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7 AUDIT EVIDENCE SOMETIMES THE MOST IMPORTANT EVIDENCE IS NOT FOUND IN THE ACCOUNTING RECORDS.

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Presentation on theme: "7 AUDIT EVIDENCE SOMETIMES THE MOST IMPORTANT EVIDENCE IS NOT FOUND IN THE ACCOUNTING RECORDS."— Presentation transcript:

1 7 AUDIT EVIDENCE SOMETIMES THE MOST IMPORTANT EVIDENCE IS NOT FOUND IN THE ACCOUNTING RECORDS

2 ¶ Which audit procedures to use ¶ What sample size to select for a given procedure ¶ Which items to select from the population ¶ When to perform the procedures ¶ Which audit procedures to use ¶ What sample size to select for a given procedure ¶ Which items to select from the population ¶ When to perform the procedures Four Evidence Decisions

3 Audit program - Includes all audit procedures the audit considers necessary in the circumstances. Think: URACECV Audit program - Includes all audit procedures the audit considers necessary in the circumstances. Think: URACECV

4 Characteristics of Evidence for a Scientific Experiment, Legal Case, and Audit of Financial Statements Characteristics of Evidence for a Scientific Experiment, Legal Case, and Audit of Financial Statements TABLE 7-1

5 RelevanceCompetenceAppropriatenessRelevanceCompetenceAppropriateness Independence of provider Effectiveness of internal controls Auditor’s direct knowledge Qualifications of individual Objective nature of evidence Independence of provider Effectiveness of internal controls Auditor’s direct knowledge Qualifications of individual Objective nature of evidence SufficiencyTimelinessSufficiencyTimeliness

6 TYPES OF AUDIT EVIDENCE 1. Physical examination 2.Confirmation 2. Confirmation 3. Documentation 4. Observation 5. Inquiries of the client 6. Recalculation 7. Analytical procedures

7 TABLE Information Often Confirmed InformationSource Assets Cash in bankBank Accounts receivableCustomer Notes receivableMaker Owned inventory out on consignmentConsignee Inventory held in public warehousesPublic warehouse Cash surrender value of life insuranceInsurance company Liabilities Accounts payableCreditor Notes payableLender Advances from customersCustomer Mortgages payableMortgagor Bonds payableBondholder Owners’ Equity Shares outstandingRegistrar and transfer agent Other Information Insurance coverageInsurance company Contingent liabilitiesBank, lender, and client’s counsel Bond indenture agreementsBondholder Collateral held by creditorsCreditor

8 Criteria to Determine Competence TABLE Competence to Types of Evidence

9 PhasePhase FIGURE Timing and Purposes of Analytical Procedures FIGURE Timing and Purposes of Analytical Procedures Purpose Understand client’s industry and business (Required) Planning Phase Testing Phase (Required) Completion Phase Primary purpose Assess going concern Secondary purpose Secondary purpose Indicate possible misstatements (attention directing) Primary purpose Primary purpose Secondary purpose Reduce detailed tests Secondary purpose Primary purpose

10 FIVE TYPES OF ANALYTICAL PROCEDURES FIVE TYPES OF ANALYTICAL PROCEDURES 1. Compare client and industry data. 2. Compare client data with similar prior-period data. 3. Compare client data with client-determined expected results. 4. Compare client data with auditor-determined expected results. 5. Compare client data with expected results, using nonfinancial data.

11 ClientIndustry Inventory turnover Gross margin percent 26.3% 26.4%27.3% 26.2% Compare Client and Industry Data

12 Internal Comparisons and Relationships Ratio or Comparison Possible Misstatement Raw material turnover for a Misstatement of inventory or manufacturing company cost of goods sold or obsolescence of raw material inventory Sales commissions divided byMisstatement of sales commissions net sales Sales returns and allowancesMisclassified sales returns and divided by gross salesallowances or unrecorded returns or allowances subsequent to yearend Cash surrender value of life insuranceFailure to record the change in cash (current year) divided by cash surrendersurrender value or an error in recording value of life insurance (preceding year)the change Each of the individual manufacturingSignificant misstatement of individual expenses as a percentage of total expenses within a total manufacturing expense TABLE 7 - 7

13 USING STATISTICAL TECHNIQUES AND COMPUTER SOFTWARE USING STATISTICAL TECHNIQUES AND COMPUTER SOFTWARE The use of statistical techniques is desirable to make analytical procedures more relevant. Many auditors use computer software to make statistical and nonstatistical calculations easier. The use of statistical techniques is desirable to make analytical procedures more relevant. Many auditors use computer software to make statistical and nonstatistical calculations easier.

14 Short-Term Debt-Paying Ability Short-Term Liquidity Ability to Meet Long-Term Debt Obligations and Preferred Dividends Operating and Performance Ratios

15 Analytical Procedures Audit Procedure Audit Program Budgets Competence of Evidence Confirmation Documentation External Document Inquiry Analytical Procedures Audit Procedure Audit Program Budgets Competence of Evidence Confirmation Documentation External Document Inquiry Internal document Observation Persuasiveness of evidence Physical examination Reliability of evidence Reperformance Sufficiency of evidence Unusual fluctuations Vouching Internal document Observation Persuasiveness of evidence Physical examination Reliability of evidence Reperformance Sufficiency of evidence Unusual fluctuations Vouching


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