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Audit Evidence

Chapter 7

Generally Accepted Auditing Standards


Third Standard of Field Work

Sufficient competent evidential matter is to be


obtained through inspection, observation,
inquiries, and confirmations to afford a
reasonable basis for an opinion regarding the
financial statements under audit.

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

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.

Persuasiveness of Evidence
Competence and sufficiency are determinants
of the persuasiveness of evidence.
Factors affecting competence include:
Relevance to audit objective
Independence of provider
Effectiveness of internal controls
Auditors direct knowledge
Qualifications of providers
Degree of objectivity
Timeliness

Table 7-2, (p. 167)

Types of Audit Evidence

1.
2.
3.
4.
5.
6.
7.

Physical examination (tangible assets)


Confirmation (positive and negative)
Documentation
Analytical procedures
Inquiries of the client
Reperformance
Observation

Confirmations and Information Often Confirmed


Confirmations may be positive or negative.
Procedures for non-response positives

Information

Source

Assets
Cash in bank (example)
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.

Information Often Confirmed


Information

Source

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

Creditor
Lender
Customer
Mortgagor
Bondholder

Information Often Confirmed


Information
Owners Equity
Shares outstanding

Other Information
Insurance coverage
Contingent liabilities
Bond indenture agreements
Collateral held by creditors

Source
Registrar and
transfer agent

Insurance co.
Bank, lender,
and clients
legal counsel
Bondholder
Creditor

Other Forms of Evidence


Documentation Clients documents and records
Internal vs. External documents
Tracing vs. Vouching see next slide

Tracing vs. Vouching


(Figure 6-7 is from another text)

Inspection of Documents or Records


Vouching
Tracing
Note: students should understand the differences
between tracing and vouching.

Reliability of Documentary Evidence


(Figure 6-5 is from another text)

Other Forms of Evidence: Analytical


procedures
Importance of context understanding the
clients business and industry

Analytical procedures are used for:


Assessing going concern
Finding possible misstatements in the financials
Reducing detailed audit tests

Other Forms of Evidence


Inquiries of the client written or oral
Reperformance verifying calculations or
information processing
Observation

Competence of Types of Evidence,


Table 7-4 (p. 172)

Terms and Types of Evidence,


Table 7-6, (p. 175)
Terms

Type of Evidence

Examine
Scan
Read
Compute
Recompute
Foot

Documentation
Analytical procedures
Documentation
Analytical procedures
Reperformance
Reperformance

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

Audit Documentation

Audit documentation is the principal record


of auditing procedures applied, evidence
obtained, and conclusions reached by
the auditor in the engagement.

Audit Documentation
Purposes of audit documentation primary
means to support that the audit was
conducted in accordance with GAAS.
Ownership of audit files

Confidentiality of audit files rule 301, chapter 4.

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.

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
Operations
Liabilities
and Equity
Assets

Analytical
Procedures
Test of Controls
& Substantive
TOT
Internal
Control
General
Information
Audit
Programs
Permanent
Files

Permanent Files

These files are intended to contain data of a


historical or continuing nature pertinent to the
current audit. Examples include:
Articles of incorporation
Loan agreements
Documents related to understanding I/C
Leases

Current Files
Audit program
General information
Working trial balance
Adjusting and reclassification entries
Supporting schedules

Relationship of Audit Documentation


to Financial Statements
FINANCIALSTATEMENTS
STATEMENTS
FINANCIAL
Cash
122
Cash
122
Acc.
.
Acc.
.
WORKING TRIAL BALANCE
AJEs
Prelim. AJEs
Final Expense
90
Cash
212
(90)
122
Cash
LEAD SCHEDULE CASH
Per G/L
Petty Cash A-2
5
Cash in Bank:
General A-3
186
Payroll A-4
21
212

AJEs
(90)
(90)

90

A-1
Final
5
96
21
122

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

AJEs
(90)
(90)

A-1
Final
5
96
21
122

A-4
Bank Reconciliation

A-4/1
Confirmation

A-4/2
O/S Check List

Types of Supporting Schedules


Analysis
Trial balance or list
Reconciliation of amounts
Tests of reasonableness

Types of Supporting Schedules


Summary of procedures
Examination of supporting documents
Informational
Outside documentation

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.

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.