Arens_Chapter07 audit evidence

Audit Evidence
Chapter 7
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 7-1

Learning Objective 1
Contrast audit evidence with
evidence used by other
professions.
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7-2

Nature of Evidence
 The use of evidence is not unique to auditors
 Evidence is also used by scientists, lawyers,

and historians

Identify the four audit evidence
decisions that are needed to
create an audit program.

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)

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.

Specify the characteristics that
determine the persuasiveness
of evidence.

Persuasiveness of Evidence
Two determinants:
 Appropriateness
 Sufficiency

Six Characteristics of Reliable
Evidence
1. Independence of provider
2. Effectiveness of client’s
internal controls
3. Auditor’s direct knowledge
4. Qualification of individuals
providing the information
5. Degree of objectivity
6. Timeliness
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 10

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
Persuasiveness and Cost
In making decisions about evidence

for a given audit, both persuasiveness
and cost must be considered.
The auditor’s goal is to obtain a

sufficient amount of appropriate
evidence at the lowest total cost.

Identify and apply the eight types
of evidence used in auditing.

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 auditor’s
Observation accumulation
Audit
procedures Specific instructions
FOUR for the accumulation
AUDIT of types of evidence
EVIDENCE Sample size
DECISIONS and items
to select Timing
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley
of tests 7 - 15
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

1. 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.

2. Confirmation
Information Source
Assets
Cash in bank Bank
Marketable securities Customer
Accounts receivable Maker
Notes receivable Consignee
Owned inventory out on consignment Public warehouse
Inventory held in public warehouses Insurance company
Cash surrender value of life insurance Investment custodian

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

Confirmation
Information Source
Owners’ Equity
Shares outstanding Registrar and
transfer agent
Other Information
Insurance coverage Insurance company
Contingent liabilities Bank, lender, and
client’s legal counsel
Bond indenture agreements Bond holder
Collateral held by creditors Creditor
3. Documentation
It is the auditor’s inspection of the

client’s documents and records.
Internal External
documents documents

4. Analytical Procedures
 Understand the client’s industry and business
 Assess the entity’s ability to continue as a

going concern
 Indicate the presence of possible misstatements

in the financial statements
 Reduce detailed audit tests

5. Inquiries of the Client
It is the obtaining of written or oral information

from the client in response to questions
from the auditor.

6. Recalculation
It involves rechecking a sample of calculations

made by the client.

7. Reperformance
It is the auditor’s independent tests of client

accounting procedures or controls that
were originally done.

8. 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 client’s facilities.

Types of Evidence and Four Evidence Decisions for
a Balance-Related Audit Objective for Inventory*
Evidence Decisions
Type of Evidence Audit Procedure Sample Size Items to Select Timing

Observation Observes client’s personnel All count teams Not applicable Balance
counting inventory to sheet date
determine whether they are
properly following instructions
Physical examination Count a sample of 120 items 40 items with Balance

inventory and compare large dollar sheet date
quantity and description value, plus 80
to client’s counts randomly
selected
Documentation Compare quantity on 70 items 30 items with large Balance
client’s perpetual records dollar value, plus sheet date
to quantity on client’s 40 randomly
counts selected

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
Exercise


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Audit Evidence

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 7-1

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7-2

 The use of evidence is not unique to auditors

 Evidence is also used by scientists, lawyers,

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7-3

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7-4

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)

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7-5

It includes a list of the audit procedures

Most auditors use computers to facilitate

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7-6

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7-7

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7-8

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 10

In making decisions about evidence

The auditor’s goal is to obtain a

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 13

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 14

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 16

It is the inspection or count by the

This type of evidence is most often

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 17

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 18

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 19

It is the auditor’s inspection of the

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 21

 Understand the client’s industry and business

 Assess the entity’s ability to continue as a

 Indicate the presence of possible misstatements

 Reduce detailed audit tests

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 23

It is the obtaining of written or oral information

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 24

It involves rechecking a sample of calculations

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 25

It is the auditor’s independent tests of client

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 26

It is the use of the senses to assess client activities.

The auditor may tour the plant to obtain a general

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 27

Type of Evidence Audit Procedure Sample Size Items to Select Timing

Physical examination Count a sample of 120 items 40 items with Balance

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 31

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 33

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