Keep the Big Picture in Mind When Reviewing Working Papers

October 2004

Working paper review has to be one of my least favorite tasks—ever. Often it is very difficult to understand what the auditor was thinking and to retrace their thought process by looking at a set of working papers. It often takes hours just to get a sense of the overall purpose of the working papers.

Two simple guiding principles of working paper review make the task a little less daunting. Both have to do with keeping a big picture perspective. The first is to concentrate on concept before mechanics and the second is to review working papers at the top of the working paper hierarchy first.

Check Concepts before Mechanics

I once was part of an audit team who expressed an opinion on a university’s bond issues. One of our more senior auditors took the lead in auditing arbitrage… a pretty technical subject.

He spent two days auditing and creating a fabulous looking working paper. It was a huge, fold-out spreadsheet that had several columns and rows and had plenty of colored tickmarks and numbers. It was worthy of framing.

The supervisor got a hold of this lovely spreadsheet and started her review. She re-footed and re-cross-footed the columns. She checked the meaning of all the lovely tickmarks and added one of her own.

And then, after spending about half-a-day reviewing it—she realized that the concept behind the working paper was flawed. The senior auditor had gone down a bunny trail and tested attributes that did not pertain to our audit objective. The whole working paper was scrapped.

So, the auditor had invested two days and the supervisor had invested half-a-day and none of it was necessary.

If the supervisor had checked the concept of the working paper before the mechanics, she could have saved herself the effort. A half-day of precious audit budget could have been reserved.

So how do you check the concept behind the workingpaper. If your team uses ‘source,purpose, procedures, results, conclusions’ in your working paper, then you should read that first—paying close attention to the purpose of the working paper.

The purpose should correspond to a step on the audit program. That is the next place I recommend you look. This of course assumes that the audit program is any good. And that gets us to my next point.

Follow the Hierarchy of Working Papers

Only if the top of the hierarchy is working well and is understandable do you delve into the working papers at the bottom of the hierarchy. This saves us time and effort.

The hierarchy of working papers is as follows:
#1 = Audit Objective
#2 = Audit Program
#3 = Summary Memo
#4 = Detailed Working Papers

So, the first thing you look at as a reviewer is the audit objective. If the audit objective is stinky, you can stop right there. You can give the working papers back to the auditor and tell them to work on the objective and change the working papers accordingly. For a discussion of what makes a happy audit objective see the January 2004 newsletter at www.happycashflow.com

Now that you are happy with the audit objective, you can review either the summary memo or the audit program. Some folks don’t create summary memos (I personally am a big fan of summary memos and will discuss them in future issues of the newsletter) so you may be forced to look at the program.

Or maybe the summary memo isn’t that good… so you have to look at the program. If you see that the program is disjointed and does not help satisfy the audit objective, you can again stop your working paper review and return the working papers to the auditor.

No need in your going any further until the program is rewritten. Next, assuming that your audit program and summary memo are good, you can then move on to the detailed supporting working papers.

And what do we check on those working papers? We make sure that they satisfy steps of the audit program. If the working papers have a vague purpose or bad concept (ie are not relevant or meaningful) then you can stop there.

Try it, you’ll like it!