Audit Evidence Chapter 7 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7-1 Learning Objective 1 Contrast audit evidence with evidence used by other professions. ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7-2 Nature of Evidence The use of evidence is not unique to auditors. Evidence is also used by scientists, lawyers, and historians. ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7-3 Learning Objective 2 Identify the four audit evidence decisions that are needed to create an audit program. ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7-4 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 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7-5 Audit Program It includes a list of the audit procedures the auditor considers necessary. Sample sizes Items to select Timing of the tests Most auditors use computers to facilitate the preparation of audit programs. ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7-6 Learning Objective 3 Specify the characteristics that determine the persuasiveness of evidence. ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7-7 Persuasiveness of Evidence Competence Sufficiency Combined effect Persuasiveness and cost ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7-8 Competence Relevance Independence of provider Effectiveness of internal controls Auditor’s direct knowledge Qualifications of providers Degree of objectivity Timeliness ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7-9 Learning Objective 4 Identify and apply the seven types of evidence used in auditing. ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 10 Types of Audit Evidence 1. 2. 3. 4. 5. 6. 7. Physical examination Confirmation Documentation Analytical procedures Inquiries of the client Reperformance Observation ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 11 Relationships Qualifications and conduct Auditing standards Broad guidelines Evidence accumulation Reporting Types of evidence Broad categories ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 12 Relationships Types of evidence Sample size Audit procedures Specific instructions Items to select Timing of tests ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 13 Information Often Confirmed Information Source Assets Cash in bank Accounts receivable Notes receivable Owned inventory out on consignment Inventory held in public warehouses Cash surrender value of life insurance Bank Customer Maker Consignee Warehouse Insurance co. ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 14 Information Often Confirmed Information Source Liabilities Accounts payable Notes payable Advances from customers Mortgages payable Bonds payable Creditor Lender Customer Mortgagor Bondholder ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 15 Information Often Confirmed Information Owners’ Equity Shares outstanding Other Information Insurance coverage Contingent liabilities Bond indenture agreements Collateral held by creditors ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Source Registrar and transfer agent Insurance co. Bank, lender, and clients legal counsel Bondholder Creditor 7 - 16 Information Often Confirmed Documentation Analytical procedures Inquiries of the client Reperformance Observation ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 17 Competence of Types of Evidence Type of evidence Independence of provider Effectiveness of client’s internal controls Auditor’s direct knowledge Qualifications of provider Objectivity of evidence ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 18 Terms and Types of Evidence Terms Type of Evidence Examine Scan Read Compute Recompute Foot Documentation Analytical procedures Documentation Analytical procedures Reperformance Reperformance ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 19 Terms and Types of Evidence Terms Type of Evidence Trace Documentation/ Reperformance Documentation Physical examination Observation Inquiries of client Documentation Compare Count Observe Inquire Vouch ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 20 Learning Objective 5 Understand the purposes of audit documentation. ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 21 Audit Documentation Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement. ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 22 Audit Documentation Purposes of audit documentation Ownership of audit files Confidentiality of audit files ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 23 Sarbanes-Oxley Act 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. ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 24 Learning Objective 6 Prepare organized audit documentation. ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 25 Audit File Contents and Organization Financial Statements and Audit Report Robinson Associates Trial Balance 12/31/05 Cash Accounts Receivable Prepaid Insurance Interest Receivable $165,237 275,050 37,795 20,493 Working Trial Balance Adjusting Journal Entries Contingent Liabilities Analytical Procedures Test of Controls & Substantive TOT Internal Control General Information Operations Liabilities and Equity Assets ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Audit Programs Permanent Files 7 - 26 Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to the current audit. ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 27 Current Files Audit program General information Working trial balance Adjusting and reclassification entries Supporting schedules ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 28 Relationship of Audit Documentation to Financial Statements FINANCIAL STATEMENTS Cash 122 Acc. …………………. WORKING TRIAL BALANCE Prelim. AJE’s Final Cash 212 (90) 122 LEAD SCHEDULE – CASH Per G/L Petty Cash A-2 5 Cash in Bank: General A-3 186 Payroll A-4 21 212 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder AJE’s Expense 90 Cash AJE’s (90) (90) 90 A-1 Final 5 96 21 122 7 - 29 Relationship of Audit Documentation to Financial Statements LEAD SCHEDULE – CASH Per G/L Petty Cash A-2 5 Cash in Bank: General A-3 186 Payroll A-4 21 212 A-2 Cash Count Sheet A-3/1 Confirmation A-3 Bank Reconciliation A-3/2 O/S Check List AJE’s (90) (90) 96 21 122 A-4 Bank Reconciliation A-4/1 Confirmation ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder A-1 Final 5 A-4/2 O/S Check List 7 - 30 Types of Supporting Schedules Analysis Trial balance or list Reconciliation of amounts Tests of reasonableness ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 31 Types of Supporting Schedules Summary of procedures Examination of supporting documents Informational Outside documentation ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 32 Characteristics of Audit Documentation Each audit file should be properly identified. Documentation should be indexed and cross-referenced. Completed documentation must clearly indicate the audit work performed. It should include sufficient information. It should plainly state the conclusions reached. ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 33 Learning Objective 7 Describe how e-commerce affects audit evidence and audit documentation. ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 34 Effect of E-commerce Audit evidence is increasingly in electronic form. Auditors must evaluate how electronic information affects their ability to gather evidence. Auditors use computers to read and examine evidence. Software programs are typically Windows-based. ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 35 End of Chapter 7 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 36