mastering yellow book and single audit workpaper...

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Mastering Yellow Book and Single Audit Workpaper

Documentation: Preparing High-Quality GAGAS Working Papers

Tuesday, November 10, 1:00-2:50 pm Eastern

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November 10, 2015

Mastering Yellow Book and Single Audit Workpaper Documentation: Preparing High-Quality GAGAS Working Papers

Jay Giannantonio, MS, CPA, CIA

BNA Training and IT Solutions

[email protected]

Johnny L. Brooks, CPA

Brooks & Associates

[email protected]

Notice

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Mastering Yellow Book Documentation:

High Quality GAGAS Working Papers

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■ 703.296.4070 ■ www.bnatraining.net ■ 703.296.4070 www.bnatraining.net

Mastering Yellow Book Documentation

Johnny L. Brooks, CPA Jay Giannantonio, CPA/CGMA,CIA Managing Director Principal – Finance & Accounting

Copyright © 2015 Brooks & Associates, LLC & BNA

Training & IT Solutions 6

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Objectives

Revisit the Significant Audit Standards and Guidelines affecting Yellow Book/GAGAS Audits;

Review and discuss the Required Documentation – Including Workpaper Development; and

Share Documentation Better Practices.

7 Copyright © 2015 Brooks & Associates, LLC & BNA

Training & IT Solutions

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■ 703.296.4070 ■ www.bnatraining.net ■ 703.296.4070 www.bnatraining.net Copyright © 2015 Brooks & Associates, LLC & BNA


Topics Covered

I. Background – GAGAS and Yellow Book Requirement

II. Yellow Book documentation standards for workpapers

III. Elements of review-efficient workpapers

IV. Summary memo and referencing methods

V. Documenting audit tests

VI. Common deficiencies of audit workpapers

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Background on GAGAS and Yellow Book

Standards

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Standards

The Generally Accepted Government Auditing Standards

(GAGAS), also known as the Yellow Book, provide a

framework for conducting high quality audits with competence,

integrity, objectivity, and independence. The Yellow Book is for

use by auditors of government entities, entities that receive

government awards, and other audit organizations performing

Yellow Book audits.

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Background on GAGAS and Yellow

Book Standards

Government Auditing Standards

Auditing Standards (“ The

Yellow Book”) are issued by GAO and contains standards for audits of government organizations, programs, activities and functions, and of government assistance received by contractors, nonprofit organizations, and other nongovernment organizations.

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Standards


The standards, often referred to as

generally acceptable government auditing standards (GAGAS) are to be followed by auditors required by law, regulation, agreement, contract, or policy.

To help ensure that Government Auditing Standards continues to meet the needs of the audit community and the public it serves, the Comptroller General of the United States appointed the Advisory Council on Government Auditing Standards to review the standards and recommend necessary changes.

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Standards


GAGAS incorporates the AICPAs

Attestation standards. These standards cover examinations, reviews, and agreed-upon procedures engagements. In cases where an auditor does attestation work, GAGAS refers to the AICPA guidelines.

GAGAS incorporates AICPA Statements of Audit Standards (SASs) and these must automatically be followed in financial audits. There are over 120 SASs.

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Standards

Standards for Internal Control

GAO issues Standards for Internal Control (The "Green Book”) in the Federal Government under the authority in FMFIA.

5 Standards for Internal Control (based on COSO IC Model) Control Environment Risk Assessment Control Activities Information and Communications Monitoring

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Standards

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

GENERALLY ACCEPTED GOVERNMENT AUDITING STANDARDS

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Standards

Single Audit Act of 1996 and amendments

Audit Requirements for All entities that receive Federal Funds

Uniformity

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Standards

The Generally Accepted Government Auditing Standards (GAGAS), also known as the Yellow Book, provide a framework for conducting high quality audits with competence, integrity, objectivity, and independence. The Yellow Book is for use by auditors of government entities, entities that receive government awards, and other audit organizations performing Yellow Book audits.

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Standards

General

1. The auditor must maintain independence in mental attitude in all matters related to the audit.

2. The auditor must have adequate technical training & proficiency to perform the audit.

3. The auditor must exercise due professional care during the performance of the audit and the preparation

of the report.

