• 15 Marks

AA – Nov 2015 – L2 – Q6 – Audit Documentation

Discussing the retention of working papers, justification for retaining them, and types of information found in audit files.

Delta, Gamma, and Co. are the auditors to Hope Limited. The firm proposes to move their office to new premises and wishes to destroy old audit working papers beyond six years while others are to be converted into electronic copies by using scanners. Hope Limited, having decided to discontinue with Delta, Gamma & Co. as its auditors, has requested that the firm should hand over to their new auditors all the audit working papers of the previous years and the permanent audit file.

Required:
a. Advise Delta, Gamma & Co. on the above scenarios. (5 Marks)
b. Justify why it is important to maintain and keep audit working papers. (5 Marks)
c. State FIVE types of information you would expect to see in each of the following:
i. Permanent audit file
ii. Current working paper file (5 Marks)

a. Advice to Delta, Gamma & Co.:
Delta, Gamma & Co. should inform Hope Limited that audit working papers are the property of the audit firm, not the client. While the firm can share some information with the new auditors, it is not obligated to hand over the working papers themselves. Delta, Gamma & Co. should retain the working papers for at least six years from the completion of the audit, as per professional and legal requirements, before they can consider destruction or digitization. They should ensure the transition to electronic copies is secure and that no vital information is lost in the process.

b. Importance of Retaining Audit Working Papers:

  1. Legal and Regulatory Compliance: Retaining working papers for a minimum period ensures compliance with statutory and regulatory obligations.
  2. Evidence for Auditor’s Defense: The working papers serve as evidence of the auditor’s due diligence and procedures followed, which may be required if the audit is later questioned in legal or regulatory disputes.
  3. Basis for Future Audits: They provide continuity for future audits, offering background knowledge about the entity and its historical financial data.
  4. Quality Control Reviews: Retained working papers are used for internal or external quality control reviews to ensure that audit standards were properly followed.
  5. Client Service and Support: Retaining these documents ensures that the auditor can address any subsequent queries or issues that arise regarding the audit after it has been completed.

c. Types of Information in Files:
i. Permanent Audit File:

  1. Key client information, including legal structure and ownership details.
  2. A copy of significant agreements, such as leases or contracts.
  3. Historical financial information relevant to the current and future audits.
  4. Details of accounting policies and procedures.
  5. Records of significant long-term investments or assets.

ii. Current Working Paper File:

  1. Copies of the current year’s financial statements.
  2. Detailed audit planning documents and risk assessments.
  3. Testing of internal controls and substantive audit procedures performed.
  4. Summary of audit findings, including any identified risks or issues.
  5. Audit conclusions and recommendations, including any proposed audit adjustments.
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