Audit Evidence

Chapter 7

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

7-1

Learning Objective 1
Contrast audit evidence with
evidence used by other
professions.

2008 Prentice Hall Business Publishing, Auditing 12/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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

7-3

Learning Objective 2
Identify the four audit evidence
decisions that are needed to
create an audit program.

2008 Prentice Hall Business Publishing, Auditing 12/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 (timing)

2008 Prentice Hall Business Publishing, Auditing 12/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.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

7-6

Learning Objective 3
Specify the characteristics that
determine the persuasiveness
of evidence.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

7-7

Persuasiveness of Evidence
Two determinants:

Appropriateness

Sufficiency

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

7-8

Six Characteristics of Reliable

Evidence
1. Independence of provider
2. Effectiveness of clients
internal controls
3. Auditors direct knowledge

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

7-9

Six Characteristics of Reliable

Evidence
4. Qualification of individuals
providing the information
5. Degree of objectivity
6. Timeliness

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Relationships Among Audit

Evidence and Persuasiveness
Audit Evidence Decisions

Qualities Affecting Persuasiveness

of Evidence

Audit procedures and timing

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

Sample size and items to select

Sufficiency
Adequate sample size
Selection of proper population items

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Persuasiveness and Cost

In making decisions about evidence
for a given audit, both persuasiveness
and cost must be considered.
The auditors goal is to obtain a
sufficient amount of appropriate
evidence at the lowest total cost.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 4
Identify and apply the eight types
of evidence used in auditing.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Relationships
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

Broad guidelines
concerning auditor
qualifications and
conduct, evidence
accumulation,
and reporting

Sample size
and items
to select

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

Broad categories of
evidence available
for the auditors
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.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Confirmation
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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

Bank
Customer
Maker
Consignee
Public warehouse
Insurance company

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Confirmation
Information

Source

Liabilities
Accounts payable
Notes payable
Advances from customers
Mortgages payable
Bonds payable

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

Creditor
Lender
Customer
Mortgagor
Bondholder

7 - 18

Confirmation
Information

Source

Owners Equity
Shares outstanding

Registrar and
transfer agent

Other Information
Insurance coverage
Contingent liabilities
Bond indenture agreements
Collateral held by creditors
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

Insurance company
Bank, lender, and
clients legal counsel
Bond holder
Creditor
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Documentation
It is the auditors inspection of the
clients documents and records.

Internal
documents

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

External
documents

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Analytical Procedures

Understand the clients industry and business

Assess the entitys ability to continue as a
going concern

Indicate the presence of possible misstatements
in the financial statements

Reduce detailed audit tests

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Inquiries of the Client

It is the obtaining of written or oral information
from the client in response to questions
from the auditor.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Recalculation
It involves rechecking a sample of calculations
made by the client.

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Reperformance
It is the auditors independent tests of client
accounting procedures or controls that
were originally done.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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 clients facilities.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Appropriateness of Types of
Evidence

Type of evidence

Independence of provider

Effectiveness of clients internal controls

Auditors direct knowledge

Qualifications of provider

Objectivity of evidence

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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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Learning Objective 5
Understand the purposes of
audit documentation.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 6
Prepare organized audit
documentation.

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2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Permanent Files
These files are intended to contain
data of a historical or continuing
nature pertinent to the current audit.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Current Files

Audit program

General information

Working trial balance

Adjusting and reclassification entries

Supporting schedules

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Relationship of Audit Documentation

to Financial Statements
FINANCIAL STATEMENTS
Cash
122
Acc.
WORKING TRIAL BALANCE
Prelim.
AJEs
Cash
212
(90)

AJEs
Final
122

Expense
Cash

90
90

LEAD SCHEDULECASH
Petty Cash A-2
Cash in Bank:
General A-3
Payroll A-4

A-1
Per G/L
5

AJEs

186
21
212

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

(90)
(90)

Final
5
96
21
122
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Relationship of Audit Documentation

to Financial Statements
LEAD SCHEDULECASH
Petty Cash A-2
Cash in Bank:
General A-3
Payroll A-4

A-1
Per G/L
5

AJEs

186
21
212

(90)
(90)

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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

A-4/2
O/S Check List

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Types of Supporting
Schedules

Analysis

Trial balance or list

Reconciliation of amounts

Tests of reasonableness

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Types of Supporting
Schedules

Summary of procedures

Examination of supporting documents

Informational

Outside documentation

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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
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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Learning Objective 7
Describe how e-commerce
affects audit evidence and
audit documentation.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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End of Chapter 7

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder

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