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Sarbanes Oxley Act -
Auditing Standards |
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Public
Company Accounting Oversight
Board
Bylaws
and Rules – Standards –
AS3
June
9, 2004
AUDITING AND RELATED
PROFESSIONAL PRACTICE
STANDARDS
Auditing
Standard No. 3 – Audit
Documentation
Audit Documentation
Must Demonstrate That the Work was
Done
A20.
A guiding principle of the proposed standard was
that auditors must document
procedures
performed, evidence obtained, and conclusions
reached. This principle is
not
new and was found in the interim standard, SAS
No. 96, Audit Documentation,
which
this standard supersedes. Audit documentation
also should demonstrate
compliance
with the standards of the PCAOB and include
justification for any
departures.
A21.
The proposed standard would have adapted a
provision in the California
Business
and Professions Code which provides that if
documentation does not exist,
then
there is a rebuttable presumption that the work
had not been done.
A22.
The objections to this proposal fell into two
general categories: the effect of
the
rebuttable
presumption on legal proceedings and the
perceived impracticality of
documenting
every conversation or conclusion that affected
the engagement.
Discussion
of these issues follows.
Rebuttable
Presumption
A23.
Commenters expressed concern about the effects
of the proposed language on
regulatory
or legal proceedings outside the context of the
PCAOB's oversight. They
argued
that the rebuttable presumption might be
understood to establish
evidentiary
rules
for use in judicial and administrative
proceedings in other
jurisdictions.
A24.
Some commenters also had concerns that oral
explanation alone would not
constitute
persuasive other evidence that work was done,
absent any documentation.
Those
commenters argued that not allowing oral
explanations when there was no
documentation
would essentially make the presumption
"irrebuttable." Moreover, those
commenters
argued that it was inappropriate for a
professional standard to
predetermine
for a court the relative value of
evidence.
A25.
The Board believes that complete audit
documentation is necessary for a
quality
audit
or other engagement. The Board intends the
standard to require auditors to
document
procedures performed, evidence obtained, and
conclusions reached to
improve
the quality of audits. The Board also intends
that a deficiency in
documentation
is
a departure from the Board's standards. Thus,
although the Board removed the
phrase rebuttable
presumption, the Board continues to stress, in
paragraph 9 of the
standard,
that the auditor must have persuasive other
evidence that the procedures
were
performed, evidence was obtained, and
appropriate conclusions were
reached
with
respect to relevant financial statement
assertions.
A26.
The term should (presumptively mandatory
responsibility) was changed to
must
(unconditional
responsibility) in paragraph 6 to establish a
higher threshold for the
auditor.
Auditors have an unconditional requirement to
document their work. Failure to
discharge
an unconditional responsibility is a violation
of the standard and Rule 3100,
which
requires all registered public accounting firms
to adhere to the Board's
auditing
and
related professional practice standards in
connection with an audit or review of
an
issuer's
financial statements.
A27.
The Board also added two new paragraphs to the
final standard to explain the
importance
and associated responsibility of performing the
work and adequately
documenting
all work that was performed. Paragraph 7
provides a list of factors the
auditor
should consider in determining the nature and
extent of documentation. These
factors
should be considered by both the auditor in
preparing the documentation and
the
reviewer in evaluating the
documentation.
A28.
In paragraph 9 of this standard, if, after the
documentation completion date, as
a
result
of a lack of documentation or otherwise, it
appears that audit procedures may
not
have
been performed, evidence may not have been
obtained, or appropriate
conclusions
may not have been reached, the auditor must
determine, and if so
demonstrate,
that sufficient procedures were performed,
sufficient evidence was
obtained,
and appropriate conclusions were reached with
respect to the relevant
financial
statement assertions. In those circumstances,
for example, during an
inspection
by the Board or during the firm's internal
quality control review, the auditor
is
required
to demonstrate with persuasive other evidence
that the procedures were
performed,
the evidence was obtained, and appropriate
conclusions were reached. In
this
and similar contexts, oral explanation alone
does not constitute persuasive
other
evidence.
However, oral evidence may be used to clarify
other written evidence.
A29.
In addition, more reliable, objective evidence
may be required depending on
the
nature
of the test and the objective the auditor is
trying to achieve. For example, if
there
is
a high risk of a material misstatement with
respect to a particular assertion, then
the
auditor
should obtain and document sufficient procedures
for the auditor to conclude on
the
fairness of the assertion.
Impracticality
A30.
Some commenters expressed concern that the
proposed standard could be
construed
or interpreted to require the auditor to
document every conversation held
with
company
management or among the engagement team members.
Some commenters
also
argued that they should not be required to
document every conclusion,
including
preliminary
conclusions that were part of a thought process
that may have led them to a
different
conclusion, on the ground that this would result
in needless and costly work
performed
by the auditor. Commenters also expressed
concern that an unqualified
requirement
to document procedures performed, evidence
obtained, and conclusions
reached
without allowing the use of auditor judgment
would increase the volume of
documentation
but not the quality. They stated that it would
be unnecessary, timeconsuming,
and
potentially counterproductive to require the
auditor to make a written
record
of everything he or she did.
A31.
