Chapter 7 – Audit Evidence

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Audit Evidence
Chapter 7
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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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
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Learning Objective 2
Identify the four audit evidence
decisions that are needed to
create an audit program.
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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
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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
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Learning Objective 3
Specify the characteristics that
determine the persuasiveness
of evidence.
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7-7
Persuasiveness of Evidence
Competence
Sufficiency
Combined effect
Persuasiveness and cost
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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
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Learning Objective 4
Identify and apply the seven types
of evidence used in auditing.
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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.
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Information Often Confirmed
Information
Source
Liabilities
Accounts payable
Notes payable
Advances from customers
Mortgages payable
Bonds payable
Creditor
Lender
Customer
Mortgagor
Bondholder
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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
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Information Often Confirmed
Documentation
Analytical procedures
Inquiries of the client
Reperformance
Observation
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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
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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
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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
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Learning Objective 5
Understand the purposes of
audit documentation.
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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
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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.
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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.
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Current Files
Audit program
General information
Working trial balance
Adjusting and reclassification entries
Supporting schedules
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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
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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
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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
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