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Lesson 13: Auditor Working Papers - YouTube
Channel: Executive Finance
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I like this lesson a lot why because as
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an accountant who has worked in both
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public practice and industry the
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discipline of preparing well documented
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and organized working paper files is
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equally applicable in public accounting
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gasps requires the auditor to document
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all the evidence that supports the audit
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opinion as a reminder this would include
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the risk assessments and the basis for
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such risk assessments the procedures or
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tests performed the information obtained
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and your conclusions reached in public
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accounting the auditors must assemble
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the final version of the audit file
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within 60 days of the date of the I
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report and which time the firm's
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initiate what is called a file freeze
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new information received after this time
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would be separately included in the
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front of the file the reason for doing
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this is to help ensure the integrity of
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the audit conclusions and to prevent
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hindsight from playing a role in
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prejudicing the conclusions different
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firms organize their files using varying
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formats but they all have the same
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logical consistency files may be
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documented electronically or in paper
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form permanent files maintain
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information that has pertinents from
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year to year things like corporate
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bylaws long-term contracts lending
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agreements and systems documentation
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current files maintain all the working
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papers supporting the current period and
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these files will include risk
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assessments and materiality planning
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information such as the staffing plans
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and budgets and the audit programs audit
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evidence and audit conclusions working
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papers have a logical flow to them that
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needs to be well understood not only by
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the preparer but by those who come
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behind later including the audit senior
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manager and the partner the second
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partner who may not have as much
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familiarity with the client office
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inspectors who have no familiarity with
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the client the follow of the firms file
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preparation methodology and finally
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future junior auditors with limited
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experience who may be trying to follow
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along with your work next year in larger
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organizations much of the working paper
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file is actually prepared by the client
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so the principles we talk about here are
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of equal ramblas to those who will
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ultimately work in industry whether
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you're a public accountant or in
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industry the preparation of strong
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working paper files is the key to
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achieving strong controls over financial
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reporting if you are the client and the
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audit if you're a public accountant
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let's take a moment to dive into the
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structure of the current files most
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firms have some sort of standard
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indexing system that organizes the
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working paper file it allows for the
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logical drill down beginning at the
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financial statements with each section
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of the working paper file reference to
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the major sections of the ballas sheet
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in the income statement the financial
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statements give pouch to the trial
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balance the trial balance represents the
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ending balances in the general ledger
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the general ledger contains all the
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accounts and the activity that has
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occurred throughout the period the trial
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balance is often grouped like accounts
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are aggregated first and the subtotals
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carried forward to the financial
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statements for example a company may
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have five bank accounts which get
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aggregated together reported has one
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line cash on the balance sheet lead
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schedules are often the title pages of
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each section of the working paper file
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for instance from the cash account we
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would have a lead schedule with our five
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general ledger accounts that comprise
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cash behind the lead schedules we would
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provide support for each account balance
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support in this case would include a
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bank reconciliation for each account
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followed by a bank statement followed by
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a bank confirmation on each working
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paper you will document the audit
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procedures performed you may initial a
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check list either manually or
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electronically on the audit program to
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signify performance of the procedure but
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you will also mark up the working paper
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using audit tick marks audit tick marks
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are simply a shorthand notation for
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documenting the work performed by the
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auditor whether its footing or adding a
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column of numbers or checking the
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extensions of an
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toric costing the auditor makes little
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marks to show that they've been there
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and done that for those who later review
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the file so the types of working papers
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that are often found in the current file
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include a detailed listing of what makes
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up a balance such as an inventory
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listing or cash receivable
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reconciliations which agree the balance
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of the general ledger to the supporting
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evidence for example a bank
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reconciliation continuity schedules that
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tie together the opening and closing
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balances such as a detailed fixed asset
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schedule which tracks the opening cost
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plus additions less disposals to arrive
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at the ending cost tests of
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reasonableness which are working papers
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that attempt to predict the balance of
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an account and then compare to what has
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been recorded procedure sub Maurice
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would document the results of any
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testing performed either substantive
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tests or tests of controls these sorts
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of working papers don't actually have
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subtotals or title particular balance
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because their purpose is to document the
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results of the sampling that has been
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performed referencing is an extremely
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important practice that helps readers
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make their way through the working paper
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file a reader should be able to start at
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the financial statements and drill into
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each and every number to determine what
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it is composed of and what evidence has
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been gathered to support it similarly
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referencing also needs to enable a
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reader to start with evidence and trace
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its inclusion through the working papers
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to the financial statements other items
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that get documented in the working paper
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file include proper headers that
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identify the clients name the period
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covered in the description of the
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contents the initials of the prepares
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the data preparation and a legend for
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any audit tick marks that were used
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whenever possible the auditor should
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document conclusions about the segments
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of neurotic consideration such
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conclusions are like little mini
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judgments about the application of each
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audit procedure these conclusions should
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plainly state one of the ballots has
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presented is fairly stated this is a
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personal opinion and very important for
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the overall integrity of the file
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auditors will often import the clients
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trial balance into their own software
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and on software tracks the balances from
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year-to-year to a more efficiently
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automate the analytical review
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procedures it also enables the auditors
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to make adjusting journal entries as
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necessary when they come across errors
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if an error is identified as material
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they may also ask the client to make an
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adjustment reclassification entries are
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also common our reclassification entry
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is necessary even when the general
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ledger is correct for example it's not
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uncommon to have credit balances in the
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accounts receivable if these credit
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balances are material the auditor will
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often reclassify the amount to accounts
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payable for presentation purposes only
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working papers are the property of the
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auditor even if they are a copy of the
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clients prepared working papers however
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the client owns the data contained on
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the working papers as such the auditors
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have confidentiality obligations to
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protect the privacy of the information
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contained within these files the working
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papers can only be shared with another
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party with the express written consent
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of the client the tendency for
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inexperienced prepares is to put a lot
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of support some of it unnecessary or
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irrelevant in the current files more
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paper or larger electronic files doesn't
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necessarily mean a better file in fact
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the objective is to put the right
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evidence in the file and communicate the
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work performed as efficiently as
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possible without sacrificing any
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sufficiency the thicker the audit file
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is the more challenging it is for the
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reviewer to really stand back and
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evaluate the key pieces of audit
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evidence and as I said the outset in my
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year subsequent to working in public
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practice I have continued to use these
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professional documentation skills to
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support the financial reporting process
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it is just as important for you to do
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all the little documentation things we
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have talked about in this lesson well as
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it is all the audit testing you perform
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to gather the evidence in the first
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place this is a lesson in communication
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skills for auditors until next time
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don't stop till you get to the top when
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you get to the top don't stop
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