The Board's standard distinguishes between (1)
an audit procedure that must be
documented
and (2) a conversation with company management
or among the members
of
the engagement team. Inquiries with management
should be documented when an
inquiry
is important to a particular procedure. The
inquiry could take place during
planning,
performance, or reporting. The auditor need not
document each conversation
that
occurred.
A32.
A final conclusion is an integral part of a
working paper, unless the working
paper
is
only for informational purposes, such as
documentation of a discussion or a
process.
This
standard does not require that the auditor
document each interim
conclusion
reached
in arriving at the risk assessments or final
conclusions. Conclusions
reached
early
on during an audit may be based on incomplete
information or an incorrect
understanding.
Nevertheless, auditors should document a final
conclusion for every
audit
procedure performed, if that conclusion is not
readily apparent based on
documented
results of the procedures.
A33.
The Board also believes the reference to
specialists is an important element
of
paragraph
6. Specialists play a vital role in audit
engagements. For example,
appraisers,
actuaries, and environmental consultants provide
valuable data concerning
asset
values, calculation assumptions, and loss
reserves. When using the work of
a
specialist,
the auditor must ensure that the specialist's
work, as it relates to the
audit
objectives,
also is adequately documented. For example, if
the auditor relies on the
work
of an appraiser in obtaining the fair value of
commercial property available for
sale,
then
the auditor must ensure the appraisal report is
adequately documented.
Moreover,
the
term specialist in this standard is intended to
include any specialist the auditor
relies
on
in conducting the work, including those employed
or retained by the auditor or by
the
company.
Audit
Adjustments
A34.
Several commenters recommended that the
definition of audit adjustments in
this
proposed
standard should be consistent with the
definition contained in AU sec.
380,
Communication with
Audit Committees.
A35.
Although the Board recognizes potential benefits
of having a uniform definition
of
the
term audit adjustments, the Board does not
believe that the definition in AU sec.
380
is
appropriate for this documentation standard
because that definition was intended
for
communication
with audit committees. The Board believes that
the definition should be
broader
so that the engagement partner, engagement
quality reviewer, and others
can
be
aware of all proposed corrections of
misstatements, whether or not recorded by
the
entity,
of which the auditor is aware, that were or
should have been proposed based
on
the
audit evidence.
A36.
Adjustments that should have been proposed based
on known audit evidence
are
material misstatements that the auditor
identified but did not propose
to
management.
Examples include situations in which (1) the
auditor identifies a material
error
but does not propose an adjustment and (2) the
auditor proposes an adjustment
in
the
working papers, but fails to note the adjustment
in the summary or schedule of
proposed
adjustments.
Information That Is
Inconsistent with or Contradicts the
Auditor's
Final
Conclusions
A37.
Paragraph .25 of AU sec. 326, Evidential Matter,
states: "In developing his or
her
opinion,
the auditor should consider relevant evidential
matter regardless of whether it
appears
to corroborate or to contradict the assertions
in the financial statements."
Thus,
during the conduct of an audit, the auditor
should consider all relevant
evidential
matter
even though it might contradict or be
inconsistent with other conclusions.
Audit
documentation
must contain information or data relating to
significant findings or issues
that
are inconsistent with the auditor's final
conclusions on the relevant
matter.
A38.
Also, information that initially appears to be
inconsistent or contradictory, but
is
found
to be incorrect or based on incomplete
information, need not be included in
the
final
audit documentation, provided that the apparent
inconsistencies or
contradictions
were
satisfactorily resolved by obtaining complete
and correct information. In
addition,
with
respect to differences in professional judgment,
auditors need not include in
audit
documentation
preliminary views based on incomplete
information or data.
Retention of Audit
Documentation
A39.
The proposed standard would have required an
auditor to retain audit
documentation
for seven years after completion of the
engagement, which is the
minimum
period permitted under Section 103(a)(2)(A)(i)
of the Act. In addition, the
proposed
standard would have added a new requirement that
the audit documentation
must
be assembled for retention within a reasonable
period of time after the
auditor's
report
is released. Such reasonable period of time
should not exceed 45 days.
A40.
In general, those commenting on this
documentation retention requirement
did
not
have concerns with the time period of 45 days to
assemble the working papers.
However,
some commenters suggested the Board tie this
45-day requirement to the
filing
date of the company's financial statements with
the SEC. One commenter
recommended
that the standard refer to the same trigger date
for initiating both the time
period
during which the auditor should complete work
paper assembly and the
beginning
of the seven-year retention
period.
A41.
For consistency and practical implications, the
Board agreed that the standard
should
have the same date for the auditor to start
assembling the audit
documentation
and
initiating the seven-year retention period. The
Board decided that the
seven-year
retention
period begins on the report release date, which
is defined as the date the
auditor
grants permission to use the auditor's report in
connection with the issuance of
the
company's financial statements. In addition,
auditors will have 45 days to
assemble
the
complete and final set of audit documentation,
beginning on the report release
date.
The
Board believes that using the report release
date is preferable to using the
filing
date
of the company's financial statements, since the
auditor has ultimate control
over
granting
permission to use his or her report. If an
auditor's report is not issued, then
the
audit
documentation is to be retained for seven years
from the date that fieldwork
was
substantially
completed. If the auditor was unable to complete
the engagement, then
the
seven-year period begins when the work on the
engagement ceased.
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