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Chapter 7     Audit evidence- all the information used by auditors in arriving at the conclusions on which the audit opinion

is based The scope of auditing is limited only by the demands for reliable information and an audtitable information system Sufficiency- the measure oif the quantity of audit evidence. Appropriateness o Relevance o Reliability Sources of evidence Assurance is gained through the gathering of evidence related to o Knowledge of the client, its business and its industry o Outside information0 gathered by the audit team itself using market data through independent analysis. o Accounting systems- gathered through direct tests of account balances and transactions. o The quality of internal control- gathered through an evaluation of the design of internal controls and the operations of those controls. The primary assertions are embodied in the financial statements o Existence and occurrence o Completeness o Rights and obligations o Valuation and allocation o Presentation and disclosure. Economics of gathering appropriate, sufficient evidence o Important facots affecting relevance and reliability include management integrity client’s economic risk, quality of the client’s information system and internal controls and current market conditions and competitors account Audit evidence collection process that ill helo ensure the appropriate sufficient evicence is collected: o Understand the client and its industry o Assess the risk of material misstatement by assertions for each significant component of the client’s financial statement o Determine the most persuasive evidence to address assertions and the most economical approach to gather evidence. o Assess adequacy of evidence and issue a reports Appropriateness: relevance of audit evidence o Direct evidence- directly relevant to the assertion o Indirect evidence- often requires more inference and the logic of conclusion relies on more complex inferences.

More reliable Less reliable Directly obtained evidence Indirectly obtained evidence Evidence derived from a well-controlled Evidence derived from a poorly controlled system information system or easily overridden information system Evidence from independent outside sources Evidence from within the client’s organizion Evidence that exists in documentary form Verbal evidence not supported by documentation Original documents Photocopies  The evidence must stand on its own such that another unbiased professional would reach the same conclusion.  Nature of audit testing  Direct tests of account balances and transactions are designed by determining the most efficient manner to substantiate the assertions embodied in the account or transactions. o Tests of effectiveness of internal control o Dual purpose test of controls and account balances o Substantive analytical tests o Direct tests of account balances o Direct tests of transactions  Two basic types of evidence o Underlying accounting records, including evidence of internal control o Corroborating information that validates the underlying accounting recors.  Traditionally focused audit procedures on the direct tests of asset and liability account balances, as opposed to examining transactions during this year o Fewer items o Reliable evidence o Focus on changes in assets or liabilities, rather than testing all the details that affected the accounts  Audit proceudres o Understand client and industry: preliminary planning and risk analysis o Assess risk of material misstatement: understand and test internal controls and system processing o Gather evidence related to account balances and transactions o Determine need to engage outside specialists o Assess the consistency of evicence gathered and document conclustion.  Directional testin- involving testing balances primarily for either over- or understatement (but not both) and creates audit efficiency by taking advantage of the double entry bookkeepuing system.  Commonly used audit procedures for direct tests of account balances and transactions o Observation- includes walkthrough- act differently, generalization, not sufficien o External confirmations- sending inquiry to outside party o Inspection of documents- much of the audit process depend on examining documents o Inspection of physical assets- identify potential but does not provide evicence of completeness, ownership or valuation

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Recalculation of data  Footing- adding a column of figures to verify the correctness of the client’s totals  Cross footing- checking the agreement of the cross-addition of a number of columns of figures that sum to a grand total  Tests of extension- recomouting itmes involving multuuplication  Recalculating estimated accounts o Data analysis- a hybrid of recalculation and analytical procedures o Reperformance of client procedures- execution of contols o Reprocessing of transactions- selecting a sample of a source document and reprocessing them to be sure they have all been properly recorded. o Vouching- complementary to reprocessing- taking sample of already recorded transaction and tracing them back to their original source. o Analytical procedures. Audit documentation is the written record that forms the basis for the auditor’s conclusions. Evidence used in auditing management’s estimates o First, auditors must understand the processes used by management in developing estimates  Controls over the process  Reliability of underlying data in developing the estimate  Use of outside experts  How management reviews the result of the estimates for reasonableness. o Understand the process  Test the process used, including the reliability of the underlying data  Develop undependent estiamtes and compare thise with that developed by management.

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