Audit Evidence Chapter 6 6 - 1 Essentials of Auditing 1/e,

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Audit Evidence
Chapter 6
©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
6-1
Learning Objective 1
Contrast audit evidence
with evidence used by
other professions.
©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
6-2
Nature of Evidence
The use of evidence is
not unique to auditors.
Evidence is also used
by scientists, lawyers,
and historians.
©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
6-3
Learning Objective 2
Identify the four audit evidence
decisions that are needed to
create an audit program.
©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
6-4
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
©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
6-5
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.
©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
6-6
Learning Objective 3
Specify the characteristics
that determine the
persuasiveness
of evidence.
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6-7
Persuasiveness of Evidence
Competence
Sufficiency
Combined effect
Persuasiveness and cost
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6-8
Competence
Relevance
Independence of provider
Effectiveness of internal controls
Auditor’s direct knowledge
Qualifications of individuals
Degree of objectivity
Timeliness
©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
6-9
Learning Objective 4
Identify and apply the
seven types of evidence
used in auditing.
©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
6 - 10
Relationships
Qualifications
and conduct
Auditing
standards
Broad
guidelines
Evidence
accumulation
Reporting
Types of
evidence
Broad
categories
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6 - 11
Relationships
Types of
evidence
Sample
size
Audit
procedures
Specific
instructions
Items to
select
Timing
of tests
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6 - 12
Types of Audit Evidence
1. Physical examination
2. Confirmation
3. Documentation
4. Analytical procedures
5. Inquiries of the client
6. Reperformance
7. Observation
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6 - 13
Information
Often Confirmed
Information
Assets
Cash in bank
Accounts receivable
Notes receivable
Owned inventory out on consignment
Inventory held in public warehouses
Cash surrender value of life insurance
Source
Bank
Customer
Maker
Consignee
Warehouse
Insurance co.
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6 - 14
Information
Often Confirmed
Information
Liabilities
Accounts payable
Notes payable
Advances from customers
Mortgages payable
Bonds payable
Source
Creditor
Lender
Customer
Mortgagor
Bondholder
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Information
Often Confirmed
Information
Owners’ Equity
Shares outstanding
Source
Registrar and
transfer agent
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6 - 16
Information
Often Confirmed
Information
Other Information
Insurance coverage
Contingent liabilities
Bond indenture agreements
Collateral held by creditors
Source
Insurance company
Bank, lender, and
client’s counsel
Bondholder
Creditor
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6 - 17
Criteria to Determine
Competence
Type of
evidence
Independence
of provider
Effectiveness of
client’s
internal controls
Auditor’s
direct
knowledge
Qualifications
of provider
Objectivity
of evidence
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6 - 18
Terms and Types of Evidence
Terms
Types of Evidence
Examine
Documentation
Scan
Analytical procedures
Read
Documentation
Compute Analytical procedures
Recompute
Reperformance
Foot
Reperformance
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6 - 19
Terms and Types of Evidence
Terms
Types of Evidence
Trace
Documentation
Compare
Documentation
Count
Physical examination
Observe
Observation
Inquire
Inquiries of client
Vouch
Documentation
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6 - 20
Learning Objective 5
Understand the purposes
of audit documentation.
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6 - 21
Audit Documentation
Purposes of audit documentation
Ownership of audit files
Confidentiality of audit files
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6 - 22
Learning Objective 6
Prepare organized
audit documentation.
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6 - 23
Audit File Contents
and Organization
Robinson Associates
Trial Balance
12/31/2003
Cash
Accounts Receivable
Prepaid Insurance
Interest Receivable
$165,237
275,050
37,795
20,493
Financial
Statements and
Audit Report
Working
Trial Balance
Adjusting
Journal Entries
Contingent
Liabilities
Operations
Liabilities
and Equity
Assets
Analytical
Procedures
Test of Controls
& Substantive
TOT
Internal
Control
General
Information
Audit
Programs
Permanent
Files
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6 - 24
Permanent Files
These files are intended to contain
data of a historical or continuing
nature pertinent to the current audit.
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6 - 25
Current Files
Audit program
General information
Working trial balance
Adjusting and reclassification entries
Supporting schedules
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6 - 26
Learning Objective 7
Describe how e-commerce
affects audit evidence and
audit documentation.
©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
6 - 27
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.
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6 - 28
Summary of Audit Documentation
Audit documentation is an essential
part of every audit.
Audit documentation provides a record of the
evidence accumulated and the result of the tests.
CPA firms make sure that audit documentation
is properly prepared and is appropriate.
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6 - 29
End of Chapter 6
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6 - 30
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