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Audit Evidence

Chapter 7

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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
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Nature of Evidence

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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.

Sample sizes
Items to select
Timing of the tests

Most auditors use audit software


packages to generate audit programs.
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Persuasiveness of Evidence
Two determinants:

Appropriateness

Sufficiency

The persuasiveness of evidence can be evaluated only after


considering the combination of appropriateness and sufficiency
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Six Characteristics of
Reliable Evidence
1. Independence of provider
2. Effectiveness of clients
internal controls
3. Auditors direct knowledge
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.

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Types of Audit Evidence


Physical
Examination
Observation

Reperformance

Audit
Evidence

Confirmation

Documentation

Analytical
procedures
Recalculation

Inquiry

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Relationships

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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.

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Confirmations
Auditing Standards

Requirements

United States

Auditor

International

Confirmations

must confirm
accounts receivable
Auditors control the mailing
and receipt of replies
Electronic confirmations
are permitted

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are not require

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Information often Confirmed

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Documentation
It is the auditors inspection of the
clients documents and records.

Internal
documents

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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 misstatemen
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
Use ones senses to assess
client activities.
Tour plant to obtain a general
impression of clients 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

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Application of Types of
evidence to the four
Evidence Decisions

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Terms and Types of


Evidence
Terms

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

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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.

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Audit File Contents and


Organization

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Permanent Files
These files are intended to contain
data of a historical or continuing
nature pertinent 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

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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
Proper identification of each file
Files indexed and cross-referenced
Clear indication of work performed
Include sufficient information
State conclusions reached
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Preparation of Audit
Documentation

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Effect of Technology

Audit evidence is increasingly in electronic form

Auditors must evaluate how electronic informa


affects their ability to gather evidence
Auditors use computers to read and examine
evidence

Software programs are typically Windows-base


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End of Chapter 7

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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