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

Audit Evidence

Chapter 7


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2008 Prentice Hall Business Publishing,2008 Prentice Hall Business Publishing,Auditing 12/e,Auditing 12/e,Arens/Beasley/ElderArens/Beasley/Elder 77 -- 22

Learning Objective 1

Contrast audit evidence with

evidence used by other

professions.


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Nature of Evidence

The use of evidence is not unique to auditors

Evidence is also used by scientists, lawyers,and historians


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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 procedure

3. Which items to select from the population

4. When to perform the procedures (timing)


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Audit Program

It includes a list of the audit procedures

the auditor considers necessary.

Most auditors use computers to facilitate

the preparation of audit programs.

Sample sizes

Items to select

Timing of the tests


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Specify the characteristics that

determine the persuasiveness

of evidence.


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Persuasiveness of Evidence

Appropriateness

Sufficiency

Two determinants:


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Six Characteristics of Reliable

Evidence1. Independence of provider

2. Effectiveness of clientsinternal controls

3. Auditors direct knowledge


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Six Characteristics of Reliable

Evidence4. Qualification of individuals

providing the information

5. Degree of objectivity

6. Timeliness


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Relationships Among Audit

Evidence and PersuasivenessAudit Evidence Decisions

Qualities Affecting Persuasivenessof Evidence

Audit procedures and timing AppropriatenessRelevance

ReliabilityIndependence of providerEffectiveness of internal controlsAuditor's direct knowledgeQualifications of providerObjectivity of evidence

TimelinessWhen procedures are performedPortion of period being audited

Sample size and items to select SufficiencyAdequate sample sizeSelection of proper population items


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Identify and apply the eight types

of evidence used in auditing.


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Relationships

Auditingstandards

Evidenceaccumulation

Types ofevidence

Auditprocedures

Qualificationsand conduct

Sample sizeand itemsto select Timing

of tests

Reporting

Physical examination

ConfirmationDocumentation

Analytical proceduresInquiries of the client

RecalculationReperformance

Observation

Broad guidelinesconcerning auditor

qualifications andconduct, evidence

accumulation,and reporting

Broad categories ofevidence available

for the auditorsaccumulation

Specific instructionsfor the accumulationof types of evidence

FOURAUDIT

EVIDENCEDECISIONS


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Physical Examination

It is the inspection or count by theIt is the inspection or count by the

auditor of aauditor of a tangible assettangible asset..

This type of evidence is most oftenThis type of evidence is most often

associated with inventory and cash.associated with inventory and cash.


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Confirmation

Information Source

AssetsAssets

Cash in bankAccounts receivableNotes receivableOwned inventory out on consignmentInventory held in public warehouses

Cash surrender value of life insurance

BankCustomerMakerConsigneePublic warehouse

Insurance company


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Confirmation

Information Source

LiabilitiesLiabilities

Accounts payableNotes payableAdvances from customersMortgages payableBonds payable

CreditorLenderCustomerMortgagorBondholder


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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

clients legal counselBond holderCreditor


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Documentation

It is the auditors inspection of the

clients documents and records.

Internal

documents

External

documents


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Analytical Procedures

Understand the clients industry and business

Assess the entitys 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 ofwritten ororalinformation

from the client in response to questions

from the auditor.


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Recalculation

It involves rechecking a sample of calculations

made by the client.


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Reperformance

It is the auditors independent tests of client

accounting procedures or controls that

were originally done.


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Observation

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

The auditor may tour the plant to obtain a generalimpression of the clients facilities.


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Appropriateness ofTypes of

Evidence Type of evidence

Independence of provider

Effectiveness of clients internal controls

Auditors direct knowledge

Qualifications of provider

Objectivity of evidence


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Terms and Types of Evidence

Terms Type of Evidence

Examine

Scan

Read

Compute

Recompute

Foot

Trace

CompareCount

Observe

Inquire

Vouch

DocumentationAnalytical proceduresDocumentationAnalytical proceduresRecalculationRecalculationDocumentation/Reperformance

DocumentationPhysical examinationObservationInquiries of clientDocumentation


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Understand the purposes of

audit documentation.


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Audit Documentation

Audit documentation is the principal record

of auditingprocedures applied, evidence

obtained, andconclusions 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 of

public companies to prepare and maintain

audit working papers for a period of noless than seven years.


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Prepare organized audit

documentation.


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Audit File Contents and Organization

Robinson AssociatesRobinson Associates

Trial BalanceTrial Balance12/31/0712/31/07

CashCash $165,237$165,237Accounts ReceivableAccounts Receivable 275,050275,050Prepaid InsurancePrepaid Insurance 37,79537,795Interest ReceivableInterest Receivable 20,49320,493

Financial Statementsand Audit Report



Working TrialBalance


Adjusting JournalEntries


ContingentLiabilities


Operations


Liabilitiesand Equity


Assets


AnalyticalProcedures


Tests of Controls andSubstantive TOT


InternalControl

Financial Statements

and Audit Report

GeneralInformation


AuditPrograms


Permanent Files


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Permanent Files

These files are intended to contain

data of a historical orcontinuing

nature 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 FinancialS

tatementsFINANCIAL STATEMENTSCash 122Acc.

WORKING TRIAL BALANCEPrelim. AJEs FinalCash 212 (90) 122

AJEsExpense 90Cash 90

LEAD SCHEDULECASH A-1Per G/L AJEs Final

Petty Cash A-2 5 5Cash in Bank:General A-3 186 (90) 96Payroll A-4 21 21

212 (90) 122


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Relationship of Audit Documentation

to Financial Statements

A-3/1Confirmation

A-3/2O/S Check List

A-4/2

O/S Check List

A-4/1Confirmation

A-2

Cash Count Sheet

A-3

Bank Reconciliation

A-4

Bank Reconciliation

LEAD SCHEDULECASH A-1Per G/L AJEs Final

Petty Cash A-2 5 5Cash in Bank:

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

212 (90) 122


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Types ofSupporting

Schedules

Analysis

Trial balance or list

Reconciliation of amounts

Tests of reasonableness


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Preparation of Audit

Documentation Each audit file should be properly identified

Documentation should be indexed and

cross-referenced

Completed documentation must clearly

indicate the audit work performed

It should include sufficient information

It should plainly state the conclusions reached


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Describe how e-commerce

affects audit evidence and

audit documentation.


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

End of Chapter 7

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