ICAI releases Implementation Guide on SA 230 | Audit Documentation

ICAI releases Implementation Guide on SA 230 | Audit Documentation along withFAQ's |FAQ's on Audit Documentation ICAI has released an Implementation Guide to Standard on Auditing (SA) 230, Audit Documentation (Revised 2018). The Guide also contains 37 FAQ's onSA 230 | Audit Documentation.37 FAQ's onSA 230 | Audit Documentation are given below for reference:

ICAI releases Implementation Guide on SA 230 | Audit Documentation along withFAQ's |FAQ's on Audit Documentation

Q1. What is the scope of SA 230 A1. SA 230 deals with the auditors responsibility to prepare audit documentation for an audit of financial statements. It is to be adapted as necessary in the circumstances when applied to audits of other historical financial information. The specific documentation requirements of other SAs do not limit the application of SA 230. Laws or regulations may establish additional documentation requirements. Q2. What is the nature and purpose of audit documentation A2. Audit documentation that meets the requirements of this SA and the specific documentation requirements of other relevant SAs provides:

(a) Evidence of the auditors basis for a conclusion about the achievement of the overall objectives of the auditor; and

(b) Evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements.

A table has been given stating the specific documentation requirements under various SAs. Refer response to FAQ No. 37. Q3. What are the purposes which may be served by audit documentation A3. Audit documentation serves a number of purposes, including the following:

Assisting the engagement team to plan and perform the audit.

Assisting members of the engagement team responsible for supervision to direct and supervise the audit work, and to discharge their review responsibilities in accordance with SA 220.

Enabling the engagement team to be accountable for its work.

Retaining a record of matters of continuing significance to future audits.

Enabling the conduct of quality control reviews and inspections in accordance with SQC 1.

Enabling the conduct of external inspections in accordance with applicable legal, regulatory or other requirements.

Q4. What is the objective of the auditor under SA 230 A4. The objective of the auditor is to prepare documentation that provides:

A sufficient and appropriate record of the basis for the auditors report; and

Evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements.

Q5. What do you mean by audit documentation A5. The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as working papers or workpapers are also sometimes used). It may be noted, that the documents provided by client which are used to do audit should be part of audit documentation and checking notes should be attached by auditors on such documents. Q6. What do you mean by audit file A6. One or more files, in physical or electronic form, arranged containing the records that comprise the audit documentation for a specific engagement. Q7. What do you mean by experienced auditor A7. An individual (whether internal or external to the firm) who has practical audit experience, and a reasonable understanding of:

Audit processes;

SAs and applicable legal and regulatory requirements;

The business environment in which the entity operates; and

Auditing and financial reporting issues relevant to the entitys business.

Q8. What would be the form, content and extent of Audit Documentation A8. The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, to understand:

The nature, timing, and extent of the audit procedures performed to comply with the SAs and applicable legal and regulatory requirements;

The results of the audit procedures performed, and the audit evidence obtained; and

Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions.

Q9. What are influential factors for the form, content and extent of audit documentation A9. The form, content and extent of audit documentation depend on factors such as:

The size and complexity of the entity.

The nature of the audit procedures to be performed.

The identified risks of material misstatement.

The significance of the audit evidence obtained.

The nature and extent of exceptions revealed.

The need to document a conclusion or the basis for a conclusion not readily determinable from the documentation of the work performed or audit evidence obtained.

The audit methodology and tools used.

Q10. How should the audit documentation be recorded A10. Audit documentation may be recorded on paper or on electronic or other media. Q11. What are the examples of the audit documentation A11. Examples of audit documentation include the following:

Engagement letter.

Audit programmes defined, with details of work carried out and results filled, including planning memorandum.

Analyses of various account balances through comparatives and corroborative.

Issues memoranda.

Summaries of significant matters.

Letters of confirmation and representation.

Checklists.

Correspondence (including e-mail) concerning significant matters.

Abstracts or copies of the entitys records/contracts/ agreements.

