2Generally Accepted Auditing Standards Third Standard of Field Work Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.
3Audit Evidence Decisions 1. Which audit procedures to use2. What sample size to select for a given procedure3. Which items to select from the population4. When to perform the procedures
4Audit Program It includes a list of the audit procedures the auditor considers necessary.Sample sizesItems to selectTiming of the testsMost auditors use computers to facilitatethe preparation of audit programs.
5Persuasiveness of Evidence Competence and sufficiency are determinantsof the persuasiveness of evidence.Factors affecting competence include:Relevance to audit objectiveIndependence of providerEffectiveness of internal controlsAuditor’s direct knowledgeQualifications of providersDegree of objectivityTimeliness
7Types of Audit Evidence Physical examination (tangible assets)Confirmation (positive and negative)DocumentationAnalytical proceduresInquiries of the clientReperformanceObservation
8Confirmations and Information Often Confirmed Confirmations may be positive or negative.Procedures for non-response positivesAssetsCash in bank (example) BankAccounts receivable CustomerNotes receivable MakerOwned inventory out on consignment ConsigneeInventory held in public warehouses WarehouseCash surrender value of life insurance Insurance co.Information Source
9Information Often Confirmed Information SourceLiabilitiesAccounts payable CreditorNotes payable LenderAdvances from customers CustomerMortgages payable MortgagorBonds payable Bondholder
10Information Often Confirmed Information SourceOwners’ EquityShares outstanding Registrar andtransfer agentOther InformationInsurance coverage Insurance co.Contingent liabilities Bank, lender,and clientslegal counselBond indenture agreements BondholderCollateral held by creditors Creditor
11Other Forms of Evidence Documentation – Client’s documents and recordsInternal vs. External documentsTracing vs. Vouching – see next slide
12Tracing vs. Vouching (Figure 6-7 is from another text) Inspection of Documents or RecordsVouchingTracingNote: students should understand the differencesbetween tracing and vouching.
13Reliability of Documentary Evidence (Figure 6-5 is from another text)
14Other Forms of Evidence: Analytical procedures Importance of context – understanding theclient’s business and industryAnalytical procedures are used for:Assessing going concernFinding possible misstatements in the financialsReducing detailed audit tests
15Other Forms of Evidence Inquiries of the client – written or oralReperformance – verifying calculations orinformation processingObservation
16Competence of Types of Evidence, Table 7-4 (p. 172)
17Terms and Types of Evidence, Table 7-6, (p. 175) Examine DocumentationScan Analytical proceduresRead DocumentationCompute Analytical proceduresRecompute ReperformanceFoot ReperformanceTerms Type of Evidence
18Terms and Types of Evidence Terms Type of EvidenceTrace Documentation/ReperformanceCompare DocumentationCount Physical examinationObserve ObservationInquire Inquiries of clientVouch Documentation
19Audit Documentation Audit documentation is the principal record of auditing procedures applied, evidenceobtained, and conclusions reached bythe auditor in the engagement.
20Audit Documentation Purposes of audit documentation – primary means to support that the audit wasconducted in accordance with GAAS.Ownership of audit filesConfidentiality of audit files – rule 301, chapter 4.
21Sarbanes-Oxley Act The Sarbanes-Oxley Act requires auditors of public companies to prepare andmaintain audit workingpapers for a period of noless than seven years.
23Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to thecurrent audit. Examples include:Articles of incorporationLoan agreementsDocuments related to understanding I/CLeases
24Current Files Audit program General information Working trial balance Adjusting and reclassification entriesSupporting schedules
25Relationship of Audit Documentation to Financial Statements CashAcc. ………………….WORKING TRIAL BALANCEPrelim. AJE’s FinalCash (90) 122AJE’sExpense 90CashLEAD SCHEDULE – CASH A-1Per G/L AJE’s FinalPetty Cash ACash in Bank:General A (90)Payroll A(90) 122
26Relationship of Audit Documentation to Financial Statements LEAD SCHEDULE – CASH A-1Per G/L AJE’s FinalPetty Cash ACash in Bank:General A (90)Payroll A(90) 122A-2Cash Count SheetA-3Bank ReconciliationA-4Bank ReconciliationA-3/1ConfirmationA-3/2O/S Check ListA-4/2O/S Check ListA-4/1Confirmation
27Types of Supporting Schedules AnalysisTrial balance or listReconciliation of amountsTests of reasonableness
28Types of Supporting Schedules Summary of proceduresExamination of supporting documentsInformationalOutside documentation
29Characteristics of Audit Documentation Each audit file should be properly identified.Documentation should be indexed andcross-referenced.Completed documentation must clearly indicatethe audit work performed.It should include sufficient information.It should plainly state the conclusions reached.
30Effect of E-commerceAudit evidence is increasingly in electronic form.Auditors must evaluate how electronic informationaffects their ability to gather evidence.Auditors use computers to read and examineevidence.Software programs are typically Windows-based.