Audit Documentation and Quality Management - ACCA Audit and Assurance (AA)

Summary

This Open Tuition lecture focuses on audit documentation and quality control, emphasizing the importance of proper documentation to ensure audit work is done correctly, facilitate review processes, assist future audits, and maintain methodical procedures. It distinguishes between permanent and current files, detailing their contents and uses. Additionally, it covers the quality management standard ISA 220, highlighting the engagement partner's responsibilities and the six components of quality management: leadership, ethical requirements, acceptance, resources, engagement performance, and monitoring and remediation.

Takeaways

• 📄 **Audit Documentation Purpose**: To ensure work is done properly, assist in reviews, aid future audits, and ensure methodical approach.
• 🔍 **Audit Working Papers**: Divided into permanent and current files, with permanent files serving as a reference for future audits and current files for the ongoing year.
• 📐 **Structure of Working Papers**: Organized logically by balance sheet sections, starting from financial statements to detailed audit tests.
• 📝 **Contents of Working Papers**: Include client details, audit tests, and conclusions, with clear documentation of preparation and review.
• 🔑 **Quality Management (ISA 220)**: Focuses on the responsibilities of the engagement partner to ensure audits follow standards and legal requirements.
• 👥 **Components of Quality Management**: Include leadership, ethical requirements, acceptance and continuance, resources, engagement performance, and monitoring and remediation.
• 👩‍💼 **Engagement Partner's Role**: Actively involved in all aspects of the audit process, including direction, supervision, and review.
• 📈 **Judgment Areas**: Key areas where the engagement partner must exercise judgment include materiality, use of auditors' experts, significant risks, going concern, and the final audit opinion.
• 🔄 **Engagement Quality Review**: For listed and high-risk clients, a second partner reviews the audit before the report is signed to ensure quality.
• 🔍 **Monitoring and Remediation**: Regular checks and reviews of audit files to ensure quality management is in place, with immediate fixes for identified issues.

Q & A

Why is audit documentation important?

Audit documentation is crucial to ensure that audit work has been conducted properly, assist in the review process, aid future audits by providing a clear understanding of the approach taken, and ensure that the audit is methodical, reducing the chance of oversights.

What are the potential consequences of inadequate audit documentation?

Inadequate audit documentation could lead to the inability to defend against negligence claims, as audit working papers may be required in court. It could also hinder the review process, impede efficiency in future audits, and fail to ensure methodical audit procedures.

What is the purpose of the permanent file in audit documentation?

The permanent file serves as a reference document that is consulted every year. It contains information useful for future audits, such as details of bankers, lawyers, the accounting system, organization charts, and legal requirements of the company.

What is typically found in the current file of audit documentation?

The current file contains information relevant to the current year's audit, including the financial statements, working papers for the current year, audit programs, and letters such as the letter of representation and the management letter.

What is the significance of the letter of engagement in audit documentation?

The letter of engagement is significant as it is signed at the start of the audit and outlines the terms of the audit engagement. It is usually kept in the permanent file and is not reissued every year unless there are changes in circumstances or doubts about the directors' understanding.

How does the structure of audit working papers contribute to the audit process?

The structure of audit working papers, which logically separates sections according to the balance sheet or income statement, ensures that all aspects of each item are tested and reviewed. This structure facilitates clear cross-referencing and aids in the review process by showing that all necessary audit tests have been conducted.

What does ISA 220 focus on in terms of audit quality management?

ISA 220 focuses on the responsibilities of the engagement partner to ensure that the audit is conducted in accordance with auditing standards and legal requirements, and that the audit report is appropriate based on the work done.

What are the six components of quality management in an audit as per ISA 220?

The six components of quality management in an audit are Leadership, Ethical Requirements, Acceptance and Continuance, Resources, Engagement Performance, and Monitoring and Remediation.

Why is the engagement quality review important in audits of listed and high-risk clients?

The engagement quality review is important as it involves a second partner who assesses the audit work before the report is signed, ensuring the quality of the audit and the appropriateness of the conclusions reached, which is particularly crucial for listed and high-risk clients.

What is the role of direction, supervision, and review in the audit process?