Audit documentation, however, is not a substitute for the entitys accounting records and vice versa. Q12. Whether Minutes Book, Records, Bills, Vouchers, Fixed Assets Register, legal books etc. are to be obtained by auditor as audit documentation What would the auditor not include in the audit documentation A12. No, such records are to be kept and maintained by the management / owner of the entity. Auditor may take abstract of some accounts, records, contracts etc as he may find relevant as per his judgement. Further, the auditor also need not include in audit documentation:

Superseded drafts of working papers and financial statements;

Notes that reflect incompleteness;

Preliminary thinking;

Previous copies of documents corrected for typographical or other errors; and

Duplicates of documents.

Oral explanations by the auditor, on their own, do not represent adequate support for the work auditor performed or conclusions the auditor reached, but may be used to explain or clarify information contained in the audit documentation. Q13. Whether confirmation of all parties account balances should be obtained by the management and copy of all should be recorded by the auditor as audit documentation, if not, then to what extent and in which manner the confirmation(direct/third party/obtained by management/ verification from records) is relevant for the audit documentation required to be recorded A13. No, the SAs do not prescribe that the confirmation of all account balances are required to be obtained. As it may also not be feasible considering the time and cost involved and to complete the audit in time. It is the auditors judgment to rely on the running account balances, statements, transactions with the parties and behaviour of the account. In the cases when the auditor has reason to believe that the account balances with the respective parties are material and may have material differences, he should ask for the confirmations of the balances from the respective parties/entities to reduce the risk of material misstatement at low level. The confirmations, if available in other cases also will further support the auditors opinion. As required by SA 330 and SA 505, the auditor should obtain more persuasive audit evidence to respond to the auditors assessment of higher risk. In such situation external confirmation is more reliable as an audit evidence. Hence when there is higher risk involved the auditor should reduce the risk by obtaining the external confirmation. Q14. The requirements of the laws and regulations for compliances of the disclosure are given in illustrative formats and contents of the respective laws and regulations. The auditor is required to document all matters of non-compliances in material aspects. Whether the additional documentation is required A14. The Companies Act, 2013 has given the formats for financial statements in Schedule III, with the manner of disclosure and items required to be disclosed. For high quality of reporting it is always desired that the disclosure should be more appropriate. The requirements are meant to add value to the users of the financial statements. The auditor should therefore document to support the opinion where there is any material departure from the requirement and which may also materially influence the decision of the user. Further, in those cases where no specific requirement of the format or disclosure is given, the auditor may agree to the financial reporting framework being followed by the entity and disclosing those items which are pertinent to the said framework and the applicable requirement under that audit. In such case the auditor should specify the same in the engagement letter issued to the auditee. As in case of non-corporate entities, the disclosure as required under the Companies Act, 2013 is not applicable. Q15. What would be the audit documentation in case of Smaller / Less Complex Entity A15. The audit documentation for the audit of a smaller/less Complex entity is less extensive than that for the audit of a larger entity. In certain cases it may materially vary as there may be few documentation in some small/less complex entity. Here there may be more personal communication and formally there may only be the representation letter as audit documentation. When preparing audit documentation, the auditor of a smaller entity may also find it helpful and efficient to record various aspects of the audit together in a single document. Examples of matters that may be documented together in the audit of a smaller entity include understanding of the entity and its internal control, the overall audit strategy and audit plan, materiality, determined in accordance with SA 320, Materiality in Planning and Performing an Audit, assessed risks, significant matters noted during the audit, and conclusions reached. Application and Other Explanatory Material given in the standards on auditing also mention the lesser documentation and deals with considerations specific to Smaller entities, the brief of which is explained as below (for details the auditor may refer the relevant standard): SA 260(Revised), Communication with Those Charged with Governance, which explains that in some smaller entities, however, one person may be charged with governance, for example, the owner- manager where there are no other owners, or a sole trustee. Also, in some cases, the appropriate person(s) with whom to communicate may not be clearly identifiable from the applicable legal framework or other engagement circumstances, for example, entities where the governance structure is not formally defined, such as some family-owned entities, some not-for-profit organizations, and some government entities. In such cases, the auditor may need to discuss and agree with the engaging party (Auditee) the relevant person(s) with whom to communicate. SA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management, explains that smaller entities may find that certain types of control activities are not necessary because of controls applied by management. For example, managements sole authority for granting credit to customers and approving significant purchases can provide effective control over important account balances and transactions, lessening or removing the need for more detailed control activities. SA 240, The Auditors Responsibilities relating to Fraud in an Audit of Financial Statements, which states that in case of small entity where a single owner manages the entity and no one else has governance role. In these cases, there is ordinarily no action on the part of the auditor because there is no oversight separate from the management. SA 300, Planning an Audit of Financial Statements, which explains that in audits of small entities, the entire audit may be conducted by a very small