Presentation on theme: "SOMETIMES THE MOST IMPORTANT EVIDENCE IS NOT FOUND IN THE"— Presentation transcript:
1 SOMETIMES THE MOST IMPORTANT EVIDENCE IS NOT FOUND IN THE 7AUDIT EVIDENCESOMETIMES THE MOST IMPORTANTEVIDENCE IS NOT FOUND IN THEACCOUNTING RECORDS
2 Four Evidence Decisions Which audit procedures to useWhat sample size to select for a given procedureWhich items to select from the populationWhen to perform the procedures
3 Audit Program Audit program - Includes all audit procedures the audit considers necessary in the circumstances.Think:URACECV
4 Legal Case, and Audit of Financial Statements TABLE 7-1Characteristics of Evidence for a Scientific Experiment,Legal Case, and Audit of Financial Statements
5 Persuasiveness of Evidence RelevanceCompetenceAppropriatenessIndependence of providerEffectiveness of internal controlsAuditor’s direct knowledgeQualifications of individualObjective nature of evidenceSufficiencyTimeliness
6 TYPES OF AUDIT EVIDENCE 1. Physical examination2. Confirmation3. Documentation4. Observation5. Inquiries of the client6. Recalculation7. Analytical procedures
7 TABLE 7 - 3 Information Often Confirmed Information Source AssetsCash in bank BankAccounts receivable CustomerNotes receivable MakerOwned inventory out on consignment ConsigneeInventory held in public warehouses Public warehouseCash surrender value of life insurance Insurance companyLiabilitiesAccounts payable CreditorNotes payable LenderAdvances from customers CustomerMortgages payable MortgagorBonds payable BondholderOwners’ EquityShares outstanding Registrar and transfer agentOther InformationInsurance coverage Insurance companyContingent liabilities Bank, lender, and client’s counselBond indenture agreements BondholderCollateral held by creditors Creditor
8 Criteria to Determine Competence TABLE Competence to Types of EvidenceCriteria to Determine Competence
9 Timing and Purposes of Analytical Procedures FIGURETiming and Purposes of Analytical ProceduresPhase(Required)PlanningPhase(Required)CompletionPhasePurposeTestingPhaseUnderstand client’sindustry andbusinessPrimarypurposeAssess goingconcernSecondarypurposeSecondarypurposeIndicate possiblemisstatements(attention directing)SecondarypurposePrimarypurposePrimarypurposeReduce detailedtestsSecondarypurposePrimarypurpose
10 ANALYTICAL PROCEDURES FIVE TYPES OFANALYTICAL PROCEDURES1. Compare client and industry data.2. Compare client data with similarprior-period data.3. Compare client data withclient-determined expected results.4. Compare client data withauditor-determined expected results.5. Compare client data with expected results,using nonfinancial data.
11 Compare Client and Industry Data Inventory turnoverGross margin percent % % 27.3% %
12 Internal Comparisons and Relationships TABLE 7 - 7Internal Comparisons and RelationshipsRatio or Comparison Possible MisstatementRaw material turnover for a Misstatement of inventory ormanufacturing company cost of goods sold or obsolescenceof raw material inventorySales commissions divided by Misstatement of sales commissionsnet salesSales returns and allowances Misclassified sales returns anddivided by gross sales allowances or unrecorded returns orallowances subsequent to yearendCash surrender value of life insurance Failure to record the change in cash(current year) divided by cash surrender surrender value or an error in recordingvalue of life insurance (preceding year) the changeEach of the individual manufacturing Significant misstatement of individualexpenses as a percentage of total expenses within a totalmanufacturing expense
13 USING STATISTICAL TECHNIQUES AND COMPUTER SOFTWARE The use of statistical techniques is desirable to make analyticalprocedures more relevant.Many auditors use computer software to make statisticaland nonstatistical calculations easier.
14 Common Financial Ratios Short-Term Debt-Paying AbilityShort-Term LiquidityAbility to Meet Long-Term DebtObligations and Preferred DividendsOperating and Performance Ratios
15 Essential Terms Analytical Procedures Audit Procedure Audit Program BudgetsCompetence of EvidenceConfirmationDocumentationExternal DocumentInquiryInternal documentObservationPersuasiveness of evidencePhysical examinationReliability of evidenceReperformanceSufficiency of evidenceUnusual fluctuationsVouching