Audit Evidence

1
Audit Evidence

• Chapter 7

2
Learning Objective 1
Contrast audit evidence with evidence used
by other professions.
3
Nature of Evidence
The use of evidence is not unique to auditors.
Evidence is also used by scientists, lawyers, and
historians.
4
Learning Objective 2
Identify the four audit evidence decisions that
are needed to create an audit program.
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
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
Learning Objective 3
Specify the characteristics that determine
the persuasiveness of evidence.
8
Persuasiveness of Evidence
Competence
Sufficiency
Combined effect
Persuasiveness and cost
9
Competence
Relevance
Independence of provider
Effectiveness of internal controls
Auditors direct knowledge
Qualifications of individuals
Degree of objectivity
Timeliness
10
Learning Objective 4
Identify and apply the seven types of
evidence used in auditing.
11
Types of Audit Evidence
1. Physical examination
2. Confirmation
3. Documentation
4. Analytical procedures
5. Inquiries of the client
6. Reperformance
7. Observation
12
Relationships
Auditing standards
Broad guidelines
Qualifications and conduct
Reporting
Evidence accumulation
Types of evidence
Broad categories
13
Relationships
Types of evidence
Audit procedures
Specific instructions
Sample size
Timing of tests
Items to select
14
InformationOften Confirmed
Information Source Assets Cash in
bank Bank Accounts receivable Custo
mer Notes receivable Maker Owned
inventory out on consignment Consignee Inventory
held in public warehouses Warehouse Cash
surrender value of life insurance Insurance co.
15
InformationOften Confirmed
Information Source Liabilities Accounts
payable Creditor Notes payable Lend
er Advances from customers Customer Mortgages
payable Mortgagor Bonds payable Bon
dholder
16
InformationOften Confirmed
Information Source Owners Equity Shares
outstanding Registrar and tra
nsfer agent
17
InformationOften Confirmed
Information Source Other
Information Insurance coverage Insurance
company Contingent liabilities Bank,
lender, and clients counsel Bond
indenture agreements Bondholder Collateral held
by creditors Creditor
18
Criteria to DetermineCompetence
Type of evidence
Auditors direct knowledge
Independence of provider
Qualifications of provider
Effectiveness of clients internal controls
Objectivity of evidence
19
Terms and Types of Evidence
Terms
Types of Evidence
Examine
Documentation
Scan
Analytical procedures
Read
Documentation
Analytical procedures
Compute
Recompute
Reperformance
Foot
Reperformance
20
Terms and Types of Evidence
Terms
Types of Evidence
Trace
Documentation
Compare
Documentation
Count
Physical examination
Observation
Observe
Inquire
Inquiries of client
Vouch
Documentation
21
Learning Objective 5
Understand the purposes of audit documentation.
22
Audit Documentation
Purposes of audit documentation
Ownership of audit files
Confidentiality of audit files
23
Learning Objective 6
Prepare organized audit documentation.
24
Audit File Contentsand Organization
Financial Statements and Audit Report
Analytical Procedures
Test of Controls Substantive TOT
Working Trial Balance
Derrickson Associates Trial Balance 12/31/2003 Ca
sh 165,237 Accounts Receivable
275,050 Prepaid Insurance 37,795 Interest
Receivable 20,493
Adjusting Journal Entries
Internal Control
Contingent Liabilities
General Information
Operations
Liabilities and Equity
Audit Programs
Assets
Permanent Files
25
Permanent Files
These files are intended to contain data of a
historical or continuing nature pertinent to the
current audit.
26
Current Files
Audit program
General information
Working trial balance
Adjusting and reclassification entries
Supporting schedules
27
Relationship of Audit Documentationto Financial
Statements
FINANCIAL STATEMENTS Cash 122 Acc. .
WORKING TRIAL BALANCE Prelim. AIEs
Final Cash 212 (90) 122
AIEs Expense 90 Cash 90
28
Relationship of Audit Documentationto Financial
Statements
LEAD SCHEDULE CASH A-1 Per
G/1 AIEs Final Petty Cash A-2
5 5 Cash in Bank General
A-3 186 (90) 96 Payroll A-4 21
21 212 (90) 122
29
Relationship of Audit Documentationto Financial
Statements
A-2 Cash Count Sheet
A-3 Bank Reconciliation
A-3/1 Confirmation
A-3/2 O/S Check List
30
Relationship of Audit Documentationto Financial
Statements
A-4 Bank Reconciliation
A-4/1 Confirmation
A-4/2 O/S Check List
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
Learning Objective 7
Describe how e-commerce affects audit evidence
and audit documentation.
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
End of Chapter 7