Standards of Field Work

1. The auditor must adequately plan the work and must properly supervise any assistants.

2. The auditor must obtain a sufficient understanding of the entity and its environment, including its

internal control, to assess the risk of material misstatement of the financial statements whether due to

error or fraud, and to design the nature, timing, and extent of further audit procedures.

3. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a

reasonable basis for an opinion regarding the financial statements under audit.

4. The auditor must assign qualified personnel to the engagement.

Standards of Reporting

1. The auditor must state in the auditor's report whether the financial statements are presented in

accordance with generally accepted accounting principles.

2. The auditor must identify in the auditor's report those circumstances in which such principles have not

been consistently observed in the current period in relation to the preceding period.

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4 Phases of an Audit

Planning Internal Control

Testing Reporting

Documentation throughout these phases

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Standards

3. When the auditor determines that informative disclosures are not reasonably

adequate, the auditor must so state in the auditor's report.

4. The auditor must either express an opinion regarding the financial statements,

taken as a whole, or state that an opinion cannot be expressed, in the auditor's

report. When the auditor cannot express an overall opinion, the auditor should

state the reasons therefore in the auditor's report. In all cases where an auditor's

name is associated with financial statements, the auditor should clearly indicate

the character of the auditor's work, if any, and the degree of responsibility the

auditor is taking, in the auditor's report.

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Standards

The third standard of field work is: Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a

reasonable basis for an opinion regarding the financial statements under audit.

Most of the independent auditor's work in forming his or her opinion on financial statements consists of obtaining and evaluating

evidential matter concerning the assertions in such financial statements. The measure of the validity of such evidence for audit

purposes lies in the judgment of the auditor; in this respect audit evidence differs from legal evidence, which is circumscribed by

rigid rules. Evidential matter varies substantially in its influence on the auditor as he or she develops an opinion with respect to

financial statements under audit. The pertinence of the evidence, its objectivity, its timeliness, and the existence of other

evidential matter corroborating the conclusions to which it leads all bear on its competence. Nature of Assertions

Assertions are representations by management that are embodied in financial statement components. They can be either explicit

or implicit and can be classified according to the following broad categories: Existence or occurrence Completeness Rights and obligations Valuation or allocation Presentation and disclosure

Assertions about existence or occurrence address whether assets or liabilities of the entity exist at a given date and whether

recorded transactions have occurred during a given period. For example, management asserts that finished goods inventories in

the balance sheet are available for sale. Similarly, management asserts that sales in the income statement represent the exchange

of goods or services with customers for cash or other consideration.



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Standards

Assertions about completeness address whether all transactions and accounts that should be presented in the financial

statements are so included. For example, management asserts that all purchases of goods and services are recorded and are

included in the financial statements. Similarly, management asserts that notes payable in the balance sheet include all such

obligations of the entity.

Assertions about rights and obligations address whether assets are the rights of the entity and liabilities are the obligations of

the entity at a given date. For example, management asserts that amounts capitalized for leases in the balance sheet represent

the cost of the entity's rights to leased property and that the corresponding lease liability represents an obligation of the entity.

Assertions about valuation or allocation address whether asset, liability, equity, revenue, and expense components have been

included in the financial statements at appropriate amounts. For example, management asserts that property is recorded at

historical cost and that such cost is systematically allocated to appropriate accounting periods. Similarly, management asserts

that trade accounts receivable included in the balance sheet are stated at net realizable value. [As amended, effective for

engagements beginning on or after January 1, 1997, by Statement on Auditing Standards No. 80.]

Assertions about presentation and disclosure address whether particular components of the financial statements are properly

classified, described, and disclosed. For example, management asserts that obligations classified as long-term liabilities in the

balance sheet will not mature within one year. Similarly, management asserts that amounts presented as extraordinary items in

the income statement are properly classified and described. Use of Assertions in Developing Audit Objectives and Designing Substantive Tests



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Standards

In obtaining evidential matter in support of financial statement assertions, the auditor develops specific audit

objectives in the light of those assertions. In developing the audit objectives of a particular engagement, the auditor

should consider the specific circumstances of the entity, including the nature of its economic activity and the

accounting practices unique to its industry. For example, one audit objective related to the assertion about

completeness that an auditor might develop for inventory balances is that inventory quantities include all products,

materials, and supplies on hand.

