Audit Evidence
Chapter 7
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
7-1
Learning Objective 1
Contrast audit evidence with
evidence used by other
professions.
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7-2
Nature of Evidence
The use of evidence is
not unique to auditors.
Evidence is also used
by scientists, lawyers,
and historians.
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Learning Objective 2
Identify the FIVE audit evidence
decisions that are needed to
create an audit program.
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Audit Evidence Decisions
1. Which audit procedures to use = nature, research:
by far the hardest – especially related to fraud.
2. What sample size to select for a given
procedure / budget = extent
3. Which items to select from the population = nature
4. When to perform the procedures = timing
5. Who should perform the procedure = staffing
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7-5
Audit Program
It includes a list of the audit procedures (tests)
the auditor considers necessary. Table of contents
covering objectives / To do list for account.
Most auditors use computers to facilitate
the preparation of audit programs.
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Learning Objective 3
Specify the characteristics
that determine the
persuasiveness
of evidence.
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Persuasiveness of Evidence
Appropriateness - Quality
Sufficiency - Qty
Combined effect:
Examine client supporting doc. to support
sales transaction: sample size = 120.
Obtain external confirmation of A/R (sales
transaction): sample size = 25.
Persuasiveness and cost: Inspecting inventory
for Nordstrom’s
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Appropriateness
Relevance – to objective
Independence of provider – source objectivity
Effectiveness of internal controls
Auditor’s direct knowledge
Qualifications of individuals – source competence
Degree of objectivity – b/w or grey
Timeliness – B/S vs. I/S
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Learning Objective 4
Identify and apply the
eight types of evidence
used in auditing.
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Types of Audit Evidence – Tools!
1. Physical examination - Inventory
2. Confirmation – A/R
3. Documentation – Sales transaction
4. Analytical procedures – Expectation for allowance
5. Inquiries of the client – A/P difference - Corroborate
6. Recalculation – Dep. Expense, quantitative
7. Reperformance – Credit check, posting and summ.
8. Observation – Tour, Seg of duties
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7 - 11
Terms and Types of Evidence
Terms
Types of Evidence
Examine
Documentation
Scan
Analytical procedures
Read
Documentation
Compute Analytical procedures
Recompute
Recalculation
Simulation
Reperformance
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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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Learning Objective 5
Understand the purposes
of audit documentation.
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Why keep a record of
audit/WPs/Documentation?
Legal
Planning
Learning
Review
SOX – keep WPs for 7 yrs and
PCAOB inspection
Client changes auditors: Babysitting
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7 - 15
Learning Objective 6
Prepare organized
audit documentation.
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Audit File Contents
and Organization
Derrickson 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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Permanent Files
These files are intended to contain
data of a historical or continuing
nature pertinent to the current audit.
Update and carryforward to CY
WPs.
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Example – WP Structure
1000 series = Planning WPs (ex. 1100 =
Planning Memo)
 2000 series = Reporting (ex. 2100 = Trial
balance)
 5000 series = Assets, 5100 = Cash, 5110 =
Cash Audit Program, 5120 = Cash Leadsheet,
5130 = Bank reconciliation for acct #XXXX.
 8000 series = Income statement accounts

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Current Files
Audit program – for each account
General administration - budget
Working trial balance – agreed to leadsheets and F/S
Adjusting and reclassification entries – from
supporting schedules and booked to
T/B or passed.
Supporting schedules – bank reconciliation,
confirmation of A/R, completeness tests
of sales transactions
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Relationship of Audit Documentation
to Financial Statements
FINANCIAL STATEMENTS
Cash
122
Acc. ………………….
WORKING TRIAL
AJE’s
BALANCE
Expense 90
Prelim. AIE’s Final
Cash
Cash 212
(90)
122
90
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Relationship of Audit Documentation
to Financial Statements
LEAD SCHEDULE – CASH
Per G/1
Petty Cash A-2
5
Cash in Bank:
General A-3
186
Payroll A-4
21
212
AJE’s
(90)
(90)
A-1
Final
5
96
21
122
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Relationship of Audit Documentation
to Financial Statements
A-2
Observe cash
b/c pettty
cash
A-3
Bank
Reconciliation
Agreed to L/S
A-3/1
Confirmation
A-3/2
O/S Check List
Dep. in transit, etc.
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Relationship of Audit Documentation
to Financial Statements
A-4
Bank
Reconciliation
Agreed to L/S
A-4/1
Confirmation
A-4/2
O/S Check List
Dep. in transit, etc.
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Learning Objective 7
Describe how technology affects
audit evidence and audit
documentation.
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Effect of Technology
Audit evidence is increasingly in electronic form.
IT audit specialists!
Auditors use computers to read
and examine evidence (e.g., ACL)
Software programs are typically Windows-based.
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End of Chapter 7
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