7 - 1 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Audit Evidence Chapter 7

7 - 1©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder

Audit EvidenceAudit Evidence

Chapter 7Chapter 7


Learning Objective 1Learning Objective 1

Contrast audit evidence withContrast audit evidence with

evidence used by otherevidence used by other

professions.professions.


Nature of EvidenceNature of Evidence

The use of evidence is not unique to auditors.The use of evidence is not unique to auditors.

Evidence is also used by scientists, lawyers,Evidence is also used by scientists, lawyers,and historians.and historians.



Identify the four audit evidenceIdentify the four audit evidence

decisions that are needed todecisions that are needed to

create an audit program.create an audit program.


Audit Evidence DecisionsAudit Evidence Decisions

1. Which audit procedures to use1. Which audit procedures to use

2. What sample size to select for a given procedure2. What sample size to select for a given procedure

3. Which items to select from the population3. Which items to select from the population

4. When to perform the procedures4. When to perform the procedures


Audit ProgramAudit Program

It includes a list of the audit proceduresIt includes a list of the audit proceduresthe auditor considers necessary.the auditor considers necessary.

Most auditors use computers to facilitateMost auditors use computers to facilitatethe preparation of audit programs.the preparation of audit programs.

Sample sizesSample sizes Items to selectItems to select Timing of the testsTiming of the tests



Specify the characteristics thatSpecify the characteristics that

determine the persuasivenessdetermine the persuasiveness

of evidence.of evidence.


Persuasiveness of EvidencePersuasiveness of Evidence

CompetenceCompetence

SufficiencySufficiency

Combined effectCombined effect

Persuasiveness and costPersuasiveness and cost


CompetenceCompetence

RelevanceRelevance Independence of providerIndependence of provider Effectiveness of internal controlsEffectiveness of internal controls Auditor’s direct knowledgeAuditor’s direct knowledge Qualifications of providersQualifications of providers Degree of objectivity Degree of objectivity TimelinessTimeliness



Identify and apply the seven typesIdentify and apply the seven types

of evidence used in auditing.of evidence used in auditing.


Types of Audit EvidenceTypes of Audit Evidence

1.1. Physical examinationPhysical examination2.2. ConfirmationConfirmation3.3. DocumentationDocumentation4.4. Analytical proceduresAnalytical procedures5.5. Inquiries of the clientInquiries of the client6.6. ReperformanceReperformance7.7. ObservationObservation


RelationshipsRelationships

AuditingAuditingstandardsstandards

QualificationsQualificationsand conductand conduct ReportingReportingEvidenceEvidence

accumulationaccumulation

Types ofTypes ofevidenceevidence

Broadguidelines

Broadcategories


RelationshipsRelationships

Types ofTypes ofevidenceevidence

AuditAuditproceduresprocedures

Items toItems toselectselect

Specificinstructions

SampleSamplesizesize

TimingTimingof testsof tests


Information Often ConfirmedInformation Often Confirmed

AssetsAssetsCash in bankCash in bank BankBankAccounts receivableAccounts receivable CustomerCustomerNotes receivableNotes receivable MakerMakerOwned inventory out on consignmentOwned inventory out on consignment ConsigneeConsigneeInventory held in public warehousesInventory held in public warehouses WarehouseWarehouseCash surrender value of life insuranceCash surrender value of life insurance Insurance co.Insurance co.

InformationInformation SourceSource



LiabilitiesLiabilitiesAccounts payableAccounts payable CreditorCreditorNotes payableNotes payable LenderLenderAdvances from customersAdvances from customers CustomerCustomerMortgages payableMortgages payable MortgagorMortgagorBonds payableBonds payable BondholderBondholder




Owners’ EquityOwners’ EquityShares outstandingShares outstanding Registrar andRegistrar and

transfer agenttransfer agent

Other InformationOther InformationInsurance coverageInsurance coverage Insurance co.Insurance co.Contingent liabilitiesContingent liabilities Bank, lender,Bank, lender,

and clientsand clientslegal counsellegal counsel

Bond indenture agreementsBond indenture agreements BondholderBondholderCollateral held by creditorsCollateral held by creditors CreditorCreditor




DocumentationDocumentation

Analytical proceduresAnalytical procedures

Inquiries of the clientInquiries of the client

ReperformanceReperformance

ObservationObservation


Competence of Types of EvidenceCompetence of Types of Evidence

Type of evidenceType of evidence

Effectiveness of client’s internal controlsEffectiveness of client’s internal controls

Qualifications of providerQualifications of provider

Independence of providerIndependence of provider

Auditor’s direct knowledgeAuditor’s direct knowledge

Objectivity of evidenceObjectivity of evidence


Terms and Types of EvidenceTerms and Types of Evidence

ExamineExamine DocumentationDocumentationScanScan Analytical proceduresAnalytical proceduresReadRead DocumentationDocumentationComputeCompute Analytical proceduresAnalytical proceduresRecomputeRecompute ReperformanceReperformanceFootFoot ReperformanceReperformance

TermsTerms Type of EvidenceType of Evidence


Terms and Types of EvidenceTerms and Types of Evidence

TraceTrace Documentation/Documentation/ReperformanceReperformance

CompareCompare DocumentationDocumentationCountCount Physical examinationPhysical examinationObserveObserve ObservationObservationInquireInquire Inquiries of clientInquiries of clientVouchVouch DocumentationDocumentation

TermsTerms Type of EvidenceType of Evidence



Understand the purposes ofUnderstand the purposes of

audit documentation.audit documentation.


