1. CHAPTER 6 Audit Evidence

2. An auditor must address four decisions regarding evidence accumulation:

3. Which audit procedures should be used?
An auditor must address four decisions regarding evidence accumulation:
Which audit procedures should be used?

4. Which audit procedures should be used?
What
are audit
procedures?

5. Which audit procedures should be used?
An audit
procedure is a detailed
instruction for the
collection of a type of
audit evidence.

6. Which audit procedures should be used?
In general, the auditor will seek
the most appropriate procedures
that are also cost-feasible.

7. What sample size should be selected?
An auditor must address four decisions regarding evidence accumulation:
MORE LESS
What sample size should be selected?

8. Which items should be selected for testing?
An auditor must address four decisions regarding evidence accumulation:
Which items should be selected for testing?

9. Which items should be selected for testing?
The auditor will consider:
- random/judgmental
selection

10. Which items should be selected for testing?
The auditor will consider:
- random/judgmental
selection
- materiality

11. Which items should be selected for testing?
The auditor will consider:
- random/judgmental
selection
- materiality
- results of prior audits

12. When should the procedures be performed?
An auditor must address four decisions regarding evidence accumulation:
When should the procedures be performed?
December ?

13. When should the procedures be performed?
December
The auditor will consider procedures
that should be performed before, on,
or after the balance sheet date.

14. When should the procedures be performed?
An auditor must address four decisions regarding evidence accumulation:
Which audit procedures should be used?
What sample size should be selected?
Which items should be selected for testing?
When should the procedures be performed?

15. When should the procedures be performed?
Which audit procedures should be used?
What sample size should be selected?
Which items should be selected for testing?
When should the procedures be performed?
After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed.

16. What is an audit program?
After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed.
What is an audit program?

17. An audit program is a list of
After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed.
An audit
program is a list of
detailed audit procedures for each component or cycle specifying proce-dure timing, sample sizes, and selection methods.

18. Persuasiveness of evidence is determined by:
relevance
timeliness
sufficiency
appropriate-
ness

19. Persuasiveness of evidence is determined by:
relevance
timeliness
sufficiency
appropriate-
ness
Which of
these are
specifically
mentioned in the 3rd
examination
standard?

20. sufficiency
Which of
these are
specifically
mentioned in the 3rd
examination standard?
appropriate-
ness

21. Evidence must pertain to the specific audit objective.
relevance
Evidence must pertain to the specific audit objective.

22. Evidence must pertain to the specific audit objective.
relevance
Example: An auditor is concerned about
the completeness of accounts payable
(a/p). Why would confirmation of a/p bal-
ances be an irrelevant procedure?

23. Example: An auditor is concerned about
relevance
Example: An auditor is concerned about
the completeness of accounts payable
(a/p). Why would confirmation of a/p bal-
ances be an irrelevant procedure?
Confirmation addresses existence.
For completeness, a search is needed.

24. Appropriateness concerns the believability and trustworthi-
ness of the evidence.

25. Appropriateness concerns the believability and trustworthiness
of the evidence.
Appropriateness is determined by:
- independence of the evidence provider

26. Appropriateness concerns the believability and trustworthiness
of the evidence.
Appropriateness is determined by:
- independence of the evidence provider
- effectiveness of client’s internal controls

27. Appropriateness concerns the believability and trustworthiness
of the evidence.
Appropriateness is determined by:
- independence of the evidence provider
- effectiveness of client’s internal controls
- auditor’s direct knowledge

28. Appropriateness concerns the believability and trustworthiness
of the evidence.
Appropriateness is determined by:
- independence of the evidence provider
- effectiveness of client’s internal controls
- auditor’s direct knowledge
- qualifications of information provider

29. Appropriateness concerns the believability and trustworthiness
of the evidence.
Appropriateness is determined by:
- independence of the evidence provider
- effectiveness of client’s internal controls
- auditor’s direct knowledge
- qualifications of information provider
- degree of objectivity

30. Appropriateness concerns the believability and trustworthiness
of the evidence.
appropriate-
ness
Appropriateness is a measure of evidence quality, it cannot be enhanced by a larger sample size.

31. sufficiency
Sufficiency is a measure of quantity. In general, the larger the sample size, the more persuasive the evidence.

32. Auditors must balance the trade-off be-
More evidence yields
more assurance and
higher audit costs.
MORE LESS
Less evidence yields
less assurance and
lower audit
costs.
Auditors must balance the trade-off be-
tween gathering more or less evidence.

33. Sufficiency must be addressed for each audit test and each component
of the financial statements.

34. Sufficiency must be addressed for each audit test and each component
of the financial statements.
An appropriate sample size may be
determined by auditor judgment
and/or by statistical sampling.