Direction involves briefing the audit team, supervision is an active process to ensure team members are capable and may involve reassigning tasks or providing training, and review focuses on areas where judgment is exercised, such as materiality determination, use of auditors' experts, and the final audit opinion.

Outlines

00:00

📚 Audit Documentation and Quality Control

This paragraph discusses the importance of audit documentation and quality control in the auditing process. It highlights the need for documentation to ensure that audit work is properly conducted, to assist in the review process, to aid future audits, and to maintain a methodical approach. The paragraph introduces the concept of audit working papers, which are divided into permanent and current files. The permanent file contains reference documents used annually, such as the letter of engagement, while the current file contains documents specific to the current year's audit. The lecture emphasizes the significance of understanding the purpose of documentation and the structure of the audit files.

05:02

📁 Structure of Audit Files

This section delves into the structure of audit files, explaining how each section corresponds to a different part of the financial statements. It describes the logical organization of the files, starting from the financial statements to the detailed audit tests on individual items. The paragraph also covers the contents of working papers, including client details, the purpose of the paper, preparation and review details, and the progression from financial statement figures to detailed audit test results. It stresses the importance of understanding the file structure and the typical contents of a working paper.

10:04

🛠️ Quality Management in Auditing

The focus shifts to quality management in auditing, with an emphasis on the responsibilities of the engagement partner as outlined in ISA 220. The paragraph discusses the objective of quality management, which is to provide reasonable assurance that the audit adheres to auditing standards and legal requirements, and that the audit report is appropriate based on the work conducted. It introduces the six components of quality management (LIRUM): Leadership, Ethical Requirements, Acceptance, Resources, Engagement Performance, and Monitoring and Remediation. The paragraph also touches on the importance of the engagement partner's active involvement throughout the audit process.

15:06

👥 Components of Quality Management

This paragraph breaks down the components of quality management in more detail. It starts with leadership, emphasizing the engagement partner's capabilities and authority. It then covers ethical requirements, ensuring the audit team meets ethical standards, such as not holding shares in the client company. The acceptance and continuance component discusses the firm's decision-making process regarding taking on or continuing an audit engagement, considering factors like competence, client growth, and potential conflicts of interest. The paragraph also outlines the types of resources required for an audit, including human, intellectual, and technological resources, and the importance of engagement performance, which involves direction, supervision, review, and consultation opportunities.

20:07

🔍 Engagement Performance and Quality Reviews

The final paragraph discusses engagement performance, focusing on direction, supervision, and review within the audit process. It explains the importance of team briefings, active supervision, and the need for the engagement partner to review critical areas where judgment is exercised. These areas include determining materiality, using auditors' experts, responding to significant risks, assessing going concern considerations, understanding the size and importance of errors, and forming the final audit opinion. The paragraph also introduces the concept of an engagement quality review, where a second partner reviews the work before the audit report is signed, particularly for listed and high-risk clients. It concludes with the importance of monitoring and remediation to ensure quality control is maintained throughout the audit process.

Keywords

💡Audit Documentation

Audit documentation refers to the process of recording the audit work performed, including the audit procedures, evidence obtained, and conclusions reached. It is crucial for demonstrating that an audit has been conducted in accordance with professional standards and is often required in the event of legal proceedings. In the script, the purpose of audit documentation is discussed as a means to confirm that work has been done properly, assist with review processes, and facilitate future audits.

💡Quality Control

Quality control in auditing involves a set of procedures designed to ensure that audit work is of a high standard and complies with professional standards. It includes activities such as supervision, review, and monitoring of audit work. The script emphasizes the importance of quality control, particularly in relation to the responsibilities of the engagement partner, and how it ensures the audit report is appropriate and based on sufficient evidence.

💡Working Papers

Working papers are the documents that auditors prepare and use to support their audit findings. They include details of the audit procedures performed, evidence obtained, and conclusions drawn. The script distinguishes between two types of working papers: the permanent file, which contains information relevant to each audit such as the client's accounting system, and the current file, which contains information specific to the current year's audit.

