Audit Evidence
Chapter 7
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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 four audit evidence
decisions that are needed to
create an audit program.
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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 (timing)
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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.
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7-6
Learning Objective 3
Specify the characteristics that
determine the persuasiveness
of evidence.
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7-7
Persuasiveness of Evidence
Two determinants:
 Appropriateness
 Sufficiency
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7-8
Six Characteristics of Reliable
Evidence
1. Independence of provider
2. Effectiveness of client’s
internal controls
3. Auditor’s direct knowledge
4. Qualification of individuals
providing the information
5. Degree of objectivity
6. Timeliness
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7-9
Relationships Among Audit
Evidence and Persuasiveness
Audit Evidence Decisions
Audit procedures and timing
Sample size and items to select
Qualities Affecting Persuasiveness
of Evidence
Appropriateness
Relevance
Reliability
Independence of provider
Effectiveness of internal controls
Auditor's direct knowledge
Qualifications of provider
Objectivity of evidence
Timeliness
When procedures are performed
Portion of period being audited
Sufficiency
Adequate sample size
Selection of proper population items
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7 - 10
Persuasiveness and Cost
In making decisions about evidence
for a given audit, both persuasiveness
and cost must be considered.
The auditor’s goal is to obtain a
sufficient amount of appropriate
evidence at the lowest total cost.
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7 - 11
Learning Objective 4
Identify and apply the eight types
of evidence used in auditing.
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7 - 12
Types of Audit Evidence
1. Physical examination
2. Confirmation
3. Documentation
4. Analytical procedures
5. Inquiries of the client
6. Recalculation
7. Reperformance
8. Observation
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7 - 13
Relationships
Broad guidelines
concerning auditor
qualifications and
conduct, evidence
accumulation,
and reporting
Auditing
standards
Qualifications
and conduct
Physical examination
Confirmation
Documentation
Analytical procedures
Inquiries of the client
Recalculation
Reperformance
Observation
Evidence
accumulation
Reporting
Types of
evidence
Audit
procedures
FOUR
AUDIT
EVIDENCE
DECISIONS
Sample size
and items
to select
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Broad categories of
evidence available
for the auditor’s
accumulation
Specific instructions
for the accumulation
of types of evidence
Timing
of tests
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Physical Examination
It is the inspection or count by the
auditor of a tangible asset.
This type of evidence is most often
associated with inventory and cash.
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7 - 15
Confirmation
Information
Source
Assets
Cash in bank
Marketable securities
Accounts receivable
Notes receivable
Owned inventory out on consignment
Inventory held in public warehouses
Cash surrender value of life insurance
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Bank
Customer
Maker
Consignee
Public warehouse
Insurance company
Investment custodian
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Confirmation
Information
Source
Liabilities
Accounts payable
Notes payable
Advances from customers
Mortgages payable
Bonds payable
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Creditor
Lender
Customer
Mortgagor
Bondholder
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Confirmation
Information
Source
Owners’ Equity
Shares outstanding
Registrar and
transfer agent
Other Information
Insurance coverage
Contingent liabilities
Bond indenture agreements
Collateral held by creditors
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Insurance company
Bank, lender, and
client’s legal counsel
Bond holder
Creditor
7 - 18
Documentation
It is the auditor’s inspection of the
client’s documents and records.
Internal
documents
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External
documents
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Analytical Procedures
 Understand the client’s industry and business
 Assess the entity’s ability to continue as a
going concern
 Indicate the presence of possible misstatements
in the financial statements
 Reduce detailed audit tests
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7 - 20
Inquiries of the Client
It is the obtaining of written or oral information
from the client in response to questions
from the auditor.
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7 - 21
Recalculation
It involves rechecking a sample of calculations
made by the client.
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7 - 22
Reperformance
It is the auditor’s independent tests of client
accounting procedures or controls that
were originally done.
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7 - 23
Observation
It is the use of the senses to assess client activities.
The auditor may tour the plant to obtain a general
impression of the client’s facilities.
