Audit Evidence

Chapter 7

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

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Nature of Evidence
Any information used by the auditor to determine whether the information being audited is stated in accordance with established criteria The use of evidence is not unique to auditors Evidence is also used by scientists, lawyers, and historians
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Nature of Evidence

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

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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)

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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 audit software packages to generate audit programs.

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

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Persuasiveness of Evidence
Two determinants:

Appropriateness

Sufficiency

The persuasiveness of evidence can be evaluated only after considering the combination of appropriateness and sufficiency
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Six Characteristics of Reliable Evidence

1. Independence of provider 2. Effectiveness of clients internal controls 3. Auditors direct knowledge 4. Qualification of individuals providing the information 5. Degree of objectivity 6. Timeliness

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Relationships Among Audit Evidence and Persuasiveness

Audit Evidence Decisions Audit procedures and timing Qualities Affecting Persuasiveness of Evidence

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
Sufficiency Adequate sample size Selection of proper population items
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Sample size and items to select

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

Persuasiveness and Cost

In making decisions about evidence for a given audit, both persuasiveness and cost must be considered. The auditors goal is to obtain a sufficient amount of appropriate evidence at the lowest total cost.

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

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Types of Audit Evidence

Physical Examination Observation Confirmation

Reperformance

Audit Evidence

Documentation

Analytical procedures

Recalculation

Inquiry
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Relationships

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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.

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Confirmations
Auditing Standards United States

Requirements

Auditor must confirm accounts receivable Auditors control the mailing and receipt of replies Electronic confirmations are permitted
Confirmations are not required

International

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Information often Confirmed

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Documentation
clients documents and records.
It is the auditors inspection of the

Internal documents

External documents

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Analytical Procedures
Understand the clients industry and business Assess the entitys ability to continue as a going concern Indicate the presence of possible misstatements in the financial statements Reduce detailed audit tests

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Inquiries of the Client

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

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

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Reperformance
It is the auditors independent tests of client accounting procedures or controls that were originally done.

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Observation
Use ones senses to assess client activities. Tour plant to obtain a general impression of clients facilities. Observation is rarely sufficient by itself. Often need to corroborate with another kind of evidence.
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Appropriateness of Types of Evidence

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Application of Types of evidence to the four Evidence Decisions

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Terms and Types of Evidence

Terms
Examine Scan Read Compute Recompute Foot Trace Compare Count Observe Inquire Vouch

Type of Evidence
Documentation Analytical procedures Documentation Analytical procedures Recalculation Recalculation Documentation/Reperformance Documentation Physical examination Observation Inquiries of client Documentation
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Learning Objective 5
Understand the purposes of audit documentation.

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Audit Documentation
Audit documentation is the principal record

of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement.

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Audit Documentation

Purposes of audit documentation Ownership of audit files Confidentiality of audit files

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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.

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Learning Objective 6
Prepare organized audit documentation.

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Audit File Contents and Organization

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

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Current Files
Audit program General information

Working trial balance

Adjusting and reclassification entries Supporting schedules
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Relationship of Audit Documentation to Financial Statements

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Types of Supporting Schedules

Analysis
Trial balance or list Reconciliation of amounts Tests of reasonableness

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Types of Supporting Schedules

Summary of procedures
Examination of supporting documents Informational Outside documentation

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Preparation of Audit Documentation

Proper identification of each file Files indexed and cross-referenced Clear indication of work performed Include sufficient information

State conclusions reached

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Preparation of Audit Documentation

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

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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
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End of Chapter 7

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