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Audit Evidence
Chapter 7
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Learning Objective 1
Contrast audit evidence with
evidence used by other
professions.
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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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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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Audit Program
It includes a list of the audit procedures
the auditor considers necessary.
Most auditors use computers to facilitate
the preparation of audit programs.
Sample sizes
Items to select
Timing of the tests
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Learning Objective 3
Specify the characteristics that
determine the persuasiveness
of evidence.
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Persuasiveness of Evidence
Appropriateness
Sufficiency
Two determinants:
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Six Characteristics of Reliable
Evidence
1. Independence of provider
2. Effectiveness of clients
internal controls
3. Auditors direct knowledge
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Six Characteristics of Reliable
Evidence
4. Qualification of individuals
providing the information
5. Degree of objectivity
6. Timeliness
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Relationships Among Audit
Evidence and Persuasiveness
Audit Evidence DecisionsQualities Affecting Persuasivenessof Evidence
Audit procedures and timing AppropriatenessRelevanceReliability
Independence of providerEffectiveness of internal controlsAuditor's direct knowledgeQualifications of providerObjectivity of evidenceTimeliness
When procedures are performedPortion of period being audited
Sample size and items to select SufficiencyAdequate sample sizeSelection of proper population items
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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.
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Learning Objective 4
Identify and apply the eight types
of evidence used in auditing.
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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
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Relationships
Auditing
standards
Evidenceaccumulation
Types ofevidence
Auditprocedures
Qualificationsand conduct
Sample sizeand itemsto select Timing
of tests
Reporting
Physical examinationConfirmation
DocumentationAnalytical proceduresInquiries of the client
RecalculationReperformance
Observation
Broad guidelinesconcerning auditorqualifications and
conduct, evidenceaccumulation,and reporting
Broad categories ofevidence available
for the auditorsaccumulation
Specific instructionsfor the accumulationof types of evidence
FOURAUDIT
EVIDENCEDECISIONS
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Physical Examination
It is the inspection or count by the
auditor of a tangib le asset.
This type of evidence is most often
associated with inventory and cash.
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Confirmation
Information Source
Assets
Cash in bankAccounts receivableNotes receivableOwned inventory out on consignmentInventory held in public warehouses
Cash surrender value of life insurance
BankCustomerMakerConsigneePublic warehouse
Insurance company
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Confirmation
Information Source
Liabilities
Accounts payableNotes payableAdvances from customersMortgages payableBonds payable
CreditorLenderCustomerMortgagorBondholder
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Confirmation
Information Source
Owners Equity
Shares outstanding Registrar andtransfer agent
Other Information
Insurance coverageContingent liabilities
Bond indenture agreementsCollateral held by creditors
Insurance companyBank, lender, and
clients legal counselBond holderCreditor
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Documentation
It is the auditors inspection of the
clients documents and records.
Internal
documents
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
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Inquiries of the Client
It is the obtaining of wri t tenor oralinformation
from the client in response to questions
from the auditor.
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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.
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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 generalimpression of the clients facilities.
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Appropriateness of Types of
Evidence
Type of evidence
Independence of provider
Effectiveness of clients internal controlsAuditors direct knowledge
Qualifications of provider
Objectivity of evidence
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Terms and Types of Evidence
Terms Type of Evidence
Examine
Scan
ReadCompute
Recompute
Foot
Trace
CompareCount
Observe
Inquire
Vouch
DocumentationAnalytical procedures
DocumentationAnalytical proceduresRecalculationRecalculationDocumentation/Reperformance
DocumentationPhysical examinationObservationInquiries of clientDocumentation
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Learning Objective 5
Understand the purposes of
audit documentation.
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Audit Documentation
Audit documentation is the pr inc ipal record
of audi t ing pro cedures app l ied, evidence
ob tained, and conclus ions reached by
the aud i tor 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.
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Audit File Contents and Organization
Robinson AssociatesTrial Balance
12/31/07
Cash $165,237Accounts Receivable 275,050Prepaid Insurance 37,795Interest Receivable 20,493
Financial Statementsand Audit Report
Financial Statementsand Audit Report
Financial Statementsand Audit Report
Working TrialBalance
Financial Statementsand Audit Report
Adjusting JournalEntries
Financial Statementsand Audit Report
ContingentLiabilities
Financial Statementsand Audit Report
Operations
Financial Statementsand Audit Report
Liabilitiesand Equity
Financial Statementsand Audit Report
Assets
Financial Statementsand Audit Report
AnalyticalProcedures
Financial Statementsand Audit Report
Tests of Controls andSubstantive TOT
Financial Statementsand Audit Report
InternalControl
Financial Statements
and Audit Report
GeneralInformation
Financial Statementsand Audit Report
AuditPrograms
Financial Statementsand Audit Report
Permanent Files
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Permanent Files
These files are intended to contain
data of a his tor ical or con t inu ing
naturepertinent 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 STATEMENTSCash 122Acc.
WORKING TRIAL BALANCEPrelim. AJEs Final
Cash 212 (90) 122
AJEsExpense 90
Cash 90
LEAD SCHEDULECASH A-1Per G/L AJEs Final
Petty Cash A-2 5 5Cash in Bank:General A-3 186 (90) 96Payroll A-4 21 21
212 (90) 122
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Relationship of Audit Documentation
to Financial Statements
A-3/1Confirmation
A-3/2O/S Check List
A-4/2
O/S Check List
A-4/1Confirmation
A-2
Cash Count Sheet
A-3
Bank Reconciliation
A-4
Bank Reconciliation
LEAD SCHEDULECASH A-1Per G/L AJEs Final
Petty Cash A-2 5 5Cash in Bank:
General A-3 186 (90) 96
Payroll A-4 21 21212 (90) 122
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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
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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
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Learning Objective 7
Describe how e-commerce
affects audit evidence and
audit documentation.
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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
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