SAS NO. 96 RAISES THE BAR FOR AUDIT DOCUMENTATION –
ADDING SPECIFIC REQUIREMENTS IN SEVERAL AREAS

By: Gary A. Porter, CPA

Statement on Auditing Standards (SAS) No. 96 "Audit Documentation" was issued by the Auditing Standards Board (ASB) of the American Institute of CPAs in January 2002.  The new statement is effective for audits of financial statements for periods beginning on or after May 15, 2002, although earlier application is permitted. SAS No. 41, "Working Papers," which was superseded by SAS No. 96, stated that audit documentation serves mainly to provide the “principal support for the auditor’s report” and to help the auditor conduct and supervise the audit.  SAS no. 96 reaffirms these objectives.

It’s not feasible for auditors to document all the evidence they obtain and conclusions they reach on an engagement.  Therefore, the board carried forward a SAS no. 41 footnote that stated there is no intention to imply the auditor would be precluded from supporting his or her report by other means “in addition to" audit documentation. 

Under the new guidance of SAS No. 96, the documentation should be sufficient to:

• Enable engagement team members with supervision and review responsibilities to understand the evidence obtained and the nature, timing, extent and results of auditing procedures performed.
• Indicate the engagement team members who performed and reviewed the work.

SAS No. 96 also introduced six new factors the auditor must consider in determining the nature and extent of documentation for a particular audit area or procedure.

• Risk of material misstatement associated with the assertion or with the account or class of transactions.
• Extent of judgment the auditor exercises in performing the work and evaluating the results.
• Nature of the auditing procedure.
• Significance, to the assertion being tested, of the evidence the auditor obtains.
• Nature and extent of exceptions the auditor identifies.
• The need to document a conclusion or the basis for a conclusion not evident from the documentation of the work the auditor performed. 

SAS No. 96 includes two requirements dealing with certain types of audit evidence.  The ASB developed these in response to peer review comments on the quality of audit documentation.
• Documentation must include abstracts or copies of significant contracts or agreements the auditor examined to evaluated the accounting for significant transactions.
• Audit documentation for tests of operating effectiveness of controls and substantive tests of details involving inspection of documents or confirmation should include an identification of the items tested.
 
Documenting Significant Audit Findings or Issues

SAS no. 96 requires the auditor to document certain audit findings or issues he or she considers significant.  They include the following:

• Matters that are significant and involve issues regarding the appropriate selection, application and consistency of accounting principles pertaining to the financial statements, including related disclosures.
• Results of auditing procedures that indicate the financial statements or disclosures could be materially misstated or that the auditing procedures need to be significantly modified.
• Circumstances that cause the auditor significant difficulty in applying auditing procedures he or she considers necessary.
• Other findings that could result in modification of the auditor’s report.

Developing Retention Procedures

One way for auditors to satisfy this requirement is by creating a policy to maintain electronic documentation in a format that ensures its compatibility with newer versions of audit software or by retaining older versions of such software.

Amendments to Other SASs

SAS No. 96 amended several previously issued statements on auditing standards, each of which is discussed below.

The amended SAS No. 47 requires an auditor to document the nature and effect of aggregated misstatements and his or her conclusion as to whether they cause the financial statements to be materially misstated.

The amendment to SAS No. 56 requires auditors to document certain aspects of substantive analytical procedures they perform as a principal audit test of a significant financial statement assertion.  Three requirements apply:

1) First, they also amended SAS no. 56’s other two requirements will oblige auditors to document.
2) The results of their comparison of the expectation with the recorded amounts or the ratios the auditors develop from those amounts.
3) Any additional auditing procedures they perform in response to significant unexpected differences arising from analytical procedures and those additional auditing procedures’ results.

SAS No. 96’s amendment to SAS no. 59 requires the auditor to document the conditions or events that led him or her to believe there is substantial doubt about the entity’s ability to continue as a going concern.  The work performed in connection with the auditor’s evaluation of management’s plans.  The auditor’s conclusion as to whether substantial doubt remains about the entity’s ability to continue as a going concern for a reasonable period of time.  The consideration and effect of that conclusion on the financial statements, disclosures and the audit report.
 
Comparison of "Old" Audit Documentation Requirements to SAS No. 96 on Four Key Issues

1) Nature and extent of documentation

SAS no. 41, Working Papers

Provided no specific guidance other than to list certain factors at the engagement level that affect the auditor's judgment regarding the quantity, type, and content of working papers

 SAS no. 96, Audit Documentation

Identifies the six factors listed above that the auditor must consider in determining the nature and extent of the documentation for a particular audit area or procedure.

Requires audit documentation to include abstracts or copies of significant contracts or agreements that auditors examined to evaluate the accounting for significant transactions.

Requires documentation to include an identification of items tested for tests of operating effectiveness of controls and substantive tests of details that involve inspection of documents or confirmations.

2) Sufficiency of audit documentation

SAS no. 41, Working Papers

States that working papers should be sufficient to show that the accounting records agree or reconcile with the financial statements or other information reported on and that the fieldwork standards have been observed.

SAS no. 96, Audit Documentation

Incorporates the SAS No. 41 guidance and expands it by also requiring that audit documentation be sufficient to
• Enable members of the audit team to with supervision and review responsibility to understand the evidence obtained, and the nature, timing, extent, and results of the auditing procedures performed.
• Indicate the engagement team members who performed and reviewed the work.

Documentation of significant findings or issues

SAS no. 41, Working Papers

Has no such requirement.

SAS no. 96, Audit Documentation

Requires the auditor to document findings or audit issues that in his judgment are significant, and actions taken to address them, and the basis for the final conclusions reached.
Retention of audit documentation

SAS no. 41, Working Papers

States that the auditor should adopt reasonable procedures for safe custody of working papers and should retain them for a period of time sufficient to meet the needs of his practice and to satisfy any pertinent legal requirements.

SAS no. 96, Audit Documentation

States that audit procedures should enable the auditor to access electronic audit documentation throughout the retention period.

Requires the auditor to adopt reasonable procedures to maintain the confidentiality of client information in audit documentation.

Requires the auditor to adopt reasonable procedures to prevent unauthorized access to the audit documentation.

Any way we look at it, the game has changed.  The auditor is required to do more work and spend more time in completing the audit.  This will put more fee pressure on auditors in the homeowners association industry where the audit is generally viewed as a commodity, as the association will not see any added benefit, so is unlikely to be willing to pay more for the audit.

Gary Porter, CPA began his accounting career with the national CPA firm Touche Ross in 1971.  He is licensed by the California Board of Accountancy and the Nevada Board of Accountancy.  Mr. Porter has restricted his practice to work only with Common Interest Realty Associations (CIRAs), including homeowners associations, condominium associations, property owners associations, timeshare associations, fractional associations, condo-hotels, commercial associations, and other associations.

Gary Porter is the creator and coauthor of Practitioners Publishing Company (PPC) Guide to Homeowners Associations and other Common Interest Realty Associations, and Homeowners Association Tax Library.  Mr. Porter served as Editor of CAI’s Ledger Quarterly from 1989 through 2004 and is the author of more than 200 articles.  In addition, he has had articles published in The Practical Accountant, Common Ground and numerous CAI Chapter newsletters.  He has been quoted or published in The Wall Street Journal, Money Magazine, Kiplinger’s Personal Finance, and many major newspapers.

Mr. Porter is a member of Community Associations Institute (CAI), American Resort Development Associations (ARDA), and California Association of Community Managers (CACM).  Mr. Porter served as national president of CAI in 1998 – 1999.