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Audit Evidence. Chapter 7. Learning Objective 1. Contrast audit evidence with evidence used by other professions. Nature of Evidence. The use of evidence is not unique to auditors. Evidence is also used by scientists, lawyers, and historians. Learning Objective 2.
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Audit Evidence Chapter 7
Learning Objective 1 Contrast audit evidence with evidence used by other professions.
Nature of Evidence The use of evidence is not unique to auditors. Evidence is also used by scientists, lawyers, and historians.
Learning Objective 2 Identify the FIVE audit evidence decisions that are needed to create an audit program.
Audit Evidence Decisions • Which audit procedures to use = nature, research: • by far the hardest – especially related to fraud. 2. What sample size to select for a given procedure / budget = extent 3. Which items to select from the population = nature 4. When to perform the procedures = timing 5. Who should perform the procedure = staffing
Audit Program It includes a list of the audit procedures (tests) the auditor considers necessary. Table of contents covering objectives / To do list for account. Most auditors use computers to facilitate the preparation of audit programs.
Learning Objective 3 Specify the characteristics that determine the persuasiveness of evidence.
Persuasiveness of Evidence Appropriateness - Quality Sufficiency - Qty Combined effect: Examine client supporting doc. to support sales transaction: sample size = 120. Obtain external confirmation of A/R (sales transaction): sample size = 25. Persuasiveness and cost: Inspecting inventory for Nordstrom’s
Appropriateness Relevance – to objective Independence of provider – source objectivity Effectiveness of internal controls Auditor’s direct knowledge Qualifications of individuals – source competence Degree of objectivity – b/w or grey Timeliness – B/S vs. I/S
Learning Objective 4 Identify and apply the eight types of evidence used in auditing.
Types of Audit Evidence – Tools! 1. Physical examination - Inventory 2. Confirmation – A/R 3. Documentation – Sales transaction 4. Analytical procedures – Expectation for allowance 5. Inquiries of the client – A/P difference - Corroborate 6. Recalculation – Dep. Expense, quantitative 7. Reperformance – Credit check, posting and summ. 8. Observation – Tour, Seg of duties
Terms and Types of Evidence Terms Types of Evidence Examine Documentation Scan Analytical procedures Read Documentation Compute Analytical procedures Recompute Recalculation Simulation Reperformance
Terms and Types of Evidence Terms Types of Evidence Trace Documentation Compare Documentation Count Physical examination Observe Observation Inquire Inquiries of client Vouch Documentation
Learning Objective 5 Understand the purposes of audit documentation.
Why keep a record of audit/WPs/Documentation? Legal Planning Learning Review SOX – keep WPs for 7 yrs and PCAOB inspection Client changes auditors: Babysitting
Learning Objective 6 Prepare organized audit documentation.
Audit File Contentsand Organization Financial Statements and Audit Report Analytical Procedures Test of Controls & Substantive TOT Working Trial Balance Derrickson Associates Trial Balance 12/31/2003 Cash $165,237 Accounts Receivable 275,050 Prepaid Insurance 37,795 Interest Receivable 20,493 Adjusting Journal Entries Internal Control Contingent Liabilities General Information Operations Liabilities and Equity Audit Programs Assets Permanent Files
Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to the current audit. Update and carryforward to CY WPs.
Example – WP Structure • 1000 series = Planning WPs (ex. 1100 = Planning Memo) • 2000 series = Reporting (ex. 2100 = Trial balance) • 5000 series = Assets, 5100 = Cash, 5110 = Cash Audit Program, 5120 = Cash Leadsheet, 5130 = Bank reconciliation for acct #XXXX. • 8000 series = Income statement accounts
Current Files Audit program – for each account General administration - budget Working trial balance – agreed to leadsheets and F/S Adjusting and reclassification entries – from supporting schedules and booked to T/B or passed. Supporting schedules – bank reconciliation, confirmation of A/R, completeness tests of sales transactions
Relationship of Audit Documentationto Financial Statements FINANCIAL STATEMENTS Cash 122 Acc. …………………. WORKING TRIAL BALANCE Prelim.AIE’sFinal Cash 212 (90) 122 AJE’s Expense 90 Cash 90
Relationship of Audit Documentationto Financial Statements LEAD SCHEDULE – CASHA-1 Per G/1AJE’sFinal Petty Cash A-2 5 5 Cash in Bank: General A-3 186 (90) 96 Payroll A-4 21 21 212 (90) 122
Relationship of Audit Documentationto Financial Statements A-2 Observe cash b/c pettty cash A-3 Bank Reconciliation Agreed to L/S A-3/1 Confirmation A-3/2 O/S Check List Dep. in transit, etc.
Relationship of Audit Documentationto Financial Statements A-4 Bank Reconciliation Agreed to L/S A-4/2 O/S Check List Dep. in transit, etc. A-4/1 Confirmation
Learning Objective 7 Describe how technology affects audit evidence and audit documentation.
Effect of Technology Audit evidence is increasingly in electronic form. IT audit specialists! Auditors use computers to read and examine evidence (e.g., ACL) Software programs are typically Windows-based.