There is not necessarily a one-to-one relationship between audit objectives and procedures. Some auditing procedures

may relate to more than one objective. On the other hand, a combination of auditing procedures may be needed to

achieve a single objective. Paragraph .26 provides illustrative audit objectives for inventories of a manufacturing

company for each of the broad categories of assertions listed in paragraph .03 and examples of substantive tests that

may achieve those audit objectives.

In selecting particular substantive tests to achieve the audit objectives he or she has developed, an auditor considers,

among other things, the risk of material misstatement of the financial statements, including the assessed levels of

control risk, and the expected effectiveness and efficiency of such tests. These considerations include the nature and

materiality of the items being tested, the kinds and competence of available evidential matter, and the nature of the

audit objective to be achieved. For example, in designing substantive tests to achieve an objective related to the

assertion of existence or occurrence, the auditor selects from items contained in a financial statement amount and

searches for relevant evidential matter. On the other hand, in designing procedures to achieve an objective related to

the assertion of completeness, the auditor selects from evidential matter indicating that an item should be included in

the relevant financial statement amount and investigates whether that item is so included.



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Standards

The auditor's specific audit objectives do not change whether information is processed manually or electronically.

However, the methods of applying audit procedures to gather evidence may be influenced by the method of

processing. The auditor may use either manual auditing procedures, information technology-assisted audit techniques,

or a combination of both to obtain sufficient competent evidential matter. Because of the growth in the use of

computers and other information technology, many entities process significant information electronically. Accordingly,

it may be difficult or impossible for the auditor to access certain information for inspection, inquiry, or confirmation

without using information technology. [Paragraph added, effective for periods beginning after August 31, 1984, by

Statement on Auditing Standards No. 48. As amended, effective for engagements beginning on or after January 1,

1997, by Statement on Auditing Standards No. 80.]

The nature, timing, and extent of the procedures to be applied on a particular engagement are a matter of professional

judgment to be determined by the auditor, based on the specific circumstances. However, the procedures adopted

should be adequate to achieve the auditor's specific objectives and reduce detection risk to a level acceptable to the

auditor. The evidential matter obtained should be sufficient for the auditor to form conclusions concerning the validity

of the individual assertions embodied in the components of financial statements. The evidential matter provided by the

combination of the auditor's assessment of inherent risk and control risk and on substantive tests should provide a

reasonable basis for his or her opinion (see section 319, Consideration of Internal Control in a Financial Statement

Audit, paragraphs .105 through .108). [Paragraph renumbered by the issuance of Statement on Auditing Standards No.

48, July 1984. As amended, effective for engagements beginning on or after January 1, 1997, by Statement on

Auditing Standards No. 80. Revised, May 2001, to reflect conforming changes necessary due to the issuance of

Statement on Auditing Standards No. 94.]



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Standards

In entities where significant information is transmitted, processed, maintained, or accessed electronically, the

auditor may determine that it is not practical or possible to reduce detection risk to an acceptable level by

performing only substantive tests for one or more financial statement assertions. For example, the potential

for improper initiation or alteration of information to occur and not be detected may be greater if information

is produced, maintained, or accessed only in electronic form. In such circumstances, the auditor should

perform tests of controls to gather evidential matter to use in assessing control risk, or consider the effect on

his or her report (see paragraph .25 of this section). [Paragraph added, effective for engagements beginning on

or after January 1, 1997, by Statement on Auditing Standards No. 80.] Nature of Evidential Matter



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Standards Competence of Evidential Matter

To be competent, evidence, regardless of its form, must be both valid and relevant. The validity of evidential matter is so dependent on

the circumstances under which it is obtained that generalizations about the reliability of various kinds of evidence are subject to

important exceptions. If the possibility of important exceptions is recognized, however, the following presumptions, which are not

mutually exclusive, about the validity of evidential matter in auditing have some usefulness: a. When evidential matter can be obtained from independent sources outside an entity, it provides greater assurance of reliability for

the purposes of an independent audit than that secured solely within the entity. b. The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial

statements. c. The independent auditor's direct personal knowledge, obtained through physical examination, observation, computation, and

inspection, is more persuasive than information obtained indirectly. [Paragraph renumbered by the issuance of Statement on Auditing Standards No. 48, July 1984. Paragraph subsequently renumbered and

amended, effective for engagements beginning on or after January 1, 1997, by the issuance of Statement on Auditing Standards No. 80.] Sufficiency of Evidential Matter The independent auditor's objective is to obtain sufficient competent evidential matter to provide him or her with a reasonable basis for

forming an opinion. The amount and kinds of evidential matter required to support an informed opinion are matters for the auditor to

determine in the exercise of his or her professional judgment after a careful study of the circumstances in the particular case. However,

in the great majority of cases, the auditor has to rely on evidence that is persuasive rather than convincing. Both the individual

assertions in financial statements and the overall proposition that the financial statements as a whole are fairly presented are of such a

nature that even an experienced auditor is seldom convinced beyond all doubt with respect to all aspects of the statements being audited.