💡Permanent File

The permanent file is a component of the audit working papers that contains information that is relevant to multiple audits over time. It includes documents like the client's organizational charts, legal requirements, and the letter of engagement. The script explains that the permanent file acts as a reference for future audits, ensuring continuity and consistency in the audit approach.

💡Current File

The current file contains documents and records specific to the audit of the current financial period. It includes the financial statements, audit programs, and letters of representation and management. The script highlights that the current file is reviewed annually and is essential for the audit of the current year.

💡Letter of Engagement

The letter of engagement is a formal document signed at the beginning of an audit engagement, outlining the terms and conditions of the audit. It is typically kept in the permanent file and is not reissued each year unless there are changes in circumstances or doubts about the client's understanding. The script mentions it as a key document found in the permanent file.

💡Letter of Representation

The letter of representation is a document in which the client's management confirms certain information to the auditors, such as their responsibility for the financial statements. It is part of the current file and is crucial for the auditors to obtain direct evidence from the client. The script discusses it in the context of documents found in the current file.

💡Management Letter

The management letter is a communication from the auditors to the client's management, identifying weaknesses in internal controls and making recommendations for improvement. It is part of the current file and is discussed in the script as a document that reflects the auditors' findings and advice for the client.

💡Professional Skepticism

Professional skepticism is the attitude that auditors maintain throughout the audit process, questioning and critically assessing the evidence and information provided by the client. The script emphasizes the importance of professional skepticism in audit work, particularly during team briefings where auditors are reminded to exercise it.

💡ISA 220

ISA 220, also known as the International Standard on Quality Control, is the standard that sets out the responsibilities of the engagement partner and the firm in ensuring audit quality. The script discusses ISA 220 as the key standard for quality management in audits, focusing on the components of quality management and the responsibilities of the engagement partner.

💡Engagement Quality Review

An engagement quality review is a process where a second partner reviews the audit work before the audit report is signed, particularly for listed and high-risk clients. The script explains that this review is meant to provide an additional layer of quality control, ensuring that the audit work meets professional standards and that the audit opinion is justified.

Highlights

The purpose of audit documentation is to ensure work is done properly, assist with review, aid future audits, and ensure methodical approach.

Audit documentation helps in case of litigation, showing that a proper audit was conducted.

Audit working papers are divided into permanent and current files, with the permanent file acting as a reference for future audits.

The letter of engagement is typically found in the permanent file and is not reissued annually unless necessary.

The current file contains information relevant to the current year's audit, including financial statements and audit programs.

Audit files are logically structured, starting with a summary of financial figures and moving to detailed audit tests.

Working papers include details of the client, audit tests conducted, and are reviewed to ensure quality.

Quality management in auditing is governed by ISA 220, focusing on the responsibilities of the engagement partner.

The objective of quality management is to provide reasonable assurance that the audit follows standards and legal requirements.

The engagement partner must be actively involved throughout the audit process to ensure quality.

The six components of quality management are remembered by the mnemonic LIRUM: Leadership, Ethical Requirements, Acceptance, Resources, Engagement Performance, and Monitoring and Remediation.

Leadership in quality management requires the audit team leader to have suitable capabilities and authority.

Ethical requirements ensure that the audit team meets relevant ethical standards, including a questionnaire to confirm compliance.

Acceptance and continuance involve assessing whether the firm should take or continue the audit job, considering competence and conflicts of interest.

Resources for quality management include human, intellectual, and technological resources, ensuring they are appropriate and sufficient.

Engagement performance involves direction, supervision, review, and opportunities for consultation within the audit team.

Monitoring and remediation involve ongoing checks to ensure quality control is working and fixing issues as they arise.

Direction involves briefing the audit team on the need for professional skepticism and the specifics of audit testing.

Supervision is an active process to ensure audit team members are capable and may involve reassigning tasks or providing training.

Review involves the engagement partner focusing on areas where judgment is exercised, such as materiality and going concern assessments.

Engagement quality review is a specific aspect of review for listed and high-risk clients, involving a second partner before the audit report is signed.

Post-audit reviews, known as cold or post-issuance reviews, are conducted to ensure quality management was in place after the audit opinion has been signed.

