Document, document, document.

With the passage of recent legislation, California Business & Professions Code Sec. 5097-8, that was effective Jan. 1, 2003, the California Board of Accountancy adopted corresponding regulations that became effective Jan. 23, 2004. All practicing CPAs should be aware the impact that these new regulations will have not only on their audit practice, but on their entire practice as well.

WHAT ARE WORKING PAPERS?

While the new regulations became effective January 2004, "working papers" as currently defined were in the regulations as early as 1996. Working papers represent the work performed, the information obtained and the pertinent conclusions reached in an audit, review, compilation, tax, special report or other engagement. They may take many forms including handwritten notes, typewritten notes, photocopies or computer databases.

Prior to recent legislation, there was a requirement that licensees adopt reasonable procedures for the safe custody of working papers. The requirement to develop and retain working papers is not new to the California licensee.

The recent legislation, California B&P Code Sec. 5097(b), adds a working paper requirement taken from Government Auditing Standards--the Yellow Book--published by the Government Accountability Office: "The audit documentation must be sufficient to enable a reviewer with relevant knowledge and experience, having no previous contact with the audit engagement, to understand the work performed and the conclusions reached."

The CBA regulations, Rule 68.3(d), add a working paper requirement taken from the U.S. Securities and Exchange Commission's regulations that require documentation regarding significant matters to be retained even if it is inconsistent with the auditor's final conclusions.

WHAT ARE THE IMPORTANT DATES?

The new regulations identify two important dates for audit record-keeping purposes. The first, the report date, represents the date that many CPAs recognize as the date the field work was completed. The second, which represents a new term for the profession, is the document completion date. The document completion date represents the date by which the CPA must complete all of the documentation associated with the audit engagement.

For California purposes, there is a 60-day period after the report issuance date where additions to the documentation of work previously performed is acceptable.

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Documentation cannot be deleted from the working papers after the report issuance date. Thus, good housekeeping should be exercised during the entire engagement so that unnecessary items, like completed review notes, are removed from the working papers before the report is issued.

CAN I CHANGE THE DOCUMENTATION AFTER THE ISSUANCE OF THE REPORT?

Yes, as mentioned above, for 60 days after the issuance of the report, you can complete the documentation of work performed before the report issuance. After this 60-day period, you can change the audit documentation; however, you must identify the following:

* The person making the change;

* The person approving the change;

* The date of the change; and

* The reason for the change if it is not for the assembling of pre-existing documents within the 60-day period after the issue date of the report.

The documentation that is changed must contain sufficient detail to enable a reviewer to understand the nature and extent of the change.

WHAT SHOULD THE WORKING PAPERS INCLUDE?

The new regulations, Rule 68.2, provide that working papers must include:

* An index or guide to the audit documentation;

* The date the preparer and/or reviewer completed the documents or working papers; and

* Both the report date and the issue date of the report.

Experienced practitioners recognize that the new minimum requirements don't represent the totality of normal working papers.

Depending on the engagement, the CPA should refer to existing professional standards, including Audit Standards, Accounting and Review Standards, Attestation Standards, or other services provided by the CPA firm to demonstrate the nature and scope of work performed.

AM I REQUIRED TO KEEP EVERY SINGLE PIECE OF DOCUMENTATION GENERATED?

Since the California regulations closely parallel SEC guidelines on audit documentation, the above chart may assist the practitioner in identifying documents that do not have to be retained.

HOW LONG SHOULD I KEEP THE WORKING PAPERS?

Working papers and audit documentation have a required seven-year retention period.

DO I NEED A DOCUMENT RETENTION POLICY?

California regulations now require licensees to maintain and document compliance with a written audit documentation, retention and destruction policy and shall include as a minimum the following:

* Procedures to maintain back-up copies of electronic audit documentation at secure locations;

* Procedures to maintain audit documentation;

* Procedures to approve any changes to audit documentation; and

* Procedures to approve destruction of documentation when retention is no longer required.

In addition, the policy must identify the person(s) by name or position authorized to approve the destruction of audit documentation or, alternatively, destruction may be self-executing once the retention period has expired.

WHAT SHOULD I DO IF THERE IS A CBA INVESTIGATION?

While the regulations provide for a seven-year document retention policy, in the event that the California Board of Accountancy begins an investigation, you must retain your working papers pending the completion of the investigation.

WHAT ABOUT CONFIDENTIALITY?

There has been no change in Rule 54 relating to the duty of a CPA to maintain confidential information. Therefore, as a practicing CPA you should be familiar with your duties of maintaining the confidentiality of such documentation.

WHERE CAN I GO FOR ADDITIONAL INFORMATION?

Other sources of information regarding documentation requirements include the professional standards established by the AICPA, including the Audit Standards, Accounting and Review Standards and Attestation Standards, as well as standards for other services provided by the CPA. In addition, the PCAOB recently has issued Audit Standard No. 3, Auditing Documentation, which may provide additional insight to the practicing CPA even though the firm may not be subject to PCAOB practice standards.

Finally, CAMICO has provided their policyholders with a record retention and destruction policy available to download in a Microsoft Word format.

DOCUMENT RETENTION {requirements}

TYPE OF DOCUMENT                                             RETAINED?

Superceded drafts of memoranda, financial statements or         No
regulatory filings

Notes on superceded drafts of memoranda, financial              No
statements or regulatory filings that reflect incomplete or
preliminary thinking

Duplicates of documents                                         No

Copies of client records unless the client records contain      No
evidence of audit or other procedures applied by the firm

Review notes                                                    No

"To do" lists which have been completed                         No

Documents that contain typographical errors or other minor      No
errors that result from normal business/learning process or
from preliminary views based upon incomplete information or
data

Voicemail messages                                              No

RELATED ARTICLE: Except for voicemail messages,

California law & regulations require these items to be discarded prior to the report issuance date, otherwise they must remain a part of the working papers for the full retention period.

If any of these documents include information about conclusions, opinions, analyses or financial data regarding any significant matter related to the audit that is inconsistent with the final conclusions, opinion or analyses, then those documents require retention.

BY HAROLD S. SCHULTZ, CPA & MICHAEL G. UELTZEN, CPA

Harold S. Schultz, CPA, a partner with PricewaterhouseCoopers in Irvine, is regulatory co-chair of CalCPA's Government Relations Committee. Michael G. Ueltzen, CPA is managing partner of Ueltzen & Company in Sacramento and legislative co-chair of CalCPA's Government Relations Committee.