[Paragraph renumbered by the issuance of Statement on Auditing Standards No. 48, July 1984. Paragraph subsequently renumbered and

amended, effective for engagements beginning on or after January 1, 1997, by the issuance of Statement on Auditing Standards No. 80.]



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Book Standards

An auditor typically works within economic limits; the auditor's opinion, to be economically useful, must be formed within a

reasonable length of time and at reasonable cost. The auditor must decide, again exercising professional judgment, whether the

evidential matter available to him or her within the limits of time and cost is sufficient to justify expression of an opinion. [Paragraph

renumbered by the issuance of Statement on Auditing Standards No. 48, July 1984. Paragraph subsequently renumbered by the

issuance of Statement on Auditing Standards No. 80, December 1996.]

As a guiding rule, there should be a rational relationship between the cost of obtaining evidence and the usefulness of the information

obtained. The matter of difficulty and expense involved in testing a particular item is not in itself a valid basis for omitting the test.

[Paragraph renumbered by the issuance of Statement on Auditing Standards No. 48, July 1984. Paragraph subsequently renumbered by

the issuance of Statement on Auditing Standards No. 80, December 1996.] Evaluation of Evidential Matter

In evaluating evidential matter, the auditor considers whether specific audit objectives have been achieved. The independent auditor

should be thorough in his or her search for evidential matter and unbiased in its evaluation. In designing audit procedures to obtain

competent evidential matter, he or she should recognize the possibility that the financial statements may not be fairly presented in

conformity with generally accepted accounting principles or a comprehensive basis of accounting other than generally accepted

accounting principles. 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. To the extent the auditor remains in substantial doubt

about any assertion of material significance, he or she must refrain from forming an opinion until he or she has obtained sufficient

competent evidential matter to remove such substantial doubt, or the auditor must express a qualified opinion or a disclaimer of

opinion. [Paragraph renumbered by the issuance of Statement on Auditing Standards No. 48, July 1984. Paragraph subsequently

renumbered and amended, effective for engagements beginning on or after January 1, 1997, by the issuance of Statement on Auditing

Standards No. 80.]



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Book Standards

Evidential Matter is supported and documented by the

development of Workpapers.



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II. YELLOW BOOK DOCUMENTATION

STANDARDS FOR WORKPAPERS



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Audit Governance

– Government Auditing Standards


GAGAS incorporates AICPA Statements of Audit Standards (SASs) and these must automatically be followed in financial audits. There are over 125 SASs.

GAGAS incorporates the AICPAs Attestation standards(SSAE’s). These standards cover examinations, reviews, and agreed-upon procedures engagements. In cases where an auditor does attestation work, GAGAS refers to the AICPA guidelines.



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AICPA – Auditing Standards Board (ASB)

AICPA Standards setting Board for the Audit Profession in the United States.

Publishes the Statements of Auditing Standards (SAS)

Updates the Standards as needed

Its mission is to serve the public interest by developing, updating and communicating comprehensive standards and practice guidance that enable audit practitioners to provide high-quality, objective audit and attestation services in an effective and efficient manner.



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Single Audit Act and GAGAS Standards

Single Audit Act of 1996 and amendments

Audit Requirements for All entities that receive Federal Funds

Uniformity



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Putting it all together…Workpapers

AICPA, GAGAS, Single Audit Act…

Document the planning, performance, and review of audit work. Audit documentation provides written support for planning and scoping decisions, testing methodologies and results, and evidence of review and completion of audit program work steps. In this sense, audit workpapers serve as a tool to assist the auditor and document what has been done, why it has been done, and how to re-create what has been done.

Provide the principal support for audit communication such as observations, conclusions, and the final report. Audit workpapers must contain sufficient evidence to support the auditor's assessments and testing.