Remediation is crucial for addressing quality control issues promptly to ensure the audit opinion is justified.

Transcripts

this is a lecture from open tuition

to benefit from the lecture you should

download the free lecture notes from

opentuition.com hello

this recording concerns the chapter on

audit documentation and quality control

we will talk about audit documentation

first

questions about this in the exam will

probably be

knowledge based

so this is a case really

of learning a few key points

one thing that you could be asked is

why should we document anything so what

is the purpose

and in a sense you might say this is

common sense

in the same way

as when you go shopping you make a

shopping list so that you don't come

back with the right with the wrong

things

but we probably need to be more specific

and learn what the isis says

so as far as possible

try and remember the points that i've

highlighted here in the notes

first of all

to make sure that the audit work has

actually been done properly

one of the problems the auditor might

face

is

if at some stage the firm is sued for

negligence

the judge will ask to see the audit

working papers

in court in which case we would need to

produce them to show that the work that

we've done

and that we did do a proper audit

secondly

it will help with the process of review

remember

again to avoid the risk of litigation

and to protect the good name of the firm

the work of the audit junior staff

is reviewed by their supervisor

that's then reviewed by the manager

that's then reviewed by the partner

and that means that we have a whole

chain of review

documented in the working papers

thirdly

it will help in future years

in future years

it's useful for next year's audit team

to understand the approach that was

taken this year

and you know this could be very mundane

things about who could contact we could

contact about certain issues

or very important issues

concerning the approach taken in tests

and areas where we had to exercise for

example more skepticism

it will help next year's audit to be

more efficient

finally

it will ensure that as far as possible

we are methodical

because we have a lot of checklists

again to work our way through

that means that we won't won't miss

things out

and it's very clear

who did what work

and what they did

so what's the point of having the

documentation

those four points

to confirm the work has been done

properly

to help with review

to help next year's audit and finally

to make sure the audit has been done in

a methodical way

audit working papers which normally now

would be soft copies as opposed to hard

copies

are conventionally divided into two

types of filing system

there's a filing system

for the working papers that are useful

every year

and that's known as the permanent file

so it acts like a reference document

and every year

it will need to be consulted

to see what happened again

uh in that

that would be relevant

in future audits

so it would have details of things like

the bankers the lawyers the accounting

system

organization charts

who does what at the client

legal requirements with the company like

its constitution

how directors are appointed and all

those sorts of things

one particular letter that you would

find on the permanent file

is the letter of engagement

the letter of engagement is signed at

the start of the audit

it's not normally reissued every year

unless there's some doubt about

directors understanding or some change

in circumstances

in most cases it's something that would

be kept on the permanent file

the current file

is really just for

this year

so that's where you'll find all the

information about this year

the financial statements themselves

the working papers again in terms of

this year

the audit programs for this year

and two other letters that you meet in

other chapters in our notes

the letter of representation

which you will see

is a letter that we asked directors to

write us confirming

things like their responsibility for the

financial statements

and the management letter

which is a letter that we send them

every year

identifying

weaknesses in controls

suggesting

what the implication of that could fit

the business

and also making recommendations

so that would very typically be tested

in a multiple choice question

where would you find a certain document

where would i find the constitution

of the company answer on the permanent

file

within the audit files

everything is logically structured

now i think this is harder to test so as

long as you appreciate the point from

these notes i think that's fine

each section of the file

deals with a separate section of the

balance sheet or statement of financial

position or the income statement

so there'll be a section of the file

again that deals with ppe for example

it will start with

a summary of the figures in the accounts

and they sometimes call that

the lead schedule

which will then be the figures will then

be analyzed

and as you can see as you work down this

page

you go from the financial statements

down to the breakdown of the numbers in

the financial statements

down to the detail of the audit tests on

each of those items

we know that when we're testing ppe

we have to test additions and disposals

so you can see everything

is nicely cross-referenced

and it's clear to the reviewer that all

aspects of ppe have been properly tested

so as far as that section goes

i think all that matters is that you

appreciate the way in which the file is

structured

i think that section there is a bit

