Chapter 7

Audit Planning and Analytical

Procedures

Presentation Outline
I.
II.
III.

Defining Audit Evidence

Types of Audit Evidence
Audit Documentation

I. Defining Audit Evidence

Audit Evidence Decisions

Persuasiveness of Audit Evidence
C. Competence Considerations
A.

B.

A. Audit Evidence Decisions

Audit procedures to use specific procedures
should be spelled out for instruction during the
audit.
Sample size how many items should be tested
for each audit procedure.
Items to select determine which items in the
population should be selected.
Timing timing can vary from early in the
accounting period to long after it has ended.

B. Persuasiveness of Audit Evidence

Audit evidence is any information used by the
auditor to determine whether the information being
audited is stated in accordance with established
criteria. Two determinants of persuasiveness of
evidence are:
Competence the degree to which evidence can be
considered trustworthy.
Sufficiency amount of evidence is enough to
form a reasonable opinion.

C. Competence Considerations
Relevance must pertain to the audit objective being
tested.
Independence evidence from outside the client is a
stronger form of evidence
Effectiveness of client internal controls good internal
controls can mean better information.
Auditor direct knowledge auditor determinations are
stronger that client comments.
Qualifications individual is a qualified source.
Degree of objectivity objective evidence is stronger
than subjective evidence.
Timeliness balance sheet account evidence is better
when it is collected around the date of the financial
statement. Income statement evidence should sample
entire period.

II. Types of Audit Evidence

A.
B.
C.
D.

Physical examination
Confirmations
Documentation
Analytical
Procedures

E.
F.
G.

Inquiries of the
Client
Reperformance
Observation

A. Physical Examination

Inspection or count by
the auditor of a
tangible asset.
Different from
examining
documentation is that
the asset has inherent
value.

B. Confirmations
The receipt of a written or oral response from an
independent third party. Auditor has client request
that the third party respond directly to the auditor.
Positive Confirmations
Negative Confirmations
Asks for response even
if balance is correct.
More reliable than
negative
confirmations.

Asks for a response

only if balance is
incorrect.
Uncertainty associated
with no response.

Confirmation of accounts receivable is normally required when practical

reasonable (SAS 67)

B. Confirmations (Continued)
1. Customers Confirm A/R balances
2. Vendors Confirm A/P balances
3. Banks Confirm checking account and loan
balances
4. Attorneys Confirm contingent liabilities
5. Inventory Agents Confirm consignments

C. Documentation

1.
2.
3.

Types of Documents
Document Vouching
Document Tracing

1. Types of Documents
Examine supporting evidence in client files.

Internal Documents
Prepared and used
within client company.
Does not go outside the
client.

External Documents
Document has been in
hands of an outside
party to the
transaction.
More reliable than
internal documents.

Recorded Item
Supporting
Document

2. Document Vouching

Examination of
documents that support a
recorded transaction or
amount.
The direction of testing
must be from the
recorded item to the
supporting document.
Tests existence or
occurrence

Supporting
Document
Recorded
Item

3. Document Tracing

The primary test for

unrecorded items and
therefore tests the
completeness
assertion.
The direction of
testing must be from
the supporting
document to the
recorded item.

D. Analytical Procedures
Audits studies relationships among data. Unusual
fluctuations occur when significant difference are
not expected but do exist or when significant
differences are expected but do not exist. Required
during the planning and completion phases on all
audits.

E. Inquiries of the Client

Auditor obtains
information from the
client in response to
questions.
Although much
evidence is obtained
through inquiry, it can
not be regarded as
conclusive and may be
biased in the clients
favor.

F. Reperformance
Reperformance involves rechecking a sample of the
computations and transfers of information. Rechecking of
computations consists of testing mathematical accuracy.
Rechecking of transfers of information involves seeing if
information is recorded consistently in the accounting records.

I dont think
this is what they
meant by
reperformance!

H. Observation
Auditor witnesses the physical activities of
the client.
Differs from physical examination because
physical examination counts assets, while
observation focuses on client activities.

III. Audit Documentation

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

Working Papers Files

B. Typical Working Paper Format
C. Storage of Working Papers
D. Ownership of Working Papers
A.

The Sarbanes-Oxley Act requires auditors of public companies to prepare

and maintain audit working papers for a period of no less than 7 years.

A. Working Papers Files

Working papers provide the principal record that the
audit has conformed to GAAS. Also provide
information for deciding on the proper report.
Permanent File

Current File

Information that is
relevant for multiple
years on recurring
engagements.

Information relevant
for a given audit client
for a particular audit
year.

(See examples on
page 178)

(See examples on
pages 178-182)

B. Typical Working Paper Format

Headings audit client

name, year under audit, etc.
Indexing arrange papers in
some common order.
Tick marks symbols to key
a footnote to an item.
Sign-off indicates auditors
that prepare and review.

Prepared by: KM
Reviewed by: J.S.

A1

Ricky
Corporation Cash
1st Savings

234.00

Traced to bank
reconciliation.

C. Storage of Working Papers

Working papers of
continuing clients are
maintained
indefinitely.
Check with legal
counsel before
discarding any
working papers.

D. Ownership of Working Papers

The working papers are the auditors
property, not the clients.
In most cases, an auditor can not reveal
information in the working papers without
the clients permission.

Summary
I.
II.
III.

Audit Evidence and Persuasiveness

Types of Audit Evidence
Working Paper Format, Storage,
and Ownership