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7 - 24
Appropriateness 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 - 25
Types of Evidence and Four Evidence Decisions for
a Balance-Related Audit Objective for Inventory*
Evidence Decisions
Type of Evidence
Audit Procedure
Sample Size
Items to Select
Timing
Observation
Observes client’s personnel All count teams
counting inventory to
determine whether they are
properly following instructions
Not applicable
Balance
sheet date
Physical examination
Count a sample of
inventory and compare
quantity and description
to client’s counts
120 items
40 items with
large dollar
value, plus 80
randomly
selected
Balance
sheet date
Documentation
Compare quantity on
client’s perpetual records
to quantity on client’s
counts
70 items
30 items with large
dollar value, plus
40 randomly
selected
Balance
sheet date
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7 - 26
Terms and Types of Evidence
Terms
Type of Evidence
Examine
Scan
Read
Compute
Recompute
Foot
Trace
Compare
Count
Observe
Inquire
Vouch
Documentation
Analytical procedures
Documentation
Analytical procedures
Recalculation
Recalculation
Documentation/Reperformance
Documentation
Physical examination
Observation
Inquiries of client
Documentation
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7 - 27
Learning Objective 5
Understand the purposes of
audit documentation.
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7 - 28
Audit Documentation
Audit documentation is the principal record
of auditing procedures applied, evidence
obtained, and conclusions reached by
the auditor in the engagement.
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7 - 29
Audit Documentation
 Purposes of audit documentation
 Ownership of audit files
 Confidentiality of audit files
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7 - 30
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.
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7 - 31
Learning Objective 6
Prepare organized audit
documentation.
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7 - 32
Audit File Contents and Organization
Robinson Associates
Trial Balance
12/31/09
Cash
Accounts Receivable
Prepaid Insurance
Interest Receivable
$165,237
275,050
37,795
20,493
Financial Statements
and Audit
Report
Financial
Statements
and Audit
Report
Working
Trial
Balance
Financial
Statements
and Audit
ReportJournal
Adjusting
Entries
Financial
Statements
and AuditContingent
Report
Liabilities
Financial
Statements
and Audit Report
Operations
Financial Statements
and Audit Liabilities
Report
and Equity
Financial
Statements
and Audit Report
Assets
Financial Statements
and Audit Report
Analytical
Procedures
Financial
Statements
and
Audit
Report
Tests of Controls and
Substantive
TOT
Financial
Statements
and
Audit
Report
Internal
Control
Financial
Statements
and
Audit
General Report
Information
Financial
Statements
and
Audit
Report
Audit
Programs
Financial
Statements
and Audit Report
Permanent Files
Financial Statements
and Audit Report
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Permanent Files
These files are intended to contain
data of a historical or continuing
nature pertinent to the current audit.
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7 - 34
Current Files
 Audit program
 General information
 Working trial balance
 Adjusting and reclassification entries
 Supporting schedules
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7 - 35
Relationship of Audit Documentation
to Financial Statements
FINANCIAL STATEMENTS
Cash
122
Acc.
WORKING TRIAL BALANCE
Prelim.
AJE’s
Cash
212
(90)
LEAD SCHEDULE–CASH
Petty Cash A-2
Cash in Bank:
General A-3
Payroll A-4
Per G/L
5
AJE’s
Expense
90
Cash
Final
122
AJE’s
186
21
212
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(90)
(90)
90
A-1
Final
5
96
21
122
7 - 36
Relationship of Audit Documentation
to Financial Statements
LEAD SCHEDULE–CASH
Petty Cash A-2
Cash in Bank:
General A-3
Payroll A-4
Per G/L
5
AJE’s
186
21
212
(90)
(90)
A-1
Final
5
96
21
122
A-2
Cash Count Sheet
A-3
Bank Reconciliation
A-4
Bank Reconciliation
A-3/1
Confirmation
A-3/2
O/S Check List
A-4/1
Confirmation
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A-4/2
O/S Check List
7 - 37
Types of Supporting Schedules
 Analysis
 Trial balance or list
 Reconciliation of amounts
 Tests of reasonableness
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7 - 38
Types of Supporting Schedules
 Summary of procedures
 Examination of supporting documents
 Informational
 Outside documentation
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7 - 39
Preparation 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
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7 - 40
Learning Objective 7
Describe how technology affects audit
evidence and audit documentation.
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7 - 41
Effect of Technology
 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
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7 - 42
End of Chapter 7
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7 - 43