"Information should be sufficient, competent, relevant, and useful to provide a sound basis for audit observations and recommendations. Sufficient information is factual, adequate, and convincing so that a prudent, informed person would reach the same conclusions as the auditor."

Continued



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Putting it all together…Workpapers

AICPA, GAGAS, Single Audit Act…

Audit workpapers provide an audit trail that enables a technically competent individual who has no experience with the prior audit to re-perform procedures.

Provide a basis for evaluating the audit activity's quality control program. Quality verifications are performed after audits are completed. Thus, workpapers often are the only tangible representation of the audit that can be assessed during the quality review.



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III. ELEMENTS OF REVIEW – EFFICIENT

WORKPAPERS



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ELEMENTS OF REVIEW – EFFICIENT

WORKPAPERS

Efficient Workpapers:

Provide support for the auditors’ opinion

Document the auditors’ compliance with

generally accepted auditing standards, especially

the standards of field work

Provide a means of assigning and coordinating

audit work

Aid in supervising and reviewing the audit work

Aid in planning and conducting future audits

Should “stand on their own” i.e. self-explanatory



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WORKPAPERS

Reviewing working papers: keeping the big picture in mind

It is often very difficult to understand what the auditor was thinking and to retrace the thought process during an audit by looking

at a set of working papers. It may take hours 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

beginning at the top of the working paper hierarchy.

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 bond arbitrage – a pretty technical subject. He spent two days auditing and creating a fabulous looking working

paper. It was a huge, foldout spreadsheet that had several columns and rows and had plenty of colored tick marks and numbers. It

was worthy of framing.

The supervisor started her review of this lovely spreadsheet. She re-footed and re-cross-footed the columns. She checked the

meaning of all the lovely tick marks 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.



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WORKPAPERS Bare bones of the working papers

Looking at the Yellow Book standards, we can make sure that we document all of the basics in

the working papers.

6.83 Auditors should document the following:

a. the objectives, scope, and methodology of the audit;

b.

the work performed and evidence obtained to support significant judgments and

conclusions, including descriptions of transactions and records examined (for

example, by listing file numbers, case numbers, or other means of identifying

specific documents examined, but copies of documents examined or detailed

listings of information from those documents are not required); and

c. supervisory review, before the audit report is issued, of the evidence that supports

the findings, conclusions, and recommendations contained in the audit report.

Here are some common standards that audit shops require of their auditors’ working papers. See

whether you think these ideas are wise and practical.

The working paper has

– Name of project

– Title

– Auditor’s initials

– Date completed

– Page number and reference

– Source, purpose, procedures, results, conclusions

– Explanation of all tick marks

– Two-way cross-references

The working paper is

– Neat and legible

– Referenced to the program

– Understandable without further explanation

Important calculations were verified

Source documents are included as necessary

If a document was created by the client, “PBC” is written on the working paper

A review has been indicated and all points were cleared

Let’s look at these shop requirements more in-depth.



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WORKPAPERS

1. The working paper is titled, signed, and dated

Each working paper includes:

The name of project

The unique title of the working paper

The auditor’s initials

The date completed

A page number and reference

This is just plain practical. I see no reason to ever skip this. But hey, the standards don’t require it! Go ahead and skip it, you

rebel you, and see how the review goes!

2. Source, purpose, procedures, results, and conclusion on every page

Whew. Source, purpose, procedures, results, and conclusions – Sharon made me put these so called “elements of a working

paper” on every working paper! Every page, Sharon? How about the first page of each unique working paper? Yes, I like that

better.

What do all of the elements of a working paper mean? Here are the questions that each element should answer:

SOURCE: Where did we get the evidence on the working paper? Who gave it to us? Which evidence did we look at? Where

is the evidence and how can we get to it again?

PURPOSE: What question does this working paper seek to answer? Why was this working paper created and why was this

work done? What program step does it satisfy?

PROCEDURES: What did we do on this working paper? What methodology did we use? What were the detailed steps and

procedures we performed?

RESULTS: What did the procedures yield? What were the results of applying the methodologies? This should contain the

same language and easily link back to the procedure element. Here we also want a lot of detail.



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WORKPAPERS

CONCLUSION: What is the answer to the question posed in the purpose? Was the program step satisfied? What did we

do with any issues we found? Did we take the issues to a finding or a point disposition sheet?

