1. Audit Evidence
Chapter 7

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

3. 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

4. Nature of Evidence

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

6. 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
An audit procedure is the detailed instruction that explains the audit evidence to be obtained during the audit.
Once a procedure is selected, auditors can vary the sample size from one to all the items in the population being tested.
The auditor can select a week and examine the first 50 checks or select 50 checks with the largest amounts, or select the checks randomly or select those checks that the auditor thinks are most likely to be in error.
The timing of audit procedures can vary from early in the accounting period to long after it has ended.
4. When to perform the
procedures (timing)

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 audit software
packages to generate audit programs.

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

9. Persuasiveness of Evidence
Two determinants:
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.
Evidence must pertain to the audit objective that the auditor is testing before it can be appropriate.
Reliability of evidence refers to the degree to which evidence can be believable or worthy of trust.
Appropriateness
Sufficiency
The persuasiveness of evidence can be evaluated only after
considering the combination of appropriateness and sufficiency

10. Six Characteristics of Reliable Evidence
1. Independence of provider
2. Effectiveness of client’s
internal controls
3. Auditor’s direct knowledge
4. Qualification of individuals
providing the information
5. Degree of objectivity
6. Timeliness
Evidence obtained from a source outside the entity is more reliable that that obtained from within.
When a client’s internal controls are effective, evidence obtained is more reliable than when they are weak.
Evidence obtained directly by the auditor through physical examination, observation, recalculation, and inspection is more reliable than information obtained indirectly.
Although the source of information is independent the evidence will not be reliable unless the individual providing it is qualified to do so.
Objective evidence is more reliable than evidence that requires considerable judgment to determine whether it is correct.
Timeliness of audit evidence can refer either to when it is accumulated or to the period covered by the audit.

11. 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

12. 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.
The persuasiveness and cost of all alternatives should be considered before selecting the best type of types of evidence.

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

14. Types of Audit Evidence
Physical
Examination
Confirmation
Observation
Audit
Evidence
Documentation
Reperformance
Analytical
procedures
Recalculation
Inquiry

15. Relationships

16. 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.
Some companies are also conducting a physical count of fixed assets to verify assets recorded on the ledger.

17. Confirmations Auditor must confirm accounts receivable
Auditing Standards
Requirements
United States
Auditor must confirm
accounts receivable
Auditors control the mailing
and receipt of replies
Electronic confirmations
are permitted
Electronic confirmations are permitted but the auditor may decide to verify authenticity
of the responder
International
Confirmations are not required

18. Information often Confirmed

19. client’s documents and records.
Documentation
It is the auditor’s inspection of the
client’s documents and records.
Internal
documents
External
documents
Internal documents are prepared and used within the client’s organization and are retained without ever going to an outside party.
External documents are handled by someone outside the client's organization who is a party to the transaction being documented but which are either currently held by the client or readily accessible.

20. 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
Understanding the business is an audit requirement
Analytical procedures are often a useful indicator for determining whether the client company has financial problems.
If the unusual fluctuation is large, the auditor must determine the reason and be satisfied that the cause is a valid economic event and not a misstatement.
When no unusual fluctuations are noted, the risk of material misstatement is minimized.

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

22. Recalculation It involves rechecking a sample of calculations
made by the client.
Auditor is merely testing the arithmetical accuracy of client’s records. This may include the following: extending sales invoices and inventory, adding journals and subsidiary records and checking calculations of depreciation expense.

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

24. Observation Use one’s senses to assess client activities.
Tour plant to obtain a general
impression of client’s facilities.
Observation is rarely sufficient
by itself.
Often need to corroborate
with another kind of evidence.
Observation is rarely sufficient by itself because of the risk of client personnel changing their behavior
because of the auditor’s presence.

25. Appropriateness of Types of Evidence

26. Application of Types of evidence to the four Evidence Decisions

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

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

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

30. Audit Documentation Purposes of audit documentation
Ownership of audit files
Confidentiality of audit files
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 files are the property of the auditor.
Rule 301 of the Code of Professional Conduct states, a member shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client.

31. 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.
Working papers form the basis of the audit of the company’s annual financial statements or review of the company’s quarterly financial statements.
SEC rules require the auditor to maintain copies of memos, correspondence, communications, other documents and records, including electronic records, related to the audit or review.

32. Learning Objective 6
Prepare organized audit documentation.

33. Audit File Contents and Organization

34. Permanent Files These files are intended to contain
data of a historical or continuing
nature pertinent to the current audit.
Permanent files contain: copies of articles of incorporation, bylaws, bond indentures and contracts.
analyses from previous years of accounts that have continuing importance to the auditor.
information related to understanding internal control and assessing control risk.
results of analytical procedures from previous years’ audits.

35. Current Files Audit program General information Working trial balance
Adjusting and reclassification entries
Supporting schedules
Auditing standards require a written program for every audit.
General information may include planning memos, abstracts or copies of minutes of board meetings, review comments and general conclusions.
Supporting schedules are prepared by the client or auditor in support of specific amounts on the financial statements.

36. Relationship of Audit Documentation to Financial Statements
Discuss how work papers are organized and how lead schedules support and directly tie to the amounts shown on the trial balance.

37. Types of Supporting Schedules
Analysis
Trial balance or list
Reconciliation of amounts
Tests of reasonableness
Analysis is designed to show the activity in a general ledger account during the entire period under audit.
A trial balance or list consists of the details that make up a year-end balance or a general ledger account.
A reconciliation supports a specific amount and is normally expected to tie the amount recorded in the client’s records to another source of information.
Tests of reasonableness contain information that enables the auditor to evaluate whether the client’s balance appears to include a misstatement considering the circumstances in the engagement.

38. Types of Supporting Schedules
Summary of procedures
Examination of supporting documents
Informational
Outside documentation
Another type of schedule summarizes the results of a specific audit procedure.
A number of special purpose schedules are designed to show detailed tests performed, such documents examined during tests of controls and substantive tests of transactions.
An informational schedule contains information as opposed to audit evidence.
Outside documentation represents evidence gathered by auditor from outside parties such as confirmation replies and copies of client agreements.

39. 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
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

40. Preparation of Audit Documentation

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

42. 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

43. End of Chapter 7