arens12e 07

©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Auditing 12/e,Auditing 12/e, Arens/Beasley/Elder Arens/Beasley/Elder 7 - 1

Audit Evidence

Chapter 7

©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Auditing 12/e,Auditing 12/e, Arens/Beasley/Elder Arens/Beasley/Elder 7 - 7 - 22

Learning Objective 1

Contrast audit evidence with

evidence used by other

professions.


Nature of Evidence

The use of evidence is not unique to auditors

Evidence is also used by scientists, lawyers,and historians



Identify the four audit evidence

decisions that are needed to

create an audit program.


Audit Evidence Decisions

1. Which audit procedures to use

2. What sample size to select for a given procedure

3. Which items to select from the population

4. When to perform the procedures (timing)


Audit Program

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

Most auditors use computers to facilitatethe preparation of audit programs.

Sample sizes Items to select Timing of the tests



Specify the characteristics that

determine the persuasiveness

of evidence.


Persuasiveness of Evidence

Appropriateness

Sufficiency

Two determinants:


Six Characteristics of Reliable Evidence1. Independence of provider

2. Effectiveness of client’sinternal controls

3. Auditor’s direct knowledge


Six Characteristics of Reliable Evidence

4. Qualification of individualsproviding the information

5. Degree of objectivity

6. Timeliness


Relationships Among Audit Evidence and Persuasiveness

Audit Evidence DecisionsQualities 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


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.



Identify and apply the eight types

of evidence used in auditing.


Types of Audit Evidence

1. Physical examination

2. Confirmation

3. Documentation

4. Analytical procedures

5. Inquiries of the client

6. Recalculation

7. Reperformance

8. Observation


RelationshipsAuditing

standards

Evidenceaccumulation

Types ofevidence

Auditprocedures

Qualificationsand conduct

Sample sizeand itemsto select Timing

of tests

ReportingPhysical examination

ConfirmationDocumentation

Analytical proceduresInquiries of the client

RecalculationReperformance

Observation

Broad guidelinesconcerning auditorqualifications andconduct, evidence

accumulation,and reporting

Broad categories ofevidence available

for the auditor’saccumulation

Specific instructionsfor the accumulationof types of evidence

FOURAUDIT

EVIDENCEDECISIONS


Physical Examination

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

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


Confirmation

Information Source

AssetsAssets

Cash in bankAccounts receivableNotes receivableOwned inventory out on consignmentInventory held in public warehousesCash surrender value of life insurance

BankCustomerMakerConsigneePublic warehouseInsurance company


Confirmation

Information Source

LiabilitiesLiabilities

Accounts payableNotes payableAdvances from customersMortgages payableBonds payable

CreditorLenderCustomerMortgagorBondholder


Confirmation

Information Source

Owners’ EquityOwners’ Equity

Shares outstanding Registrar andtransfer agent

Other InformationOther Information

Insurance coverageContingent liabilities

Bond indenture agreementsCollateral held by creditors

Insurance companyBank, lender, and client’s legal counselBond holderCreditor


Documentation

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

Internaldocuments

Externaldocuments


Analytical Procedures

Understand the client’s industry and business

Assess the entity’s ability to continue as agoing concern

Indicate the presence of possible misstatementsin the financial statements

Reduce detailed audit tests


Inquiries of the Client

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


Recalculation

It involves rechecking a sample of calculationsmade by the client.


Reperformance

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


Observation

It is the use of the senses to assess client activities.

The auditor may tour the plant to obtain a generalimpression of the client’s facilities.


Appropriateness of Types of Evidence

Type of evidence Independence of provider Effectiveness of client’s internal controls Auditor’s direct knowledge Qualifications of provider Objectivity of evidence


Terms and Types of Evidence

Terms Type of Evidence

ExamineScanReadComputeRecomputeFootTraceCompareCountObserveInquireVouch

DocumentationAnalytical proceduresDocumentationAnalytical proceduresRecalculationRecalculationDocumentation/ReperformanceDocumentationPhysical examinationObservationInquiries of clientDocumentation



Understand the purposes of

audit documentation.


Audit Documentation

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


Audit Documentation

Purposes of audit documentation

Ownership of audit files

Confidentiality of audit files


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.



Prepare organized audit

documentation.


Audit File Contents and Organization

Robinson AssociatesRobinson AssociatesTrial BalanceTrial Balance

12/31/0712/31/07

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

Financial Statementsand Audit Report



Working TrialBalance


Adjusting JournalEntries


ContingentLiabilities


Operations


Liabilitiesand Equity


Assets


AnalyticalProcedures


Tests of Controls andSubstantive TOT


InternalControl


GeneralInformation


AuditPrograms


Permanent Files


Permanent Files

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


Current Files

Audit program

General information

Working trial balance

Adjusting and reclassification entries

Supporting schedules


Relationship of Audit Documentationto Financial Statements

FINANCIAL STATEMENTSCash 122Acc.

WORKING TRIAL BALANCE Prelim. AJE’s Final

Cash 212 (90) 122

AJE’sExpense 90

Cash 90

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

Petty Cash A-2 5 5Cash in Bank:

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

212 (90) 122


Relationship of Audit Documentationto Financial Statements

A-3/1Confirmation

A-3/2O/S Check List

A-4/2O/S Check List

A-4/1Confirmation

A-2Cash Count Sheet

A-3Bank Reconciliation

A-4Bank Reconciliation

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

Petty Cash A-2 5 5Cash in Bank:

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

212 (90) 122


Types of Supporting Schedules Analysis

Trial balance or list

Reconciliation of amounts

Tests of reasonableness


Types of Supporting Schedules Summary of procedures

Examination of supporting documents

Informational

Outside documentation


Preparation of Audit Documentation

Each audit file should be properly identified

Documentation should be indexed andcross-referenced

Completed documentation must clearlyindicate the audit work performed

It should include sufficient information

It should plainly state the conclusions reached



Describe how e-commerce

affects audit evidence and

audit documentation.


Effect of E-commerce

Audit evidence is increasingly in electronic form

Auditors must evaluate how electronic informationaffects their ability to gather evidence

Auditors use computers to read and examineevidence

Software programs are typically Windows-based

©2008 Prentice Hall Business Publishing, ©2008 Prentice Hall Business Publishing, Auditing 12/e,Auditing 12/e, Arens/Beasley/Elder Arens/Beasley/Elder 7 - 43

End of Chapter 7

arens12e 07

Business

auditors evidence

types of audit evidence

use of evidence

contrast audit evidence

audit evidence chapter

appropriate evidence

nature of evidence

given audit