Advancing the Audit Documentation Standard: Auditors Must Leave a Clear Record in Private Company Audits
EXECUTIVE SUMMARY * SAS no. 103 establishes standards and provides guidance for auditors to follow when documenting their work during audits of private companies. It is effective for audits of financial statements of such companies for periods ending on or after December 15, 2006. * The terms must, should and may as described in SAS no. 102, Defining Professional Requirements in Statements on Auditing Standards, are used in SAS no. 103. * Documentation should be sufficiently detailed to give experienced auditors who were not previously involved in the audit a clear understanding of the work performed, the evidence obtained and the conclusions reached. * The new standard says what should be documented and the characteristics of workpapers that should be retained. * Oral explanations are not sufficient to document auditors' work or conclusions, but auditors may use them to clarify or explain information in the documentation. * Auditors should document audit evidence that contradicts or is inconsistent with audit conclusions regarding significant findings or issues and also explain how they addressed the contradiction in forming the conclusion. * Auditors should assemble audit documentation within 60 days from the audit report date. Subsequent deletions from the documentation are prohibited, and any additions should be documented in keeping with the standard. Audit documentation should be retained until at least five years after the report release date. ********** Changes in the audit environment have recently led the Auditing Standards Board (ASB) to significantly revise guidance it had issued less than four years earlier. In January 2002, Statement on Auditing Standards (SAS) no. 96, Audit Documentation, made the most significant changes to audit workpaper guidance in more than three decades. But soon, major frauds and business failures focused attention on audit documentation. So in December 2005 the ASB tightened the requirements governing documentation by issuing SAS no. 103 (see Official Releases, JofA, Mar.06, page 95), which bears the same title as its predecessor. The new guidance requires that engagement workpapers be sufficiently detailed to provide an experienced auditor a clear understanding of the procedures performed, the evidence obtained and the significant conclusions reached during audits of private companies. It is effective for audits of financial statements of private companies for periods ending on or after December 15, 2006. This article discusses crucial changes that the standard introduces and explains how they will affect auditing practice. THE ROAD TO NEW GUIDANCE When Enron collapsed and documents were destroyed, the profession, standard setters, regulators and state boards of accountancy became focused on audit documentation requirements and the issue of workpaper retention. In 2002 the Sarbanes-Oxley Act was passed, and it included provisions for increased audit documentation guidance for audits of public companies. Several state boards of accountancy adopted or proposed documentation regulations for all audits within their jurisdictions. Divergent rules started to emerge from the SEC, the state boards, the Government Accountability Office (GAO), the International Federation of Accountants (IFAC) and the Public Company Accounting Oversight Board (PCAOB). So the ASB set out to make its guidance not only more consistent with that of other standard setters, but also more responsive to the needs of U.S. auditors of nonpublic companies and the private company regulators overseeing their activities. WHAT'S NEW? SAS no. 103 amends several of SAS no. 96's provisions (see "How SAS No. 96 and SAS No. 103 Differ" on page 65, and "The New Audit Documentation Requirements," JofA, Apr.02, page 53). Specifically, the new SAS * Revises SAS no. 96's guidance by requiring that audit documentation be sufficient for an experienced auditor to understand--among other things--the nature, timing, extent and results of auditing procedures the engagement auditors performed, the audit evidence they obtained and the conclusions they reached on significant matters. …