Poor documentation has hidden costs. Karen Eckstein shares some simple steps that auditors can take to avoid them.
It is commonly said that “if it isn’t written down, it didn’t happen” and this is a good mindset to have when performing an audit engagement. If there isn’t evidence on the file of a review, of consideration of issues, of reasons for any judgements reached, the implication may be drawn that these things simply did not happen – leading to unintended and avoidable consequences.
Any claim or complaint, or audit review, is largely based on audit file documentation. As I highlighted during the faculty webinar Quality documentation – getting it right first time, lack of contemporaneous evidence can be very damaging when lawyers seek to defend challenges to decisions made, actions taken or not taken or not part of the audit file.
In such circumstances, explanations and evidence created ‘after the event’ are of significantly less value than contemporaneous evidence and after the event that evidence may be difficult, time consuming and costly to obtain. The auditor’s defence is also less likely to succeed than it would be if it was backed up by contemporaneous evidence.
A little time spent adequately documenting work that is undertaken during the audit, understanding what good documentation looks like to a lawyer and avoiding common shortcomings can improve audit quality and position your firm to minimise the risk of and assist in the defence of claims, complaints, negative review findings and the associated costs.
By clicking on the common documentation shortcomings listed in the table below, auditors can learn more about the reasons why they matter to lawyers.
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Over-reliance on prior year working papers
If prior year audit planning working papers are simply rolled forward, for example, the implication might be that no consideration was given to any potential changes in the year and therefore that no real planning work has been done.
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Failure to document design and implementation of controls (walkthroughs) in the current year
Auditors might appear to have assumed that controls, particularly key controls, have not changed since the prior year. If they have changed, this will have an impact on the risk assessment and audit procedures; an impact that auditors will appear to have missed.
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Outstanding issues left unresolved
If the resolution of outstanding issues and queries have not been documented, this may be relevant to claims made against the firm and may indicate a lax approach to the audit overall.
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Lack of documentation of professional scepticism
Auditors who fail to adequately document how they challenged management, their thought processes when presented with audit evidence, etc, may appear to have exercised insufficient professional scepticism during the audit.
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Insufficient back-up documentation to support the going concern assumption
Documentation of statements from personnel within the audited organisation do not constitute adequate and reliable evidence to support the going concern assumption. Independent evidence demonstrating, for example, that funding will continue or that a critical deal will complete, is a key part of the auditor’s documentation.
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Use of lazy or imprecise wording
Examples include:
- Referring to the client as ‘we’ in documentation. This can imply that the auditor is not at an independent and objective distance from management when performing their work. Such language can have adverse implications if a claim is made.
- Making concluding statements such as “debts are reasonable”, instead of “debts do not appear to be irrecoverable”. This can intimate that the auditor did not understand or properly perform an audit procedure – and can leave the auditor open to challenge.
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Ambiguity in the engagement letter
Common shortcomings include not making clear who the client is, what work is being undertaken, entities that are and are not in the audit scope, and who has the authority to provide information for the purposes of the audit.
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Failure to appropriately document onboarding issues
If the auditor fails to document consideration of the potential risks and mitigating factors from taking on a client, including whether the auditor’s independence might be compromised, an implication can arise that pressure to earn fees have overridden the need to remain independent.
The hidden costs of a claim or poor documentation can be significant:
Professional indemnity insurance (PII) costs
- If a claim made against the firm gives rise to a payment to the claimant, the firm is liable to pay the PII excess.
- A successful claim may increase the firm’s future PII premium for several years.
- A more difficult PII renewal will require significantly more time to be spent by the firm.
Dealing with the claim
- Considerable time may be spent, usually by a senior member of the firm, in investigating and dealing with the claim in question. This can translate to hundreds if not thousands of hours, depending on the complexity of the claim. This is time that could otherwise have been spent on managing the firm or acting for clients.
Client relationships
- As well as not getting paid for the work in question, firms risk losing the client retainer.
Firm staff
- Staff questioned about the audit work they have undertaken can lose confidence in their work, affecting work performance overall and general wellbeing.
- Staff may leave because of claims. The cost to the firm of replacing a staff member can be significant.
Firm reputation
- If the issue is a disciplinary matter, it is likely to be made public and that could give rise to reputational damage to the firm.
- Even if the client does not publicise the dispute, they are unlikely to recommend the firm to other potential clients, giving rise to a loss of a potential future income stream.
The potential costs of inadequate audit documentation can be daunting, but there is good news: they are also easily avoided. A little additional effort to appropriately document the work that has been undertaken during the audit is all that is needed.
What does ‘good’ documentation look like to a lawyer?
Time records are an easily overlooked piece of evidence. However, they are key information for lawyers when a claim or complaint is brought to establish what was done and when. The narratives to the time records can be a critical and useful piece of evidence to support the work undertaken on the file.
Frequently, the only evidence on the audit file will be information produced by the audit client. Without documentation of what the audit team thought about that evidence, time the team spent reviewing it, any judgements made and conclusions drawn, a fundamental part of the audit ‘story’ is missing.
Effective audit documentation is crucial for defending against claims and maintaining firm reputation. By ensuring thorough and contemporaneous records, auditors can avoid significant hidden costs and demonstrate the quality of their work.
Karen Eckstein, founder of Karen Eckstein Ltd, providers of risk management advice and training.
Other ICAEW resources
Quality documentation – getting it right first time Specialists share insights and good practice techniques to help auditors overcome documentation challenges.
Tips on audit documentation Avoid and address areas of weakness with practical pointers from the Financial Reporting Council and ICAEW’s Quality Assurance Department (QAD).
Reviewing audit file assembly procedures Strengthen file assembly, completion and safeguarding procedures, with insights and reminders from QAD.
