1. 6 - 1 Copyright  2003 Pearson Education Canada Inc. CHAPTER 6 Audit Evidence

2. 6 - 2 Copyright  2003 Pearson Education Canada Inc. An auditor must address four decisions regarding evidence accumulation:

3. 6 - 3 Copyright  2003 Pearson Education Canada Inc. Which audit procedures should be used? An auditor must address four decisions regarding evidence accumulation:

4. 6 - 4 Copyright  2003 Pearson Education Canada Inc. Which audit procedures should be used? What are audit procedures?

5. 6 - 5 Copyright  2003 Pearson Education Canada Inc. Which audit procedures should be used? An audit procedure is a detailed instruction for the collection of a type of audit evidence.

6. 6 - 6 Copyright  2003 Pearson Education Canada Inc. Which audit procedures should be used? In general, the auditor will seek the most appropriate procedures that are also cost-feasible.

7. 6 - 7 Copyright  2003 Pearson Education Canada Inc. MORE LESS An auditor must address four decisions regarding evidence accumulation: What sample size should be selected?

8. 6 - 8 Copyright  2003 Pearson Education Canada Inc. Which items should be selected for testing? An auditor must address four decisions regarding evidence accumulation:

9. 6 - 9 Copyright  2003 Pearson Education Canada Inc. The auditor will consider: - random/judgmental selection Which items should be selected for testing?

10. 6 - 10 Copyright  2003 Pearson Education Canada Inc. The auditor will consider: - random/judgmental selection - materiality Which items should be selected for testing?

11. 6 - 11 Copyright  2003 Pearson Education Canada Inc. The auditor will consider: - random/judgmental selection - materiality - results of prior audits Which items should be selected for testing?

12. 6 - 12 Copyright  2003 Pearson Education Canada Inc. When should the procedures be performed? An auditor must address four decisions regarding evidence accumulation: December ?

13. 6 - 13 Copyright  2003 Pearson Education Canada Inc. When should the procedures be performed? The auditor will consider procedures that should be performed before, on, or after the balance sheet date. December

14. 6 - 14 Copyright  2003 Pearson Education Canada Inc. When should the procedures be performed? An auditor must address four decisions regarding evidence accumulation: Which items should be selected for testing? What sample size should be selected? Which audit procedures should be used?

15. 6 - 15 Copyright  2003 Pearson Education Canada Inc. When should the procedures be performed? After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed. Which items should be selected for testing? What sample size should be selected? Which audit procedures should be used?

16. 6 - 16 Copyright  2003 Pearson Education Canada Inc. What is an audit program? After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed.

17. 6 - 17 Copyright  2003 Pearson Education Canada Inc. After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed. An audit program is a list of detailed audit procedures for each component or cycle specifying proce- dure timing, sample sizes, and selection methods.

18. 6 - 18 Copyright  2003 Pearson Education Canada Inc. Persuasiveness of evidence is determined by: relevance timeliness sufficiency appropriate- ness

19. 6 - 19 Copyright  2003 Pearson Education Canada Inc. Persuasiveness of evidence is determined by: relevance timeliness sufficiency appropriate- ness Which of these are specifically mentioned in the 3rd examination standard?

20. 6 - 20 Copyright  2003 Pearson Education Canada Inc. sufficiency appropriate- ness Which of these are specifically mentioned in the 3rd examination standard?

21. 6 - 21 Copyright  2003 Pearson Education Canada Inc. relevance Evidence must pertain to the specific audit objective.

22. 6 - 22 Copyright  2003 Pearson Education Canada Inc. relevance Example: An auditor is concerned about the completeness of accounts payable (a/p). Why would confirmation of a/p bal- ances be an irrelevant procedure? Evidence must pertain to the specific audit objective.

23. 6 - 23 Copyright  2003 Pearson Education Canada Inc. relevance Example: An auditor is concerned about the completeness of accounts payable (a/p). Why would confirmation of a/p bal- ances be an irrelevant procedure? Confirmation addresses existence. For completeness, a search is needed.

24. 6 - 24 Copyright  2003 Pearson Education Canada Inc. appropriate- ness Appropriateness concerns the believability and trustworthi- ness of the evidence.

25. 6 - 25 Copyright  2003 Pearson Education Canada Inc. appropriate- ness Appropriateness is determined by: - independence of the evidence provider Appropriateness concerns the believability and trustworthiness of the evidence.

26. 6 - 26 Copyright  2003 Pearson Education Canada Inc. appropriate- ness Appropriateness is determined by: - independence of the evidence provider - effectiveness of client’s internal controls Appropriateness concerns the believability and trustworthiness of the evidence.

