©2003 prentice hall business publishing, auditing and assurance services 9/e, arens/elder/beasley 7...

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 1

Audit EvidenceChapter 7


Learning Objective 1

Contrast audit evidencewith evidence used by

other professions.


Nature of Evidence

The use of evidence isnot unique to auditors.

Evidence is also usedby scientists, lawyers,

and historians.



Identify the four audit evidencedecisions that are needed to

create an audit program.


Audit Evidence Decisions

1. Which audit procedures to use2. What sample size to select for a given procedure3. Which items to select from the population4. When to perform the procedures


Audit Program

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

Most auditors use computers to facilitatethe preparation of audit programs.



Specify the characteristicsthat determine the

persuasivenessof evidence.


Persuasiveness of Evidence

CompetenceSufficiency

Combined effectPersuasiveness and cost


Competence

RelevanceIndependence of provider

Effectiveness of internal controlsAuditor’s direct knowledgeQualifications of individuals

Degree of objectivityTimeliness



Identify and apply theseven types of evidence

used in auditing.


Types of Audit Evidence

1. Physical examination

3. Documentation

5. Inquiries of the client 6. Reperformance

2. Confirmation

4. Observation

7. Analytical procedures


Types of Audit Evidence

Physical examination : inspection or count by the auditor of a tangible asset.

Confirmation : receipt of a written or oral response from an independent third party verifying the accuracy of information that was requested by the auditor

Documentation : auditor’s examination of the client’s documents and records


Types of Audit Evidence Observation : the use of senses to assess certain

activities Inquiry : written or oral information from the

client in response to questions from the auditor Reperformance : rechecking the computations

and transfers of information Analytical procedure : using comparison and

relationships to assess whether data appear reasonable


Relationships

Auditingstandards

Qualificationsand conduct ReportingEvidence

accumulation

Types ofevidence

Broadguidelines

Broadcategories


Relationships

Types ofevidence

Samplesize

Timingof tests

Auditprocedures

Items toselect

Specificinstructions


InformationOften Confirmed

Information SourceAssetsCash in bank BankAccounts receivable CustomerNotes receivable MakerOwned inventory out on consignment ConsigneeInventory held in public warehouses WarehouseCash surrender value of life insurance Insurance co.



Information SourceLiabilitiesAccounts payable CreditorNotes payable LenderAdvances from customers CustomerMortgages payable MortgagorBonds payable Bondholder



Information SourceOwners’ EquityShares outstanding Registrar and

transfer agent



Information SourceOther InformationInsurance coverage Insurance companyContingent liabilities Bank, lender, and

client’s counselBond indenture agreements BondholderCollateral held by creditors Creditor


Criteria to DetermineCompetence

For each Type of evidence:

Independenceof provider

Effectiveness ofclient’s

internal controls

Auditor’sdirect

knowledge

Qualificationsof provider

Objectivityof evidence


Criteria to DetermineCompetence

Type of EvidenceIndependence

of Provider

Effectiveness of Internal Controls

Auditor's Direct

Knowledge

Qualification of Provider

Objectivity of Evidence

Physical Examination

Confirmation N/A

Documentation ±

Observation N/A

Inquiries of client <

Reperformance

Analytical procedure


Terms and Types of Evidence

Terms Types of EvidenceRead Documentation

Examine Documentation

Foot Reperformance

Trace Doc/Reperformance

Compare DocumentationVouch Documentation


Terms and Types of Evidence

Terms Types of Evidence

ObservationObserveInquire Inquiries of clientScan Analytical procedures

Analytical proceduresCompute

Recompute ReperformanceCount Physical examination



Understand the purposesof audit documentation.


Audit Documentation

Purposes of audit documentation

Ownership of audit files

Confidentiality of audit files



Prepare organizedaudit documentation.


Audit File Contentsand Organization

Derrickson AssociatesTrial Balance

12/31/2003

Cash $165,237Accounts Receivable 275,050Prepaid Insurance 37,795Interest Receivable 20,493

FinancialStatements andAudit ReportWorking

Trial BalanceAdjusting

Journal EntriesContingentLiabilities

Operations

Liabilities and Equity

Assets

AnalyticalProcedures

Test of Controls& Substantive

TOTInternalControl

GeneralInformation

AuditPrograms

PermanentFiles


Permanent Files

These files are intended to containdata of a historical or continuing

nature pertinent to the current audit.


Current Files

Audit programGeneral information

Working trial balanceAdjusting and reclassification entries

Supporting schedules


Relationship of Audit Documentation

to Financial Statements

FINANCIAL STATEMENTSCash 122Acc. ………………….

WORKING TRIALBALANCE

Prelim. AIE’s FinalCash 212 (90) 122

AIE’sExpense 90

Cash 90




LEAD SCHEDULE – CASH A-1 Per G/1 AIE’s Final

Petty Cash A-2 5 5Cash in Bank:

General A-3 186 (90) 96Payroll A-4 21 21

212 (90) 122




A-2CashCountSheet

A-3BankReconciliation

A-3/1Confirmation

A-3/2O/S Check List




A-4BankReconciliation

A-4/1Confirmation

A-4/2O/S Check List


Types of Supporting Schedules

AnalysisTrial balance

Reconciliation of amountsTests of reasonablenessSummary of procedures

Examination of supporting documentsInformational

Outside documentation



Describe how e-commerceaffects audit evidence and

audit documentation.


Effect of E-commerce

Audit evidence is increasingly in electronic form.

Auditors use computers to readand examine evidence.

Software programs are typically Windows-based.


End of Chapter 7

©2003 prentice hall business publishing, auditing and assurance services 9/e, arens/elder/beasley 7...

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