Arens12e 07


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Arens12e 07

  1. 1. Audit Evidence Chapter 7
  2. 2. Learning Objective 1 <ul><li>Contrast audit evidence with </li></ul><ul><li>evidence used by other </li></ul><ul><li>professions. </li></ul>
  3. 3. Nature of Evidence <ul><li>The use of evidence is not unique to auditors </li></ul><ul><li>Evidence is also used by scientists, lawyers, </li></ul><ul><li>and historians </li></ul>
  4. 4. Learning Objective 2 <ul><li>Identify the four audit evidence </li></ul><ul><li>decisions that are needed to </li></ul><ul><li>create an audit program. </li></ul>
  5. 5. 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)
  6. 6. 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. <ul><li>Sample sizes </li></ul><ul><li>Items to select </li></ul><ul><li>Timing of the tests </li></ul>
  7. 7. Learning Objective 3 <ul><li>Specify the characteristics that </li></ul><ul><li>determine the persuasiveness </li></ul><ul><li>of evidence. </li></ul>
  8. 8. Persuasiveness of Evidence <ul><li>Appropriateness </li></ul><ul><li>Sufficiency </li></ul>Two determinants:
  9. 9. Six Characteristics of Reliable Evidence 1. Independence of provider 2. Effectiveness of client’s internal controls 3. Auditor’s direct knowledge
  10. 10. Six Characteristics of Reliable Evidence 4. Qualification of individuals providing the information 5. Degree of objectivity 6. Timeliness
  11. 11. Relationships Among Audit Evidence and Persuasiveness Audit Evidence Decisions Qualities Affecting Persuasiveness of 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
  12. 12. Persuasiveness and Cost In making decisions about evidence for a given audit, both persuasiveness and cost must be considered. The auditor’s goal is to obtain a sufficient amount of appropriate evidence at the lowest total cost.
  13. 13. Learning Objective 4 <ul><li>Identify and apply the eight types </li></ul><ul><li>of evidence used in auditing. </li></ul>
  14. 14. 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
  15. 15. Relationships Auditing standards Evidence accumulation Types of evidence Audit procedures Qualifications and conduct Sample size and items to select Timing of tests Reporting Physical examination Confirmation Documentation Analytical procedures Inquiries of the client Recalculation Reperformance Observation Broad guidelines concerning auditor qualifications and conduct, evidence accumulation, and reporting Broad categories of evidence available for the auditor’s accumulation Specific instructions for the accumulation of types of evidence FOUR AUDIT EVIDENCE DECISIONS
  16. 16. Physical Examination It is the inspection or count by the auditor of a tangible asset . This type of evidence is most often associated with inventory and cash.
  17. 17. Confirmation Information Source Assets Cash in bank Accounts receivable Notes receivable Owned inventory out on consignment Inventory held in public warehouses Cash surrender value of life insurance Bank Customer Maker Consignee Public warehouse Insurance company
  18. 18. Confirmation Information Source Liabilities Accounts payable Notes payable Advances from customers Mortgages payable Bonds payable Creditor Lender Customer Mortgagor Bondholder
  19. 19. Confirmation Information Source Owners’ Equity Shares outstanding Registrar and transfer agent Other Information Insurance coverage Contingent liabilities Bond indenture agreements Collateral held by creditors Insurance company Bank, lender, and client’s legal counsel Bond holder Creditor
  20. 20. Documentation It is the auditor’s inspection of the client’s documents and records. Internal documents External documents
  21. 21. Analytical Procedures <ul><li>Understand the client’s industry and business </li></ul><ul><li>Assess the entity’s ability to continue as a </li></ul><ul><li>going concern </li></ul><ul><li>Indicate the presence of possible misstatements </li></ul><ul><li>in the financial statements </li></ul><ul><li>Reduce detailed audit tests </li></ul>
  22. 22. Inquiries of the Client It is the obtaining of written or oral information from the client in response to questions from the auditor.
  23. 23. Recalculation It involves rechecking a sample of calculations made by the client.
  24. 24. Reperformance It is the auditor’s independent tests of client accounting procedures or controls that were originally done.
  25. 25. Observation It is the use of the senses to assess client activities. The auditor may tour the plant to obtain a general impression of the client’s facilities.
