Chapter 7 Audit Planning and Analytical Procedures

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Chapter 7Audit Planning and Analytical Procedures
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Presentation Outline

1. Defining Audit Evidence
2. Types of Audit Evidence
3. Audit Documentation

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I. Defining Audit Evidence

1. Audit Evidence Decisions
2. Persuasiveness of Audit Evidence
3. Competence Considerations

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A. Audit Evidence Decisions

• Audit procedures to use specific procedures
  should be spelled out for instruction during the
  audit.
• Sample size how many items should be tested for
  each audit procedure.
• Items to select determine which items in the
  population should be selected.
• Timing timing can vary from early in the
  accounting period to long after it has ended.

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B. Persuasiveness of Audit Evidence

• Audit evidence is any information used by the
  auditor to determine whether the information
  being audited is stated in accordance with
  established criteria. Two determinants of
  persuasiveness of evidence are
• Competence the degree to which evidence can be
  considered trustworthy.
• Sufficiency amount of evidence is enough to
  form a reasonable opinion.

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C. Competence Considerations

• Relevance must pertain to the audit objective
  being tested.
• Independence evidence from outside the client
  is a stronger form of evidence
• Effectiveness of client internal controls good
  internal controls can mean better information.
• Auditor direct knowledge auditor determinations
  are stronger that client comments.
• Qualifications individual is a qualified
  source.
• Degree of objectivity objective evidence is
  stronger than subjective evidence.
• Timeliness balance sheet account evidence is
  better when it is collected around the date of
  the financial statement. Income statement
  evidence should sample entire period.

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II. Types of Audit Evidence

1. Physical examination
2. Confirmations
3. Documentation
4. Analytical Procedures

• Inquiries of the Client
• Reperformance
• Observation

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A. Physical Examination

• Inspection or count by the auditor of a tangible
  asset.
• Different from examining documentation is that
  the asset has inherent value.

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B. Confirmations
The receipt of a written or oral response from an
independent third party. Auditor has client
request that the third party respond directly to
the auditor.

• Positive Confirmations

• Negative Confirmations

Asks for response even if balance is correct.
Asks for a response only if balance is incorrect.
More reliable than negative confirmations.
Uncertainty associated with no response.
Confirmation of accounts receivable is normally
required when practical reasonable (SAS 67)
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B. Confirmations (Continued)
1. Customers Confirm A/R balances
2. Vendors Confirm A/P balances

1. Banks Confirm checking account and loan balances

4. Attorneys Confirm contingent liabilities
5. Inventory Agents Confirm consignments
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C. Documentation

1. Types of Documents
2. Document Vouching
3. Document Tracing

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1. Types of Documents
Examine supporting evidence in client files.

• Internal Documents

• External Documents

Document has been in hands of an outside party to
the transaction.
Prepared and used within client company. Does
not go outside the client.
More reliable than internal documents.
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2. Document Vouching
Recorded Item
Supporting Document

• Examination of documents that support a recorded
  transaction or amount.
• The direction of testing must be from the
  recorded item to the supporting document.
• Tests existence or occurrence

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3. Document Tracing
Supporting Document
Recorded Item

• The primary test for unrecorded items and
  therefore tests the completeness assertion.
• The direction of testing must be from the
  supporting document to the recorded item.

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D. Analytical Procedures

• Audits studies relationships among data. Unusual
  fluctuations occur when significant difference
  are not expected but do exist or when significant
  differences are expected but do not exist.
  Required during the planning and completion
  phases on all audits.

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E. Inquiries of the Client

• Auditor obtains information from the client in
  response to questions.
• Although much evidence is obtained through
  inquiry, it can not be regarded as conclusive and
  may be biased in the clients favor.

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F. Reperformance

• Reperformance involves rechecking a sample of the
  computations and transfers of information.
  Rechecking of computations consists of testing
  mathematical accuracy. Rechecking of transfers
  of information involves seeing if information is
  recorded consistently in the accounting records.

I dont think this is what they meant by
reperformance!
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H. Observation

• Auditor witnesses the physical activities of the
  client.
• Differs from physical examination because
  physical examination counts assets, while
  observation focuses on client activities.

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III. Audit Documentation
Audit documentation is the principal record of
auditing procedures applied, evidence obtained,
and conclusions reached by the auditor.

1. Working Papers Files
2. Typical Working Paper Format
3. Storage of Working Papers
4. Ownership of Working Papers

The Sarbanes-Oxley Act requires auditors of
public companies to prepare and maintain audit
working papers for a period of no less than 7
years.
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A. Working Papers Files
Working papers provide the principal record that
the audit has conformed to GAAS. Also provide
information for deciding on the proper report.

• Permanent File

• Current File

Information that is relevant for multiple years
on recurring engagements. (See examples on page
178)
Information relevant for a given audit client for
a particular audit year. (See examples on pages
178-182)
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B. Typical Working Paper Format
Prepared by KM Reviewed by J.S.
A1

• Headings audit client name, year under audit,
  etc.
• Indexing arrange papers in some common order.
• Tick marks symbols to key a footnote to an
  item.
• Sign-off indicates auditors that prepare and
  review.

Ricky Corporation Cash
1st Savings
234.00
Traced to bank reconciliation.
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C. Storage of Working Papers

• Working papers of continuing clients are
  maintained indefinitely.
• Check with legal counsel before discarding any
  working papers.

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D. Ownership of Working Papers

• The working papers are the auditors property,
  not the clients.
• In most cases, an auditor can not reveal
  information in the working papers without the
  clients permission.

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Summary

• Audit Evidence and Persuasiveness
• Types of Audit Evidence
• Working Paper Format, Storage,
• and Ownership