1. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 1 Audit Evidence Chapter 7

2. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 2 Learning Objective 1 Contrast audit evidence with evidence used by other professions.

3. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 3 Nature of Evidence The use of evidence is not unique to auditors. Evidence is also used by scientists, lawyers, and historians.

4. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 4 Learning Objective 2 Identify the four audit evidence decisions that are needed to create an audit program.

5. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 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

6. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 6 Audit Program It includes a list of the audit procedures the auditor considers necessary. Most auditors use computers to facilitate the preparation of audit programs.

7. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 7 Learning Objective 3 Specify the characteristics that determine the persuasiveness of evidence.

8. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 8 Persuasiveness of Evidence Competence Sufficiency Combined effect Persuasiveness and cost

9. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 9 Competence Relevance Independence of provider Effectiveness of internal controls Auditor’s direct knowledge Qualifications of individuals Degree of objectivity Timeliness

10. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 10 Learning Objective 4 Identify and apply the seven types of evidence used in auditing.

11. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 11 Types of Audit Evidence 1. Physical examination 3. Documentation 5. Inquiries of the client 6. Reperformance 2. Confirmation 4. Analytical procedures 7. Observation

12. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 12 Relationships Auditing standards Qualifications and conduct Reporting Evidence accumulation Types of evidence Broad guidelines Broad categories

13. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 13 Relationships Types of evidence Sample size Timing of tests Audit procedures Items to select Specific instructions

14. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 14 Information Often Confirmed InformationSource Assets Cash in bankBank Accounts receivableCustomer Notes receivableMaker Owned inventory out on consignmentConsignee Inventory held in public warehousesWarehouse Cash surrender value of life insuranceInsurance co.

15. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 15 Information Often Confirmed InformationSource Liabilities Accounts payableCreditor Notes payableLender Advances from customersCustomer Mortgages payableMortgagor Bonds payableBondholder

16. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 16 Information Often Confirmed InformationSource Owners’ Equity Shares outstandingRegistrar and transfer agent

17. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 17 Information Often Confirmed InformationSource Other Information Insurance coverageInsurance company Contingent liabilitiesBank, lender,and client’s counsel Bond indenture agreementsBondholder Collateral held by creditorsCreditor

18. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 18 Criteria to Determine Competence Type of evidence Independence of provider Effectiveness of client’s internal controls Auditor’s direct knowledge Qualifications of provider Objectivity of evidence

19. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 19 Terms and Types of Evidence TermsTypes of Evidence ExamineDocumentation ScanAnalytical procedures Read Analytical procedures Documentation Compute RecomputeReperformance FootReperformance

20. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 20 Terms and Types of Evidence TermsTypes of Evidence TraceDocumentation CompareDocumentation Count Observation Physical examination Observe InquireInquiries of client VouchDocumentation

21. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 21 Learning Objective 5 Understand the purposes of audit documentation.

22. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 22 Audit Documentation Purposes of audit documentation Ownership of audit files Confidentiality of audit files

23. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 23 Learning Objective 6 Prepare organized audit documentation.

24. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 24 Audit File Contents and Organization Derrickson Associates Trial Balance 12/31/2003 Cash$165,237 Accounts Receivable 275,050 Prepaid Insurance 37,795 Interest Receivable 20,493 Financial Statements and Audit Report Working Trial Balance Adjusting Journal Entries Contingent Liabilities Operations Liabilities and Equity Assets Analytical Procedures Test of Controls & Substantive TOT Internal Control General Information Audit Programs Permanent Files

25. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 25 Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to the current audit.

26. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 26 Current Files Audit program General information Working trial balance Adjusting and reclassification entries Supporting schedules

27. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 27 Relationship of Audit Documentation to Financial Statements FINANCIAL STATEMENTS Cash122 Acc. …………………. WORKING TRIAL BALANCE Prelim. AIE’s Final Cash212(90)122 AIE’s Expense90 Cash90

28. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 28 Relationship of Audit Documentation to Financial Statements LEAD SCHEDULE – CASH A-1 Per G/1 AIE’s Final Petty Cash A-2 5 5 Cash in Bank: General A-3186(90) 96 Payroll A-4 21 21 212(90)122

29. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 29 Relationship of Audit Documentation to Financial Statements A-2 Cash Count Sheet A-3 Bank Reconciliation A-3/1 Confirmation A-3/2 O/S Check List

30. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 30 Relationship of Audit Documentation to Financial Statements A-4 Bank Reconciliation A-4/1 Confirmation A-4/2 O/S Check List

31. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 31 Types of Supporting Schedules Analysis Trial balance Reconciliation of amounts Tests of reasonableness Summary of procedures Examination of supporting documents Informational Outside documentation

32. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 32 Learning Objective 7 Describe how e-commerce affects audit evidence and audit documentation.

33. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 33 Effect of E-commerce Audit evidence is increasingly in electronic form. Auditors use computers to read and examine evidence. Software programs are typically Windows-based.

34. ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 34 End of Chapter 7