Audit EvidenceAudit Evidence

Chapter 7Chapter 7

Generally Accepted Auditing StandardsGenerally Accepted Auditing StandardsThird Standard of Field WorkThird Standard of Field Work

Sufficient competent evidential matterSufficient competent evidential matter is to be is to be obtained through inspection, observation, obtained through inspection, observation, inquiries, and confirmations to afford a inquiries, and confirmations to afford a reasonable basis for an opinion regarding the reasonable basis for an opinion regarding the financial statements under audit.financial statements under audit.

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

Persuasiveness of EvidencePersuasiveness of Evidence

Competence and sufficiency are determinantsCompetence and sufficiency are determinantsof the persuasiveness of evidence.of the persuasiveness of evidence.Factors affecting competence include:Factors affecting competence include:

Relevance to audit objectiveRelevance to audit objective Independence of providerIndependence of provider Effectiveness of internal controls Effectiveness of internal controls Auditor’s direct knowledgeAuditor’s direct knowledge Qualifications of providersQualifications of providers Degree of objectivity Degree of objectivity TimelinessTimeliness

Table 7-2, Table 7-2, (p. 167)(p. 167)

Types of Audit EvidenceTypes of Audit Evidence

1.1. Physical examination (tangible assets) Physical examination (tangible assets) 2.2. Confirmation (positive and negative)Confirmation (positive and negative)3.3. Documentation Documentation 4.4. Analytical proceduresAnalytical procedures5.5. Inquiries of the clientInquiries of the client6.6. ReperformanceReperformance7.7. ObservationObservation

Confirmations and Information Often ConfirmedConfirmations and Information Often Confirmed

AssetsAssetsCash in bank (example)Cash in bank (example) 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

Confirmations may be positive or negative.Confirmations may be positive or negative. Procedures for non-response positivesProcedures for non-response positives

Information Often ConfirmedInformation Often Confirmed

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

InformationInformation SourceSource

Information Often ConfirmedInformation Often Confirmed

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

InformationInformation SourceSource

Other Forms of EvidenceOther Forms of Evidence

Documentation – Client’s documents and recordsDocumentation – Client’s documents and records

Internal vs. External documentsInternal vs. External documents

Tracing vs. Vouching – see next slideTracing vs. Vouching – see next slide

Tracing vs. VouchingTracing vs. Vouching (Figure 6-7 is from another text) (Figure 6-7 is from another text)

Inspection of Documents or RecordsInspection of Documents or Records

Vouching Vouching

TracingTracing

Note: students should understand the differences Note: students should understand the differences between tracing and vouching.between tracing and vouching.

Reliability of Documentary EvidenceReliability of Documentary Evidence(Figure 6-5 is from another text)(Figure 6-5 is from another text)

Other Forms of Evidence: Other Forms of Evidence: Analytical Analytical proceduresprocedures

Importance of context – understanding the Importance of context – understanding the client’s business and industryclient’s business and industry

Analytical procedures are used for:Analytical procedures are used for:• Assessing going concernAssessing going concern• Finding possible misstatements in the financialsFinding possible misstatements in the financials• Reducing detailed audit testsReducing detailed audit tests

Other Forms of EvidenceOther Forms of Evidence

Inquiries of the client – written or oralInquiries of the client – written or oral

Reperformance – verifying calculations or Reperformance – verifying calculations or information processinginformation processing

Observation Observation

Competence of Types of Evidence, Competence of Types of Evidence, Table 7-4 (p. 172)Table 7-4 (p. 172)

Terms and Types of Evidence,Terms and Types of Evidence,Table 7-6, (p. 175)Table 7-6, (p. 175)

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

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 – primaryPurposes of audit documentation – primarymeansmeans to support that the audit was to support that the audit was conducted in accordance with GAAS. conducted in accordance with GAAS.

Ownership of audit filesOwnership of audit files

Confidentiality of audit files – rule 301, chapter 4.Confidentiality of audit files – rule 301, chapter 4.

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.

Audit File Contents and OrganizationAudit File Contents and Organization

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 contain data of aThese files are intended to contain data of a historical or continuing historical or continuing naturenature pertinent to the pertinent to the current audit. Examples include:current audit. Examples include:• Articles of incorporationArticles of incorporation• Loan agreementsLoan agreements• Documents related to understanding I/CDocuments related to understanding I/C• LeasesLeases

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 Statements

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

Petty 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 DocumentationCharacteristics of Audit Documentation

Each 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.

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.