CHAPTER14 AUDIT WORKING PAPERS I Review Questions Refer to page 522, 3rd paragraph of the textbook The major function of audit workpapers is to provide evidence of conformance with generally accepted auditing standards As a body, the workpapers are the principal record of the evidence which the auditor has gathered and evaluated in support of the audit opinion Refer to pages 524 to 525 of the textbook Refer to page 524, 2nd paragraph of the textbook With electronic spreadsheets, audit adjustments need only be entered once – in the supporting schedule The adjustments are then automatically reflected in lead schedules and in the working trial balance through equations entered in appropriate cells The cell equations “link” the workpapers such that an adjustment need be entered only once in order for all affected workpapers to be automatically updated Permanent files contain information that is of a continuing interest to the auditor A permanent file typically contains (1) copies or abstracts of significant company documents and (2) auditor- or client-prepared information on accounts Current-year files contain working papers prepared to support the assertions embodied in the financial statements Client personnel may prepare working papers to reduce the time spent by the auditor on the engagement When client personnel prepare working papers, the auditor should give the client personnel detailed instructions Working papers prepared by the client should be identified as PBC (prepared by client) and should involve no decision making The auditor should test completed working papers against underlying documentation The lead schedule, especially on larger engagements, is designed to bridge the gap between the working trial balance and the general ledger by listing all general ledger accounts that are reported as one account in the financial statements Supporting schedules is a term for working papers that support the amounts presented in the financial statements by providing support for a detailed 14-2 Solutions Manual - Assurance Principles, Professional Ethics… account on a lead schedule Supporting schedules represent the bulk of working papers In general, a properly prepared working paper should meet firm policy, have a proper heading, clearly indicate the work performed, clearly meet the audit objective for which it was designed, and clearly state the auditors’ conclusion 10 The prior year’s audit working papers are a useful guide to staff assistants because the audit procedures performed in the prior year usually are similar to those of the current year By referring to last year’s working papers, the assistant can see how the procedures were documented and is given a possible format for organizing the current year’s working paper In addition, exceptions noted in last year’s working papers may alert the assistant to possible problems in the current year Finally, the prior year’s working papers contain information substantiating the beginning balances for the current year 11 The more common types of audit working papers and their principal purposes may be summarized as follows: (1) Audit administrative working papers – aid the auditors in planning and administration of the audit, and include such items as the audit programs, questionnaires and flowcharts, decision aids, time budgets, and engagement letters (2) Working trial balance – represents the backbone of the auditors’ working papers, for it contains the balances of the ledger accounts, the adjustments and reclassifications deemed necessary by the auditors, and the adjusted amounts that appear in the financial statements It also contains references to all supporting schedules and analyses, thus serving to control the other types of working papers (3) Lead schedules – working papers that serve to combine similar general ledger accounts, the total of which appears on the working trial balance (4) Adjusting journal entries – material misstatements in the accounts disclosed by the auditors’ investigation are corrected by means of adjusting journal entries These appear on the auditors’ working trial balance, and in addition, a list of such entries is turned over to the client at the conclusion of the audit with the request that they be approved and entered in the accounting records (5) Reclassification entries – entries necessary to properly reflect financial results but not representing misstatements in the financial records of the client (6) Supporting schedules – although the term schedule is at times applied to various types of working papers, the preferred usage is to designate a listing of the details or elements comprising the balance in an account at a Audit Working Papers 14-3 specified date Preparation of such a listing is often an essential step in determining the nature of an account (7) Analyses – consist of working papers showing the changes which occurred in an account during a given period By analyzing an account, the auditors determine its nature and contents (8) Reconciliations – working papers that prove the relationship between two amounts obtained from different sources (9) Computational working papers – used to verify such data as interest expense, income taxes, and earnings per share (10) Corroborating documents – working papers that provide support for specific representations made in the financial statements, such as letters of representations from clients, lawyers’ letters, audit confirmations, and copies of the contracts 12 Audit working papers are the property of the auditor; however, they must not violate the confidential relationship between client and auditors by making the papers available to outsiders or even to the client’s employees without specific permission from the client 13 Refer to page 535, 1st and 2nd paragraphs of the textbook 14 Refer to page 535, 3rd paragraph of the textbook II Multiple Choice Questions d d c a d c c d 10 11 12 13 14 15 16 b b a d d b d d 17 18 19 20 21 22 23 24 d c c d b d a b 25 26 27 28 29 30 31 32 b d d c d c d d III Comprehensive Cases Case a (1) The functions of audit working papers are to aid the CPA in the conduct of his work and to provide support for his opinion and his compliance with auditing standards (2) Working papers are the CPA’s records of the procedures performed, and conclusions reached in the audit 14-4 Solutions Manual - Assurance Principles, Professional Ethics… b The factors that affect the CPA’s