The results of this study are important for audit firms to consider when evaluating documentation protocol.  The results suggest that the preparation of detailed workpapers resulted in better pattern recognition and also a greater identification of exceptions.  Both of these would increase audit effectiveness.  Even though detailed workpapers are associated with greater detection rates and pattern recognition, the auditors did not perform as well on memory tests.  Therefore, audit teams may enhance the memory of auditors by encouraging team members to examine evidence a greater number of times.  The results also indicated that self-review of documentation could also increase pattern recognition, which would have a beneficial impact on audit effectiveness. 

Payne, E. A. and R. J. Ramsay. 2008. Audit Documentation Methods: A Path Model of Cognitive Processing, Memory, and Performance. Auditing: A Journal of Practice and Theory 27 (1): 151-168

In recent years, public accounting firms have increased the use of detailed audit workpapers and are using fewer summary memos.  Summary memos were previously popular because they often provided increased efficiency (by a reduction of time to complete documentation) and reduced litigation risk.  However, the adoption of PCAOB’s Auditing Standard #3 increased the amount of documentation of auditing procedures that should be maintained by firms.  A contrast of the two types of memos is provided below: 

• Summary memos: include an explanation of the overall procedures performed (i.e. sample selection and selection criteria) and a description of exceptions of the audit tests
• Detailed workpapers: include the specifics of all items examined (which can include names, dates, amounts, etc.), procedures performed on each item, and the results associated with each of those items. 

The authors consider whether the type of documentation can impact the efficiency and effectiveness of evidence gathering procedures.  Specifically, the authors consider if the type of audit documentation affects cognitive processing (i.e. how information is processed within an individual’s brain) and if these differences in cognitive processing are associated with better memory and performance measures.  The performance measures can include recognition of patterns that might suggest fraud and the identification of internal controls exceptions.

The research evidence is collected prior to 2005, before AS No. 3 was issued.  The authors use a group of staff and senior auditors from three of the (then) Big 5 accounting firms.  The computerized experiment was conducted at firm training sessions. Each participant completed a case study which involved testing internal controls for write-offs of accounts receivable. After reading the client background information, the subjects were presented a sample of A/R write-offs and related evidence which allowed them to  determine if the write-offs were approved in accordance with the client’s policy.  Participants were asked to complete their documentation using either a summary memo, or to prepare detailed workpapers.  The case materials included errors (i.e., a posting error and an authorization error).  Additionally, the materials were constructed to include a pattern suggestive of fraud (i.e., 5 of the 20 write-offs were just under the client’s threshold for authorization).

• The two methods of documentation (detailed workpapers versus summary memos) both enhance the cognitive process, but they have different effects on memory and performance.
• The preparation of summary memos requires auditors to view each piece of audit evidence a greater numbers of times; viewing evidence more results in better pattern recognition (i.e. recognizing a combination of factors that together suggest fraud) and increased memory.
• The use of detailed workpapers increases the amount of time auditors spend reviewing  each of the evidence items; the increased preparation time improves auditors’ ability to identify internal control exceptions and to detect an underlying pattern in the information.
• While both documentation methods enhance the identification of patterns in the data, the use of detailed workpapers also improves the ability to identify exceptions in internal controls while the use of summary memos enhances memory/recall.
• Thorough self-review by a preparer of detailed workpapers further enhanced the ability to detect patterns.
• Preparation of detailed workpapers was more efficient.