harder to test though

they could set you

a multiple choice question

on what you see in a working paper

so again

i've picked out some of the popular

things that you might see

there'll be details of the name of the

client and their year end

a title explaining what's going to

happen on the working paper

perhaps they're doing some existence

test on additions or something like that

details of who prepared it

and when they prepared it

and above all

details of who reviewed it and when they

reviewed it

and logically the working paper will

work down

explain the test explain the results

and get to a conclusion

at the end of the working paper

so that's it in terms of documentation

key things

what's the purpose of documentation

secondly

permanent versus current file

and thirdly

what might you typically see on a

working

paper but for the rest of this lecture

we're talking about something separate

and this is now the general issue of

quality management

which they used to call

quality control but the word now is

quality management

there are a number of standards that

deal with this

but the only one you have to be

concerned with is isa 220

quality management

it is only concerned with audit

so it's not concerned with other

assurance engagements

it's only concerned with a standard

audit of a specific set of financial

statements

again

and the whole standard

focuses on the responsibilities of the

boss

the boss is the engagement partner

she or he is the one who's going to sign

the audit opinion at the end of the

engagement

and this is really a standard for them

and it says to them

this is for you

these are your responsibilities

do not shirk them

the objective of quality management

again important i suppose

for multiple choice questions you can

see here

highlighted in blue

it's to make sure that the firm

is getting

reasonable assurance

that the audit has followed standards

like auditing standards with reference

to accounting standards and so on

and also

legal requirements

local legislation in the country where

the audit is being conducted

so reasonable assurance that the audit

has been conducted in that way

and reasonable assurance secondly

that the report is appropriate in the

circumstances

based on the work that's been done

as i said

everything in the standard focuses

on the responsibility of the engagement

partner

and the message is

that she or he

must be actively involved throughout the

audit process

the standard then picks up on components

of quality management

if you started your studies

using an earlier version of iso 220

although the the words look similar in

terms of the components

you'll notice

that some of the wordings have slightly

changed

so again for multiple choice questions

just be careful again

when you are looking at the scenario or

if you are explaining quality control

management

try and use the right sort of language

i use a mnemonic for this you don't have

to the mnemonic i've got it just goes

across the page

is lirum

l-e-a-r-e-m

it just helps me to remember

the six components of quality management

on an individual audit

l stands for leadership

the fact that the person in charge

must have suitable capabilities

suitable competence

and also again

suitable authority

over the rest of the team

e stands

for ethical requirements

it's the fact

that the person in charge

is happy

that the audit team and the audit firm

has met relevant or ethical requirements

one of the things that they will do

is send out an ethics questionnaire to

the audit team

asking them to confirm for example they

hold no shares in the client

that they're not related to staff at the

client

so that we can move staff around before

the problem arises

so there's been suitable

meeting of ethical requirements

a stands for acceptance but also

continuance

are we absolutely sure

we should be taking this job or

continuing this job

so does the firm still has the

competence

has the client outgrown the auditor

are there any conflicts of interest with

other clients in the same industry

do we feel

the client has appropriate integrity

so that we're happy to be associated

with them

so leadership

ethics and acceptance

r stands for resources

making sure that the resources are

appropriate and sufficient

resources

in three categories

so again i use a mnemonic

hit

hit

human resources

are the staff appropriately trained

are we giving people work at the right

level

if someone has just started with the

firm

we don't want them auditing something

like derivatives which is very technical

so

are the human resources okay

intellectual again

very much thinking about the documents

that they need to be using you know is

it are we complying with the firm's

internal audit

procedure manual are we complying with

the isis

do we have a proper understanding of the

international accounting standards

and finally

technological

thinking about the i.t

so firms are using increasingly audit

software

is the package appropriate is it working

in the right way

so resources

human

intellectual

technological

we all understand human

intellectual think of someone reading a

book

technological

think of i.t

next is e

that's engagement performance

which includes a number of things

in particular

direction supervision review

and opportunities for consultation

we're going to talk about those in just

a minute

and finally

a bit like a cat chasing its own tail we

need to make sure that as an ongoing

process

that we are monitoring

the way in which the quality control

works

now

again we will talk about that