judgment of the type and content of the working papers for a particular engagement include: The nature of the auditor’s report The nature of the client’s business The nature of the financial statements, schedules or other information upon which the CPA is reporting and the materiality of the items included therein The nature and condition of the client’s records and internal controls The needs for supervision and review of work performed by assistants c Evidence which should be included in audit working papers to support a CPA’s compliance with generally accepted auditing standard includes: d Evidence that the financial statements or other information upon which the auditor is reporting were in agreement or reconciled with the client’s records Evidence that the client’s system of internal control was reviewed and evaluated to determine the nature, timing, and extent of audit procedures Evidence of the auditing procedures performed in obtaining evidential matter for evaluation Evidence of how exceptions and unusual matters disclosed byauditing procedures were resolved or treated Evidence of the auditor’s conclusions on significant aspects of the engagement with appropriate commentaries The CPA should perform an adequate examination at minimum cost and effort and the preceding year’s programs will aid in doing this The preceding year’s audit programs ordinarily contain information useful in the current examination (such as descriptions of the unique features of a client’s operations or records, a formalized sequence of audit steps in logical order, and approximate time requirements to perform various phases of the work) The auditor should decide whether to use the old program or prepare a new one Case In general, the working paper is not set up in a logical manner to show what the auditor wants to accomplish The primary objective of the working paper is to verify the ending balance in notes receivable and interest receivable A secondary objective is to account for all interest income, cash received and cash disbursed for new notes, collateral as security, and other information about the notes for disclosure purposes Audit Working Papers 14-5 Specific deficiencies of the working paper presented in the question are: a DEFICIENCY Tick mark explanation “tested” does not indicate specifically what was done Explanation of some tick marks is not given Classification of long-term portion indicates no verification Paid-to-date row is confusing Due dates are missing for C.C Co., P Pablo and Tetra Co c SPREADSHEET SOLUTION b IMPROVEMENT Should have separate tick marks meaning: Agreed to confirmation Footed Traced to cash receipts journal Recomputed, etc Explain all tick marks on the same page of the working paper Recompute portions of notes which are long-term Column should say “date paid to” and this should be confirmed Include due dates on working paper for these notes The purpose of using an Excel spreadsheet in this problem is to give the student some experience in preparing a simple working paper using an Excel spreadsheet It should be explained to students that this type of working paper may or may not be prepared in actual practice, and that often templates are used to prepare more time-consuming working papers Also, whether or not tick marks are computerized is a matter to be decided The advantage is that the completed audit work can then be stored and reviewed electronically, a direction many firms are going On the other hand, it may be more efficient to indicate audit work manually as it is performed, and a contrast in the color of the tick marks through use of a colored pencil may be desirable The formulas used are self-evident, so no listing is provided Two items deserve comment: An advantage of using a spreadsheet program for these types of analyses is that footing and crossfooting are done automatically When auditor tick marks are done by computer, a problem arises as to how to place them on the worksheet One could use narrow 14-6 Solutions Manual - Assurance Principles, Professional Ethics… columns inserted between the scheduled client data, or, as done here, the tick marks are placed in blank rows beneath the related data 14-7 Solutions Manual - Principles of Auditing and Other Assurance Services FOURTH PACIFIC COMPANY A/C # 110 – NOTE RECEIVABLE 12/31/03 Schedule Prepared by Approved by Account # 110 – Notes Receivable Maker Alba Co c* Barrios, Inc c* C.C Co c* P Pablo c* Martin Cruz c* Tetra Co c* Date Interest Made / Rate / Due Date Paid to 6/15/02 / 5% / 6/15/04 None pd 11/21/02 / 5% / Demand 12/31/03 11/1/02 / 5% / 4/1/08 12/31/03 (P200/Mo.) 7/26/03 / 5% / 8/1/05 9/30/03 (P1000/Mo.) 5/12/02 / 5% / Demand 12/31/03 9/3/03 / 6% / 2/1/06 11/30/03 (P400/Mo.) Balance 12/31/02 4000 3591 12780 Value of Security None 3591 None 13180 24000 25000 50000 25000 r 5000 r 20000 2100 None 10000 12000 r 2100 r 1600 r 12000 2100 22471 37000 f f 0 Payments 1000 r 3591 r 2400 r Date 1/21/04 2/15/04 Interest Face Amount 5000 Additions N-1 JD PP Balance 12/31/03 3000 Receivable 12/31/02 104 tp 24 Receivable 12/31/03 279 Earned 175 < 102 < 577 < Received 102 r 601 r 0 468 < 200 r 268 105 < 162 < 105 r 108 r 10400 15691 43780 128 1589 1116 601 f f, cf wtb f tb f op f f, cf wtb 10380 Legend of Auditor’s Tick Marks f Footed cf Crossfooted Traced to prior year working papers wtb Traced total to working trial balance op Traced total to operations working paper – OP6 * Examined note for payee, made and due dates, interest rate, face amount, and value of security No exceptions noted c Received confirmation, including date interest paid to, interest rate, interest paid during 2003, note balance, and security No exceptions noted r Traced to cash receipts journal < Recomputed for the year 54 14-8 Services Solutions Manual - Principles of Auditing and Other Assurance ... related data 14-7 Solutions Manual - Principles of Auditing and Other Assurance Services FOURTH PACIFIC COMPANY A/C # 110 – NOTE RECEIVABLE 12/31/03 Schedule Prepared by Approved by Account # 110... procedures Evidence of the auditing procedures performed in obtaining evidential matter for evaluation Evidence of how exceptions and unusual matters disclosed by auditing procedures were resolved... automatically When auditor tick marks are done by computer, a problem arises as to how to place them on the worksheet One could use narrow 14-6 Solutions Manual - Assurance Principles, Professional