27. 6 - 27 Copyright  2003 Pearson Education Canada Inc. appropriate- ness Appropriateness is determined by: - independence of the evidence provider - effectiveness of client’s internal controls - auditor’s direct knowledge Appropriateness concerns the believability and trustworthiness of the evidence.

28. 6 - 28 Copyright  2003 Pearson Education Canada Inc. appropriate- ness Appropriateness is determined by: - independence of the evidence provider - effectiveness of client’s internal controls - auditor’s direct knowledge - qualifications of information provider Appropriateness concerns the believability and trustworthiness of the evidence.

29. 6 - 29 Copyright  2003 Pearson Education Canada Inc. appropriate- ness Appropriateness is determined by: - independence of the evidence provider - effectiveness of client’s internal controls - auditor’s direct knowledge - qualifications of information provider - degree of objectivity Appropriateness concerns the believability and trustworthiness of the evidence.

30. 6 - 30 Copyright  2003 Pearson Education Canada Inc. appropriate- ness Appropriateness is a measure of evidence quality, it cannot be enhanced by a larger sample size. Appropriateness concerns the believability and trustworthiness of the evidence.

31. 6 - 31 Copyright  2003 Pearson Education Canada Inc. sufficiency Sufficiency is a measure of quantity. In general, the larger the sample size, the more persuasive the evidence.

32. 6 - 32 Copyright  2003 Pearson Education Canada Inc. Less evidence yields less assurance and lower audit costs. More evidence yields more assurance and higher audit costs. MORE LESS Auditors must balance the trade-off be- tween gathering more or less evidence.

33. 6 - 33 Copyright  2003 Pearson Education Canada Inc. sufficiency Sufficiency must be addressed for each audit test and each component of the financial statements.

34. 6 - 34 Copyright  2003 Pearson Education Canada Inc. An appropriate sample size may be determined by auditor judgment and/or by statistical sampling. sufficiency Sufficiency must be addressed for each audit test and each component of the financial statements.

35. 6 - 35 Copyright  2003 Pearson Education Canada Inc. sufficiency In determining a sufficient sample size, an auditor will also consider: - “representativeness”

36. 6 - 36 Copyright  2003 Pearson Education Canada Inc. sufficiency - “representativeness” - materiality, large dollar amounts In determining a sufficient sample size, an auditor will also consider:

37. 6 - 37 Copyright  2003 Pearson Education Canada Inc. sufficiency - “representativeness” - materiality, large dollar amounts - items with high probability of misstatement In determining a sufficient sample size, an auditor will also consider:

38. 6 - 38 Copyright  2003 Pearson Education Canada Inc. timeliness When should audit evidence be gathered?

39. 6 - 39 Copyright  2003 Pearson Education Canada Inc. timeliness When should audit evidence be gathered? - evidence related to balance sheet accounts should be collected as close to the balance sheet date as possible

40. 6 - 40 Copyright  2003 Pearson Education Canada Inc. timeliness When should audit evidence be gathered? - evidence related to balance sheet accounts should be collected as close to the balance sheet date as possible - evidence related to income statement accounts should be collected from throughout the period rather than from only part of the period

41. 6 - 41 Copyright  2003 Pearson Education Canada Inc. relevance timeliness sufficiency appropriate- ness Evidence is considered persuasive only if all four determinants have been met.

42. 6 - 42 Copyright  2003 Pearson Education Canada Inc. With regard to the adequacy and costs of audit evidence: absolute certainty convincing evidence requires

43. 6 - 43 Copyright  2003 Pearson Education Canada Inc. requires With regard to the adequacy and costs of audit evidence: absolute certainty convincing evidence high audit costs

44. 6 - 44 Copyright  2003 Pearson Education Canada Inc. With regard to the adequacy and costs of audit evidence: requires absolute certainty convincing evidence high audit costs requires reasonable certainty persuasive evidence

45. 6 - 45 Copyright  2003 Pearson Education Canada Inc. With regard to the adequacy and costs of audit evidence: requires absolute certainty convincing evidence high audit costs requires reasonable certainty persuasive evidence reasonable audit costs

46. 6 - 46 Copyright  2003 Pearson Education Canada Inc. Types of evidence - physical examination - inspection or count by the auditor of a tangible asset very appropriate evidence!

