A permanent audit file and a current audit file are the two categories in which working papers of an audit are segregated. But what are audit working papers?
Audit working papers refer to the documentation of the planning and execution of an audit engagement. They are essentially a record of audit procedures performed by the auditor while auditing his client’s books, relevant audit evidence obtained, and the conclusions reached by him.
It is very important that an auditor should maintain proper working papers to demonstrate the audit work. The purpose of the working papers is to demonstrate that the audit is and has been conducted in adherence to the basic principles. The working papers include the documents prepared or obtained by the auditor and retained by him in connection to the audit. They include all evidence gathered by the auditor that work has been performed in conformity with relevant auditing standards.
Auditors maintain a variety of working papers for each audit engagement every year. The audit working papers that are maintained for the current year and are relevant to the current year’s audit engagement are referred to as “current working papers”. On the other hand, sometimes working papers that are relevant to more than one audit engagement are often retained separately in a file known as “permanent working papers”. These files may be of continuous use by the auditor and may include details about the auditee’s business and accounting system.
Further, the audit working papers (both current and permanent) prepared for a client and its audit engagement are usually detailed enough for another auditor, who is adequately experienced and competent but unfamiliar with the client, to obtain an overall understanding of the engagement.
Types of working papers
As understood from above, in the case of recurrent audits, some working paper files may be divided into two categories: permanent audit file and current audit file: where the former contains information of continuing importance, and the latter provides information relevant to a single audit period.
To put it in another way, the information contained in a permanent audit file is of continued interest and relevance to subsequent audits. But, as the name indicates, a current audit file contains information relating to the audit of the current period only. It is normally not useful for succeeding audits, except where it contains something important that may be of relevance for the next year.
The contents of each of these files have been listed below:
Contents of Permanent Audit File
A permanent audit file contains information on the following:
- The legal and organizational framework of the client’s entity, for example, the Memorandum of Association (MOA) and Articles of Association (AOA) in the case of a company
- Extracts or copies of essential legal papers, agreements (e.g., loan agreements), and minutes that may be important and relevant for the audit
- A record of the study and evaluation of the internal control system of the entity (This could take the form of narrative descriptions, questionnaires, flow charts, or a combination of the three.)
- The letter of engagement
- A list of client’s investments
- An analysis of critical ratios concerning the performance of the business and their trends
- Copies of the audited financial statements of the previous year (or years)
- Notes regarding significant accounting policies being followed by the company
- Important audit observations made in the earlier financial years
- Details of leases, if any
Contents of Current Audit File
A current audit file contains information on the following:
- Correspondence on the acceptance of the annual reappointment of the auditor
- Copies of management letters and representations
- Letters of attorneys
- Extracts of significant matters contained in the minutes of Board Meetings and General Meetings relevant to the audit
- An analysis of business transactions and ledger balances
- Copies of communication with other auditors, experts (e.g., valuers), and third parties
- Overall Audit plan, risk assessments, and Audit programme
- Conclusions obtained on important audit issues
- Copies of financial statements and the audit report
- Workings of the entity’s trial balance and worksheets
- Details of adjusting journal entries and reclassification entries
- Documentation relating to the consideration of internal control and the consideration of fraud risk factors
- Record of test of controls carried out and substantive tests
- Record of audit exceptions (i.e., deviations from the anticipated results of testing of control activities) and their resolutions
- Confirmation responses
- A record of queries raised during the course of the audit and their clearance, with notes for future reference (if, any).
- A record of results of audit tests on transactions and ledger balances and conclusions reached
Who retains these working papers?
Working papers are the property of the auditor and some portions or extracts of them can be obtained at his discretion. These working papers need to be kept in safe custody by the auditor and in a confidential manner for such time as may be necessary to meet the requirements of his practice or to satisfy any legal or professional requirement related to record retention.
What should be the form of working papers?
Working papers should be prepared and organized to satisfy the unique conditions of each audit as well as the auditor’s requirements. The efficiency with which working papers are written and reviewed will get improved when they are standardized (for example, through checklists, specimen letters, etc.).
Also, working papers are maintained in such a manner that they are complete and detailed enough for any auditor to gain a comprehensive understanding of the audit. But the scope of the documentation is a question of professional judgment because it is neither essential nor possible for the auditor to document every observation, thought, consideration, or conclusion in his working papers.
Both permanent and current audit files make an important component of the audit documentation required to be kept on the part of an auditor. The current audit file and permanent audit file together are known as audit working papers.
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