Professional Documents
Culture Documents
Chapter 7
7-1
Learning Objective 1
Contrast audit evidence with
evidence used by other
professions.
7-2
Nature of Evidence
The use of evidence is not unique to auditors
Evidence is also used by scientists, lawyers,
and historians
7-3
Learning Objective 2
Identify the four audit evidence
decisions that are needed to
create an audit program.
7-4
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
7-6
Learning Objective 3
Specify the characteristics that
determine the persuasiveness
of evidence.
7-7
Persuasiveness of Evidence
Two determinants:
Appropriateness
Sufficiency
7-8
7-9
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
Sufficiency
Adequate sample size
Selection of proper population items
7 - 10
7 - 11
Learning Objective 4
Identify and apply the eight types
of evidence used in auditing.
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Relationships
Broad guidelines
concerning auditor
qualifications and
conduct, evidence
accumulation,
and reporting
Auditing
standards
Qualifications
and conduct
Physical examination
Confirmation
Documentation
Analytical procedures
Inquiries of the client
Recalculation
Reperformance
Observation
FOUR
AUDIT
EVIDENCE
DECISIONS
Evidence
accumulation
Reporting
Types of
evidence
Audit
procedures
Sample size
and items
to select
Broad categories of
evidence available
for the auditors
accumulation
Specific instructions
for the accumulation
of types of evidence
Timing
of tests
7 - 14
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 - 15
Confirmation
Information
Source
Assets
Cash in bank
Marketable securities
Accounts receivable
Notes receivable
Owned inventory out on consignment
Inventory held in public warehouses
Cash surrender value of life insurance
Bank
Customer
Maker
Consignee
Public warehouse
Insurance company
Investment custodian
7 - 16
Confirmation
Information
Source
Liabilities
Accounts payable
Notes payable
Advances from customers
Mortgages payable
Bonds payable
Creditor
Lender
Customer
Mortgagor
Bondholder
7 - 17
Confirmation
Information
Source
Owners Equity
Shares outstanding
Registrar and
transfer agent
Other Information
Insurance coverage
Contingent liabilities
Bond indenture agreements
Collateral held by creditors
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley
Insurance company
Bank, lender, and
clients legal counsel
Bond holder
Creditor
7 - 18
Documentation
It is the auditors inspection of the
clients documents and records.
Internal
documents
External
documents
7 - 19
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
7 - 20
7 - 21
Recalculation
It involves rechecking a sample of calculations
made by the client.
7 - 22
Reperformance
It is the auditors independent tests of client
accounting procedures or controls that
were originally done.
7 - 23
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.
7 - 24
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
7 - 25
Audit Procedure
Sample Size
Items to Select
Timing
Observation
Not applicable
Balance
sheet date
Physical examination
Count a sample of
inventory and compare
quantity and description
to clients counts
120 items
40 items with
large dollar
value, plus 80
randomly
selected
Balance
sheet date
Documentation
Compare quantity on
clients perpetual records
to quantity on clients
counts
70 items
Balance
sheet date
7 - 26
Type of Evidence
Examine
Scan
Read
Compute
Recompute
Foot
Trace
Compare
Count
Observe
Inquire
Vouch
Documentation
Analytical procedures
Documentation
Analytical procedures
Recalculation
Recalculation
Documentation/Reperformance
Documentation
Physical examination
Observation
Inquiries of client
Documentation
7 - 27
Learning Objective 5
Understand the purposes of
audit documentation.
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.
7 - 29
Audit Documentation
Purposes of audit documentation
Ownership of audit files
Confidentiality of audit files
7 - 30
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.
7 - 31
Learning Objective 6
Prepare organized audit
documentation.
7 - 32
Robinson Associates
Trial Balance
12/31/09
Cash
Accounts Receivable
Prepaid Insurance
Interest Receivable
$165,237
275,050
37,795
20,493
Financial Statements
and Audit
Report
Financial
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
Financial Equity
Statements
and Audit Report
Assets
Financial Statements
and Audit Report
Analytical
Procedures
Financial
Statements
and
Audit
Report
Tests of Controls and
Substantive
TOT
Financial
Statements
and
Audit
Report
Internal
Control
Financial
Statements
and Audit Report
General
Information
Financial
Statements
and Audit Report
Audit
Programs
Financial
Statements
and Audit Report
Permanent Files
Financial Statements
and Audit Report
7 - 33
Permanent Files
These files are intended to contain
data of a historical or continuing
nature pertinent to the current audit.
7 - 34
Current Files
Audit program
General information
Working trial balance
Adjusting and reclassification entries
Supporting schedules
7 - 35
Per G/L
5
AJEs
Final
122
Expense
Cash
AJEs
186
21
212
(90)
(90)
90
Final
5
90
A-1
96
21
122
7 - 36
Per G/L
5
AJEs
186
21
212
(90)
(90)
Final
5
A-1
96
21
122
A-2
Cash Count Sheet
A-3
Bank Reconciliation
A-4
Bank Reconciliation
A-3/1
Confirmation
A-3/2
O/S Check List
A-4/1
Confirmation
A-4/2
O/S Check List
7 - 37
7 - 38
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
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley
7 - 40
Learning Objective 7
Describe how technology affects audit
evidence and audit documentation.
7 - 41
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 - 42
End of Chapter 7
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