What is in the permanent audit file?

In the case of recurring audits, some working paper files may be classified as permanent audit files which are updated currently with information of continuing importance to succeeding audit, as distinct from current audit files which contain information relating primarily to the audit of a single period.

A permanent audit file normally includes :

• Information concerning the legal and organizational structure of the entity. In the case of a company, this includes the Memorandum and Articles of Association. In the case of a statutory corporation, this includes the Act and Regulations under which the corporation functions.
• Extracts or copies of important legal documents, agreements and minutes relevant to the audit.
• A record of the study and the evaluation of the internal controls related to the accounting system. This might be in the form of narrative descriptions,questionnaires or flow charts, or some combination thereof.
• Copies of audited financial statements for previous years.
• Analysis of significant ratios and trends.
• Copies of management letters issued by the auditor, if any. Record of communication with the retiring auditor, if any, before acceptance of the appointment as auditor.
• Notes regarding significant accounting policies.
• Significant audit observations of earlier years.

The current file normally includes :

1. Correspondence relating to acceptance of annual reappointment.
2. Extracts of important matters in the minutes of Board Meetings and General Meetings as relevant to audit.
3. Evidence of the planning process of the audit and audit programme.
4. Analysis of transactions and balances.
5. A record of the nature, timing and extent of auditing procedures performed, and the results of such procedures.
6. Evidence that the work performed by assistants was supervised and reviewed.
7. Copies of communication with other auditors, experts and other third parties.
8. Letters of representation or confirmation received from the client.
9. Conclusions reached by the auditor concerning significant aspects of the audit, including the manner in which exceptions and unusual matters, if any, disclosed by the auditor’s procedures were resolved or treated.
10. Copies of the financial information being reported on and the related audit reports.

The permanent audit file (Perm File) consists of documents or contracts of audit significance beyond the current audit period. Audit documentation is a crucial aspect of planning and performing audits. There is a saying that if the work is not documented, it’s called as not done at all. So, documentation shall be robust in the audit files.

I think the above-cited reasons are enough to stress the importance of audit documentation and Perm Files.

What does Permanent audit file comprises of?

• Entity Incorporation Documents which includes Membership Interest Purchase Agreement, Memorandum of Association or Article of Associations, etc.Advertisements
• Agreements and contracts entered by the entity such as Long-term debt Contracts, Purchases, Sales Agreements, operation agreements such as security contracts, housekeeping contracts, etc. These agreements are long term in nature. In other words, these agreements tenure will be for more than a year. So, those are form part of Perm Files.
• Engagement Letters
• Lease Agreements
• Employee Stock Options Agreements
• Board of Director Minutes, if those are having significance to subsequent audit periods (For example, Minutes that has resolutions relating to signature authority policy. This is the policy that lists out the competent persons to authorize transactions of different value)

Still, Confused?

Understand how a signature authority policy looks with the attached example here.

Practical Insights of Permanent Audit File:

1) Ensure to have only one audit staff/personnel accountable for maintaining the Permanent Audit Files.

2) Ensure the Perm files are accessible by all the team members. The best way is to have them on some cloud platform to make it accessible in real-time for all members.

3) We can number Perm Files like PF 1, PF 2, etc. If there are any slight changes in a Perm file (let’s say there’s an extension of the debt contract period), then we can number such amendments/changes as PF 1A.

Why do we need to Number Perm Files?

Perm Files are referred to within the current year’s audit files. Let’s say, Debt Contracts are referred to within the debit account balance testing workpaper.

4) Consider adding a prefix of the account balance to the Perm Files number like PFD 1 for debt perm files. An even better idea is to distinguish the numbering for each account balance.

How about an example?

We can designate 1000 series, 2000 series, 3000 series, and 4000 series to assets, debt, expenses, and revenues. If we want to reference a Long term debt agreement, we can refer to it as PFD 2001. PFD 2002 etc.

Prepare an index file to list down the Perm files. This Index would be easy to track down the agreements/contracts.

5) Prepare a summary of the Perm files to include the important terms and conditions. If there are recurring types of contracts, we can probably build some templates for each type of contract.

Conclusion:

Permanent audit files are the files have significance for periods beyond audit period. Such files are to be retained for reference. Leverage the above practical insights to properly save those perm file for later use. Let us know your thoughts on this through your comments!

What are the contents of an audit file?

What are the matters included in the current audit file and permanent audit file?

Which of the following should be part of permanent audit?

Which of the following most likely be included in the permanent file of an auditor's working papers?