35. In determining a sufficient sample
sufficiency
In determining a sufficient sample
size, an auditor will also consider:
- “representativeness”

36. In determining a sufficient sample
sufficiency
In determining a sufficient sample
size, an auditor will also consider:
- “representativeness”
- materiality, large dollar amounts

37. In determining a sufficient sample
sufficiency
In determining a sufficient sample
size, an auditor will also consider:
- “representativeness”
- materiality, large dollar amounts
- items with high probability of
misstatement

38. When should audit evidence be gathered?
timeliness
When should audit
evidence be gathered?

39. When should audit evidence be gathered?
timeliness
When should audit
evidence be gathered?
- evidence related to balance sheet
accounts should be collected as close
to the balance sheet date as possible

40. When should audit evidence be gathered?
timeliness
When should audit
evidence be gathered?
- evidence related to balance sheet
accounts should be collected as close
to the balance sheet date as possible
- evidence related to income statement
accounts should be collected from
throughout the period rather than
from only part of the period

41. Evidence is
considered
persuasive
only if all
four
determinants
have been
met.
relevance
timeliness
sufficiency
appropriate-
ness

42. With regard to the adequacy and costs of audit evidence:
absolute
certainty
convincing
evidence
requires

43. With regard to the adequacy and costs of audit evidence:
absolute
certainty
requires
convincing
evidence
requires
high audit
costs

44. With regard to the adequacy and costs of audit evidence:
requires
absolute
certainty
convincing
evidence
high audit
costs
requires
reasonable
certainty
persuasive
evidence

45. With regard to the adequacy and costs of audit evidence:
requires
absolute
certainty
convincing
evidence
high audit
costs
reasonable
certainty
requires
persuasive
evidence
requires
reasonable
audit costs

46. Types of evidence - physical examination - inspection or
count by the auditor of a tangible
asset
very appropriate evidence!

47. Types of evidence - physical examination
- confirmation - receipt of a written or
oral response from an independent
third party at the auditor’s request
auditor
Canada 46
client’s customer
very appropriate evidence!

48. process must be controlled
Types of evidence
- physical examination
- confirmation - receipt of a written or
oral response from an independent
third party at the auditor’s request
The confirmation
process must be controlled
by the auditor.

49. a sample of accounts receivable should be confirmed by the
Types of evidence
- physical examination
- confirmation - receipt of a written re-
sponse from an independent third party
at the auditor’s request
Whenever reasonable,
a sample of accounts receivable
should be confirmed by the
auditor.

50. Types of evidence - physical examination - confirmation
- documentation (vouching) - auditor
examination of client documents and
records

51. What is the difference between internal and external documents?

52. What is the difference between internal and external documents?
External documents are usually on the
client’s premises but were either pre-
pared by a third party or processed
by a third party (more persuasive).

53. What is the difference between internal and external documents?
Internal documents have been
prepared by the client and have
not left the client’s premises
(less persuasive).

54. What is the primary determinant of the appropriateness of internal documents?

55. What is the primary determinant of the appropriateness of internal documents?
control

56. Types of evidence What is the difference between physical
- physical examination
- confirmation
- documentation
What is the difference
between physical
examination and
documentation?

57. What is the difference between physical examination and documentation?
- physical examination - inspection or
count by the auditor of a tangible
asset
- documentation (vouching) - auditor
examination of client documents and
records

58. Types of evidence - physical examination - confirmation
- documentation (vouching)
- observation - using the senses to audit;
often an informal procedure requiring
follow-up procedures

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

60. Types of evidence - 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).

61. Types of evidence - 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).

62. Analytical procedures should be used during the planning and completion phases of the audit...

63. Analytical procedures should be used during the planning and completion phases of the audit...
but they may also be
beneficial at other
times during the audit.

64. Purposes of Analytical Procedures
- facilitate understanding of client’s
business and industry

65. Purposes of Analytical Procedures
- facilitate understanding of client’s
business and industry
- may indicate financial
difficulty and the cli-
ent’s ability to con-
tinue as a going
concern
Bert’s Boutique
Going Out of Business Sale!

66. 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
financial statements

67. 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
financial statements
- may result in a reduction of detailed
audit tests

68. Types of Analytical Procedures
- industry comparisons
How do the
client’s financial ratios
compare with those
of the industry?

69. Types of Analytical Procedures
- industry comparisons
- comparisons with prior years
Ace
Company
2003
financial
statements
Ace
Company
2004
financial
statements

70. Types of Analytical Procedures
- industry comparisons
- comparisons with prior years
Ace
Company
2003
financial
statements
Ace
Company
2004
financial
statements
Conclusions from a 2-year analy-
sis may be erroneous. WHY?

71. Types of Analytical Procedures
- industry comparisons
- comparisons with prior years
- comparisons with client-determined
expected results, e.g.,
budgets

72. Types of Analytical Procedures
- industry comparisons
- comparisons with prior years
- comparisons with client-determined
expected results
- comparisons with auditor-determined
expected results, examples:
account can be calculated from
sales commissions ?????????????????

73. Types of Analytical Procedures
- industry comparisons
- comparisons with prior years
- comparisons with client-determined
expected results
- comparisons with auditor-determined
expected results, examples:
account can be calculated from
sales commissions sales
depreciation expense ??????????????????

74. Types of Analytical Procedures
- industry comparisons
- comparisons with prior years
- comparisons with client-determined
expected results
- comparisons with auditor-determined
expected results, examples:
account can be calculated from
sales commissions sales
depreciation expense fixed assets
interest expense ??????????????????

75. Types of Analytical Procedures
- industry comparisons
- comparisons with prior years
- comparisons with client-determined
expected results
- comparisons with auditor-determined
expected results, examples:
account can be calculated from
sales commissions sales
depreciation expense fixed assets
interest expense notes/bonds payable

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

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

78. Analytical proce-
dures are often
facilitated by
audit software.

79. If analytical procedures disclose unusual fluc-tuations or variances, the auditor should in-vestigate by gathering
additional evidence.

80. If analytical procedures disclose unusual fluc-tuations or variances, the auditor should investigate
by gathering additional evidence.
The auditor should con-sider whether fluctua-
tions or variances are material and whether they may be reasonably
justifiable.