Audit Evidence

Chapter 8

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-1

 Nature of Evidence
 The use of evidence is not unique to auditors

 Evidence is also used by scientists, lawyers,

and historians

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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)

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-3

 Persuasiveness of Evidence
Two determinants:

 Appropriateness

 Sufficiency

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 Six Characteristics of Reliable
Evidence
1. Independence of provider

2. Effectiveness of client’s
internal controls

3. Auditor’s direct knowledge

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 Six Characteristics of Reliable
Evidence
4. Qualification of individuals
providing the information

5. Degree of objectivity

6. Timeliness

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-6

 Relationships Among Audit
Evidence and Persuasiveness
Qualities Affecting Persuasiveness
Audit Evidence Decisions 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
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-7
 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.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-8

 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

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-9

 Relationships Broad guidelines
concerning auditor
Auditing qualifications and
standards conduct, evidence
Qualifications accumulation,
and conduct and reporting
Evidence
Physical examination accumulation
Confirmation Reporting
Documentation
Analytical procedures Types of
Inquiries of the client evidence Broad categories of
Recalculation evidence available
Reperformance for the auditor’s
Observation accumulation
Audit
procedures Specific instructions
FOUR for the accumulation
AUDIT of types of evidence
EVIDENCE Sample size
DECISIONS and items
to select Timing
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of tests 7 - 10
 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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 Confirmation
Information Source

Assets
Cash in bank Bank
Accounts receivable Customer
Notes receivable Maker
Owned inventory out on consignment Consignee
Inventory held in public warehouses Public warehouse
Cash surrender value of life insurance Insurance company

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 Confirmation
Information Source

Liabilities
Accounts payable Creditor
Notes payable Lender
Advances from customers Customer
Mortgages payable Mortgagor
Bonds payable Bondholder

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 Confirmation
Information Source

Owners’ Equity
Shares outstanding Registrar and
transfer agent

Other Information
Insurance coverage Insurance company
Contingent liabilities Bank, lender, and
client’s legal counsel
Bond indenture agreements Bond holder
Collateral held by creditors Creditor
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 Documentation

It is the auditor’s inspection of the

client’s documents and records.

Internal External
documents documents

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 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

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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 auditor’s independent tests of client

accounting procedures or controls that
were originally done.

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 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.

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 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

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 Terms and Types of Evidence
Terms Type of Evidence
Examine Documentation
Scan Analytical procedures
Read Documentation
Compute Analytical procedures
Recompute Recalculation
Foot Recalculation
Trace Documentation/Reperformance
Compare Documentation
Count Physical examination
Observe Observation
Inquire Inquiries of client
Vouch 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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 Purposes of audit documentation:
the overall objective of audit documentation
is to aid the auditor in providing reasonable
assurance that an adequate audit was
conducted in accordance with auditing
standards. Audit documentation provides:
1- A basis for planning the audit.
2- A record of the evidence accumulated and
the results of the tests.
3- Data for determining the proper type of
audit report.
4- A basis for review by supervisors and
partners
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 Ownership of audit files
Audit documentation prepared during
the engagement, including schedules
prepared by the client for the auditor, is
the property of the auditor. The only time
anyone else, including the client, has a
legal right to examine the files is when
they are subpoenaed by a court as legal
evidence.

©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 26

 Ownership of audit files
At the completion of the engagement,
audit files are retained on the CPA’s
premises for future reference and to
comply with auditing standards related
to document retention.

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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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 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
The current files include all audit
documentation applicable to the year under
audit. The following are types of information
often included in the current file:
 Audit program
 General information
 Working trial balance
 Adjusting and reclassification entries
 Supporting schedules
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7 - 30
 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
 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

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