AUDIT DOCUMENTATION AND RECORDS RETENTION

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

AUDIT DOCUMENTATION AND RECORDS RETENTION

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LEARNING OBJECTIVES

After you complete this course, you should be able to:

Describe the basic provisions of AS 1215 and AU-C sec. 230 Apply Firm policies regarding audit documentationDescribe the basic provisions of Rule 2-06Apply Firm policies regarding records retention

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INTRODUCTION

PCAOB AS 1215 (formerly AS 3)

AICPA Clarified Statement on Auditing Standards 103 (AU-C sec. 230)

Firm documentation policies

Rule 2-06 of Regulation S-X

Firm records retention policies

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AUDIT DOCUMENTATION

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GUIDANCE AND TERMINOLOGY

Auditing Standard No. 3 AU-C sec. 230 PCAOB Rule 3101: Certain Terms Used in Auditing and

Related Professional Practice Standards

Must, Shall, Is Required = Unconditional

Should = Presumptively Mandatory

May, Might, Could = Responsibility to Consider

AU-C sec. 200: Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards

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GUIDING PRINCIPLES

Must document

Procedures performed

Evidence obtained

Conclusions reached

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WHAT IS “AUDIT DOCUMENTATION”?

“Audit documentation is the written record of the basis for

the auditor’s conclusions.” Examples of audit documentation

include: Memoranda Confirmation and representation letters Correspondence Schedules Audit programs

May be on paper, in electronic files, or on other media

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ORAL EXPLANATIONS NOT PERSUASIVE

Oral explanation alone does not constitute persuasive evidence, but, it may be used to clarify other written evidence

Must exercise professional skepticism and care

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Actual Documentation

There were few instances of management investigation of

inappropriate practices.Potential employees that indicate a criminal record

are scrutinized closely. The individual’s background is

checked thoroughly.

CLEAR AS A BELL?

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Actual Documentation

There were few instances of management investigation of

inappropriate practices.Potential employees that indicate a criminal record

are scrutinized closely. The individual’s background is

checked thoroughly.

CLEAR AS A BELL?

Improved Documentation

Managers are responsive to signs of inappropriate

practices.

Hiring policies require a background check for

applicants with a criminal record.

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WHO IS THE AUDIENCE?

An Experienced Auditor has:

No previous connection with the engagement

Reasonable understanding of audit activities and has studied the company's industry as well as the accounting and auditing issues relevant to the industry

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Engagement Team Members

DOCUMENTATION CONTENT

Procedures performed Evidence obtained Results Conclusions

Who performed and when?

Who reviewed and when?

Engagement Team Members

Show that accounting records reconcile with financial statements

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NATURE AND EXTENT OF DOCUMENTATION

Nature of procedure

Risk associated with assertion, account, or class of transactions,

including disclosures

Extent of judgment

Significance of evidence

Nature and extent of exceptions identified

Need to document a conclusion not readily determinable from the

documentation of work performed or evidence obtained

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WHAT TO DOCUMENT

Significant findings or issues

Actions taken to address them

Additional evidence obtained

Basis for conclusions reached

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WHAT IS “SIGNIFICANT”?

Significant matters include: Accounting principles and disclosure Complex or unusual transactions Estimates and uncertainties Changes in planned procedures/risk assessment Audit adjustments Internal control weaknesses Disagreements Difficulty applying audit procedures Matters affecting audit report

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ENGAGEMENT COMPLETION DOCUMENT

AS 1215 requires an engagement completion document for all public engagements

A properly completed highlights summary and Form A-20 are sufficient

Include:All significant findings or issues Matters identified during interim reviews

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ENGAGEMENT COMPLETION DOCUMENT

Compliance with Independence Rules

Training and Proficiency

Client Acceptance and Continuance

Outside Resources

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WHAT TO RETAIN?

Sufficient detail to identify specific items examined

Copies of original documents should be retained:

If not likely to be retained by company, or

If retaining copies would facilitate understanding of

Procedures performed

Evidence obtained

Conclusions reached

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IDENTIFICATION OF SPECIFIC ITEMSINSPECTED

Documentation should be sufficiently detailed to identify the specific items examined.

Document the identifying characteristics of the sampled items Check number Check date Invoice number Vendor

Example: Auditor selected Check #4782 dated 5/4/2016.

Example: Auditor inspected invoice #SP254-2 from Smith’s Manufacturing.

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Identify the population and scope of the sample

Identify the population and indicate the starting point and sampling interval for systematic samples

Example: Selected all invoices over $20,000 from the July sales register.

Example: Tested all checks over $100K from the May cash receipts log.

Example: Sampled every 40th invoice from the July sales register, starting with invoice #452.

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Does this sentence provide sufficient documentation?

Example: Auditor scanned all year-end AJE’s in the G/L and selected all items over $100,000 and any unusual items for review.

How might you better document the specific items inspected?

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Does this sentence provide sufficient documentation?

Example: Auditor scanned all year-end AJE’s in the G/L and selected all items over $100,000 and any unusual items for review.

How might you better document the specific items inspected?

