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Audit Evidence Chapter 7
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Generally Accepted Auditing Standards Third Standard of Field Work
Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.
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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
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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.
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Persuasiveness of Evidence
Competence and sufficiency are determinants of the persuasiveness of evidence. Factors affecting competence include: Relevance to audit objective Independence of provider Effectiveness of internal controls Auditor’s direct knowledge Qualifications of providers Degree of objectivity Timeliness
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Table 7-2, (p. 167)
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Types of Audit Evidence
Physical examination (tangible assets) Confirmation (positive and negative) Documentation Analytical procedures Inquiries of the client Reperformance Observation
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Confirmations and Information Often Confirmed
Confirmations may be positive or negative. Procedures for non-response positives Assets Cash in bank (example) Bank Accounts receivable Customer Notes receivable Maker Owned inventory out on consignment Consignee Inventory held in public warehouses Warehouse Cash surrender value of life insurance Insurance co. Information Source
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Information Often Confirmed
Information Source Liabilities Accounts payable Creditor Notes payable Lender Advances from customers Customer Mortgages payable Mortgagor Bonds payable Bondholder
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Information Often Confirmed
Information Source Owners’ Equity Shares outstanding Registrar and transfer agent Other Information Insurance coverage Insurance co. Contingent liabilities Bank, lender, and clients legal counsel Bond indenture agreements Bondholder Collateral held by creditors Creditor
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Other Forms of Evidence
Documentation – Client’s documents and records Internal vs. External documents Tracing vs. Vouching – see next slide
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Tracing vs. Vouching (Figure 6-7 is from another text)
Inspection of Documents or Records Vouching Tracing Note: students should understand the differences between tracing and vouching.
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Reliability of Documentary Evidence (Figure 6-5 is from another text)
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Other Forms of Evidence: Analytical procedures
Importance of context – understanding the client’s business and industry Analytical procedures are used for: Assessing going concern Finding possible misstatements in the financials Reducing detailed audit tests
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Other Forms of Evidence
Inquiries of the client – written or oral Reperformance – verifying calculations or information processing Observation
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Competence of Types of Evidence, Table 7-4 (p. 172)
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Terms and Types of Evidence, Table 7-6, (p. 175)
Examine Documentation Scan Analytical procedures Read Documentation Compute Analytical procedures Recompute Reperformance Foot Reperformance Terms Type of Evidence
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Terms and Types of Evidence
Terms Type of Evidence Trace Documentation/ Reperformance Compare Documentation Count Physical examination Observe Observation Inquire Inquiries of client Vouch Documentation
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Audit Documentation Audit documentation is the principal record
of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement.
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Audit Documentation Purposes of audit documentation – primary
means to support that the audit was conducted in accordance with GAAS. Ownership of audit files Confidentiality of audit files – rule 301, chapter 4.
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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.
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Audit File Contents and Organization
Financial Statements and Audit Report Working Trial Balance Adjusting Journal Entries Contingent Liabilities Operations and Equity Assets Analytical Procedures Test of Controls & Substantive TOT Internal Control General Information Audit Programs Permanent Files Robinson Associates Trial Balance 12/31/05 Cash $165,237 Accounts Receivable 275,050 Prepaid Insurance ,795 Interest Receivable ,493
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Permanent Files These files are intended to contain data of a
historical or continuing nature pertinent to the current audit. Examples include: Articles of incorporation Loan agreements Documents related to understanding I/C Leases
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Current Files Audit program General information Working trial balance
Adjusting and reclassification entries Supporting schedules
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Relationship of Audit Documentation to Financial Statements
Cash 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 (90) 122
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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 (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-4/2 O/S Check List A-4/1 Confirmation
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Types of Supporting Schedules
Analysis Trial balance or list Reconciliation of amounts Tests of reasonableness
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Types of Supporting Schedules
Summary of procedures Examination of supporting documents Informational Outside documentation
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Characteristics 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.
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Effect of E-commerce 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.
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