‘If it isn’t documented, it wasn’t done’ is almost the law in California

While doing the required CPE for regulatory ethics, I reread the California state law on audit documentation. The standard is that if something wasn’t done documented, there is a rebuttable presumption that it was not done.  You can overcome that presumption, but the burden would be on you as the CPA to persuade a jury you really did something for which you prepared no documentation.

That gets back to a comment I’ve made in CPE courses that having a confused, typo-filled, hard to understand comment in the workpapers is far better than nothing. If there is something present, you can verbally explain it.

Here is the text:

Audit Documentation Requirements

5097.

(c) Failure of the audit documentation to document the procedures applied, tests performed, evidence obtained, and relevant conclusions reached in an engagement shall raise a presumption that the procedures were not applied, tests were not performed, information was not obtained, and relevant conclusions were not reached. This presumption shall be a rebuttable presumption affecting the burden of proof relative to those portions of the audit that are not documented as required in subdivision (b). The burden may be met by a preponderance of the evidence.


So having a literal comment like “Jonh siad plan to restruct. platn” is really lousy support for management intent to reorganize a plant and revitalize production, but that will be invaluable if it is all you have to support your position of no impairment of the production facilities. That would allow you to explain all the conversations that took place on what management is doing and why it means the net book value of the plant is not impaired. 

Likewise, some lousy comment like “Mayr – no consult w/attny” is a terrible explanation of why you didn’t send legal confirmation letters. If that is all that is in the workpapers, you could then explain you talked to CFO Mary who said the company did not consult with any attorneys regarding litigation, asserted claims, or unasserted claims.

It’s best to put good memos in the workpapers. If you can’t do that, put something in the files.

Update – Oops. One critical word corrected. Thanks Gary.

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