MODERN AUDITING
7th Edition
William C. Boynton
California Polytechnic State
University at San Luis Obispo
Raymond N. Johnson
Portland State University
Walter G. Kell
University of Michigan
Developed by:
Gregory K. Lowry, MBA, CPA
Saint Paul’s College
John Wiley & Sons, Inc.
CHAPTER 6
AUDIT EVIDENCE, AUDIT OBJECTIVES,
AUDIT PROGRAMS, AND WORKING PAPERS
 Top-Down vs. Bottom-Up Audits
 Important Decisions About Audit Evidence
 Specific Audit Objectives and Audit
Evidence
 Audit Evidence, Corroborating Information,
and Audit Procedures
 Electronic Data Processing and Audit
Procedures
 Audit Programs
 Working Papers
Top-Down Versus
Bottom-Up Audits
Top-down audit evidence focuses the
auditor’s attention on obtaining an
understanding of:
1. the business and industry,
2. management’s goals and objectives,
3. how management uses its resources to
attain those goals,
4. the organization’s competitive advantage
in the marketplace,
5. core business processes, and
6. the earnings and cash flow that result.
Top-Down Versus
Bottom-Up Audits
Bottom-up audit evidence focuses on directly
testing:
1. transactions,
2. account balances, and
3. the systems that record the transactions
and resulting account balances.
Top-Down vs. Bottom-Up Audit Procedures
Figure 6-1
Important Decision About
Audit Evidence
When planning the audit, the auditor
must make 4 important decisions
about scope and conduct of the audit.
These include:
1. The nature of tests to be performed
2. The timing of tests to be performed
3. The extent of tests to be performed
4. The assignment of staff to perform
audit tests
Developing Specific Audit Objectives
from Management’s Assertions
Figure 6-2
Assertion
Category
Existence or occurrence
Transaction Class
or Balance
Transactions
Balance
Specific
Audit Objective
All sales (EO1), cash receipts
(EO2), and sales adjustment (EO3)
transactions that have been
recorded occurred during the
period.
EO4. Accounts receivable
represent valid amounts owed by
customers at the balance sheet
date.
Developing Specific Audit Objectives
from Management’s Assertions
Figure 6-2
Assertion
Category
Completeness
Transaction Class
or Balance
Transaction Class
Balance
Rights and obligations
Balance
Specific
Audit Objective
C1. All sales transactions that
occurred during the period have
been recorded.
C2. All cash receipts transactions
that occurred during the period
have been recorded.
C3. All sales adjustment
transactions that occurred during
the period have been recorded.
C4. Accounts receivable include
all claims on customers at the
balance sheet date.
RO1. Accounts receivable at the
balance sheet date represent legal
claims of the entity on customers
for payment.
Developing Specific Audit Objectives
from Management’s Assertions
Figure 6-2
Assertion
Category
Valuation or allocation
Transaction Class
or Balance
Specific
Audit Objective
Transactions
All sales (VA1), cash receipts
(VA2), and sales adjustments
(VA3) are correctly valued at their
historical costs and correctly
journalized, summarized, and
posted.
Balance
VA4. Accounts receivable
represent gross claims on
customers at the balance sheet
date and agree with the sum of the
accounts receivable subsidiary
ledger.
VA5. The allowance for
uncollectable accounts represents
a reasonable estimate of the
difference between gross
receivables and their net realizable
value.
Categories and Types of Evidential Matter
Figure 6-3
Nature of Evidential Matter
UNDERLYING ACCOUNTING DATA
Books of original entry.
General and subsidiary ledgers.
Related accounting manuals.
Informal and memorandum records, such as work
sheets, computations, and reconciliations.
CORROBORATING INFORMATION
Documents such as checks, invoices, contracts,
and minutes of meetings.
Confirmation and other written representations.
Information from inquiry, observation, inspection,
and physical examination.
Other information obtained or developed by the
auditor.
}
Third Standard of Field Work
SUFFICIENT
COMPETENT
EVIDENTIAL
MATTER
Effects of Circulation on
Reliability of Documentary Evidence
Figure 6-5
Audit Procedures
10 types of audit procedures:
1. Analytical procedures
2. Inspecting
3. Confirming
4. Inquiring
5. Counting
6. Tracing
7. Vouching
8. Observing
9. Reperforming
10. Computer-assisted audit techniques
Directional Testing —
Vouching and Tracing
Figure 6-6
Computer-Assisted
Audit Techniques
The auditor can use computer audit software to do the
following:
1. Perform the calculations and comparisons used in
analytical procedures.
2. Select a sample of accounts receivable for confirmation.
3. Scan a file to determine that all documents in a series
have been accounted for.
4. Compare data elements in different files for agreement.
5. Submit test data to the client’s programs to determine
that computer aspects of internal controls are
functioning.
6. Reperform a variety of calculations such as totaling the
accounts receivable subsidiary ledger or inventory file.
Electronic Data Processing
and Audit Procedures
1. Effect on Material Account
Balance and Transaction
Classes
2. Effect on Nature of Audit Tests
3. Effect on Timing of Audit Tests
4. Effect on Extent of Audit Tests
5. Effect on Audit Staffing
Key Elements of an Audit Program
Figure 6-8
Working Papers
SAS 41 describes working papers as the
records kept by the auditor of:
1. the procedures applied,
2. the tests performed,
3. the information obtained, and
4. the pertinent conclusions reached in
the audit.
Working Papers
Working papers provide:
1. The principal support for the auditor’s
report.
2. A means for coordinating and
supervising the audit.
3. Evidence that the audit was made in
accordance with GAAS.
Integrated Working Papers for Cash
Figure 6-11
Preparing Working Papers
The following essential techniques of good working
paper preparation should always be observed:
1. Heading Each working paper should contain the
name of the client, a descriptive title identifying
the content of the working paper, and the balance
sheet date or the period covered by the audit.
2. Index number Each working paper is give an
index or reference number, for identification and
filing purposes.
3. Cross-referencing Data on a working paper that is
taken from another working paper or that is
carried forward to another working paper should
be cross-referenced with the index numbers of
those working papers.
Preparing Working Papers
4. Tick marks Tick marks are symbols that are used
on working papers to indicate that the auditor has
performed some procedure on the item to which
the tick mark is affixed, or that additional
information about the item is available elsewhere
on the working paper.
5. Signatures and dates Upon completing their
respective tasks, both the preparer and reviewer
of a working paper should initial and date it.
CHAPTER 6
AUDIT EVIDENCE, AUDIT OBJECTIVES,
AUDIT PROGRAMS, AND WORKING PAPERS
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