An auditor is documenting the results of an audit of a nonissuer. The auditor has identified a complex accounting estimate regarding the fair value of Level 3 derivatives. Which of the following statements BEST describes the documentation requirement for the professional judgment exercised in this area?

Answer options:

The auditor must document every conversation held with management regarding the estimate.

The documentation must be sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the significant professional judgments made in reaching conclusions.

The auditor must include a copy of the specialist's report in the audit file to support the judgment.

The auditor must document that the estimate is precise and free from management bias.

How to approach this question

Recall the 'Experienced Auditor' standard from AU-C 230. Documentation must tell the story of the audit to someone who wasn't there.

Full Answer

B.The documentation must be sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the significant professional judgments made in reaching conclusions.✓ Correct

AU-C 230 states that audit documentation must be sufficient to enable an experienced auditor, having no previous connection with the audit, to understand: (a) the nature, timing, and extent of procedures; (b) the results of procedures and evidence obtained; and (c) significant findings or issues, conclusions reached, and significant professional judgments made.

Common mistakes

Focusing on quantity (every conversation) rather than quality (rationale for judgments).

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