CHAPTER 6 Audit Evidence

1. CHAPTER 6AuditEvidence

2. An auditor must address four decisions regarding evidence accumulation:

3. An auditor must address four decisions regarding evidence accumulation: Which audit procedures should be used?

4. What are audit procedures? Which audit procedures should be used?

5. An audit procedure is a detailed instruction for the collection of a type of audit evidence. Which audit procedures should be used?

6. Which audit procedures should be used? In general, the auditor will seek the most appropriate procedures that are also cost-feasible.

7. An auditor must address four decisions regarding evidence accumulation: What sample size should be selected? MORE LESS

8. An auditor must address four decisions regarding evidence accumulation: Which items should be selected for testing?

9. Which items should be selected for testing? The auditor will consider: - random/judgmental selection

10. Which items should be selected for testing? The auditor will consider: - random/judgmental selection - materiality

11. Which items should be selected for testing? The auditor will consider: - random/judgmental selection - materiality - results of prior audits

12. December An auditor must address four decisions regarding evidence accumulation: When should the procedures be performed? ?

13. December When should the procedures be performed? The auditor will consider procedures that should be performed before, on, or after the balance sheet date.

14. An auditor must address four decisions regarding evidence accumulation: Which audit procedures should be used? What sample size should be selected? Which items should be selected for testing? When should the procedures be performed?

15. Which audit procedures should be used? What sample size should be selected? Which items should be selected for testing? When should the procedures be performed? After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed.

16. After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed. Whatis an auditprogram?

17. After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed. An audit program is a list of detailed audit procedures for each component or cycle specifying proce-dure timing, sample sizes, and selection methods.

18. relevance sufficiency appropriate- ness timeliness Persuasiveness of evidence is determined by:

19. relevance sufficiency appropriate- ness timeliness Persuasiveness of evidence is determined by: Which of these are specifically mentioned in the 3rd examination standard?

20. sufficiency appropriate- ness Which of these are specifically mentioned in the 3rd examination standard?

21. relevance Evidence must pertain to the specific audit objective.

22. relevance Evidence must pertain to the specific audit objective. Example: An auditor is concerned about the completeness of accounts payable (a/p). Why would confirmation of a/p bal- ances be an irrelevant procedure?

23. relevance Example: An auditor is concerned about the completeness of accounts payable (a/p). Why would confirmation of a/p bal- ances be an irrelevant procedure? Confirmation addresses existence. For completeness, a search is needed.

24. appropriate- ness Appropriateness concerns the believability and trustworthi- ness of the evidence.

25. appropriate- ness Appropriateness concerns the believability and trustworthiness of the evidence. Appropriateness is determined by: - independence of the evidence provider

26. appropriate- ness Appropriateness concerns the believability and trustworthiness of the evidence. Appropriateness is determined by: - independence of the evidence provider - effectiveness of client’s internal controls

27. appropriate- ness Appropriateness concerns the believability and trustworthiness of the evidence. Appropriateness is determined by: - independence of the evidence provider - effectiveness of client’s internal controls - auditor’s direct knowledge

28. appropriate- ness Appropriateness concerns the believability and trustworthiness of the evidence. Appropriateness is determined by: - independence of the evidence provider - effectiveness of client’s internal controls - auditor’s direct knowledge - qualifications of information provider

29. appropriate- ness Appropriateness concerns the believability and trustworthiness of the evidence. Appropriateness is determined by: - independence of the evidence provider - effectiveness of client’s internal controls - auditor’s direct knowledge - qualifications of information provider - degree of objectivity

30. appropriate- ness Appropriateness concerns the believability and trustworthiness of the evidence. Appropriateness is a measure of evidence quality, it cannot be enhanced by a larger sample size.

31. sufficiency Sufficiency is a measure of quantity. In general, the larger the sample size, the more persuasive the evidence.

32. More evidence yields more assurance and higher audit costs. MORE LESS Less evidence yields less assurance and lower audit costs. Auditors must balance the trade-off be- tween gathering more or less evidence.

33. sufficiency Sufficiency must be addressed for each audit test and each component of the financial statements.

34. sufficiency Sufficiency must be addressed for each audit test and each component of the financial statements. An appropriate sample size may be determined by auditor judgment and/or by statistical sampling.

35. sufficiency In determining a sufficient sample size, an auditor will also consider: - “representativeness”

36. sufficiency In determining a sufficient sample size, an auditor will also consider: - “representativeness” - materiality, large dollar amounts

37. sufficiency In determining a sufficient sample size, an auditor will also consider: - “representativeness” - materiality, large dollar amounts - items with high probability of misstatement

38. timeliness When should audit evidence be gathered?

39. timeliness When should audit evidence be gathered? - evidence related to balance sheet accounts should be collected as close to the balance sheet date as possible

40. timeliness When should audit evidence be gathered? - evidence related to balance sheet accounts should be collected as close to the balance sheet date as possible - evidence related to income statement accounts should be collected from throughout the period rather than from only part of the period

41. Evidence is considered persuasive only if all four determinants have been met. relevance sufficiency appropriate- ness timeliness

42. absolute certainty requires convincing evidence With regard to the adequacy and costs of audit evidence:

43. absolute certainty requires convincing evidence requires high audit costs With regard to the adequacy and costs of audit evidence:

44. absolute certainty reasonable certainty requires convincing evidence requires persuasive evidence requires high audit costs With regard to the adequacy and costs of audit evidence:

45. absolute certainty reasonable certainty requires convincing evidence requires requires reasonable audit costs high audit costs With regard to the adequacy and costs of audit evidence: requires persuasive evidence

46. Types of evidence - physical examination - inspection or count by the auditor of a tangible asset very appropriate evidence!

47. Canada 46 Types of evidence - physical examination - confirmation - receipt of a written or oral response from an independent third party at the auditor’s request auditor client’s customer very appropriate evidence!

48. Types of evidence - physical examination - confirmation- receipt of a written or oral response from an independent third party at the auditor’s request The confirmation process must be controlled by the auditor.

49. Types of evidence - physical examination - confirmation- receipt of a written re- sponse from an independent third party at the auditor’s request Whenever reasonable, a sample of accounts receivable should be confirmed by the auditor.

50. Types of evidence - physical examination - confirmation - documentation (vouching) - auditor examination of client documents and records