Audit Evidence

Chapter 7

2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7-1

 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.

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 Learning Objective 2

Identify the four audit evidence

decisions that are needed to
create an audit program.

2006 Prentice Hall Business Publishing, Auditing 11/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

2006 Prentice Hall Business Publishing, Auditing 11/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.

2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7-6

 Learning Objective 3

Specify the characteristics that

determine the persuasiveness
of evidence.

2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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
Auditors direct knowledge
Qualifications of providers
Degree of objectivity
Timeliness

2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7-9

 Learning Objective 4

Identify and apply the seven types

of evidence used in auditing.

2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 10

 Types of Audit Evidence

1. Physical examination
2. Confirmation
3. Documentation
4. Analytical procedures
5. Inquiries of the client
6. Reperformance
7. Observation

2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 11

 Relationships

Auditing Broad
standards guidelines

Qualifications Evidence
Reporting
and conduct accumulation

Types of Broad
evidence categories

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 Relationships

Types of
evidence

Audit Specific
procedures instructions

Sample Items to Timing

size select of tests

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 Information Often Confirmed
Information Source
Assets
Cash in bank Bank
Accounts receivable Customer
Notes receivable Maker
Owned inventory out on consignment Consignee
Inventory held in public warehouses Warehouse
Cash surrender value of life insurance Insurance co.

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 Information Often Confirmed
Information Source
Liabilities
Accounts payable Creditor
Notes payable Lender
Advances from customers Customer
Mortgages payable Mortgagor
Bonds payable Bondholder

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 Information Often Confirmed
Information Source
Owners Equity
Shares outstanding Registrar and
transfer agent

Other Information
Insurance coverage Insurance co.
Contingent liabilities Bank, lender,
and clients
legal counsel
Bond indenture agreements Bondholder
Collateral held by creditors Creditor

2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 16

 Information Often Confirmed

Documentation

Analytical procedures

Inquiries of the client

Reperformance

Observation

2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 17

 Competence of Types of Evidence
Type of evidence

Independence of provider

Effectiveness of clients internal controls

Auditors direct knowledge

Qualifications of provider

Objectivity of evidence
2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 18
 Terms and Types of Evidence

Terms Type of Evidence

Examine Documentation
Scan Analytical procedures
Read Documentation
Compute Analytical procedures
Recompute Reperformance
Foot Reperformance

2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 19

 Terms and Types of Evidence

Terms Type of Evidence

Trace Documentation/
Reperformance
Compare Documentation
Count Physical examination
Observe Observation
Inquire Inquiries of client
Vouch Documentation

2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 20

 Learning Objective 5

Understand the purposes of

audit documentation.

2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 21

 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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 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.

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 Learning Objective 6

Prepare organized audit

documentation.

2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 25

 Audit File Contents and
Organization Financial
Statements and
Analytical
Procedures
Audit Report
Test of Controls
Working & Substantive
Robinson Associates Trial Balance
TOT
Trial Balance Adjusting
12/31/05 Journal Entries Internal
Control
Cash $165,237 Contingent
Liabilities General
Accounts Receivable 275,050 Information
Prepaid Insurance 37,795 Operations
Interest Receivable 20,493
Liabilities Audit
and Equity Programs

Assets 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.

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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 AJEs
Prelim. AJEs Final Expense 90
Cash 212 (90) 122 Cash 90
LEAD SCHEDULE CASH A-1
Per G/L AJEs Final
Petty Cash A-2 5 5
Cash in Bank:
General A-3 186 (90) 96
Payroll A-4 21 21
212 (90) 122
2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 7 - 29
 Relationship of Audit Documentation
to Financial Statements
LEAD SCHEDULE CASH A-1
Per G/L AJEs Final
Petty Cash A-2 5 5
Cash in Bank:
General A-3 186 (90) 96
Payroll A-4 21 21
212 (90) 122
A-2 A-3 A-4
Cash Count Sheet Bank Reconciliation Bank Reconciliation

A-3/1 A-3/2 A-4/1 A-4/2

Confirmation O/S Check List Confirmation O/S Check List

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 Types of Supporting Schedules

Analysis

Trial balance or list

Reconciliation of amounts

Tests of reasonableness

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 Types of Supporting Schedules

Summary of procedures

Examination of supporting documents

Informational

Outside documentation

2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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

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