That kind of information couldn’t be any more helpful to a reviewer. Without these elements of a working paper, the

reviewer has to make all sorts of logical leaps and assumptions to get through the working papers. We all know that five

people can look at the same set of data and come to five different conclusions! You, the auditor, need to be making those

conclusions for the reviewer. The last thing you want as a preparer is to have some crazy, overworked supervisor making

assumptions and leaping around trying to link ideas together! Guide them.

Did you notice the linkage among the elements? If you do it right, the purpose and conclusions match and the procedures

and results match. Auditors, this proves your clarity of thought and supports your logical conclusions. Reviewers, if these

elements do not link together, return the working papers to the auditor until they can show you that what they’ve done has

meaning!

An example

Here is a simple example. (You auditors of financial aid out there, please realize I made this up on an airplane after a long

day of teaching. If you must critique it, please send your comments to www.leitadoesntwannahearit.com.)

SOURCE: Student files maintained in the Student Financial Aid Office by Julie Neal. Tested fall semester 2004 students.

PURPOSE: To determine whether students receiving federal student financial aid are eligible. To satisfy program step 2

at A-PGM.

PROCEDURE: Sampled 72 files out of a population of 13,500 files. Examined each file to determine whether the proper

paperwork was in the file and that the student met federal eligibility requirements. The attributes tested are as follows:

Blah blah blah blah

Blah blah blah blah

Blah blah blah blah



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WORKPAPERS

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RESULTS: Out of all attributes tested on 72 files, we noted only one error. The student had failed to initial one of the pages of the

financial aid application.

CONCLUSION: Students receiving financial aid are eligible. The one error noted is not significant and we will not take it to the

report.

This is one of my favorite Sharon requirements.

3. Every tick mark is explained

What, you say, is a tick mark!?! A tick mark is a little symbol that indicates a task the auditor has completed. For instance a ∧ may

indicate that a column of numbers has been summed and a √ may indicate that attribute was verified.

To explain the tick marks in the working papers, Sharon had a little tick mark legend, which included about 15 tick marks (and we

had to paste into the inside cover of each binder of working papers). You were not allowed to change the meaning of those tick

marks!

This sped up her working paper review because she knew what you meant without having to look at a unique legend each time.

4. All cross references are two-way

To cross reference working papers, if you got a number for working paper A from working paper B, you would write “B” on

working paper A near the number. And on working paper B, you would write a reference to working paper A.

Working paper review, especially on a financial audit, is nearly impossible without two-way cross referencing.

5. Each working paper is neat and legible

Wow, I always got written up for this. Thank the heavens for computers. It saved my career; my handwriting is atrocious.

6. Each working paper is referenced to the program

If you can’t tie the working paper to a program step, then you’d better take it out. Otherwise, you are subverting the audit program.

7. Each working paper is understandable without further explanation

This is a very high standard, indeed, but a good thing to keep in mind as you document your work. Imagine yourself in a meeting

with the reviewer of your working papers and she says, “What did you mean here?” and you can’t remember! Your credibility goes

down the drain.



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WORKPAPERS

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8. Important calculations were verified

Verifying important calculations is crucial on a financial audit and why most new financial auditors are required to learn how to

use a 10-key calculator their first week on the job. Someone needs to sum or recalculate the numbers. For very significant

numbers, the supervisor might even recalculate them, too.

9. Source documents were included as necessary

This one is tricky. What does the reviewer actually need to understand about what you tested? Make sure that you include any

source documents that will help the reviewer. To determine the right level of documentation, you had better check with your own

personal Sharon to find out what she wants.

For instance, if you tested 30 files to see that the program director initialed a certain document, do you have to include in the file

a copy of all 30 documents? I would say no. That would unnecessarily kill trees.

In my view, you only want to include a description of the files or the forms so that, if necessary, someone could replicate your

work. So you might add a description of the file including the date created, name, director’s initials, and the date of review. You

might even copy one of the forms and put it in the file just so a reviewer or a subsequent auditor could easily find the forms again.

If you have a few exceptions – in our example, these might be forms without initials – you could copy those and put them in the

working papers with an explanation of how the issue was resolved. Also consider whether the issue will make it into the report. If

it will, you might want to make copies of or scan in the exceptions to strengthen your evidence.

