:

• Understand the nature, timing, extent and results of the procedures performed, evidence obtained and conclusions reached, and
• Determine the person who performed the work, the date of the work’s completion, the reviewer of the work, and the date of the review

The auditor should consider the following when determining the appropriate nature and extent of documentation for a financial statement assertion:

• What is the nature of the auditing procedure?
• What is the risk of material misstatement associated with the assertion?
• To what extent is judgment required in performing the work and evaluating the results?
• What is the significance of the evidence obtained to the assertion being tested?
• What is the auditor’s responsibility to document a conclusion not readily determinable from the documentation of the procedures performed and evidence obtained?

The auditor is also required to include in the audit documentation information that the auditor has identified related to significant findings or issues (see “Definitions of Terms”) that is inconsistent with, or contradicts, the conclusions reached by the auditor. Such records include but are not limited to:

• Procedures performed in responding to such information
• Documentation of consultations on, or resolutions of, differences in professional judgment among members of the engagement team or between the engagement team and other parties consulted

Documentation of General Client Matters

The auditor’s documentation for certain matters, such as the auditor’s independence, staff training and proficiency, and client acceptance and retention, may be in a central firm repository or in the office participating in the engagement. If documented in a central firm repository, the documentation should refer to the central depository. The auditor should document specific engagement matters in the pertinent engagement’s audit documentation.

Documentation of Specific Matters

The auditor’s documentation should include the following:

• The items inspected when performing auditing procedures that involve inspecting documents or confirmation (such as tests of details, tests of operating effectiveness of controls, and walk-throughs) should be identified.
• Abstracts or copies of significant contracts or agreements should be included when documenting audit procedures that involve inspecting such documentation.

PCAOB 3 provides the following examples of identification of the items inspected:

The Engagement Completion Document

The auditor must document all significant findings or issues in an engagement completion document. The auditor is required to document:

• The significant findings or issues
• Actions taken to address them (including additional evidence obtained)
• The basis for conclusions reached in the engagement

The engagement completion document:

• May include either all information needed to understand the significant findings and issues, or cross-references to available supporting documentation
• Should, along with cross-referenced documentation, be as specific as necessary to allow a reviewer to thoroughly understand the significant findings and issues
• Should document significant findings or issues identified during the interim review of financial information, if the engagement completion document is for the annual audit

Omitted Procedures and Audit Documentation

After the documentation completion date, the auditor may become aware of audit procedures not performed, evidence not obtained, or appropriate conclusions not reached. This may be a result of lack of documentation or other factors. In this situation, the auditor must determine and then demonstrate that the sufficient procedures were performed and evidence obtained, and appropriate conclusions were reached. The auditor must accomplish this with persuasive other evidence.

If the auditor both determines and can demonstrate that the procedures, evidence and conclusions are sufficient and appropriate, but the documentation for such is inadequate, the auditor should consider what additional appropriate documentation is needed. Additional documentation must indicate the date the information was added, the name of the preparer, and the reason for adding it.

If the auditor cannot determine or demonstrate that the procedures, evidence and conclusions are sufficient and appropriate, the auditor should comply with the provisions of AU Section 390, Consideration of Omitted Procedures After the Report Date.

Retention of and Subsequent Changes to Audit Documentation

Retention period. If an audit report is issued, retain audit documentation for seven years, starting with the report release date, unless a longer time period is required by law.

If a report is not issued, retain audit documentation for seven years from the date that fieldwork was substantially completed.

If the engagement is not completed, retain audit documentation for seven years from the date the engagement ceased.

Document completion. Before the report release date, all audit procedures must be completed (including clearing notes and supporting final conclusions) and sufficient evidence obtained to support the auditor’s report. The auditor should assemble a complete and final set of audit documentation not more than forty-five days after the report release date.

If a report is not issued, the documentation completion date is not more than forty-five days after the date that fieldwork was substantially completed.

If the auditor could not complete the engagement, the documentation completion date should not be more than forty-five days after the date the engagement ceased.

Subsequent changes. The auditor may find it necessary to add to audit documentation after the report release date. However, documentation must not be deleted or discarded after the documentation completion date. Any documentation subsequently added must indicate the date it was added, the name of the preparer and the reason for adding it.

If the auditor is required to perform procedures after the report release date, the auditor must identify and document any additions necessitated by these procedures. An example is an auditor’s required procedures up to the effective date of a registration statement, performed under AU Section 711, Filings under Federal Securities Statutes. Again, subsequently added documentation must have the date added, the name of the preparer, and the reason for adding it.

Responsibility for retention. The office of the firm that issues the audit report is responsible for making sure that all documentation needed to meet the requirements in PCAOB 3 is both prepared and retained.

Work of other auditors.2 The office issuing the report must either retain or have access to audit documentation supporting the work performed by other auditors. That office also must obtain, review, and retain, before the report release date, the following documentation of the other auditor’s work (including auditors associated with the firm’s other offices, affiliated firms, or nonaffiliated firms):

• An engagement completion document that meets the requirements in PCAOB 3 and contains all cross-referenced supporting audit documentation
• A list of significant fraud risk factors, the auditor’s response, and the results of the auditor’s related procedures
• Sufficient information concerning any significant findings or issues that are not consistent with or contradict final conclusions
• Any findings that affect the consolidating or combining of accounts in the consolidated financial statements
• Sufficient information to allow the office issuing the report to agree or to reconcile the financial statement amounts audited by the other auditor to the information underlying the consolidated financial statements.
• A schedule of audit adjustments, including a description of the nature of each misstatement and its cause
• All significant deficiencies and material weaknesses in internal control over financial reporting, including a clear distinction between these two categories of items
• Management representation letters
• All matters to be communicated to the audit committee

Other Documentation Requirements

The auditor should also meet any other documentation requirements, such as the Securities and Exchange Commission’s (SEC’s) requirement to retain memoranda, correspondence, communications, (for example, electronic mail), other documents, and records (whether paper, electronic, or other media) that are created, sent, or received in connection with an engagement that contain conclusions, opinions, analyses, or data related to the engagement.

1 Practitioners should reference the additional guidance listed in the section “Other PCAOB Guidance” in this volume’s chapter PCAOB 1.

2 “Other auditors” includes auditors associated with other offices of the firm, affiliated firm, and non-affiliated firms.