Example: Auditor scanned all year-end AJE’s in the G/L and selected all items over $100,000 for review. Auditor also selected any unusual items including:

• Entries posted on Saturday

• Entries posted from 12:00 AM – 4:00AM

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What if no items meet our scope?

Example: AJE’s consisted of normal year-end adjustments, none of which were over $100,000. No unusual adjusting journal entries meeting the criteria defined were noted.

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WORK OF EXPERTS

Experts include: Appraisers Actuaries Environmental consultants BDO Consulting – Valuation & Business Analytics (BDOC-VBA)

Document work performed in accordance with PCAOB AS 1210 and/or AS 2501 (AU-C 620 and/or AU-C sec. 540 for nonpublic engagements)

Review with professional skepticism

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WORK OF EXPERTS

FACTS: Audit team engages BDOC-VBA to review an external valuation firm

report supporting the value of an asset recorded by the client.

BDOC-VBA prepares a memo dated after the audit opinion which identifies errors in the external valuation firms’ report. These errors were also identified by the client and corrected prior to issuance of our audit opinion.

The audit working papers include a PBC memo documenting the corrections made to the external valuation firms’ report.

The audit team did not prepare a separate memo.

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WORK OF EXPERTS

Documentation should include: Evaluation of objectivity and competence of external experts Verification of data provided to the expert Factors considered in evaluating approach and assumptions* Recalculation of key computations

HOW THE ERRORS IDENTIFIED WERE ADDRESSED

Audits of public entities – expert’s final report and/or working papers will be obtained prior to issuing audit opinion

For audits of non-public entities: If report issuance is after June 30, 2017, expert’s final reports etc. will be

obtained prior to release of auditor’s report

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MULTI-LOCATION ENGAGEMENTS

The office issuing the auditor’s report must obtain, and review and retain, prior to the report release date, certain documentation related to the work performed by other auditors.

Other BDO offices or other firms not referred to in the audit report often assemble and submit a reporting package containing the required documentation.

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REPORTING PACKAGE

Engagement completion document (highlights summary)

List of significant risks, the auditor’s responses, and the results of the auditor’s related procedures

Findings inconsistent with conclusions

Consolidation matters

Schedule of accumulated misstatements, including a description of nature and cause of each misstatement, and an evaluation of uncorrected misstatements (BDO Form A-53)

All significant deficiencies and material weaknesses in internal control

Representation letters

Audit committee communications

Memo summarizing risk brainstorming meeting

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Additional documentation required for: Reliance on system generated reports Auditing revenue Journal entry testing

PCAOB INSPECTION COMMENTS

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Additional documentation required for: Information produced by the entity (IPE) and reliance on system

generated reports Required to test accuracy and completeness of information or

testing controls over accuracy and completeness of information Required to evaluate whether information is sufficiently precise

and detailed for our purposes

Example – auditing completeness of allowance for doubtful accounts AR aging report should be tested for accuracy and completeness by:

Obtaining invoice copies Agreeing data back to aging (invoice #, date, customer) Recalculating age of invoice

REPORT RELIANCE

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Appropriate sample size for testing IPE depends on: Risk of material misstatement of FSA IPE’s volume, complexity, and inherent reliability TOCs reliance, if any Importance of IPE to planned audit procedure

IPE Sample Size Calculator Template Required for audits performed under PCAOB standards and

encouraged for other audits

Available Practice Aid, Audit Work on Information Produced by the Entity

REPORT RELIANCE

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Additional documentation required for: Auditing revenue

Example – auditing revenue recognition policies

PBC revenue recognition memo should be audited by: Ensuring that all revenue streams are considered Documenting the applicable authoritative guidance Evaluating the appropriateness of the accounting Testing transactions to ensure the correct accounting is

consistently applied

AUDITING REVENUE

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Additional documentation required for: Journal entry testing

Example – testing journal entries for evidence of management override Population of journal entries should be tested for completeness by:

Observing the download of entries from the system Rollforward all journal entries to the period end trial balance Reconcile trial balance to the financial statements Reconcile net effect of income statement impact to net income

Use of Journal Entry Testing Practice Aid expected for audits performed under PCAOB standards, and encouraged for other audits

JOURNAL ENTRY TESTING

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GOOD AUDIT DOCUMENTATION

Professional skepticismIdentify and reassess risk Document evidence to support conclusions Support oral explanationsComply with records retention rules

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HELPFUL TOOLS

Audit Manual

APT

Practice Aids in AKB

BDO FormsA-20, highlights

summary IndexSEC-6, SEC Reminder

Checklist

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Document work in sufficient detail to provide a clear indication of: Procedures performed Evidence obtained Conclusions reached

REMEMBER!

