Audit Evidence

1. Audit Evidence Chapter 7

2. Learning Objective 1 • Contrast audit evidence with • evidence used by other • professions.

3. Nature of Evidence The use of evidence is not unique to auditors. Evidence is also used by scientists, lawyers, and historians.

4. Learning Objective 2 • Identify the four audit evidence • decisions that are needed to • create an audit program.

5. 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

6. 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.

7. Learning Objective 3 • Specify the characteristics that • determine the persuasiveness • of evidence.

8. Persuasiveness of Evidence Competence Sufficiency Combined effect Persuasiveness and cost

9. Competence • Relevance • Independence of provider • Effectiveness of internal controls • Auditor’s direct knowledge • Qualifications of providers • Degree of objectivity • Timeliness

10. Learning Objective 4 • Identify and apply the seven types • of evidence used in auditing.

11. Types of Audit Evidence • Physical examination • Confirmation • Documentation • Analytical procedures • Inquiries of the client • Reperformance • Observation

12. Broad guidelines Qualifications and conduct Evidence accumulation Reporting Types of evidence Broad categories Relationships Auditing standards

13. Audit procedures Specific instructions Sample size Items to select Timing of tests Relationships Types of evidence

14. Information Source Assets Cash in bank Bank Accounts receivable Customer Notes receivable Maker Owned inventory out on consignment Consignee Inventory held in public warehouses Warehouse Cash surrender value of life insurance Insurance co. Information Often Confirmed

15. Information Often Confirmed Information Source Liabilities Accounts payable Creditor Notes payable Lender Advances from customers Customer Mortgages payable Mortgagor Bonds payable Bondholder

16. Information Often Confirmed Information Source Owners’ Equity Shares outstanding Registrar and transfer agent Other Information Insurance coverage Insurance co. Contingent liabilities Bank, lender, and clients legal counsel Bond indenture agreements Bondholder Collateral held by creditors Creditor

17. Information Often Confirmed Documentation Analytical procedures Inquiries of the client Reperformance Observation

18. Competence of Types of Evidence Type of evidence Independence of provider Effectiveness of client’s internal controls Auditor’s direct knowledge Qualifications of provider Objectivity of evidence

19. Terms Type of Evidence Examine Documentation Scan Analytical procedures Read Documentation Compute Analytical procedures Recompute Reperformance Foot Reperformance Terms and Types of Evidence

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

21. Learning Objective 5 • Understand the purposes of • audit documentation.

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

23. Audit Documentation Purposes of audit documentation Ownership of audit files Confidentiality of audit files

24. 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.

25. Learning Objective 6 • Prepare organized audit • documentation.

26. Financial Statements and Audit Report Analytical Procedures Test of Controls & Substantive TOT Working Trial Balance Robinson Associates Trial Balance 12/31/05 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 Audit File Contents and Organization

27. Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to the current audit.

28. Current Files Audit program General information Working trial balance Adjusting and reclassification entries Supporting schedules

29. FINANCIAL STATEMENTS Cash 122 Acc. …………………. WORKING TRIAL BALANCE Prelim.AJE’sFinal Cash 212 (90) 122 AJE’s Expense 90 Cash 90 LEAD SCHEDULE – CASHA-1 Per G/LAJE’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

30. 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 Relationship of Audit Documentationto Financial Statements LEAD SCHEDULE – CASHA-1 Per G/LAJE’sFinal Petty Cash A-2 5 5 Cash in Bank: General A-3 186 (90) 96 Payroll A-4 21 21 212 (90) 122

31. Types of Supporting Schedules Analysis Trial balance or list Reconciliation of amounts Tests of reasonableness

32. Types of Supporting Schedules Summary of procedures Examination of supporting documents Informational Outside documentation

33. 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.

34. Learning Objective 7 • Describe how e-commerce • affects audit evidence and • audit documentation.

35. 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.

36. End of Chapter 7