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Audit Evidence

Chapter 7

Generally Accepted Auditing Standards Third Standard of Field Work

Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.

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

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.

Persuasiveness of Evidence
Competence and sufficiency are determinants of the persuasiveness of evidence. Factors affecting competence include:
Relevance to audit objective Independence of provider Effectiveness of internal controls Auditors direct knowledge Qualifications of providers Degree of objectivity Timeliness

Table 7-2, (p. 167)

Types of Audit Evidence

1. 2. 3. 4. 5. 6. 7.

Physical examination (tangible assets) Confirmation (positive and negative) Documentation Analytical procedures Inquiries of the client Reperformance Observation

Confirmations and Information Often Confirmed


Confirmations may be positive or negative.
Procedures for non-response positives

Information
Assets Cash in bank (example) Accounts receivable Notes receivable Owned inventory out on consignment Inventory held in public warehouses Cash surrender value of life insurance

Source
Bank Customer Maker Consignee Warehouse Insurance co.

Information Often Confirmed


Information
Liabilities Accounts payable Notes payable Advances from customers Mortgages payable Bonds payable

Source
Creditor Lender Customer Mortgagor Bondholder

Information Often Confirmed


Information
Owners Equity Shares outstanding

Source
Registrar and transfer agent

Other Information Insurance coverage Contingent liabilities

Bond indenture agreements Collateral held by creditors

Insurance co. Bank, lender, and clients legal counsel Bondholder Creditor

Other Forms of Evidence


Documentation Clients documents and records Internal vs. External documents Tracing vs. Vouching see next slide

Tracing vs. Vouching (Figure 6-7 is from another text)

Inspection of Documents or Records Vouching Tracing


Note: students should understand the differences between tracing and vouching.

Reliability of Documentary Evidence (Figure 6-5 is from another text)

Other Forms of Evidence: Analytical procedures


Importance of context understanding the clients business and industry

Analytical procedures are used for: Assessing going concern Finding possible misstatements in the financials Reducing detailed audit tests

Other Forms of Evidence

Inquiries of the client written or oral Reperformance verifying calculations or information processing

Observation

Competence of Types of Evidence, Table 7-4 (p. 172)

Terms and Types of Evidence, Table 7-6, (p. 175)


Terms Type of Evidence

Examine Scan Read Compute Recompute Foot

Documentation Analytical procedures Documentation Analytical procedures Reperformance Reperformance

Terms and Types of Evidence


Terms Trace Compare Count Observe Inquire Vouch Type of Evidence Documentation/ Reperformance Documentation Physical examination Observation Inquiries of client Documentation

Audit Documentation

Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement.

Audit Documentation
Purposes of audit documentation primary means to support that the audit was conducted in accordance with GAAS. Ownership of audit files

Confidentiality of audit files rule 301, chapter 4.

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.

Audit File Contents and Organization


Financial Statements and Audit Report Robinson Associates Trial Balance 12/31/05 Cash Accounts Receivable Prepaid Insurance Interest Receivable $165,237 275,050 37,795 20,493 Analytical Procedures Test of Controls & Substantive TOT Internal Control General Information Audit Programs Permanent Files

Working Trial Balance


Adjusting Journal Entries Contingent Liabilities Operations Liabilities and Equity Assets

Permanent Files

These files are intended to contain data of a historical or continuing nature pertinent to the current audit. Examples include: Articles of incorporation Loan agreements Documents related to understanding I/C Leases

Current Files
Audit program General information

Working trial balance


Adjusting and reclassification entries

Supporting schedules

Relationship of Audit Documentation to Financial Statements


FINANCIAL STATEMENTS Cash 122 Acc. .

WORKING TRIAL BALANCE Prelim. AJEs Final Cash 212 (90) 122 LEAD SCHEDULE CASH Per G/L Petty Cash A-2 5 Cash in Bank: General A-3 186 Payroll A-4 21 212

AJEs Expense 90 Cash


AJEs (90) (90)

90

A-1 Final 5
96 21 122

Relationship of Audit Documentation to Financial Statements


LEAD SCHEDULE CASH Per G/L Petty Cash A-2 5 Cash in Bank: General A-3 186 Payroll A-4 21 212
A-2 Cash Count Sheet A-3 Bank Reconciliation

AJEs (90) (90)

A-1 Final 5
96 21 122

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

Types of Supporting Schedules

Analysis Trial balance or list Reconciliation of amounts Tests of reasonableness

Types of Supporting Schedules

Summary of procedures Examination of supporting documents Informational Outside documentation

Characteristics 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.

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.