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RECORDS RETENTION

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INTRODUCTION

Congress adopted Section 802 of the Sarbanes-Oxley Act

SEC adopted Rule 2-06 of Regulation S-X

Overview of Rule 2-06

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CONSIDER 3 AUDITORS

Mr. Shredder – Discards anything that contradicts his final conclusion

Mr. Monkey – Doesn’t write anything down, has nothing to retain

Mr. C.Y.A – Documents everything in the working papers, pro and con

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SCOPE OF RULE 2-06

Applies to audits and reviews of public issuers By domestic accounting firms; and By foreign accounting firms

More stringent requirements apply in: Investigations Litigation

Retention, not creation

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PURPOSE OF RULE 2-06

To discourage the destruction, and assist in the availability, of records that may be relevant to investigations conducted under the securities laws, commission rules or criminal laws and:

Preserve evidence reflecting significant accounting judgments; and

Provide evidence of financial reporting improprieties or deficiencies in the audit process.

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PENALTIES FOR NON-COMPLIANCE

If one knowingly and willfully violates the Rule: Up to $750,000 fine Up to 10 years imprisonment

More severe penalties if one impedes a federal investigation or bankruptcy proceeding

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RETAIN RELEVANT RECORDS FOR 7 YEARS

Working papers

Other documents that form the basis of the audit or review; and

Memoranda, correspondence, communications and other documents, including electronic records

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TWO ADDITIONAL RETENTION CRITERIA

Retain records that:

1. Are created, sent or received in connection with the audit or review, and

2. Contain conclusions, opinions, analyses, or financial data related to the audit or review.

Reminder: Retain relevant documents, regardless of whether they are consistent or inconsistent with the auditor’s final conclusions.

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THE THOUGHT PROCESS

Is the document a working paper?

For other documents, is it

relevant?

Does the document form the basis for the audit

or review?

Yes

Yes

Yes

Must retain document



Document can be discarded

No

No

No

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OUR POLICIES ARE TO RETAIN

Working papers

Other documents that form the basis for an audit or review

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“OTHER” DOCUMENTS

“Memoranda, correspondence, communications, and other documents and records (including electronic records)” could include: Review comments Superseded drafts of memoranda Superseded drafts of financial statements Notes Previous versions of working papers Duplicate documents Emails Voicemails Documentation of Instant Messages Consultation memoranda

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“OTHER DOCUMENTS”: CONSULTATION MEMO

Prepare a draft consultation memo before initiating consultation

Involve SEC reviewer during consultation process.

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WHICH RECORDS ARE RELEVANT?

Consider purpose of Rule 2-06

Relevant = Substantive = Significant matters Accounting principles Estimates Uncertainties Audit adjustments Unsatisfactory test results

Reasonable investor standard

Duplicate documents are not considered relevant

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DUPLICATE DOCUMENTS – AN EXAMPLE

Our audit file contains the following working papers: Debt modification memorandum Partner’s review comments , including the following:

“Did we consider the guidance in FASB ASC 470-50-40?”

Subsequent to receiving the review comment, the Senior amended the debt modification memo to document the engagement team’s consideration of the standard.

Do we have a duplicate document?

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DUPLICATE DOCUMENTS – AN EXAMPLE

While addressing the partner’s review comment, the Senior realizes the client’s accounting treatment is incorrect.

He revises the first draft of the memorandum to: Document the consideration of FASB ASC 470-50-40; and Revise his conclusion about the client’s accounting treatment.

Do we have a duplicate document?Which memo should we retain?

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POLICIES FOR NON-ISSUERS

Subtle differences – different purposes

Purpose of GAAS:Review the workSupport the report

Purpose of Rule 2-06:Evidence for investigations

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RULE 2-06 DOES NOT:

Intend for auditors to retain ALL documents created during an audit or review.

Ignore materiality

Overlook relevance

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PRACTICAL CONSIDERATIONS

Support the opinion

Create high quality work

Exercise care when creating instant messages, emails or voicemails

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ARCHIVING WORKPAPERS

In-charge auditor’s responsibility

Archive relevant emails

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Report Release

Date

Documentation Completion

Date

45 days to assemble a complete and final set of work

papers

Audit Documentation should be retained for 7 Years

60 days for private engagements not conducted

in New York

Best Practice – archive within 15 days of report release date

RECORDS RETENTION

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Complete all necessary auditing procedures

Clear all review notes

Obtain sufficient evidence to support report

PRIOR TO REPORT RELEASE DATE

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No earlier than the date on which the auditor has obtained sufficient, appropriate audit evidence to support the opinion.

Management representation letter should be dated the same as the auditor’s report.

REPORT DATING

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Within this period:

Documentation can be updated Superseded documents can be discarded If documentation is added, must indicate:

Date added Name of person making addition Reason for change

Report Release

Date

Documentation Completion

Date

45-60 days to assemble a complete and final set of

working papers

AFTER THE REPORT RELEASE DATE

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No deletions

Can only add documentation with explanation

Must be currently dated

AFTER THE DOUMENTATION COMPLETION DATE

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CONSIDER 3 AUDITORS

Mr. Shredder – Discards anything that contradicts his final conclusion

Mr. Monkey – Doesn’t write anything down, has nothing to retain

Mr. C.Y.A – Documents everything in the working papers, pro and con

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CONCLUSION

Priority is to comply with the retention standards

If in doubt, consult!

AUDIT DOCUMENTATION AND RECORDS RETENTION

Documents

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