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.

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 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

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 Relationships Among Audit
Evidence 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
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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 7 - 12

 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 Broad guidelines
concerning auditor
Auditing qualifications and
standards conduct, evidence
Qualifications accumulation,
and conduct and reporting
Evidence
Physical examination accumulation
Confirmation Reporting
Documentation
Analytical procedures Types of
Inquiries of the client evidence Broad categories of
Recalculation evidence available
Reperformance for the auditors
Observation accumulation
Audit
procedures Specific instructions
FOUR for the accumulation
AUDIT of types of evidence
EVIDENCE Sample size
DECISIONS and items
to select Timing
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
of tests 7 - 15
 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 7 - 16

 Confirmation
Information Source

Assets
Cash in bank Bank
Accounts receivable Customer
Notes receivable Maker
Owned inventory out on consignment Consignee
Inventory held in public warehouses Public warehouse
Cash surrender value of life insurance Insurance company

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 17

 Confirmation
Information Source

Liabilities
Accounts payable Creditor
Notes payable Lender
Advances from customers Customer
Mortgages payable Mortgagor
Bonds payable Bondholder

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 18

 Confirmation
Information Source

Owners Equity
Shares outstanding Registrar and
transfer agent

Other Information
Insurance coverage Insurance company
Contingent liabilities Bank, lender, and
clients legal counsel
Bond indenture agreements Bond holder
Collateral held by creditors Creditor
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 Documentation

It is the auditors inspection of the

clients documents and records.

Internal External
documents 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 written or oral information

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 general

impression of the clients facilities.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 25

 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 7 - 26

 Terms and Types of Evidence
Terms Type of Evidence
Examine Documentation
Scan Analytical procedures
Read Documentation
Compute Analytical procedures
Recompute Recalculation
Foot Recalculation
Trace Documentation/Reperformance
Compare Documentation
Count Physical examination
Observe Observation
Inquire Inquiries of client
Vouch 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 7 - 28

 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.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 31

 Learning Objective 6

Prepare organized audit

documentation.

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 Audit File Contents and Organization
Financial Statements
and Audit
Financial Report
Statements
and Audit Report
Working Trial
Balance
Financial Statements
and Audit ReportJournal
Adjusting
Entries
Financial Statements
and AuditContingent
Report
Liabilities
Financial Statements
and Audit Report
Operations
Financial Statements
and Audit Liabilities
Report
and Equity
Financial Statements
Robinson Associates and Audit Report
Assets
Trial Balance Financial Statements
12/31/07 and Audit Report
Analytical
Procedures
Financial Statements
and Audit
Tests of Controls andReport
Cash $165,237 Substantive TOT
Financial Statements
Accounts Receivable 275,050 and Audit
Internal Report
Prepaid Insurance 37,795 Control
Financial Statements
Interest Receivable 20,493 General Report
and Audit
Information
Financial Statements
and
AuditAudit Report
Programs
Financial Statements
and Audit Report
Permanent Files
Financial Statements
and Audit Report

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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 7 - 34

 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 7 - 35

 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 SCHEDULECASH 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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 36

 Relationship of Audit Documentation
to Financial Statements
LEAD SCHEDULECASH 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

Confirmation O/S Check List Confirmation

A-4/2
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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

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 39

 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 7 - 40

 Learning Objective 7

Describe how e-commerce

affects audit evidence and
audit documentation.

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 41

 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 7 - 42

 End of Chapter 7

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