ch07 Modified

Chapter 7
Nature and Type

of Audit Evidence
Copyright © 2014 Pearson Education

Learning Objectives
Contrast audit evidence with evidence
used by other professions.
Identify the four audit evidence decisions
that are needed to create an audit
program.
Specify the characteristics that determine
the persuasiveness of evidence.
Identify and apply the eight types of
evidence used in auditing.
7-2
Learning Objectives
Understand the purposes of audit
documentation.
Prepare organized audit documentation.
Describe how technology affects audit
evidence and audit documentation.
7-3
1
Contrast audit evidence with
evidence used by other
professions.
7-4
Nature of Evidence
Any information used by the auditor to

determine whether the information being
audited is stated in accordance with
established criteria
The use of evidence is not unique to auditors
Evidence is also used by scientists, lawyers,

and historians
7-5
Nature of Evidence
7-6 Copyright © 2014 Pearson Education

2
Identify the four audit evidence decisions that are
needed to create an audit program.
7-7
Audit Evidence Decisions
1. What audit procedures to use:
- Audit procedure is the detailed instruction that

explains the audit evidence to be obtained during
the audit.
- The following example is an audit procedure for the
verification of cash disbursement:
• Examine cash disbursements journal in the
accounting system and compare the payee, name
amount, and the date with online information
provided by the bank about checks processed for
the account.
7-8
2. What sample size to select for a given
procedure:
- Auditors can vary sample size from one to all

population being tested.
- Sample size for any given procedure may vary
from audit to audit
9
3. Which items to select from the
population:
- several different methods can be used to

select the sample:
a. Select a week and examine the first 50
checks
b. Select the 50 checks with largest amount
c. Select the checks randomly
d. Combination of methods
10
4. When to perform the procedure (timing):
- Timing decision is affected by when the client

needs audit to be completed.
- And when the auditor believes the audit
evidence will be most effective and when audit
staff is available
- For example auditors prefer to do counts of
inventory as close to balance sheet date as
possible
11
Audit Program
It includes a list of the audit procedures
the auditor considers necessary.
 Sample sizes
 Items to select
 Timing of the tests
Many auditors use audit software

packages to generate audit programs.
There will be audit program for accounts receivables, sales,

cash disbursement and so on.
7-12
3
Specify the characteristics that determine the
persuasiveness of evidence.
7-13
Persuasiveness of Evidence
Two determinants:
Appropriateness Sufficiency
The persuasiveness of evidence can be evaluated only after

considering the combination of appropriateness and sufficiency
7-14
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
7-15
Relationships Among Evidence
Decisions and Persuasiveness
Qualities Affecting Persuasiveness
Audit Evidence Decisions 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
7-16
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.
7-17
4
Identify and apply the eight types
of evidence used in auditing.
7-18
Types of Audit Evidence
Physical
Examination
Confirmation
Observation
Audit
Reperformance Inspection
Evidence
Analytical
Recalculation
Client Inquiries procedures
7-19
Relationships
7-20
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.
7-21
Confirmations
Auditing Standards Requirements

United States Auditor must confirm
accounts receivable
Auditors control the mailing
and receipt of replies
Electronic confirmations
are permitted
International Confirmations are not
required
7-22
Information often Confirmed
7-23
Inspection
It is the auditor’s examination of the

client’s documents and records.
Internal External
documents documents
7-24
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
7-25
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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Recalculation
Involves rechecking a sample of calculations

made by the client.
7-27
Reperformance
The auditor’s independent tests of client

accounting procedures or controls that
were originally done as part of the entity’s
accounting and internal control system.
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Observation
 Use one’s senses to assess

client activities.
 Tour plant to obtain a general
impression of client’s facilities.
 Observation is rarely sufficient
by itself.
 Often need to corroborate
with another kind of evidence.
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Appropriateness of Types of
Evidence
7-30
Application of Types of evidence to
the three Evidence Decisions
7-31
Terms and Types of Evidence
Terms Type of Evidence

Examine Inspection
Scan Analytical procedures
Read Inspection
Compute Analytical procedures
Recompute Recalculation
Foot Recalculation
Trace Inspection/Reperformance
Compare Inspection
Count Physical examination
Observe Observation
Inquire Inquiries of client
Vouch Inspection
7-32
5
Understand the purposes of audit
documentation.
7-33
Audit Documentation
Audit documentation is the record of the

audit procedures performed, relevant
audit evidence, and conclusions the
auditor reached.
7-34
Audit Documentation
Purposes of audit documentation
Ownership of audit files
Confidentiality of audit files
Requirements for Retention of

audit Documentation
7-35
Sarbanes-Oxley Act
The Sarbanes-Oxley Act requires auditors of

public companies to prepare and maintain
audit working papers for a period of not
less than seven years.
7-36
6
Prepare organized audit documentation.
7-37
Audit File Contents and Organization
7-38
Permanent Files
These files are intended to contain

data of a historical or continuing
nature pertinent to the current audit.
7-39
Current Files
Audit program
General information
Working trial balance
Adjusting and reclassification entries
Supporting schedules
7-40
Relationship of Audit Documentation
to Financial Statements
7-41
Types of Supporting Schedules
Analysis
Trial balance or list
Reconciliation of amounts
Tests of reasonableness
7-42
Types of Supporting Schedules
Summary of procedures
Examination of supporting documents
Informational
Outside documentation
7-43
Preparation of Audit
Documentation
Proper identification of each file
Files indexed and cross-referenced
Clear indication of work performed
Include sufficient information

State conclusions reached
7-44
Preparation of Audit Documentation
7-45
7
Describe how technology affects
audit evidence and audit
documentation.
7-46
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
7-47
7-48
Copyright
All rights reserved. No part of this publication may

be reproduced, stored in a retrieval system, or
transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise,
without the prior written permission of the
publisher. Printed in the United States of America.
7-49

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Chapter 7

Nature and Type

Copyright © 2014 Pearson Education

Any information used by the auditor to

The use of evidence is not unique to auditors

Evidence is also used by scientists, lawyers,

7-6 Copyright © 2014 Pearson Education

- Audit procedure is the detailed instruction that

- Auditors can vary sample size from one to all

- several different methods can be used to

- Timing decision is affected by when the client

 Timing of the tests

Many auditors use audit software

There will be audit program for accounts receivables, sales,

The persuasiveness of evidence can be evaluated only after

In making decisions about evidence

The auditor’s goal is to obtain a

It is the inspection or count by the

This type of evidence is most often

Auditing Standards Requirements

It is the auditor’s examination of the

 Understand the client’s industry and business

It is the obtaining of written or oral

Involves rechecking a sample of calculations

The auditor’s independent tests of client

 Use one’s senses to assess

Terms Type of Evidence

Audit documentation is the record of the

Purposes of audit documentation

Ownership of audit files

Confidentiality of audit files

Requirements for Retention of

The Sarbanes-Oxley Act requires auditors of

These files are intended to contain

Working trial balance

Adjusting and reclassification entries

Trial balance or list

Examination of supporting documents

Files indexed and cross-referenced

Clear indication of work performed

Include sufficient information

 Audit evidence is increasingly in electronic form

All rights reserved. No part of this publication may

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