10. If the client creates a document, write “PBC” on the working paper

“PBC” indicates to the reviewer who created the working paper, which matters in determining strength of evidence. Generally,

evidence directly obtained by the auditor is considered stronger than evidence that the client provides. The reason is that clients

are not considered to be as objective as auditors about the information.



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WORKPAPERS

Lady G.A.G.A.S

11. A review has been indicated

This is not a Sharon standard; it is a Yellow Book and an AICPA standard. How do you do this?

Following are some ways that you can fulfill this requirement. The reviewer might:

Initial and date each working paper.

Initial only significant working papers.

Create a checklist and include it at the front of the working papers.

Initial the binder.

Write up review comments and include them in the working papers.



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WORKPAPERS

A review consists of consideration of whether, for example: The work has been performed in accordance with professional

standards & applicable legal and regulatory requirements; Significant findings or issues have been raised for further

consideration; Appropriate consultations have taken place and the resulting

conclusions have been documented and implemented; The nature, timing, and extent of the work performed is appropriate

and without need for revision; The work performed supports the conclusions reached and is

appropriately documented; The evidence obtained is sufficient and appropriate to support the

auditor’s report; and The objectives of the engagement procedures have been achieved.

These describe the primary objectives of a working paper review.



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WORKPAPERS

Work paper reviews can be an effective learning tool for staff auditors. A chance to sit down and explain the objectives and purpose

of good audit work paper techniques.

Goal is to give constructive feedback not “gotcha” comments.

A chance to teach why “SALY” may or may not be a good technique to follow.

A good indication of how our staff are progressing.

Compliance with our audit standards.



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WORKPAPERS

Technically, the working paper review must be completed on or before the date of the auditor’s report. However, from a practical and staff training perspective, it

makes sense to review the working papers while the audit staff is still in the field, and you have easy access to source documentation; and

The staff is still on the job and still available to do any additional work.

Why? - The work is still fresh in everyone’s mind, and the staff can learn from your review comments.



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WORKPAPERS

Review for…

Ensure that… The reason is…

Technical accuracy All cross-referenced amounts agree

All identified misstatements have been noted and

properly resolved

Working paper conclusions are adequately

supported

Accounting standards were observed

Supervisory review is your

Responsibility.

To ensure the audit fieldwork was

properly performed using GAAS and

GAGAS

Completeness All necessary audit procedures were adequately

performed

There are no pending items left in the working

papers.

The person performing the work can

lack the perspective necessary to

determine if important steps were

forgotten.

As a reviewer, checking for the

completeness of the procedures

performed should be a primary

responsibility.

Housekeeping Each working paper is properly headed, dated, and

initialed.

The audit program has been completed and signed

off.

You have documented your review of the work.

The working papers “stand on their own”.

In the event that questions arise

about the audit or who performed

the work and when, it is vital that

these housekeeping items be

completed. 48

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IV. SUMMARY MEMO AND REFERENCING

METHODS



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Summary Memo and Referencing

Methods

Lady G.A.G.A.S

The Summary Memo

You might call the summary memo by another name: a lead sheet, a

conclusions form, or a top memo. It summarizes in a memo a group of working

papers and the work and conclusions reached from the audit work in that section of

working papers.

In the hierarchy of working papers, a summary memo usually comes third, even though

they may be written lastly. The hierarchy is as follows:

1. Audit Objective

2. Audit Program

3. Summary Memo

4. Detail working papers



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Summary Memo Scenario

Let’s say that you are auditing a purchasing department. After gathering information and doing a risk assessment, you

decide that you will focus on compliance in this audit.

Your overarching objective is: “Does the purchasing department comply with significant purchasing policies?”

Underneath that overarching objective you have three sub-objectives:

• Are purchases of equipment exceeding $9,000 conducted in accordance with policy?

• Are purchasing procedures written in accordance with policy?

• Are professional contracts in accordance with policy?

You will likely create a set of working papers to support each sub-objective. Let’s say that you like to use letters to

designate groups of working papers.

Sub-objective 1 is working paper set A, which answers whether purchases of equipment exceeding $9,000 were

conducted in accordance with policy.

Sub-objective 2 is working paper set B, which answers whether purchasing procedures are written in accordance

with policy.

Sub-objective 3 is working paper set C, which answers whether professional contracts are in accordance with

policy.

