Audit Evidence

1. Audit Evidence Chapter 7

2. Contrast audit evidence with evidence used by other professions. 補充說明 本章與我國審計公報有關者為 1.審計公報第4號 查核之證據 2.審計公報第50號 分析性程序12號分析性複核 3.審計公報第38號 函證 4.審計公報第45號 查核工作底稿準則 Learning Objective 1

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

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

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 (timing)

6. Audit procedure • Audit procedure is the detailed instruction that explains the audit evidence to be obtained during the audit. • Audit procedures often incorporate sample size, items to select, and timing into the procedure.

7. 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.

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

9. Persuasiveness of Evidence The two determinants of the persuasiveness of evidence are appropriateness and sufficiency, which are taken directly from the third standard of field work. • Appropriateness • Sufficiency

10. Appropriateness • Appropriateness of evidence is a measure of the quality of evidence, meaning its relevance and reliability in meeting audit objectives for classes of transactions, account balances, and related disclosures. • If evidence is considered highly appropriate, it is great help in persuading the auditor that financial statements are fairly stated. • 1.Relevance of Evidence 2.Reliability of evidence

11. Relevance of evidence • Evidence must pertain to or be relevant to the audit objective that the auditor is testing before it can be appropriate.

12. Six Characteristics of Reliable Evidence Independence of provider 2. Effectiveness of client’s internal controls 3. Auditor’s direct knowledge 4. Qualification of individuals providing the information Degree of objectivity 6. Timeliness

13. Relationships Among Audit Evidence and Persuasiveness Audit Evidence Decisions Qualities Affecting Persuasiveness 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

14. 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.

15. Identify and apply the eight types of evidence used in auditing. Learning Objective 4

16. 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

17. Relationships Broad guidelines concerning auditor qualifications and conduct, evidence accumulation, and reporting Auditing standards Qualifications and conduct Evidence accumulation Physical examination Confirmation Documentation Analytical procedures Inquiries of the client Recalculation Reperformance Observation Reporting Types of evidence Broad categories of evidence available for the auditor’s accumulation Audit procedures Specific instructions for the accumulation of types of evidence FOUR AUDIT EVIDENCE DECISIONS Sample size and items to select Timing of tests

18. 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.

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

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

21. Confirmation Information Source Owners’ Equity Shares outstanding Registrar and transfer agent Other Information Insurance coverage Contingent liabilities Bond indenture agreements Collateral held by creditors Insurance company Bank, lender, and client’s legal counsel Bond holder Creditor

22. Documentation It is the auditor’s inspection of the client’s documents and records. External documents Internal documents

23. 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

24. Inquiries of the Client It is the obtaining of written or oral information from the client in response to questions from the auditor.

25. Recalculation It involves rechecking a sample of calculations made by the client.

26. Reperformance It is the auditor’s independent tests of client accounting procedures or controls that were originally done.

27. 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.

28. Appropriateness 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

29. Types of Evidence and Four Evidence Decisions for a Balance-Related Audit Objective for Inventory* Evidence Decisions Items to Select Audit Procedure Sample Size Type of Evidence Timing Not applicable All count teams Observes client’s personnel counting inventory to determine whether they are properly following instructions Observation Balance sheet date Balance sheet date 40 items with large dollar value, plus 80 randomly selected Count a sample of inventory and compare quantity and description to client’s counts 120 items Physical examination Documentation 30 items with large dollar value, plus 40 randomly selected Compare quantity on client’s perpetual records to quantity on client’s counts Balance sheet date 70 items

30. Terms and Types of Evidence Terms Type of Evidence Examine Scan Read Compute Recompute Foot Trace Compare Count Observe Inquire Vouch Documentation Analytical procedures Documentation Analytical procedures Recalculation Recalculation Documentation/Reperformance Documentation Physical examination Observation Inquiries of client Documentation

31. Understand the purposes of audit documentation. Learning Objective 5

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

33. Audit Documentation • Purposes of audit documentation • Ownership of audit files • Confidentiality of audit files

34. 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.

35. Prepare organized audit documentation. Learning Objective 6

36. Robinson Associates Trial Balance 12/31/09 Cash $165,237 Accounts Receivable 275,050 Prepaid Insurance 37,795 Interest Receivable 20,493 Contingent Liabilities Adjusting Journal Entries Financial Statements and Audit Report Permanent Files Operations Assets Working Trial Balance Tests of Controls and Substantive TOT Internal Control General Information Audit Programs Liabilities and Equity Analytical Procedures Financial Statements and Audit Report Financial Statements and Audit Report Financial Statements and Audit Report Financial Statements and Audit Report Financial Statements and Audit Report Financial Statements and Audit Report Financial Statements and Audit Report Financial Statements and Audit Report Financial Statements and Audit Report Financial Statements and Audit Report Financial Statements and Audit Report Financial Statements and Audit Report Financial Statements and Audit Report Audit File Contents and Organization

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

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

39. Relationship of Audit Documentationto Financial Statements FINANCIAL STATEMENTS Cash 122 Acc. WORKING TRIAL BALANCE Prelim. AJE’s Final Cash 212 (90) 122 AJE’s Expense 90 Cash 90 LEAD SCHEDULE–CASH A-1 Per G/L AJE’s Final Petty Cash A-2 5 5 Cash in Bank: General A-3 186 (90) 96 Payroll A-4 21 21 212 (90) 122

40. Relationship of Audit Documentationto Financial Statements LEAD SCHEDULE–CASH A-1 Per G/L AJE’s Final Petty Cash A-2 5 5 Cash in Bank: General A-3 186 (90) 96 Payroll A-4 21 21 212 (90) 122 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

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

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

43. Preparation 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

44. Describe how technology affects audit evidence and audit documentation. Learning Objective 7

45. Effect of Technology • 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

46. End of Chapter 7