As one of the first steps in pre-engagement planning, the review of the prior year’s audit documentation is one of the most important. Among other things, this review provides the auditor with knowledge of the prior year’s audit strategies and plans, the reporting entity’s business environment, including internal control, and information about possible risks of material misstatement due to error and fraud.
For entities considering the use of a special purpose framework (SPF), such as the American Institute of CPAs (AICPA) Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs), documentation of the application of the principles in the entity’s previous applicable reporting framework will provide information to enable the auditor to determine if an SPF is the most appropriate financial reporting framework. For entities that have decided to change their reporting framework to an SPF, the prior year’s audit documentation will be the starting place for a transition.
Following are some questions auditors may use in their prior-period documentation review.
1. How does the paper or document affect this year’s engagement? Does it affect the reporting framework’s measurement and disclosure? If so, is there a continuing working paper that can be used for documenting current information, or is preparation of a new document necessary?
2. Is the internal control documentation current? Does it need to be updated? Is it most efficient to update old information or to prepare new documentation? Would the preparation and replication of a flowchart be more effective and easier to update?
3. Is retention of the permanent file information necessary, or can the file be purged and old information permanently stored or destroyed?
4. Does the engagement time control documentation indicate any problems or issues that should be incorporated in this year’s planning activities?
5. What were the results of prior-year audit responses to identified risks of material misstatement? At the financial statement level? At the assertion level? If the results were positive, how can they reduce the extent of testing in the current year?
1. What information for return preparation should be gathered during performance of a compilation, review, or audit for the current year?
2. What differences can we expect between financial accounting and taxable income? Will any differences be minimized by the use of an SPF? If the entity uses a deferred tax method, are there temporary differences that will carry over to the current period? For a US GAAP framework, has a FIN 48 (ASC 740), Accounting for Uncertainties in Income Taxes, schedule been prepared? Is tax department assistance needed to do this for the current year?
3. Is tax-related work to be billed in addition to the planned engagement fees? Will the time charges for the tax-related work be charged to the tax function? Who will be responsible for the client billing and collection?
1. What disclosure information will be required? Do we have a current disclosure checklist for the applicable reporting framework? Do we need to gather information for disclosure while performing our normal procedures? What is the fastest way to document the information? Will the client prepare the financial statements and footnotes?
2. Are there any additions or deletions of report information for this year? Will additions require additional work? Will deletions enable us to eliminate work?
3. Has the client acted on matters in last year's internal control communication letter? How will the actions taken, or the failure to take action, affect this year’s audit?
4. Can blocked-out financial statements be used to prepare a handwritten copy of the financial statements before adjustments for use during planning, or can the statements be prepared on accounting or auditing software to eliminate retyping during engagement completion?
Last Year’s Current File
1. What objectives does each working paper document? Are there faster ways to document the accomplishment of the objectives, such as more extensive risk assessment procedures or highly effective analytical procedures? Will the audit strategy for major financial statement classifications change this year?
2. Are any of the working papers unnecessary? Are any prepared because of preference or tradition? Can the scope of the work be described in the audit program and only exceptions and their disposition documented in the working papers or memos?
3. Can client-prepared or accounting software-prepared documentation replace handwritten schedules and memos? Are there other computer-assisted auditing techniques and documentation that could be used to save time, such as data extraction software?
4. Does the firm’s template library contain templates that could be used in place of re-creating electronic schedules and worksheets on each engagement?
5. Is there an opportunity to design new spreadsheet templates to create uniformity among CPA firm engagements?
6. Will sampling applications be used this year? Are nonsampling applications the most efficient methods to use?
7. Are there new accounting or auditing pronouncements that will affect audit procedures or documentation, taking into account the policies and procedures of a change to an SPF and the clarified auditing standards?
8. Are specialists necessary for any part of the engagement?
9. Will any of the prior year’s adjustments to the financial statements be recurring this year? Will any additional information be necessary to make the recurring adjustments?
10. What work can be done before the client’s fiscal year-end? What work must be done as of the client’s fiscal year-end?
11. What due dates need to be scheduled for this year?
12. What is the staff level and special experience of engagement personnel that should be considered when scheduling staff, considering that higher risk of material misstatement requires more experienced personnel and/or more supervision? Can we use a more economical temporary or paraprofessional person to perform lower-level work?
13. Has the nature of the engagement changed this year? Has the client made any special requests for additional information?
As you can see, this review is not something an auditor can do in the backseat of the car on the way to the first day at the client’s office! This procedure is the catalyst for increasing profits on audit engagements of all financial reporting frameworks.
Indeed, failing to ask these questions during the review of prior year’s documentation may result in not asking some of them at all.
For an overview of the entire small audit engagement process, you can register for a free, one-hour webcast with CPE credit that will be presented on March 21, 2014. You can also register for 12, two-hour webcasts in my Small Audit Series by clicking on the applicable box on the left side of my home page.