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Do You Really Need That Working Paper?

June 2009

By Sefton Boyars, CPA, CGFM

When we were neophyte auditors, our supervisors constantly admonished us to keep good working papers so that we could properly support our conclusions. Consequently, many auditors tend to keep virtually all documents they either obtained or created during an audit. I want you now to think about the opposite point of view: What working papers do you actually need to retain in your files?

Some years ago, I was working with a professional association in California that was planning to facilitate peer reviews for the many state audit agencies. As each audit agency would contribute staff to participate in peer reviews, it was essential that the different agencies had similar expectations regarding working papers. Accordingly, I asked each audit manager to bring in a set of working papers. I did not want the best set of working papers ever created in the office, nor did I want working papers that did not meet their standards.

Each manager brought in a set, and they then reviewed the other agencies’ working papers. The primary question they had to answer was whether those working papers would be considered acceptable in their agencies. In general, the answer was yes—the different agencies had similar standards for working papers. That was essential for the process we were intending to initiate.

Then I asked the managers to provide comments on the working paper packages. Only one comment was repeated a number of times: "I don’t know why these working papers are included." When we looked at the examples, they often reflected the same situation. An auditor had copied a large number of documents from the auditee, and had included them all in the working paper package—even though they were unnecessary for the final product.

For example, assume that you are auditing the costs claimed on a grant for fiscal year 20XX. You want to ensure that the amount claimed agrees with the entity’s accounting records. For that reason, you request the auditee to provide you with a copy of all of the fiscal year’s accounting records. (Or the auditee representative made copies of more records than you asked for.)

You got the records, but did you look at them all? Of course not. You reviewed just those records related to the grant. But you were loathe to throw away the unnecessary records (say 65 pages of the 70 pages you received). So you just included them all in the working paper package, figuring it wouldn’t do any harm, and someone may find something useful in the records.

Unfortunately, this practice rarely does any good, but it can do serious harm. The main problem is that you have initialed the papers, or otherwise indicated that you have reviewed them. But you haven’t reviewed them.

Is it possible that a close review of the files could identify a significant problem in the organization? Perhaps even fraud? It is indeed possible. If the problem comes to light after you have issued your audit report, both you and your supervisors may have a difficult time explaining how you had the information in your files, but did not notice it—even though you had all signed off on the working papers.

You may argue that the problem, or the fraud, was unrelated to your audit objectives and scope. That argument may convince your colleagues, but is not likely to convince the media or oversight agencies. Further, they may ask you, "If the material was unrelated to your audit, we did you have it in your files?" That would be a very difficult question for you to answer under the circumstances.

In addition, for your supervisors and managers, the unneeded records are "white noise." They require extra work without providing any benefit. The extra pages can distract them from more closely reviewing the real information. After all, if those items remain in the working paper file, the supervisors and managers must also indicate that they have reviewed them. But, of course, no one closely examines those files.

In short, extra working papers, at best, just clog up the review process. At worst, extra working papers can place the audit agency at risk because no one identified a problem could have been found in the files.

I recommend that as you near the end of the audit, you review your working papers to determine which ones were actually used during the audit process and support your findings and conclusions. You should obviously retain them. You should carefully consider whether to retain any working paper that doesn’t meet that standard. You may still want to keep some of them, but make sure you can explain why you kept them. You should probably discard the rest.

Of course, as in all processes, you should discuss this matter with your supervisors to be sure that you will act in accordance with their wishes. The fact that I think it is a good idea may not carry much weight with them. Good luck in reducing the size of those working paper packages.

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Sefton Boyars was the Regional Inspector General for Audit for the U.S. Department of Education. He retired in 1996 after a 35-year career as a government auditor and audit manager. In his retirement, he presents continuing education courses for a variety of organizations, including federal, state and local governmental organizations, AGA, Management Concepts and the USDA Graduate School.

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Leita Hart-Fanta, CPA, CGFM
Resides in Austin, Texas and can be reached at www.auditskills.com