audit team. Many audits of small entities involve the engagement partner (who may be a sole practitioner) working with one engagement team member (or without any engagement team members). With a smaller team, co-ordination of, and communication between, team members are easier. Establishing the overall audit strategy for the audit of a small entity need not be a complex or time-consuming exercise; it varies according to the size of the entity, the complexity of the audit, and the size of the engagement team. For example, a brief memorandum prepared at the completion of the previous audit, based on a review of the working papers and highlighting issues identified in the audit just completed, updated in the current period based on discussions with the owner-manager, can serve as the documented audit strategy for the current audit engagement if it covers the matters noted in paragraph 7 of SA 300. SA 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment, which explains that Many small audits are carried out entirely by the engagement partner (who may be a sole practitioner). In such situations, it is the engagement partner who, having personally conducted the planning of the audit, would be responsible for considering the susceptibility of the entitys financial statements to material misstatement due to fraud or error. Further, smaller entities may not have interim or monthly financial information that can be used for purposes of analytical procedures. In these circumstances, the auditor may be able to perform very limited procedures. SA 320, Materiality in Planning and Performing an Audit, which explains that when an entitys profit before tax from continuing operations is consistently nominal, as might be the case for an owner-managed business where the owner takes much of the profit before tax in the form of remuneration, a benchmark such as profit before remuneration and tax may be more relevant for audit documentation. SA 330, The Auditors Responses to Assessed Risks, explains that in the case of small entities, there may not be many control activities that could be identified by the auditor, or the extent to which their existence or operation have been documented by the entity may be limited. SA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, explains that obtaining understanding of estimates for smaller entities is often less complex as their business activities are often limited and transactions are less complex. Further, often a single person, for example the owner-manager, identifies the need to make an accounting estimate and the auditor may focus inquiries accordingly. SA 570(Revised), Going Concern, explains that in many cases, the management of smaller entities may not have prepared a detailed assessment of the entitys ability to continue as a going concern, but instead may rely on in-depth knowledge of the business and anticipated future prospects. Nevertheless, in accordance with the requirements of this SA, the auditor needs to evaluate managements assessment of the entitys ability to continue as a going concern. Further, continued support by owner-managers is often important to smaller entities ability to continue as a going concern. Where a small entity is largely financed by a loan from the owner-manager, it may be important that these funds are not withdrawn. For example, the continuance of a small entity in financial difficulty may be dependent on the owner-manager subordinating a loan to the entity in favour of banks or other creditors, or the owner-manager supporting a loan for the entity by providing a guarantee with his or her personal assets as collateral. In such circumstances, the auditor may obtain appropriate documentary evidence of the subordination of the owner-managers loan or of the guarantee. Where an entity is dependent on additional support from the owner-manager, the auditor may evaluate the owner- managers ability to meet the obligation under the support arrangement. In addition, the auditor may request written confirmation of the terms and conditions attaching to such support and the owner- managers intention or understanding. Further, in the case of an audit where the engagement partner performs all the audit work, the documentation will not include matters that might have to be documented solely to inform or instruct members of an engagement team, or to provide evidence of review by other members of the team (for example, there will be no matters to document relating to team discussions or supervision). Q16. If the auditor complies with SA 230, will the result be sufficient and appropriate audit documentation A16. In principle, compliance with the requirements of this SA will result in the audit documentation being sufficient and appropriate in the circumstances. Other SAs contain specific documentation requirements that are intended to clarify the application of this SA in the particular circumstances of those SAs. Q17. Do the specific documentation requirements of other SAs limit the application of SA 230 A17. No, the specific documentation requirements of other SAs do not limit the application of this SA. Q18. What will be the consequence, if there is no audit documentation requirement in any SA A18. The absence of a documentation requirement in any particular SA is not intended to suggest that there is no documentation that needs to be prepared as a result of complying with that SA. Documentation appropriate to the circumstance needs to be maintained. Q19. Is it necessary for the auditor to document separately (as in a checklist, for example) compliance with matters for which compliance is demonstrated by documents included within the audit file A19. No, audit documentation provides evidence that the audit complies with SAs. However, it is neither necessary nor practicable for the auditor to document every matter considered, or professional judgment made, in an audit. Further, it is unnecessary for the auditor to document separately (as in a checklist, for example) compliance with matters for which compliance is demonstrated by documents included within the audit file. For example: The existence of an adequately documented audit plan demonstrates that the auditor has planned the audit. The existence of a signed engagement letter in the audit file demonstrates that the auditor has agreed the terms of the audit engagement with management, or where appropriate, those charged with governance. An auditors report containing an appropriately qualified opinion demonstrates that the auditor has complied with the requirement to express a qualified opinion under the circumstances specified in the SAs. In relation to requirements that apply generally throughout the audit, there may be a number of ways in which compliance with them may be demonstrated within the audit file:

For example, there may be no single way in which the auditors professional skepticism is documented. But the audit documentation may nevertheless provide evidence of the auditors exercise of professional skepticism in accordance with SAs. Such evidence may include specific procedures performed to corroborate managements responses to the auditors inquiries.

Similarly, that the engagement partner has taken responsibility for the direction, supervision and performance of the audit in compliance with the SAs may be evidenced in a number of ways within the audit documentation. This may include documentation of the engagement partners timely involvement in aspects of the audit, such as participation in the team discussion required by SA 315.

Q20. What are the examples of significant matters A20. Judging the significance of a matter requires an objective analysis of the facts and circumstances. Examples of significant matters include:

Matters that give rise to significant risks. As defined in SA 315, significant risks mean an identified and assessed risk of material misstatement that, in the auditors judgment, requires special audit consideration.

Results of audit procedures indicating (a) that the financial statements could be materially misstated, or (b) a need to revise the auditors previous assessment of the risks of material misstatement and the auditors responses to those risks.

Circumstances that cause the auditor significant difficulty in applying necessary audit procedures.

Findings that could result in a modification to the audit opinion or the inclusion of an Emphasis of Matter paragraph in the auditors report.

Q21. What are the important factors in determining the form, content and extent of audit documentation of significant matters A21. An important factor in determining the form, content and extent of audit documentation of significant matters is the extent of professional judgment exercised in performing the work and evaluating the results. Documentation of the professional judgments made, where significant, serves to explain the auditors conclusions and to reinforce the quality of the judgment. Such matters are of particular interest to those responsible for reviewing audit documentation, including those carrying out subsequent audits, when reviewing matters of continuing significance (for example, when performing a retrospective review of accounting estimates). Q22. Give examples of circumstances in which, it is appropriate to prepare audit documentation relating to the use of professional judgment A22. Some examples of circumstances in which, it is appropriate to prepare audit documentation relating to the use of professional judgment include, where the matters and judgments are significant:

The rationale for the auditors conclusion when a requirement provides that the auditor shall consider certain information or factors, and that consideration is significant in the context of the particular engagement.

The basis for the auditors conclusion on the reasonableness of areas of subjective judgments (for example, the reasonableness of significant accounting estimates).

The basis for the auditors conclusions about the authenticity of a document when further investigation (such as making appropriate use of an expert or of confirmation procedures) is undertaken in response to conditions identified during the audit that caused the auditor to believe that the document may not be authentic.

