You are on page 1of 9

CHAPTER 14

AUDIT WORKING PAPERS

I. Review Questions

1. Refer to page 522, 3rd paragraph of the textbook.

2. The major function of audit workpapers is to provide evidence of conformance


with generally accepted auditing standards. As a body, the workpapers are the
principal record of the evidence which the auditor has gathered and evaluated in
support of the audit opinion.

3. Refer to pages 524 to 525 of the textbook.

4. Refer to page 524, 2nd paragraph of the textbook.

5. With electronic spreadsheets, audit adjustments need only be entered once – in


the supporting schedule. The adjustments are then automatically reflected in
lead schedules and in the working trial balance through equations entered in
appropriate cells. The cell equations “link” the workpapers such that an
adjustment need be entered only once in order for all affected workpapers to be
automatically updated.

6. Permanent files contain information that is of a continuing interest to the


auditor. A permanent file typically contains (1) copies or abstracts of significant
company documents and (2) auditor- or client-prepared information on accounts.
Current-year files contain working papers prepared to support the assertions
embodied in the financial statements.

7. Client personnel may prepare working papers to reduce the time spent by the
auditor on the engagement. When client personnel prepare working papers, the
auditor should give the client personnel detailed instructions. Working papers
prepared by the client should be identified as PBC (prepared by client) and
should involve no decision making. The auditor should test completed working
papers against underlying documentation.

8. The lead schedule, especially on larger engagements, is designed to bridge the


gap between the working trial balance and the general ledger by listing all
general ledger accounts that are reported as one account in the financial
statements. Supporting schedules is a term for working papers that support the
14-2 Solutions Manual - Principles of Auditing and Other Assurance
Services
amounts presented in the financial statements by providing support for a detailed
account on a lead schedule. Supporting schedules represent the bulk of working
papers.
9. In general, a properly prepared working paper should meet firm policy, have a
proper heading, clearly indicate the work performed, clearly meet the audit
objective for which it was designed, and clearly state the auditors’ conclusion.

10. The prior year’s audit working papers are a useful guide to staff assistants
because the audit procedures performed in the prior year usually are similar to
those of the current year. By referring to last year’s working papers, the
assistant can see how the procedures were documented and is given a possible
format for organizing the current year’s working paper. In addition, exceptions
noted in last year’s working papers may alert the assistant to possible problems
in the current year. Finally, the prior year’s working papers contain information
substantiating the beginning balances for the current year.

11. The more common types of audit working papers and their principal purposes
may be summarized as follows:
(1) Audit administrative working papers – aid the auditors in planning and
administration of the audit, and include such items as the audit programs,
questionnaires and flowcharts, decision aids, time budgets, and
engagement letters.
(2) Working trial balance – represents the backbone of the auditors’ working
papers, for it contains the balances of the ledger accounts, the adjustments
and reclassifications deemed necessary by the auditors, and the adjusted
amounts that appear in the financial statements. It also contains references
to all supporting schedules and analyses, thus serving to control the other
types of working papers.
(3) Lead schedules – working papers that serve to combine similar general
ledger accounts, the total of which appears on the working trial balance.
(4) Adjusting journal entries – material misstatements in the accounts
disclosed by the auditors’ investigation are corrected by means of adjusting
journal entries. These appear on the auditors’ working trial balance, and in
addition, a list of such entries is turned over to the client at the conclusion
of the audit with the request that they be approved and entered in the
accounting records.
(5) Reclassification entries – entries necessary to properly reflect financial
results but not representing misstatements in the financial records of the
client.
(6) Supporting schedules – although the term schedule is at times applied to
various types of working papers, the preferred usage is to designate a
Audit Working Papers 14-3
listing of the details or elements comprising the balance in an account at a
specified date. Preparation of such a listing is often an essential step in
determining the nature of an account.
(7) Analyses – consist of working papers showing the changes which occurred
in an account during a given period. By analyzing an account, the auditors
determine its nature and contents.
(8) Reconciliations – working papers that prove the relationship between two
amounts obtained from different sources.
(9) Computational working papers – used to verify such data as interest
expense, income taxes, and earnings per share.
(10) Corroborating documents – working papers that provide support for
specific representations made in the financial statements, such as letters of
representations from clients, lawyers’ letters, audit confirmations, and
copies of the contracts.

12. Audit working papers are the property of the auditor; however, they must not
violate the confidential relationship between client and auditors by making the
papers available to outsiders or even to the client’s employees without specific
permission from the client.

13. Refer to page 535, 1st and 2nd paragraphs of the textbook.

14. Refer to page 535, 3rd paragraph of the textbook.

II. Multiple Choice Questions

1. d 9. b 17. d 25. b
2. d 10. b 18. c 26. d
3. c 11. a 19. c 27. d
4. a 12. d 20. d 28. c
5. d 13. d 21. b 29. d
6. c 14. b 22. d 30. c
7. c 15. d 23. a 31. d
8. d 16. d 24. b 32. d

III. Comprehensive Cases

Case 1. a. (1) The functions of audit working papers are to aid the CPA in the
conduct of his work and to provide support for his opinion and his
compliance with auditing standards.
(2) Working papers are the CPA’s records of the procedures performed,
and conclusions reached in the audit.
14-4 Solutions Manual - Principles of Auditing and Other Assurance
Services
b. The factors that affect the CPA’s judgment of the type and content of the
working papers for a particular engagement include:
1. The nature of the auditor’s report.
2. The nature of the client’s business.
3. The nature of the financial statements, schedules or other information
upon which the CPA is reporting and the materiality of the items
included therein.
4. The nature and condition of the client’s records and internal controls.
5. The needs for supervision and review of work performed by assistants.

