The Standards Don't Say Much About Working Papers

January 2008

I always snicker a bit when I hear auditors say they are not creative, because we are! Very. We create all sorts of documentation to support our conclusions—out of thin air! We conjure up evidence, put it in order, make it look pretty, and bind it in folders. From air to wallets full of paper (or computers full of files) in nothing flat.

We have been working on the steps of an audit—and now it is time to talk about working papers. This is going to take me a few newsletters to tackle.
 
To refresh your memory, here are the steps to conducting an audit:

1. Receive vague audit assignment
2. Gather information about audit subject
3. Determine audit criteria
4. Perform a risk assessment
5. Refine audit objective and sub-objectives
6. Choose methodologies
7. Budget each methodology
8. Document the audit plan
9. Formalize the audit program
10. Perform audit steps
11. Document results in the working papers
12. Review working papers
13. Write findings
14. Confer on findings with client
15. Conclude
16. Finalize report

We are concentrating on Steps 10 and 11:

10. Perform audit steps
11. Document results in the working papers

In Steps 10 and 11, we gather some evidence in an effort to support our audit objectives and then write it all down in the working papers.

What do we have to document, you say? I hate to tell you this, but the audit standards are not very helpful when it comes to working papers. They leave an awful lot up to our “professional judgment”. And what does “professional judgment” mean, people? It means we are on our own!

None of the audit standards dictate the contents, sequence, and format of your audit documentation. The standards make very general suggestions regarding the content of audit documentation and leave the form of the documentation up to your professional judgment. In other words, your idea of what the working papers should look like is just as good as mine.

Sharon and Andrew

I once had the pleasure of working with an audit supervisor named Sharon. Sharon was very meticulous and had high expectations for her working papers. Every piece of paper in the binder had to contain the source, purpose, procedure, results, conclusion of the individual working paper (for more on this see the November 2004 AuditSkills newsletter).

Each working paper had to be uniquely titled and numbered. All cross-references had to be two-way (coming and going). Many of the things she required had nothing to do with the standards and everything to do with making her life as a reviewer easier. And if you have ever experienced the excruciating pain of reviewing working papers, you know how hard it is to follow an auditor’s trial of thought without some of Sharon’s techniques.

However, what Sharon required was not universally accepted. In reviewing Andrew’s working papers on my next audit, I noticed that he was not following any of Sharon’s rules and I told him so. I told him that he needed to cross-reference, he needed to put source, purpose, procedures, results, and conclusion on every working paper, and he needed to stamp every page one-quarter inch from the top right corner!

Andrew responded, “Who says I need to do that?”

“I said, ‘Sharon.’”

He said, “Sharon is not on this audit. I’m not doing all that stuff.”

Whoops! But I wasn’t giving up that easily! I decided to go to the standards to bolster my comments regarding Andrew’s working papers. The standards failed me. Indeed the standards were so vague that I had to eat quite a bit of crow in front of Andrew. Fun.

The standards say that an experienced auditor should be able to follow your work. And although I couldn’t follow Andrew’s work initially, with some extra effort and some discussions I was able to figure out how he was supporting his conclusions.

The standards also say that you should document:

• The nature timing and extent of audit procedures
• The results of procedures performed
• The audit evidence obtained
• Conclusions reached
• Supervisory review before the report is issued.

Nowhere does it say your working paper stamp has to be one-quarter inch from the top left corner of your working paper!

(By the way, I heard that Sharon recently attended a scrapbooking convention on her vacation. So fitting! And so fitting into my argument that auditors are creative!)

Here is what the GAO requires in the Yellow Book:

Audit Documentation
4.19     Under AICPA standards and GAGAS, auditors must prepare audit documentation in connection with each engagement in sufficient detail to provide a clear understanding of the work performed (including the nature, timing, extent, and results of audit procedures performed), the audit evidence obtained and its source, and the conclusions reached. Under AICPA standards and GAGAS, auditors should prepare audit documentation that enables an experienced auditor, having no previous connection to the audit, to understand

a.   the nature, timing, and extent of auditing procedures performed to comply with GAGAS and other applicable standards and requirements;
b.   the results of the audit procedures performed and the audit evidence obtained;
c.    the conclusions reached on significant matters; and
d.   that the accounting records agree or reconcile with the audited financial statements or other audited information.

Notice that the standard says nothing about cross-referencing, tick marks, stamping each page, etc. This is all made up by the auditing profession to keep the working papers manageable. The Yellow Book is very open to a variety of formats and styles. Just as long as someone else can follow your logic, any format is fine.

Who do we have to please here? Our supervisors, managers, quality reviewers, and peer reviewers. I suggest you find out what your reviewers like to see and just do it! When you become queen or king of the audit world, you can design your own format for working papers.

We haven’t even scratched the surface on working papers. More next month.