The auditor may consider it helpful to prepare and retain as part of the audit documentation a summary (sometimes known as a completion memorandum) that describes the significant matters identified during the audit and how they were addressed, or that includes cross-references to other relevant supporting audit documentation that provides such information. Such a summary may facilitate effective and efficient reviews and inspections of the audit documentation, particularly for large and complex audits. Further, the preparation of such a summary may assist the auditors consideration of the significant matters. It may also help the auditor to consider whether, in light of the audit procedures performed and conclusions reached, there is any individual relevant SA objective that the auditor cannot achieve that would prevent the auditor from achieving the overall objectives of the auditor. It is however to be noted that the audit documentation for use of the professional judgment will be materially lesser in case of audit of small entities and where the engagement partner himself is dealing with the audit of such entities in all respect. Q23. What should the auditor record in documenting the nature, timing and extent of audit procedures performed A23. The auditor should record:

The identifying characteristics of the specific items or matters tested;

Who performed the audit work and the date such work was completed; and

Who reviewed the audit work performed and the date and extent of such review.

SA 220 requires the auditor to review the audit work performed through review of the audit documentation. The requirement to document who reviewed the audit work performed does not imply a need for each specific working paper to include evidence of review. The requirement, however, means documenting what audit work was reviewed, who reviewed such work, and when it was reviewed. Q24. What purposes do recording the identifying characteristics serve A24. Recording the identifying characteristics serves a number of purposes. For example, it enables the engagement team to be accountable for its work and facilitates the investigation of exceptions or inconsistencies. Identifying characteristics will vary with the nature of the audit procedure and the item or matter tested. For example:

For a detailed test of entity-generated purchase orders, the auditor may identify the documents selected for testing by their dates and unique purchase order numbers.

For a procedure requiring selection or review of all items over a specific amount from a given population, the auditor may record the scope of the procedure and identify the population (for example, all journal entries over a specified amount from the journal register).

For a procedure requiring systematic sampling from a population of documents, the auditor may identify the documents selected by recording their source, the starting point and the sampling interval (for example, a systematic sample of shipping reports selected from the shipping log for the period April 1 to September 30, starting with report number 12345 and selecting every 125th report).

For a procedure requiring inquiries of specific entity personnel, the auditor may record the dates of the inquiries and the names and job designations of the entity personnel.

For an observation procedure, the auditor may record the process or matter being observed, the relevant individuals, their respective responsibilities, and where and when the observation was carried out.

Q25. What all should the auditor document for communication/discussion with management A25. The auditor shall document discussions of significant matters with management, those charged with governance, and others, including the nature of the significant matters discussed and when and with whom the discussions took place. The documentation is not limited to records prepared by the auditor but may include other appropriate records such as minutes of meetings prepared by the entitys personnel and agreed by the auditor. Others with whom the auditor may discuss significant matters may include other personnel within the entity, and external parties, such as persons providing professional advice to the entity. The auditor should specifically deal with key audit matters documentation as specified in SA 701 and other audit conclusion and reporting standards. Q26. What should the auditor document if the auditor identified information that is inconsistent with the auditors final conclusion regarding a significant matter A26. The auditor shall document how the auditor addressed the inconsistency. The requirement to document how the auditor addressed inconsistencies in information does not imply that the auditor needs to retain documentation that is incorrect or superseded. Q27. What will the auditor do when it is necessary to depart from a relevant requirement in a SA A27. The auditor should document how the alternative audit procedures performed achieve the aim of that requirement, and the reasons for the departure, if, in exceptional circumstances, the auditor judges it necessary to depart from a relevant requirement in a SA. The requirements of the SAs are designed to enable the auditor to achieve the objectives specified in the SAs, and thereby the overall objective of the auditor. Accordingly, other than in exceptional circumstances, the SAs call for compliance with each requirement that is relevant in the circumstances of the audit. Q28. Under which situation is a documentation requirement not necessary A28. The documentation requirement applies only to requirements that are relevant in the circumstances. A requirement is not relevant only in the cases where:

The entire SA is not relevant [for example, if an entity does not have an internal audit function, nothing in SA 610(Revised) is relevant]; or

The requirement is conditional and the condition does not exist (for example, the requirement to modify the auditors opinion where there is an inability to obtain sufficient appropriate audit evidence, and there is no such inability).

