5 - 5 ©2012 prentice hall business publishing, auditing 14/e, arens/elder/beasley 7 - 1 audit...

5 - 5©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 1

Audit Evidence

Chapter 7

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Learning Objective 1

Contrast audit evidence with evidence used by other professions.

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Nature of Evidence

Any information used by the auditor to determine whether the information being audited is stated in accordance with established criteria

The use of evidence is not unique to auditors

Evidence is also used by scientists, lawyers,and historians

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Nature of Evidence

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Learning Objective 2

Identify the four audit evidence decisions that are needed to create an audit program.

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Audit Evidence Decisions

1. Which audit procedures to use

2. What sample size to select for a given procedure3. Which items to select from the population4. When to perform the procedures (timing)

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Audit Program

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

Most auditors use audit software packages to generate audit programs.

Sample sizes Items to select Timing of the tests

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Learning Objective 3

Specify the characteristics that determine the persuasiveness of evidence.

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Persuasiveness of EvidenceTwo determinants:

Appropriateness Sufficiency

The persuasiveness of evidence can be evaluated only after considering the combination of appropriateness and sufficiency

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Six Characteristics of Reliable Evidence

1. Independence of provider2. Effectiveness of client’s

internal controls3. Auditor’s direct knowledge4. Qualification of individuals

providing the information5. Degree of objectivity6. Timeliness

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Relationships Among Audit Evidence and

PersuasivenessAudit Evidence Decisions

Qualities Affecting Persuasivenessof Evidence

Audit procedures and timing Appropriateness Relevance Reliability Independence of provider Effectiveness of internal controls Auditor's direct knowledge Qualifications of provider Objectivity of evidence Timeliness When procedures are performed Portion of period being audited

Sample size and items to select Sufficiency Adequate sample size Selection of proper population items

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Persuasiveness and Cost

In making decisions about evidencefor a given audit, both persuasivenessand cost must be considered.

The auditor’s goal is to obtain asufficient amount of appropriateevidence at the lowest total cost.

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Learning Objective 4

Identify and apply the eight types of evidence used in auditing.

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Types of Audit Evidence

Documentation

Analytical procedures

Confirmation

Physical Examination

Inquiry

Observation

Reperformance

Recalculation

Audit Evidence

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Relationships

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Physical Examination

It is the inspection or count by theauditor of a tangible asset.

This type of evidence is most oftenassociated with inventory and cash.

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Confirmations

United States Auditor must confirm accounts receivableAuditors control the mailing and receipt of replies Electronic confirmations are permitted

International Confirmations are not required

Auditing Standards Requirements

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Information often Confirmed

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Documentation

It is the auditor’s inspection of theclient’s documents and records.

Internaldocuments

Externaldocuments

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Analytical Procedures

Understand the client’s industry and business Assess the entity’s ability to continue as a

going concern Indicate the presence of possible misstatements

in the financial statements Reduce detailed audit tests

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Inquiries of the Client

It is the obtaining of written or oral information from the client in response to questions from the auditor.

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Recalculation

It involves rechecking a sample of calculationsmade by the client.

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Reperformance

It is the auditor’s independent tests of clientaccounting procedures or controls thatwere originally done.

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Observation

Use one’s senses to assess client activities.

Tour plant to obtain a generalimpression of client’s facilities.

Observation is rarely sufficientby itself.

Often need to corroborate with another kind of evidence.

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Appropriateness of Types of Evidence

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Application of Types of evidence to the four Evidence Decisions

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Terms and Types of Evidence

Terms Type of Evidence

ExamineScanReadComputeRecomputeFootTraceCompareCountObserveInquireVouch

DocumentationAnalytical proceduresDocumentationAnalytical proceduresRecalculationRecalculationDocumentation/ReperformanceDocumentationPhysical examinationObservationInquiries of clientDocumentation

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Learning Objective 5

Understand the purposes of audit documentation.

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Audit Documentation

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

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Audit Documentation

Purposes of audit documentation

Ownership of audit files

Confidentiality of audit files

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Sarbanes-Oxley Act

The Sarbanes-Oxley Act requires auditors ofpublic companies to prepare and maintainaudit working papers for a period of noless than seven years.

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Learning Objective 6

Prepare organized audit documentation.

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Audit File Contents and Organization

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Permanent Files

These files are intended to containdata of a historical or continuingnature pertinent to the current audit.

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Current Files

Audit program

General information

Working trial balance

Adjusting and reclassification entries

Supporting schedules

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Relationship of Audit Documentation

to Financial Statements

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Types of Supporting Schedules

Analysis

Trial balance or list

Reconciliation of amounts

Tests of reasonableness

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Types of Supporting Schedules

Summary of procedures

Examination of supporting documents

Informational

Outside documentation

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Preparation of Audit Documentation

Proper identification of each file

Files indexed and cross-referenced

Clear indication of work performed

Include sufficient information

State conclusions reached

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Preparation of Audit Documentation

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Learning Objective 7

Describe how technology affects audit evidence and audit documentation.

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Effect of Technology

Audit evidence is increasingly in electronic form

Auditors must evaluate how electronic information

affects their ability to gather evidence

Auditors use computers to read and examine

evidence

Software programs are typically Windows-based

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End of Chapter 7