Documentation: A Key Ingredient for Audit Success
You’re trying out a pound cake recipe, but when you pull your pan out of the oven, you realize the cake didn’t rise. Instead of being fluffy and moist, it’s flat and dense. You double-check the recipe and stop short when you see baking powder on the ingredient list. You left that out because you didn’t have any and you figured it wouldn’t matter. You did everything else perfectly, so how could leaving out this one ingredient have such a big impact?
You may never have thought there could be a similarity between baking and auditing, but in both cases, leaving out one key ingredient can ruin the outcome. You’d be amazed how often it happens.
Why You Need to Document
Through its research, the AICPA Peer Review Program determined that a lack of proper audit documentation is the most common form of non-conformity with professional standards. So how do generally accepted auditing standards define sufficient audit documentation? Documentation should provide an experienced auditor who has no connection to the audit with an understanding of—among other things—the nature, timing and extent of the audit procedures performed. Auditors may be performing proper procedures, but they may incorrectly assume that being able to verbally explain what they’ve done is enough to meet the standards. However, documentation isn’t just icing on the cake. If an auditor hasn’t met the requirements of AU-C section 230, Audit Documentation, no amount of oral explanation can serve as a substitute. By leaving out the critical ingredient that is documentation, these auditors failed to obtain sufficient evidence to support their audit opinions.
To address this misconception, the AICPA has created a free documentation toolkit that helps firms improve their audit documentation and comply with the standards. It includes resources that can be used for a variety of audits and helps address three particular areas where audit documentation challenges are most common:
- Evaluating SOC 1 reports in employee benefit plan audits. The new AICPA Audit Documentation Resources include a tool that focuses on the auditor’s use of a Type 2 report and addresses some of the most common deficiencies that the AICPA has identified.
- Dual purpose testing in single audits. A template from the Governmental Audit Quality Center illustrates the necessary documentation steps when testing compliance requirements and internal controls over compliance.
- Detail testing. Another template offers a hypothetical test of short-term notes receivable, showing what information should be obtained and how it should be documented.
Turn to the Toolkit
The documentation toolkit is a component of the Private Companies Practice Section (PCPS) Invigorate the Focus on Quality Toolkit and contains resources beyond those I’ve mentioned. You’ll find presentations on audit documentation with a version for staff that includes speaker notes, a nano-learning presentation and an aid to support an effective internal inspection, so be sure to make the most of all the toolkit has to offer.
If you’re hoping to celebrate with cake after your next peer review, you’ll be in for an unpleasant surprise if all your hard work falls flat because of insufficient documentation. Fortunately, if you need to enhance your audit documentation, the AICPA toolkit has the ingredients you need.
Carl R. Mayes, Jr., CPA, Senior Manager, Special Projects — Public Accounting, Association of International Certified Professional Accountants
Pound cake courtesy of Shutterstock.