Q29. What will be the audit documentation, if, in exceptional circumstances, the auditor performs new or additional audit procedures or draws new conclusions after the date of the auditors report A29. The auditor is required to document:

The circumstances encountered;

The new or additional audit procedures performed, audit evidence obtained, and conclusions reached, and their effect on the auditors report; and

When and by whom the resulting changes to audit documentation were made and reviewed.

Q30. Give examples of exceptional circumstances Matters arising after the Date of the Auditors Report A30. Examples of exceptional circumstances include facts which become known to the auditor after the date of the auditors report but which existed at that date and which, if known at that date, might have caused the financial statements to be amended or the auditor to modify the opinion in the auditors report. The resulting changes to the audit documentation are reviewed in accordance with the review responsibilities set out in SA 220, with the engagement partner taking final responsibility for the changes. Q31. When should the auditor complete the administrative process of assembling the final audit file A31. The auditor should complete the administrative process of assembling the final audit file on a timely basis after the date of the auditors report. SQC 1 requires firms to establish policies and procedures for the timely completion of the assembly of audit files. An appropriate time limit within which to complete the assembly of the final audit file is ordinarily not more than 60 days after the date of the auditors report. Q32. Whether the administrative process of completion of the assembly of the final audit file after the date of the auditors report construes as performance of new audit procedures or the drawing of new conclusions If not, what are the changes permissible in the audit documentation during the final assembly process A32. No, the administrative process of completion of the assembly of the final audit file after the date of the auditors report does not construe as performance of new audit procedures or the drawing of new conclusions. Changes may, however, be made to the audit documentation during the final assembly process if they are administrative in nature. Examples of such changes include:

Deleting or discarding superseded documentation.

Sorting, collating and cross referencing working papers.

Signing off on completion checklists relating to the file assembly process.

Documenting audit evidence that the auditor has obtained, discussed, and agreed with the relevant members of the engagement team before the date of the auditors report.

Q33. What is the retention period for the audit documentation A33. The retention period for audit engagements, as per SQC 1, ordinarily is no shorter than seven years from the date of the auditors report, or, if later, the date of the group auditors report. Q34. What will be the audit documentation in the circumstances where the auditor finds it necessary to modify existing audit documentation or add new audit documentation after the assembly of the final audit file has been completed A34. The auditor shall, regardless of the nature of the modifications or additions, document: The specific reasons for making them; and When and by whom they were made and reviewed. Q35. Give an example of a circumstance in which the auditor may find it necessary to modify existing audit documentation or add new audit documentation after file assembly has been completed. A35. Example is the need to clarify existing audit documentation arising from comments received during monitoring inspections performed by internal or external parties. Q36. Who is the owner of the audit documentation A36. Standard on Quality Control (SQC) 1, Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements, issued by the ICAI, provides that, unless otherwise specified by law or regulation, audit documentation is the property of the auditor. He may at his discretion, make portions of, or extracts from, audit documentation available to clients, provided such disclosure does not undermine the validity of the work performed, or, in the case of assurance engagements, the independence of the auditor or of his personnel. A37. Provide the specific audit documentation requirements in other SAs A37. The specific audit documentation requirements in the respective SAs are given below. Since the standards on auditing are in alignment of the international standards on auditing prepared keeping in mind the requirements of the listed entities and public interest entities with a view to oversee the public interest, the specific documentation requirements have been given accordingly. The same may be adjusted (in case of small/ less complex entities as also briefed in the application material of the respective Standards) according to the requirements based on the size, nature, type of the entity being audited and complexities involved. Click here to download the complete Implementation Guide

ICAI releases Implementation Guide on SA 230 | Audit Documentation, FAQ's on Audit Documentation, sa 230, Audit Documentation, audit, faq's

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