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Rolling forward prior audit workpapers; are we trapping ourselves?

Updated: Jul 16, 2019

With all the focus currently on Big 4 audit firms and the quality of their audits, it has made me question the amount, we as auditors, rely on the work performed during prior year audits. At the commencement of any audit, there is a substantial investment by the firm to understand, document, and test all relevant processes within a new audit client. Even with the work of the previous audit firm, it is still necessary for the current auditor to learn as much detail as necessarily possible about their current client. The same could also be said for SOX auditors, who spend a significant amount of time documenting processes, controls and performing test procedures, within an organisation.

Given the investment in the first year, it is often common practice that audit teams will roll forward workpapers from prior year audits. It is here that the problem lies.

Although audit firms have review procedures in place, the results of the Public Company Accounting Oversight Board (PCAOB), Financial Reporting Council (FRC) and the Australian Securities and Investments Commission (ASIC), it is clear that review procedures and processes in place to ensure good audit quality, are not working. I have spoken about audit quality results in a previous blog post which can be read here. Despite the frequent reviews by the regulators, and the subsequent reports dished out within the United Kingdom such as the Competition and Market Authorities (CMA) and Business, Energy and Industrial Strategy (BEIS) "Future of Audit" report, audit quality issues keep occurring.

If we start to strip this back to the root cause, could it be that our workpapers are simply wrong from the start?

Most audit practices and in-house internal audit functions use some audit management programs such as CCH, Caseware, or Team Mate, to name a few). Each of these programs offer a simple, easy to use, roll-forward function. Workpapers from the prior year are simply carried forward, and in some instances, pre-populated, at the click of a button. Whilst such a feature is great for audit efficiency and saves 'reinventing the wheel', it raises a few questions:

  • Are we certain that the original workpaper was good enough to be rolled forward?

  • Was the content in the original workpaper accurate?

  • Did the original workpaper address all relevant standard and audit requirements?

  • Has the original workpaper been documented well enough that future auditors will understand and be able to re-perform the audit procedures?

A thread on Redit would suggest that some prior year workpapers probably wouldn't address many of these questions, and therefore, should probably not be rolled forward or even relied upon.

As senior levels within an audit team stay consistent over a number of years (noting auditor rotation), there is a risk that poor quality, or lackluster workpapers, are sliding through, resulting in potential risks to the firms and audit client. These issues are potentially reflective in the audit quality results released by a regulator.

So how do we combat this? We want to keep the roll forward function to save us time, but we also want to deliver good quality work. There are a few initial thoughts I had to prevent us being trapped in a bad habit of rolling forward workpapers and becoming complacent.

Only allow workpapers to be rolled forward every two years. Where a workpaper has reached its two year deadline, it should be re-prepared from the ground up. Its not common for whole processes or procedures to stay exactly the same for more than two years, and therefore, no workpaper (walk through or testing), should stay the same either.

Change responsibilities. Auditor familiarity can always be a risk and is similar to client predictability. If the auditor responsible for preparing or reviewing the workpaper has also been responsible in previous years, there is a risk they may become complacent in their knowledge or testing of the process, or may even present bias to the quality of the audit workpaper. Furthermore, if a business area is tested by the same person each year for the same procedure, there is a level of predictability which should be avoided. As such, rotating auditors responsible for the completion and review of workpapers should be just as consistent as starting a new workpaper.

Send for review. Firms need to up their game when it comes to audit quality and an investment needs to be made. One way would be to allocate time to a second Partner to review, at random, various components of an audit file and go directly to the audit team. The dual Partner approach (whilst often already in place for many larger and riskier audit clients) may not exist for some smaller audit clients, however materiality is relevant to the business and therefore, all clients should be treated with similar value.

Whilst this is all very financial statement audit heavy, the same principles apply to Internal Audit. Particularly where audits are performed on a rolling cycle, reliance on prior audit work programs and workpapers should be treated with caution. Whilst they give great insight into the procedures performed, potential issues and risks, it can also create a roadblock in that the auditor cannot see past the work performed previously.

Starting with a blank piece of paper, then comparing to prior audit tests, is a great way to ensure you are considering all aspects in your audit testing and you are not simply 'rolling forward' a potentially bad workpaper from the prior year.

#audit #internalaudit #financialstatements #finance #business #workpapers #testing #rollforward #auditprocedures

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