1 CHAPTER 4 Audit Evidence and Programs

2 financial statements financial statement cycles management assertions general audit objectives specific audit objectives the cycle approach audit tests

3 management assertions (AU 326) - existence or occurrence - financial components exist at a given date, transactions have occurred during a given period

4 - existence or occurrence - completeness - all transactions and accounts are presented, nothing has been left out management assertions (AU 326)

5 - existence or occurrence - completeness - valuation or allocation - com- ponents of financial statements are included at appropriate amounts management assertions (AU 326)

6 Mortgage Note Property Deed - existence or occurrence - completeness - valuation or allocation - rights and obligations - assets are rights of the entity and liabilities are obligations management assertions (AU 326)

7 - existence or occurrence - completeness - rights and obligations - valuation or allocation - presentation and disclosure - financial statement components are properly classified, de- scribed, and disclosed management assertions (AU 326)

8 } financial statements financial statement cycles management assertions general audit objectives the cycle approach Audit evidence must be gathered to support/refute management assertions. specific audit objectives

9 An audit can be divided into four phases. III III IV

10 An audit can be divided into four phases. I. Plan and design an audit approach. II. Perform tests of controls and sub- stantive tests of transactions. III. Perform analyt- ical procedures and tests of details of balances. IV. Complete the audit and issue an audit report.

11 Persuasiveness of evidence is determined by: relevance timeliness sufficiency competence

12 types of evidence - physical examination - inspection or count by the auditor of a tangible asset very competent evidence!

13 auditor client’s customer - physical examination - confirmation - receipt of a written or oral response from an independent third party at the auditor’s request very competent evidence! types of evidence 32

14 types of evidence Whenever reasonable, a sample of accounts receivable must be confirmed by the auditor (AU 330). - physical examination - confirmation - receipt of a written re- sponse from an independent third par- ty at the auditor’s request

15 - physical examination - confirmation - documentation (vouching) - auditor examination of client documents and records types of evidence

16 - physical examination - confirmation - documentation (vouching) - observation - using the senses to audit; often an informal procedure necessitat- ing followup procedures types of evidence

17 - physical examination - confirmation - documentation (vouching) - observation - inquiries of client - useful but biased and not persuasive unless supported by another form of evidence CPA types of evidence

18 - physical examination - confirmation - documentation (vouching) - observation - inquiries of client - reperformance - checking the accuracy of client calculations and transfers of information (often performed by an audit software package). types of evidence

19 - physical examination - confirmation - documentation (vouching) - observation - inquiries of client - reperformance - analytical procedures - involve analy- sis of comparisons and interrelation- ships in data (may be performed by an audit software package). types of evidence

20 Purposes of Analytical Procedures - facilitate understanding of client’s business and industry - may indicate financial difficulty and the client’s ability to continue as a going concern - may indicate misstatements in the fi- nancial statements - may result in a reduction of detailed audit tests

21 Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results - comparisons with expected results, using nonfinancial data, example: account can be calculated from equipment maintenance expense production

22 What is an audit program? The audit program is the set of detailed instructions for the entire collection of evidence for an audit. includes: - procedures to perform inquiriesexamination of documents and records analytical procedures observation

23 The audit program for most audits is designed in three parts. tests of controls and substantive tests of transactions analytical procedures tests of details of balances

24 What are working papers? procedures applied information obtained conclusions reached tests performed auditor records of:

25 working papers Working papers also provide: - a basis for planning the audit - a record of the evidence accumulated and the results of tests - data supporting the audit report - a basis for supervisor/partner review Their objective is to aid the auditor in providing reasonable assurance that an adequate audit was conducted in accordance with GAAS.

26 working papers Working papers include current files and permanent files. ?

27 Permanent files contain data of a historical nature of continuing relevance to current and future engagements. INCLUDE: - copies of client documents of continu- ing importance - analyses from prior audits that have continuing importance - internal control information - results of prior audit analytical procedures

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