Presentation on theme: "Audit Evidence Chapter 7. Generally Accepted Auditing Standards Third Standard of Field Work Sufficient competent evidential matter is to be obtained."— Presentation transcript:
Generally 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.
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
Audit Program It includes a list of the audit procedures the auditor considers necessary. Most auditors use computers to facilitate the preparation of audit programs. Sample sizes Items to select Timing of the tests
Persuasiveness of Evidence Competence and sufficiency are determinants of the persuasiveness of evidence. Factors affecting competence include: Relevance to audit objective Independence of provider Effectiveness of internal controls Auditor’s direct knowledge Qualifications of providers Degree of objectivity Timeliness
Types of Audit Evidence 1.Physical examination (tangible assets) 2.Confirmation (positive and negative) 3.Documentation 4.Analytical procedures 5.Inquiries of the client 6.Reperformance 7.Observation
Confirmations and Information Often Confirmed Assets Cash in bank (example)Bank Accounts receivableCustomer Notes receivableMaker Owned inventory out on consignmentConsignee Inventory held in public warehousesWarehouse Cash surrender value of life insuranceInsurance co. InformationSource Confirmations may be positive or negative. Procedures for non-response positives Procedures for non-response positives
Information Often Confirmed Liabilities Accounts payableCreditor Notes payableLender Advances from customersCustomer Mortgages payableMortgagor Bonds payableBondholder InformationSource
Information Often Confirmed Owners’ Equity Shares outstandingRegistrar and transfer agent Other Information Insurance coverageInsurance co. Contingent liabilitiesBank, lender, and clients legal counsel Bond indenture agreementsBondholder Collateral held by creditorsCreditor InformationSource
Other Forms of Evidence Documentation – Client’s documents and records Internal vs. External documents Tracing vs. Vouching – see next slide
Tracing vs. Vouching (Figure 6-7 is from another text) Inspection of Documents or Records VouchingTracing Note: students should understand the differences between tracing and vouching.
Reliability of Documentary Evidence (Figure 6-5 is from another text)
Other Forms of Evidence: Analytical procedures Importance of context – understanding the client’s business and industry Analytical procedures are used for: Assessing going concern Assessing going concern Finding possible misstatements in the financials Finding possible misstatements in the financials Reducing detailed audit tests Reducing detailed audit tests
Other Forms of Evidence Inquiries of the client – written or oral Reperformance – verifying calculations or information processing information processing Observation
Competence of Types of Evidence, Table 7-4 (p. 172)
Terms and Types of Evidence, Table 7-6, (p. 175) ExamineDocumentation ScanAnalytical procedures ReadDocumentation ComputeAnalytical procedures RecomputeReperformance FootReperformance TermsType of Evidence
Terms and Types of Evidence TraceDocumentation/ Reperformance CompareDocumentation CountPhysical examination ObserveObservation InquireInquiries of client VouchDocumentation TermsType of Evidence
Audit Documentation Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement.
Audit Documentation Purposes of audit documentation – primary means to support that the audit was conducted in accordance with GAAS. Ownership of audit files Confidentiality of audit files – rule 301, chapter 4.
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.
Audit File Contents and Organization Robinson Associates Trial Balance 12/31/05 Cash$165,237 Accounts Receivable 275,050 Prepaid Insurance 37,795 Interest Receivable 20,493 Financial Statements and Audit Report Working Trial Balance Adjusting Journal Entries ContingentLiabilities Operations Liabilities and Equity AssetsAnalyticalProcedures Test of Controls & Substantive TOT InternalControl GeneralInformation AuditPrograms PermanentFiles
Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to the current audit. Examples include: Articles of incorporation Articles of incorporation Loan agreements Loan agreements Documents related to understanding I/C Documents related to understanding I/C Leases Leases
Current Files Audit program General information Working trial balance Adjusting and reclassification entries Supporting schedules
Relationship of Audit Documentation to Financial Statements FINANCIAL STATEMENTS FINANCIAL STATEMENTS Cash122 Acc. …………………. FINANCIAL STATEMENTS FINANCIAL STATEMENTS Cash122 Acc. …………………. WORKING TRIAL BALANCE Prelim. AJE’s Final Prelim. AJE’s Final Cash212(90)122 AJE’s AJE’s Expense90 Cash 90 LEAD SCHEDULE – CASHA-1 Per G/L AJE’sFinal Per G/L AJE’sFinal Petty Cash A-2 5 5 Cash in Bank: General A-3186(90) 96 Payroll A-4 21 21 212(90)122
Relationship of Audit Documentation to Financial Statements LEAD SCHEDULE – CASHA-1 Per G/L AJE’sFinal Per G/L AJE’sFinal Petty Cash A-2 5 5 Cash in Bank: General A-3186(90) 96 Payroll A-4 21 21 212(90)122 A-3/1 A-3/1Confirmation A-3/2 A-3/2 O/S Check List A-4/2 A-4/2 O/S Check List A-4/1 A-4/1Confirmation A-2 A-2 Cash Count Sheet A-3 A-3 Bank Reconciliation A-4 A-4 Bank Reconciliation
Types of Supporting Schedules Analysis Trial balance or list Reconciliation of amounts Tests of reasonableness
Types of Supporting Schedules Summary of procedures Examination of supporting documents Informational Outside documentation
Characteristics 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.
Effect of E-commerce 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.