a little bit more in a minute

but it's really that final check

and a word they've brought into this isa

is this important little word here

remediation

so where we notice that things are not

going right

we don't leave it for next year

we say well what can i do

to fix the problem now

so lirum

leadership ethics acceptance resources

engagement performance

and finally m

monitoring and remediation

now our notes have got some more notes

on

direction supervision and review

so we'll talk about those

what does direction mean

if you're trying to explain it you

probably need to give an example

and the easiest example that we've put

into the notes

is that we're having team briefings so

we're talking to the staff

whether it's online or in person

reminding them for example

of the need to exercise professional

skepticism in their work

reminding them again about what exactly

is they need to be doing in terms of

audit testing

so direction

talking to the team

before they do anything

once they go out

we then need to supervise them

and that's an active process again for

the audit management

sometimes it may be

that a particular audit member staff is

out of their depth

in which case we may need to switch

around the team

if there are problems which that person

again

can't technically deal with

because maybe they've only been working

at the audit firm for a year or so

or alternatively as a result of

supervision

providing training

so we need direction

we need supervision

and we need to review everything

well

the firm needs to review everything

the engagement partner can't possibly

review everything

especially with the advent of audit

software

where

zillions of transactions are being

analyzed

so the engagement partner

will need to review the stuff that

matters

and the stuff that matters is where

judgment is involved

now as far as possible

try and learn this list here

where is judgment exercised

number one

determining materiality

five to ten percent of profit

perhaps going closer to five percent

if you think the client is high risk

decisions about using auditors experts

are surveyors pension valuers and so on

the way in which the firm is responding

not to every risk but to significant

risks

the ones that are most damaging

the ones that are most likely to occur

in the spectrum of audit risk

so what is the firm doing about sorting

those out

the way in which

the firm is looking

a going concern

as to whether

um appropriate disclosures

might need to be made in the financial

statements

or possibly even the accounts may need

to be on a breakup basis but that would

be much more rare

understanding the size

and importance of the errors

the client will correct some

some they won't correct but we need to

understand the volume of errors that

we're coming across

and of course the final judgment

the opinion

as to whether the accounts are giving a

true and fair view

and whether sufficient and appropriate

evidence has been gathered

so try and learn that list if you can of

issues that the engagement partner must

review

a very specific aspect of review

which is required for listed

and high risk clients

is the engagement quality review

this involves

not the initial partner but a second

partner who will come in

before the audit report is signed

and actually look at everything and say

would i have reached the same sort of

conclusion

is the quality in place in the work

that's been done so far

again we probably would need a bit more

substance in our answer

so perhaps you could learn some of the

words that i've highlighted there in

blue

what would this second partner do

well she would look at the financial

statements and the audit report

she would go through the judgments that

the first partner made

look at the conclusions that were

reached on the file

and in particular enlisted companies

confirm

that the firm has met all relevant

independent re um independence

requirements

in particular with listed companies

we don't want the firm preparing the

accounts and doing the audit

that would be a very bad thing to do

sometimes

it's known as a hot review or a

pre-issuance review

the key thing is it's done before the

audit report is signed

sometimes reviews are done later as well

in which case they're known as cold or

post issuance reviews

all firms will actually

look at old audit files

to make sure that quality management was

in place

and larger firms will have specialist

teams

they will come in

they'll aim to rotate around all the

partners in the firm

and say okay

you audited boxo

let's have you look at your audit file

and see if the quality control process

was in place

that's done some time after the audit

opinion has been signed

but whenever the monitoring is carried

out

finally

we would need to make sure

that there is remediation

where there are problems with quality

control

so we can't leave things for another

year

so at any time

if for example

you think that the audit team are taking

shortcuts

to meet budget

or

um they're just paranoid about the firm

not doing the work in the right number

of hours or something

then we have to stand back and say

no

we've got to be realistic

about this

even if we are going to run over budget

then that's what we will have to do

again to make sure the audit opinion is

justified

so therefore it's a case of going back

round the circle isn't it and saying

well

how can i better have directed

supervised and reviewed this process

as it went through

there we are

that was a discussion

in respect of

a documentation

and quality management