Addthis Arens Chapter07

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Audit Evidence

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Learning Objective 1

Contrast audit evidence with

evidence used by other

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Nature of Evidence

_{The use of evidence is not unique to auditors}

_{Evidence is also used by scientists, lawyers,}

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Learning Objective 2

Identify the four audit evidence

decisions that are needed to

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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

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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

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Learning Objective 3

Specify the characteristics that

determine the persuasiveness

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Persuasiveness of Evidence

_{Appropriateness}

_Sufficiency

The two determinants of the persuasiveness

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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.

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Six Characteristics of Reliable

Evidence

1. Independence of provider 2. Effectiveness of client’s

internal controls

3. Auditor’s direct knowledge 4. Qualification of individuals

providing the information 5. Degree of objectivity

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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 Sample size and items to select _Sufficiency

Adequate sample size

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Persuasiveness and Cost

In making decisions about evidence for a given audit, both persuasiveness and cost must be considered.

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Learning Objective 4

Identify and apply the eight types

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Types of Audit Evidence

1. Physical examination 2. Confirmation

3. Documentation

4. Analytical procedures 5. Inquiries of the client 6. Recalculation

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Relationships

Types of evidence

Audit procedures Qualifications

and conduct

Sample size and items

to select Timing

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

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Physical Examination

It is the inspection or count by the It is the inspection or count by the

auditor of a

auditor of a tangible assettangible asset..

This type of evidence is most often This type of evidence is most often

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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

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Confirmation

Liabilities

Accounts payable Notes payable

Advances from customers Mortgages payable

Bonds payable

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Confirmation

Owners’ Equity

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

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Documentation

It is the auditor’s inspection of the

client’s documents and records.

Internal documents

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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

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Inquiries of the Client

It is the obtaining of written or oral information

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Recalculation

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Reperformance

It is the auditor’s independent tests of client accounting procedures or controls that

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Observation

It is the use of the senses to assess client activities.

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Appropriateness of Types of

Evidence

_{Type of evidence}

_{Independence of provider}

_{Effectiveness of client’s internal controls}

_{Auditor’s direct knowledge}

_{Qualifications of provider}

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Types of Evidence and Four Evidence Decisions for

a Balance-Related Audit Objective for Inventory*

Type of Evidence Audit Procedure Sample Size Evidence Decisions

Items to Select Timing

Observation

Physical examination

Documentation

Observes client’s personnel counting inventory to

determine whether they are properly following instructions Count a sample of

inventory and compare quantity and description to client’s counts

Compare quantity on client’s perpetual records to quantity on client’s counts

All count teams

120 items

70 items

Not applicable

40 items with large dollar value, plus 80 randomly selected

30 items with large dollar value, plus 40 randomly selected

Balance sheet date

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Terms and Types of Evidence

Terms Type of Evidence

Examine

Analytical procedures Documentation

Analytical procedures Recalculation

Recalculation

Documentation/Reperformance Documentation

Physical examination Observation

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Learning Objective 5

Understand the purposes of

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Audit Documentation

Audit documentation is the principal record

of auditing procedures applied, evidence obtained, and conclusions reached by

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Audit Documentation

_{Purposes of audit documentation}

_{Ownership of audit files}

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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

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Learning Objective 6

Prepare organized audit

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Audit File Contents and Organization

Robinson Associates

Trial Balance

12/31/09

Cash

Cash $165,237$165,237 Accounts Receivable

Accounts Receivable 275,050 275,050 Prepaid Insurance

Prepaid Insurance 37,795 37,795 Interest Receivable

Interest Receivable 20,493 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

Contingent Liabilities

Operations

Liabilities and Equity

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

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Permanent Files

These files are intended to contain

data of a historical or continuing

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Current Files

_{Audit program}

_{General information}

_{Working trial balance}

_{Adjusting and reclassification entries}

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Relationship of Audit Documentation

to Financial Statements

FINANCIAL STATEMENTS

Cash 122

Acc.

WORKING TRIAL BALANCE

Prelim. AJE’s Final

Cash 212 (90) 122

AJE’s Expense 90

Cash 90

LEAD SCHEDULE–CASH A-1

Per G/L AJE’s Final Petty Cash A-2 5 5 Cash in Bank:

General A-3 186 (90) 96

Payroll A-4 21 21

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Relationship of Audit Documentation

to Financial Statements

A-3/1

Confirmation O/S Check List A-3/2 Confirmation A-4/1 A-2

Cash Count Sheet Bank Reconciliation A-3 Bank Reconciliation A-4

LEAD SCHEDULE–CASH A-1

Per G/L AJE’s Final Petty Cash A-2 5 5 Cash in Bank:

General A-3 186 (90) 96

Payroll A-4 21 21

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Types of Supporting Schedules

 _Analysis

 _{Trial balance or list}

 _{Reconciliation of amounts}

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Types of Supporting Schedules

_{Summary of procedures}

_{Examination of supporting documents}

_{Informational}

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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}

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Learning Objective 7

Describe how technology affects audit

evidence and audit documentation.

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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

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