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Changes surround audit documentation, audit report dating

By Michael Manspeaker, CPA

For the second time in approximately three years, audit documentation standards are changing.

Statement on Auditing Standards No. 103 was issued in December 2005 and is effective for audits of financial statements for periods ending on or after Dec. 15, 2006.

One of the significant changes in SAS No. 103 affects the dating of the auditor's report. Audit reports will be dated not earlier than the date on which the auditor has obtained sufficient appropriate evidence to support the opinion. Sufficient appropriate audit evidence includes evidence that the documentation has been reviewed and that the financial statements have been prepared and management has represented that they have taken responsibility for them. References to the "end of field work" will cease to exist. Therefore, the report date and the release date will be very close to each other.

Within 60 days following the release of the audit report, the audit engagement file must be assembled and no documentation can be deleted or discarded. This is referred to as “locking down the audit file.” Any additions to the audit documentation after that date must indicate when and by whom the changes were made and the specific reason for the changes.

Oral explanations on their own do not represent sufficient support for the work the auditor performed. Oral explanations can be used to clarify or explain information in the audit documentation, but essentially, if it is not documented, it wasn't done.

The minimum file retention period is five years from the report release date.

Previous audit standards (SAS No. 96) indicated that the auditor could support his or her opinion by other means in addition to audit documentation. It is very important to understand that the audit file lockdown and the exclusion of oral evidence mean that the audit documentation alone must support the auditor's opinion.

Another very significant difference between SAS No. 103 and previous standards is that SAS No. 103 requires that audit documentation allow an experienced auditor, having no previous connection to the audit, to understand the nature, timing and extent of procedures performed and conclusions reached. Previous standards required audit documentation to be sufficient to allow members of the engagement team to understand the nature, timing, etc. The obvious assumption is that documentation that allows understanding by someone with no previous connection to the audit will have to be more extensive.

The form and content of audit documentation continues to depend on the circumstances of the engagement and involves auditor judgment. Documentation needs to include any significant findings or issues, the actions taken to address them and the basis for the final conclusions reached. Audit documentation of procedures performed must include the specific items tested. If the auditor identifies information that contradicts or is inconsistent with the final conclusions, the documentation must include how the auditors addressed the contradiction or inconsistency.

While peer review is but one of the many uses for audit documentation, it is important that auditors understand the implications of SAS No. 103 to their peer review. The 60-day audit file lockdown and the inability to use oral explanations to document audit work will limit the auditor's possible responses to peer reviewer's questions and preliminary findings.

Audit firms need to modify their quality control policies and procedures to comply with SAS No. 103. Staff training and review of your practice aids to make sure they address the new requirements are important to assure compliance. Firms should also focus on audit documentation when performing practice monitoring procedures.

It is critical for auditors to understand that SAS No. 103 is a very important new standard and to take the appropriate steps to assure compliance.

Michael Manspeaker, CPA, is director of Accounting and Auditing and Quality Control for Smith Elliott Kearns & Company, LLC.