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Audit Evidence. Chapter 7. Learning Objective 1. Contrast audit evidence with evidence used by other professions. Nature of Evidence. The use of evidence is not unique to auditors. Evidence is also used by scientists, lawyers, and historians. Learning Objective 2.
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Audit Evidence Chapter 7
Learning Objective 1 Contrast audit evidence with evidence used by other professions.
Nature of Evidence The use of evidence is not unique to auditors. Evidence is also used by scientists, lawyers, and historians.
Learning Objective 2 Identify the four audit evidence decisions that are needed to create an audit program.
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
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.
Learning Objective 3 Specify the characteristics that determine the persuasiveness of evidence.
Persuasiveness of Evidence Competence Sufficiency Combined effect Persuasiveness and cost
Competence Relevance Independence of provider Effectiveness of internal controls Auditor’s direct knowledge Qualifications of provider Objectivity of evidence Timeliness
Learning Objective 4 Identify and apply the seven types of evidence used in auditing.
Types of Audit Evidence 1. Physical evidence 2. Confirmation 3. Documentation 4. Analytical procedures 5. Inquiries of the client 6. Reperformance 7. Observation
Broad guidelines Qualifications and conduct Evidence accumulation Reporting Types of evidence Broad categories Relationships Auditing standards
Audit procedures Specific instructions Sample size Items to select Timing of tests Relationships Types of evidence
Information Source Assets Cash in bank Bank Accounts receivable Customer Notes receivable Maker Owned inventory out on consignment Consignee Inventory held in public warehouses Warehouse Cash surrender value of life insurance Insurance co. InformationOften Confirmed
InformationOften Confirmed Information Source Liabilities Accounts payable Creditor Notes payable Lender Advances from customers Customer Mortgages payable Mortgagor Bonds payable Bondholder
InformationOften Confirmed Information Source Owners’ Equity Shares outstanding Registrar and transfer agent
InformationOften Confirmed Information Source Other Information Insurance coverage Insurance company Contingent liabilities Bank, lender, and client’s counsel Bond indenture agreements Bondholder Collateral held by creditors Creditor
InformationOften Confirmed Documentation Analytical procedures Inquiries of the client Reperformance Observation
Competence of Typesof Evidence Type of evidence Independence of provider Effectiveness of client’s internal controls Auditor’s direct knowledge Qualifications of provider Objectivity of evidence
Terms Types of Evidence Examine Scan Read Compute Recompute Foot Documentation Analytical procedures Documentation Analytical procedures Reperformance Reperformance Terms and Types of Evidence
Terms and Types of Evidence Terms Types of Evidence Trace Compare Count Observe Inquire Vouch Documentation Documentation Physical examination Observation Inquiries of client Documentation
Learning Objective 5 Understand the purposes of audit documentation.
Audit Documentation Purposes of audit documentation Ownership of audit files Confidentiality of audit files
Audit Documentation Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement.
Audit Documentation 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.
Learning Objective 6 Prepare organized audit documentation.
Financial Statements and Audit Report Analytical Procedures Test of Controls & Substantive TOT Working Trial Balance Derrickson Associates Trial Balance 12/31/2004 Cash $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 Audit File Contentsand Organization
Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to the current audit.
Current Files Audit program General information Working trial balance Adjusting and reclassification entries Supporting schedules
Relationship of Audit Documentationto Financial Statements FINANCIAL STATEMENTS Cash 122 Acc. …………………. WORKING TRIAL BALANCE Prelim.AJE’sFinal Cash 212 (90) 122 AJE’s Expense 90 Cash 90 LEAD SCHEDULE – CASHA-1 Per G/LAJE’sFinal Petty Cash A-2 5 5 Cash in Bank: General A-3 186 (90) 96 Payroll A-4 21 21 212 (90) 122
Relationship of Audit Documentationto Financial Statements LEAD SCHEDULE – CASHA-1 Per G/LAJE’sFinal Petty Cash A-2 5 5 Cash in Bank: General A-3 186 (90) 96 Payroll A-4 21 21 212 (90) 122 A-2 Cash Count Sheet A-3 Bank Reconciliation A-4 Bank Reconciliation A-3/1 Confirmation A-3/2 O/S Check List A-4/1 Confirmation A-4/2 O/S Check List
Types of Supporting Schedules Analysis Trial balance or list Reconciliation of amounts Tests of reasonableness
Types of Supporting Schedules Summary of procedures Examination of supporting documents Informational Outside documentation
Learning Objective 7 Describe how e-commerce affects audit evidence and audit documentation.
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.
