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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
A9.
The documentation requirements in this standard
should result in more effective
and
efficient oversight of registered public
accounting firms and associated
persons,
thereby
improving audit quality and enhancing investor
confidence.
A10.
Inadequate audit documentation diminishes audit
quality on many levels. First,
if
audit
documentation does not exist for a particular
procedure or conclusion related to
a
significant
matter, it casts doubt as to whether the
necessary work was done. If the
work
was not documented, then it becomes difficult
for the engagement team, and
others,
to know what was done, what conclusions were
reached, and how those
conclusions
were reached. In addition, good audit
documentation is very important
in
an
environment in which engagement staff changes or
rotates. Due to engagement
staff
turnover, knowledgeable staff on an engagement
may not be available for the
next
engagement.
Audit
Programs
A11.
Several commenters suggested that audit
documentation should include
audit
programs.
Audit programs were specifically mentioned in
SAS No. 96 as a form of audit
documentation.
A12.
The Board accepted this recommendation, and
paragraph 4 in the final
standard
includes
audit programs as an example of documentation.
Audit programs may provide
evidence
of audit planning as well as limited evidence of
the execution of audit
procedures,
but the Board believes that signed-off audit
programs should generally not
be
used as the sole documentation that a procedure
was performed, evidence was
obtained,
or a conclusion was reached. An audit program
aids in the conduct and
supervision
of an engagement, but completed and initialed
audit program steps should
be
supported with proper documentation in the
working papers.
Reviewability
Standard
A13.
The proposed standard would have adapted a
standard of reviewability from
the
U.S.
General Accounting Office's ("GAO")
documentation standard for government
and
other
audits conducted in accordance with generally
accepted government auditing
standards
("GAGAS"). The GAO standard provides that "Audit
documentation related
to
planning, conducting, and reporting on the audit
should contain sufficient
information
to
enable an experienced auditor who has had no
previous connection with the audit
to
ascertain
from the audit documentation the evidence that
supports the auditors'
significant
judgments and conclusions."2/
This
requirement has been important in
the
field
of government auditing because government audits
have long been reviewed by
GAO
auditors who, although experienced in auditing,
do not participate in the
actual
audits.
Moreover, the Panel on Audit Effectiveness
recommended that sufficient,
specific
requirements for audit documentation be
established to enable public
accounting
firms' internal inspection teams as well as
others, including reviewers
outside of the firms,
to assess the quality of engagement
performance.3/
Audits
and
reviews of issuers' financial statements will
now, under the Act, be subject to
review
by PCAOB inspectors. Therefore, a documentation
standard that enables an inspector
to
understand
the work that was performed in an audit or
review is appropriate.
2/
U.S. General Accounting Office, Government
Auditing
Work
Standards for Financial Audits" (2003 Revision),
paragraph 4.22.
3/
Panel on Audit Effectiveness, Report and
Recommendations (Stamford,
Ct:
Public Oversight Board, August 31,
2000).
A14.
Accordingly, the Board's proposed standard would
have required that audit
documentation
contain sufficient information to enable an
experienced auditor, having
no
previous connection with the engagement, to
understand the work that was
performed,
the name of the person(s) who performed it, the
date it was completed, and
the
conclusions reached. This experienced auditor
also should have been able to
determine
who reviewed the work and the date of such
review.
A15.
Some commenters suggested that the final
standard more specifically
describe
the
qualifications of an experienced auditor. These
commenters took the position
that
only
an engagement partner with significant years of
experience would have the
experience
necessary to be able to understand all the work
that was performed and the
conclusions
that were reached.
One
commenter suggested that an auditor who
is
reviewing
audit documentation should have experience and
knowledge consistent with
the
experience and knowledge that the auditor
performing the audit would be
required
to
possess, including knowledge of the current
accounting, auditing, and
financial
reporting
issues of the company's industry. Another said
that the characteristics
defining
an experienced auditor should be consistent with
those expected of the auditor
with
final responsibility for the
engagement.
A16.
After considering these comments, the Board has
provided additional specificity
about
the meaning of the term, experienced auditor.
The standard now describes an
experienced
auditor as one who has a reasonable
understanding of audit activities
and
has
studied the company's industry as well as the
accounting and auditing issues
relevant
to the industry.
A17.
Some commenters also suggested that the
standard, as proposed, did not
allow
for
the use of professional judgment. These
commenters pointed to the omission of
a
statement
about professional judgment found in paragraph
4.23 of GAGAS that states,
"The
quantity, type, and content of audit
documentation are a matter of the
auditors'
professional
judgment." A nearly identical statement was
found in the interim auditing
standard,
SAS No. 96, Audit
Documentation.
A18.
Auditors exercise professional judgment in
nearly every aspect of
planning,
performing,
and reporting on an audit. Auditors also
exercise professional judgment
in
the
documentation of an audit and other engagements.
An objective of this standard
is
to
ensure that auditors give proper consideration
to the need to document
procedures
performed,
evidence obtained, and conclusions reached in
light of time and cost
considerations
in completing an engagement.
A19.
Nothing in the standard precludes auditors from
exercising their professional
judgment.
Moreover, because professional judgment might
relate to any aspect of an
audit,
the Board does not believe that an explicit
reference to professional judgment
is
necessary
every time the use of professional judgment may
be appropriate.
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