1. Audit Evidence
Chapter 7

2. Learning Objective 1 Contrast audit evidence with
evidence used by other
professions.

3. Nature of Evidence The use of evidence is not unique to auditors
Evidence is also used by scientists, lawyers,
and historians, and auditors all use evidence
to help them draw conclusions.

4. Learning Objective 2 Identify the four audit evidence
decisions that are needed to
create an audit program.

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. Audit Program It includes a list of the audit procedures
the auditor considers necessary.
Sample sizes
Items to select
Timing of the tests
Most auditors use computers to facilitate
the preparation of audit programs.

7. Learning Objective 3 Specify the characteristics that
determine the persuasiveness
of evidence.

8. Persuasiveness of Evidence
The two determinants of the persuasiveness
of evidence are appropriateness and sufficiency,
which are taken directly from the third standard
of field work.
Appropriateness
Sufficiency

9. Appropriateness
Appropriateness of evidence is a measure of the quality of evidence, meaning its relevance and reliability in meeting audit objectives for classes of transactions, account balances, and related disclosures.
If evidence is considered highly appropriate, it is great help in persuading the auditor that financial statements are fairly stated.
1.Relevance of Evidence 2.Reliability of evidence

10. Six Characteristics of Reliable Evidence
Independence of provider
2. Effectiveness of client’s
internal controls
3. Auditor’s direct knowledge
4. Qualification of individuals
providing the information
Degree of objectivity
6. Timeliness

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. 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. Learning Objective 4 Identify and apply the eight types
of evidence used in auditing.

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. Analytical procedures Inquiries of the client Specific instructions
Relationships
Broad guidelines
concerning auditor
qualifications and
conduct, evidence
accumulation,
and reporting
Auditing
standards
Qualifications
and conduct
Evidence
accumulation
Physical examination
Confirmation
Documentation
Analytical procedures
Inquiries of the client
Recalculation
Reperformance
Observation
Reporting
Types of
evidence
Broad categories of
evidence available
for the auditor’s
accumulation
Audit
procedures
Specific instructions
for the accumulation
of types of evidence
FOUR
AUDIT
EVIDENCE
DECISIONS
Sample size
and items
to select
Timing
of tests

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. Confirmation Information Source Assets Cash in bank
Marketable securities
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
Investment custodian

18. Confirmation Information Source Liabilities Accounts payable
Notes payable
Advances from customers
Mortgages payable
Bonds payable
Creditor
Lender
Customer
Mortgagor
Bondholder

19. Confirmation Information Source Owners’ Equity Other Information
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. client’s documents and records.
Documentation
It is the auditor’s inspection of the
client’s documents and records.
Internal
documents
External
documents

21. 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

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. Recalculation It involves rechecking a sample of calculations
made by the client.

24. Reperformance It is the auditor’s independent tests of client
accounting procedures or controls that
were originally done.

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. 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

27. Types of Evidence and Four Evidence Decisions for a Balance-Related Audit Objective for Inventory*
Type of Evidence
Audit Procedure
Sample Size
Items to Select
Timing
Observation
Observes client’s personnel counting inventory to determine whether they are properly following instructions
All count teams
Not applicable
Balance sheet date
Physical examination
Count a sample of inventory and compare quantity and description to client’s counts
120 items
40 items with large dollar value, plus 80 randomly selected
Balance sheet date
Documentation
Compare quantity on client’s perpetual records to quantity on client’s counts
70 items
30 items with large dollar value, plus 40 randomly selected
Balance sheet date

28. Terms and Types of Evidence
Type of Evidence
Examine
Scan
Read
Compute
Recompute
Foot
Trace
Compare
Count
Observe
Inquire
Vouch
Documentation
Analytical procedures
Recalculation
Documentation/Reperformance
Physical examination
Observation
Inquiries of client

29. Learning Objective 5
Understand the purposes of
audit documentation.

30. Audit Documentation Audit documentation is the principal record
of auditing procedures applied, evidence
obtained, and conclusions reached by
the auditor in the engagement.

31. Audit Documentation Purposes of audit documentation
Ownership of audit files
Confidentiality of audit files

32. 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.

33. Learning Objective 6
Prepare organized audit
documentation.

34. Audit File Contents and Organization
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
Robinson Associates
Trial Balance
12/31/09
Cash $165,237
Accounts Receivable 275,050
Prepaid Insurance ,795
Interest Receivable ,493
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

35. Permanent Files These files are intended to contain
data of a historical or continuing
nature pertinent to the current audit.

36. Current Files Audit program General information Working trial balance
Adjusting and reclassification entries
Supporting schedules

37. Relationship of Audit Documentation to Financial Statements
Cash 122
Acc.
WORKING TRIAL BALANCE
Prelim. AJE’s Final
Cash (90) 122
AJE’s
Expense 90
Cash
LEAD SCHEDULE–CASH A-1
Per G/L AJE’s Final
Petty Cash A
Cash in Bank:
General A (90)
Payroll A
212 (90) 122

38. Relationship of Audit Documentation to Financial Statements
LEAD SCHEDULE–CASH A-1
Per G/L AJE’s Final
Petty Cash A
Cash in Bank:
General A (90)
Payroll A
212 (90) 122
A-2
Cash Count Sheet
A-3
Bank Reconciliation
A-4
Bank Reconciliation
A-3/1
Confirmation
A-3/2
O/S Check List
A-4/1
Confirmation
A-4/2
O/S Check List

39. Types of Supporting Schedules
Analysis
Trial balance or list
Reconciliation of amounts
Tests of reasonableness

40. Types of Supporting Schedules
Summary of procedures
Examination of supporting documents
Informational
Outside documentation

41. 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

42. Learning Objective 7
Describe how technology affects audit evidence and audit documentation.

43. 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

44. End of Chapter 7