Then, the summary memo for sub-objective 1 summarizes what working paper series A accomplished and how you

answered the audit objective with your evidence. Then A-1, A-2, A-3, etc. speak to the performance and results of each

audit program step.



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Methods The summary memo is sort of a narrative version of the audit program and might fall

above or beneath the program on the hierarchy. The working paper hierarchy might look

like this:



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Methods

On a financial audit, the summary memo may be mostly numbers

On a financial audit, where the objective is to determine whether the financial statements are

materially accurate and presented in accordance with GAAP, the summary memo might be a

portion of the financial statements – like a breakout of the significant receivables categories on

an Excel spreadsheet. Financial auditors often call these ”lead sheets” and they contain a

minimal amount of narrative.

Summary memos can take care of a good number of the required contents of working papers

The standards, of course, are silent regarding summary memos – as they are about most issues

regarding working papers. If you recall, the Yellow Book requires that you document the

following in your working papers – somewhere.

Characteristics of items tested

Objective, scope, and methodology

Nature, timing, and extent of procedures

Audit evidence obtained and its source and the conclusions reached

Support for significant judgments, findings, conclusions, and recommendations

Evidence of supervisory review



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Methods

Audit documentation requirements include:

Documentation of the conceptual framework for issues requiring application of safeguards. Under AICPA, documentation required but only applicable when

circumstances not addressed in Code

For any non-audit service there is an additional documentation requirement Assessing management’s skill, knowledge or experience Note: The assessment is required by the AICPA, GAGAS requires documentation of that assessment.

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Work papers Referencing - Reminders

AMOUNTS

$10,000,000.00

$ 3,333,333.34

$ 6,666,666.66

$20,000,000.00

A-10

A-20

A-30

FROM

SOURCE/SUPPORT TO ANALYSIS OR

TESTING PAGE

TO SUMMARY/TOP TRIAL

A

A-1

A-2

A-3



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DOCUMENTING AUDIT TESTS

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Considerations to include in documentation Understanding of the nature of the service Knowledge of the business Knowledge of the industry General business knowledge Education Position at the client

Some factors may be given more weight

GAGAS does not require re-performance

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Physical Examination/Observation You can see and touch

Documentary Created by outside parties and transmitted directly to auditor

Confirmations, Lawyer’s Letters, Reports from Experts/Specialists

Created by outside parties and held by the auditee Created and held by the auditee Electronic documents

Testimonial - Interviews

Analytical/Computations Re-perform/Recalculate to prove math accuracy Relationships between and among accounts are reasonable



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RELIABILITY TYPE EXAMPLE

High Physical Inventory Observation

Documentary

External Cutoff Bank Statement

External/Internal Purchase Invoice

Internal Sales Invoice

Low Testimonial Management Letter

Responses to questionnaires

Interviews



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Auditors must obtain sufficient, appropriate evidence to provide a reasonable basis for their findings and conclusions.

Sufficient - Sufficiency is a measure of the quantity of evidence

used to support the findings and conclusions related to the audit objectives. In assessing the sufficiency of evidence, auditors should determine whether enough evidence has been obtained to persuade a knowledgeable person that the findings are reasonable.

Appropriate - Evidence that encompasses its relevance, validity, and reliability in providing support for findings and conclusions related to the audit objectives. In assessing the overall appropriateness of evidence, auditors should assess whether the evidence is relevant, valid, and reliable.



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VI. COMMON DEFICIENCIES OF AUDIT

WORKPAPERS

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Common Deficiencies of Audit

Workpapers

DID NOT ADDRESS THE: PURPOSE; SCOPE; RESULTS; AND CRITERIA AUDIT PROGRAM STEP

NOT PROPERLY REFERENCED OR NO REFERENCE NOT SIGNED AND INITIALED NO EVIDENCE OF REVIEW CAN’T DETERMINE WHAT WAS DONE ILLEGIBLE NO OR LITTLE LOGICAL CONCLUSION REGARDING INTERNAL

CONTROLS DEFICIENCIES (AUDIT FINDINGS WERE UNDEVELOPED OR POORLY DEVELOPED)



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Remember…We have a job to do!

We’ll be Back !!!



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Questions?

Johnny L. Brooks, CPA Jay Giannantonio, CPA/CGMA,CIA Managing Director Principal – Finance & Accounting



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Thanks for Attending!!!



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