c. Evidence which should be included in audit working papers to support a


CPA’s compliance with generally accepted auditing standard includes:
1. Evidence that the financial statements or other information upon which
the auditor is reporting were in agreement or reconciled with the
client’s records.
2. Evidence that the client’s system of internal control was reviewed and
evaluated to determine the nature, timing, and extent of audit
procedures.
3. Evidence of the auditing procedures performed in obtaining evidential
matter for evaluation
4. Evidence of how exceptions and unusual matters disclosed by auditing
procedures were resolved or treated.
5. Evidence of the auditor’s conclusions on significant aspects of the
engagement with appropriate commentaries.

d. The CPA should perform an adequate examination at minimum cost and


effort and the preceding year’s programs will aid in doing this. The
preceding year’s audit programs ordinarily contain information useful in the
current examination (such as descriptions of the unique features of a client’s
operations or records, a formalized sequence of audit steps in logical order,
and approximate time requirements to perform various phases of the work).
The auditor should decide whether to use the old program or prepare a new
one.

Case 2. In general, the working paper is not set up in a logical manner to show what
the auditor wants to accomplish. The primary objective of the working paper is
to verify the ending balance in notes receivable and interest receivable. A
secondary objective is to account for all interest income, cash received and cash
disbursed for new notes, collateral as security, and other information about the
notes for disclosure purposes.
Audit Working Papers 14-5

Specific deficiencies of the working paper presented in the question are:

a. b.
DEFICIENCY IMPROVEMENT
1. Tick mark explanation “tested” Should have separate tick marks
does not indicate specifically meaning:
what was done.  Agreed to confirmation
 Footed
 Traced to cash receipts journal
 Recomputed, etc.
2. Explanation of some tick marks is Explain all tick marks on the same
not given. page of the working paper.
3. Classification of long-term Recompute portions of notes which are
portion indicates no verification. long-term.
4. Paid-to-date row is confusing. Column should say “date paid to” and
this should be confirmed.
5. Due dates are missing for C.C. Include due dates on working paper
Co., P. Pablo and Tetra Co. for these notes.

c. SPREADSHEET SOLUTION
The purpose of using an Excel spreadsheet in this problem is to give the
student some experience in preparing a simple working paper using an
Excel spreadsheet. It should be explained to students that this type of
working paper may or may not be prepared in actual practice, and that often
templates are used to prepare more time-consuming working papers. Also,
whether or not tick marks are computerized is a matter to be decided. The
advantage is that the completed audit work can then be stored and reviewed
electronically, a direction many firms are going. On the other hand, it may
be more efficient to indicate audit work manually as it is performed, and a
contrast in the color of the tick marks through use of a colored pencil may
be desirable.

The formulas used are self-evident, so no listing is provided. Two items


deserve comment:
1. An advantage of using a spreadsheet program for these types of
analyses is that footing and crossfooting are done automatically.
2. When auditor tick marks are done by computer, a problem arises as
to how to place them on the worksheet. One could use narrow
14-6 Solutions Manual - Principles of Auditing and Other Assurance
Services
columns inserted between the scheduled client data, or, as done
here, the tick marks are placed in blank rows beneath the related
data.
14-7 Solutions Manual - Principles of Auditing and Other Assurance Services

FOURTH PACIFIC COMPANY Schedule N-1 Date


A/C # 110 – NOTE RECEIVABLE Prepared by JD 1/21/04
12/31/03 Approved PP 2/15/04
by

Account # 110 – Notes Receivable Interest


Date Interest
Made / Rate / Face Value Balanc Balanc Receiva Receiva
Maker Due Date Amoun of e Additio Payme e ble Earned Receiv ble
Paid to t Securit 12/31/ ns nts 12/31/ 12/31/0 ed 12/31/0
y 02 03 2 3
Alba Co. c* 6/15/02 / 5% / 5000 None 4000 0 1000 3000 104 175 0 279
6/15/04 None tp r tp <
pd.
Barrios, c* 11/21/02 5% / 3591 None 3591 0 3591 0 0 102 102 0
Inc. /
Demand 12/31/ tp r tp < r
03
C.C. Co. c* 11/1/02 / 5% / 13180 24000 12780 0 2400 10380 24 577 601 0
4/1/08 12/31/ tp r tp < r
03
(P200/M
o.)
P. Pablo c* 7/26/03 / 5% / 25000 50000 0 25000 5000 20000 0 468 200 268
8/1/05 9/30/0 r r < r
3
(P1000/
Mo.)
Martin c* 5/12/02 / 5% / 2100 None 2100 0 2100 0 0 105 105 0
Cruz
Demand 12/31/ tp r tp < r
03
Tetra Co. c* 9/3/03 / 6% / 12000 10000 0 12000 1600 10400 0 162 108 54
2/1/06 11/30/ r r < r
03
(P400/M
o.)
22471 37000 15691 43780 128 1589 1116 601

f f f f, cf f f f f, cf
14-8 Solutions Manual - Principles of Auditing and Other Assurance Services

tp wtb tb op wtb

Legend of Auditor’s Tick Marks


f Footed
cf Crossfooted
tp Traced to prior year working papers
wtb Traced total to working trial balance
op Traced total to operations working paper – OP6
* Examined note for payee, made and due dates, interest rate, face
amount, and value of security. No exceptions noted.
c Received confirmation, including date interest paid to, interest rate,
interest paid during 2003, note balance, and security. No
exceptions noted.
r Traced to cash receipts journal
< Recomputed for the year
14-9 Solutions Manual - Principles of Auditing and Other Assurance
Services