  26. 26. Appropriateness of Types of Evidence <ul><li>Type of evidence </li></ul><ul><li>Independence of provider </li></ul><ul><li>Effectiveness of client’s internal controls </li></ul><ul><li>Auditor’s direct knowledge </li></ul><ul><li>Qualifications of provider </li></ul><ul><li>Objectivity of evidence </li></ul>
  27. 27. Terms and Types of Evidence Terms Type of Evidence Examine Scan Read Compute Recompute Foot Trace Compare Count Observe Inquire Vouch Documentation Analytical procedures Documentation Analytical procedures Recalculation Recalculation Documentation/Reperformance Documentation Physical examination Observation Inquiries of client Documentation
  28. 28. Learning Objective 5 <ul><li>Understand the purposes of </li></ul><ul><li>audit documentation. </li></ul>
  29. 29. Audit Documentation Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement .
  30. 30. Audit Documentation <ul><li>Purposes of audit documentation </li></ul><ul><li>Ownership of audit files </li></ul><ul><li>Confidentiality of audit files </li></ul>
  31. 31. Sarbanes-Oxley Act The Sarbanes-Oxley Act requires auditors of public companies to prepare and maintain audit working papers for a period of no less than seven years.
  32. 32. Learning Objective 6 <ul><li>Prepare organized audit </li></ul><ul><li>documentation. </li></ul>
  33. 33. Audit File Contents and Organization Robinson Associates Trial Balance 12/31/07 Cash $165,237 Accounts Receivable 275,050 Prepaid Insurance 37,795 Interest Receivable 20,493 Financial Statements and Audit Report Financial Statements and Audit Report Financial Statements and Audit Report Working Trial Balance Financial Statements and Audit Report Adjusting Journal Entries Financial Statements and Audit Report Contingent Liabilities Financial Statements and Audit Report Operations Financial Statements and Audit Report Liabilities and Equity Financial Statements and Audit Report Assets Financial Statements and Audit Report Analytical Procedures Financial Statements and Audit Report Tests of Controls and Substantive TOT Financial Statements and Audit Report Internal Control Financial Statements and Audit Report General Information Financial Statements and Audit Report Audit Programs Financial Statements and Audit Report Permanent Files
  34. 34. Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to the current audit.
  35. 35. Current Files <ul><li>Audit program </li></ul><ul><li>General information </li></ul><ul><li>Working trial balance </li></ul><ul><li>Adjusting and reclassification entries </li></ul><ul><li>Supporting schedules </li></ul>
  36. 36. Relationship of Audit Documentation to Financial Statements FINANCIAL STATEMENTS Cash 122 Acc. WORKING TRIAL BALANCE Prelim. AJE’s Final Cash 212 (90) 122 AJE’s Expense 90 Cash 90 LEAD SCHEDULE–CASH A-1 Per G/L AJE’s Final Petty Cash A-2 5 5 Cash in Bank: General A-3 186 (90) 96 Payroll A-4 21 21 212 (90) 122
  37. 37. Relationship of Audit Documentation to Financial Statements A-3/1 Confirmation A-3/2 O/S Check List A-4/2 O/S Check List A-4/1 Confirmation A-2 Cash Count Sheet A-3 Bank Reconciliation A-4 Bank Reconciliation LEAD SCHEDULE–CASH A-1 Per G/L AJE’s Final Petty Cash A-2 5 5 Cash in Bank: General A-3 186 (90) 96 Payroll A-4 21 21 212 (90) 122
  38. 38. Types of Supporting Schedules <ul><li>Analysis </li></ul><ul><li>Trial balance or list </li></ul><ul><li>Reconciliation of amounts </li></ul><ul><li>Tests of reasonableness </li></ul>
  39. 39. Types of Supporting Schedules <ul><li>Summary of procedures </li></ul><ul><li>Examination of supporting documents </li></ul><ul><li>Informational </li></ul><ul><li>Outside documentation </li></ul>
  40. 40. Preparation of Audit Documentation <ul><li>Each audit file should be properly identified </li></ul><ul><li>Documentation should be indexed and </li></ul><ul><li>cross-referenced </li></ul><ul><li>Completed documentation must clearly </li></ul><ul><ul><li>indicate the audit work performed </li></ul></ul><ul><li>It should include sufficient information </li></ul><ul><li>It should plainly state the conclusions reached </li></ul>
  41. 41. Learning Objective 7 <ul><li>Describe how e-commerce </li></ul><ul><li>affects audit evidence and </li></ul><ul><li>audit documentation. </li></ul>
  42. 42. Effect of E-commerce <ul><li>Audit evidence is increasingly in electronic form </li></ul><ul><li>Auditors must evaluate how electronic information </li></ul><ul><li>affects their ability to gather evidence </li></ul><ul><li>Auditors use computers to read and examine </li></ul><ul><li>evidence </li></ul><ul><li>Software programs are typically Windows-based </li></ul>
  43. 43. End of Chapter 7