1. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 1 Audit Evidence ادلة الاثبات في التدقيق Chapter 7

2. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 2 Nature of Evidence  The use of evidence is not unique to auditors  Evidence is also used by scientists, lawyers, and historians

3. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 3 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)

4. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 4 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.  Sample sizes  Items to select  Timing of the tests

5. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 5 Persuasiveness of Evidence  Appropriateness  Sufficiency Two determinants:

6. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 6 Six Characteristics of Reliable Evidence 1.Independence of provider 2.Effectiveness of client’s internal controls 3.Auditor’s direct knowledge

7. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 7 Six Characteristics of Reliable Evidence 4.Qualification of individuals providing the information 5.Degree of objectivity 6. Timeliness

8. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 8 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

9. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 9 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.

10. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 10 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

11. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 11 Relationships Auditing standards Evidence accumulation Types of evidence Audit procedures Qualifications and conduct Sample size and items to select Timing of tests Reporting Physical examination Confirmation Documentation Analytical procedures Inquiries of the client Recalculation Reperformance Observation Broad guidelines concerning auditor qualifications and conduct, evidence accumulation, and reporting Broad categories of evidence available for the auditor’s accumulation Specific instructions for the accumulation of types of evidence FOUR AUDIT EVIDENCE DECISIONS

12. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 12 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.

13. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 13 Confirmation InformationSource Assets Cash in bank 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

14. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 14 Confirmation InformationSource Liabilities Accounts payable Notes payable Advances from customers Mortgages payable Bonds payable Creditor Lender Customer Mortgagor Bondholder

15. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 15 Confirmation InformationSource Owners’ Equity Shares outstandingRegistrar 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

16. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 16 Documentation It is the auditor’s inspection of the client’s documents and records. Internal documents External documents

17. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 17 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

18. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 18 Inquiries of the Client It is the obtaining of written or oral information from the client in response to questions from the auditor.

19. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 19 Recalculation It involves rechecking a sample of calculations made by the client.

20. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 20 Reperformance It is the auditor’s independent tests of client accounting procedures or controls that were originally done.

21. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 21 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.

22. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 22 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

23. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 23 Terms and Types of Evidence TermsType of Evidence Examine Scan Read Compute Recompute Foot Trace Compare Count Observe Inquire Vouch Documentation Analytical procedures Documentation Analytical procedures Recalculation Documentation/Reperformance Documentation Physical examination Observation Inquiries of client Documentation

24. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 24 Audit Documentation Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement.

25. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 25 Audit Documentation  Purposes of audit documentation  Ownership of audit files  Confidentiality of audit files

26. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 26 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.

27. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 27 Audit File Contents and Organization Robinson Associates Trial Balance 12/31/07 Cash$165,237 Accounts Receivable 275,050 Prepaid Insurance 37,795 Interest Receivable 20,493 Financial Statements and Audit Report 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 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

28. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 28 Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to the current audit.

29. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 29 Current Files  Audit program  General information  Working trial balance  Adjusting and reclassification entries  Supporting schedules

30. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 30 Relationship of Audit Documentation to Financial Statements FINANCIAL STATEMENTS Cash122 Acc. WORKING TRIAL BALANCE Prelim. AJE’s Final Cash212(90)122 AJE’s Expense90 Cash 90 LEAD SCHEDULE–CASHA-1 Per G/L AJE’sFinal Petty Cash A-2 5 5 Cash in Bank: General A-3186(90) 96 Payroll A-4 21 21 212(90)122

31. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 31 Relationship of Audit Documentation to Financial Statements A-3/1 Confirmation A-3/2 O/S Check List A-4/2 O/S Check List A-4/1 Confirmation A-2 Cash Count Sheet A-3 Bank Reconciliation A-4 Bank Reconciliation LEAD SCHEDULE–CASHA-1 Per G/L AJE’sFinal Petty Cash A-2 5 5 Cash in Bank: General A-3186(90) 96 Payroll A-4 21 21 212(90)122

32. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 32 Types of Supporting Schedules  Analysis  Trial balance or list  Reconciliation of amounts  Tests of reasonableness

33. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 33 Types of Supporting Schedules  Summary of procedures  Examination of supporting documents  Informational  Outside documentation

34. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 34 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

35. ©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 35 End of Chapter 7