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Audit Evidence Chapter 7.

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Presentation on theme: "Audit Evidence Chapter 7."— Presentation transcript:

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


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