Audit DocumentationAudit Documentation

Audit documentation is the principal recordAudit documentation is the principal recordof auditing procedures applied, evidenceof auditing procedures applied, evidenceobtained, and conclusions reached byobtained, and conclusions reached bythe auditor in the engagement.the auditor in the engagement.


Audit DocumentationAudit Documentation

Purposes of audit documentation Purposes of audit documentation

Ownership of audit filesOwnership of audit files

Confidentiality of audit filesConfidentiality of audit files


Sarbanes-Oxley ActSarbanes-Oxley Act

The Sarbanes-Oxley ActThe Sarbanes-Oxley Actrequires auditors of publicrequires auditors of publiccompanies to prepare andcompanies to prepare andmaintain audit workingmaintain audit workingpapers for a period of nopapers for a period of noless than seven years.less than seven years.



Prepare organized auditPrepare organized audit

documentation.documentation.


Audit File Contents and Audit File Contents and OrganizationOrganization

Robinson AssociatesRobinson AssociatesTrial BalanceTrial Balance

12/31/0512/31/05

CashCash $165,237$165,237Accounts ReceivableAccounts Receivable 275,050 275,050Prepaid InsurancePrepaid Insurance 37,795 37,795Interest ReceivableInterest Receivable 20,493 20,493

FinancialFinancialStatements andStatements and

Audit ReportAudit Report

WorkingWorkingTrial BalanceTrial Balance

AdjustingAdjustingJournal EntriesJournal Entries

ContingentContingentLiabilitiesLiabilities

OperationsOperations

Liabilities Liabilities and Equityand Equity

AssetsAssets

AnalyticalAnalyticalProceduresProcedures

Test of ControlsTest of Controls& Substantive& Substantive

TOTTOT

InternalInternalControlControl

GeneralGeneralInformationInformation

AuditAuditProgramsPrograms

PermanentPermanentFilesFiles


Permanent FilesPermanent Files

These files are intended to containThese files are intended to containdata of a data of a historical or continuinghistorical or continuingnaturenature pertinent to the current audit. pertinent to the current audit.


Current FilesCurrent Files

Audit programAudit program

General informationGeneral information

Working trial balanceWorking trial balance

Adjusting and reclassification entriesAdjusting and reclassification entries

Supporting schedulesSupporting schedules


Relationship of Audit DocumentationRelationship of Audit Documentationto Financial Statementsto Financial Statements

FINANCIAL STATEMENTSFINANCIAL STATEMENTSCashCash 122122Acc.Acc. …………………. ………………….

FINANCIAL STATEMENTSFINANCIAL STATEMENTSCashCash 122122Acc.Acc. …………………. ………………….

WORKING TRIAL BALANCEWORKING TRIAL BALANCE Prelim.Prelim. AJE’sAJE’s FinalFinal

CashCash 212212 (90)(90) 122122

AJE’sAJE’sExpenseExpense 9090

CashCash 90 90

LEAD SCHEDULE – CASHLEAD SCHEDULE – CASH A-1A-1 Per G/LPer G/L AJE’sAJE’s FinalFinal

Petty Cash A-2Petty Cash A-2 5 5 5 5Cash in Bank:Cash in Bank:

General A-3General A-3 186186 (90)(90) 96 96Payroll A-4Payroll A-4 21 21 21 21

212212 (90)(90) 122122


Relationship of Audit DocumentationRelationship of Audit Documentationto Financial Statementsto Financial StatementsLEAD SCHEDULE – CASHLEAD SCHEDULE – CASH A-1A-1

Per G/LPer G/L AJE’sAJE’s FinalFinalPetty Cash A-2 Petty Cash A-2 5 5 5 5Cash in Bank:Cash in Bank:

General A-3General A-3 186186 (90)(90) 96 96Payroll A-4Payroll A-4 21 21 21 21

212212 (90)(90) 122122

A-3/1A-3/1ConfirmationConfirmation

A-3/2A-3/2O/S Check ListO/S Check List

A-4/2A-4/2O/S Check ListO/S Check List

A-4/1A-4/1ConfirmationConfirmation

A-2A-2Cash Count SheetCash Count Sheet

A-3A-3Bank ReconciliationBank Reconciliation

A-4A-4Bank ReconciliationBank Reconciliation


Types of Supporting SchedulesTypes of Supporting Schedules

AnalysisAnalysis

Trial balance or listTrial balance or list

Reconciliation of amountsReconciliation of amounts

Tests of reasonablenessTests of reasonableness


Types of Supporting SchedulesTypes of Supporting Schedules

Summary of proceduresSummary of procedures

Examination of supporting documentsExamination of supporting documents

InformationalInformational

Outside documentationOutside documentation


Characteristics of Audit Characteristics of Audit DocumentationDocumentationEach audit file should be properly identified.Each audit file should be properly identified.

Documentation should be indexed andDocumentation should be indexed andcross-referenced.cross-referenced.

Completed documentation must clearly indicateCompleted documentation must clearly indicatethe audit work performed.the audit work performed.

It should include sufficient information.It should include sufficient information.

It should plainly state the conclusions reached.It should plainly state the conclusions reached.



Describe how e-commerceDescribe how e-commerce

affects audit evidence andaffects audit evidence and

audit documentation.audit documentation.


Effect of E-commerceEffect of E-commerce

Audit evidence is increasingly in electronic form.Audit evidence is increasingly in electronic form.

Auditors must evaluate how electronic informationAuditors must evaluate how electronic informationaffects their ability to gather evidence.affects their ability to gather evidence.

Auditors use computers to read and examineAuditors use computers to read and examineevidence.evidence.

Software programs are typically Windows-based.Software programs are typically Windows-based.


End of Chapter 7End of Chapter 7

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7 - 1 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Audit Evidence Chapter 7