47. 6 - 47 Copyright  2003 Pearson Education Canada Inc. auditor client’s customer - physical examination - confirmation - receipt of a written or oral response from an independent third party at the auditor’s request very appropriate evidence! Types of evidence Canada 46

48. 6 - 48 Copyright  2003 Pearson Education Canada Inc. Types of evidence The confirmation process must be controlled by the auditor. - physical examination - confirmation - receipt of a written or oral response from an independent third party at the auditor’s request

49. 6 - 49 Copyright  2003 Pearson Education Canada Inc. Types of evidence Whenever reasonable, a sample of accounts receivable should be confirmed by the auditor. - physical examination - confirmation - receipt of a written re- sponse from an independent third party at the auditor’s request

50. 6 - 50 Copyright  2003 Pearson Education Canada Inc. - physical examination - confirmation - documentation (vouching) - auditor examination of client documents and records Types of evidence

51. 6 - 51 Copyright  2003 Pearson Education Canada Inc. What is the difference between internal and external documents?

52. 6 - 52 Copyright  2003 Pearson Education Canada Inc. External documents are usually on the client’s premises but were either pre- pared by a third party or processed by a third party (more persuasive). What is the difference between internal and external documents?

53. 6 - 53 Copyright  2003 Pearson Education Canada Inc. Internal documents have been prepared by the client and have not left the client’s premises (less persuasive). What is the difference between internal and external documents?

54. 6 - 54 Copyright  2003 Pearson Education Canada Inc. What is the primary determinant of the appropriateness of internal documents?

55. 6 - 55 Copyright  2003 Pearson Education Canada Inc. What is the primary determinant of the appropriateness of internal documents? internalcontrol

56. 6 - 56 Copyright  2003 Pearson Education Canada Inc. - physical examination - confirmation - documentation What is the difference between physical examination and documentation? Types of evidence

57. 6 - 57 Copyright  2003 Pearson Education Canada Inc. - documentation (vouching) - auditor examination of client documents and records - physical examination - inspection or count by the auditor of a tangible asset What is the difference between physical examination and documentation?

58. 6 - 58 Copyright  2003 Pearson Education Canada Inc. - physical examination - confirmation - documentation (vouching) - observation - using the senses to audit; often an informal procedure requiring follow-up procedures Types of evidence

59. 6 - 59 Copyright  2003 Pearson Education Canada Inc. - physical examination - confirmation - documentation (vouching) - observation - inquiries of client - useful but biased and not persuasive unless supported by another form of evidence CPA Types of evidence

60. 6 - 60 Copyright  2003 Pearson Education Canada Inc. - physical examination - confirmation - documentation (vouching) - observation - inquiries of client - reperformance - checking the accuracy of client calculations and transfers of information (often performed by an audit software package). Types of evidence

61. 6 - 61 Copyright  2003 Pearson Education Canada Inc. - physical examination - confirmation - documentation (vouching) - observation - inquiries of client - reperformance - analytical procedures - involve analy- sis of comparisons and interrelation- ships in data (may be performed by an audit software package). Types of evidence

62. 6 - 62 Copyright  2003 Pearson Education Canada Inc. Analytical procedures should be used during the planning and completion phases of the audit...

63. 6 - 63 Copyright  2003 Pearson Education Canada Inc. Analytical procedures should be used during the planning and completion phases of the audit... but they may also be beneficial at other times during the audit.

64. 6 - 64 Copyright  2003 Pearson Education Canada Inc. Purposes of Analytical Procedures - facilitate understanding of client’s business and industry

65. 6 - 65 Copyright  2003 Pearson Education Canada Inc. Purposes of Analytical Procedures - facilitate understanding of client’s business and industry - may indicate financial difficulty and the cli- ent’s ability to con- tinue as a going concern Bert’s Boutique Going Out of Business Sale!

66. 6 - 66 Copyright  2003 Pearson Education Canada Inc. Purposes of Analytical Procedures - facilitate understanding of client’s business and industry - may indicate financial difficulty and the client’s ability to continue as a going concern - may indicate misstatements in the financial statements

67. 6 - 67 Copyright  2003 Pearson Education Canada Inc. Purposes of Analytical Procedures - facilitate understanding of client’s business and industry - may indicate financial difficulty and the client’s ability to continue as a going concern - may indicate misstatements in the financial statements - may result in a reduction of detailed audit tests

68. 6 - 68 Copyright  2003 Pearson Education Canada Inc. - industry comparisons Types of Analytical Procedures How do the client’s financial ratios compare with those of the industry?

69. 6 - 69 Copyright  2003 Pearson Education Canada Inc. - industry comparisons - comparisons with prior years Ace Company 2003 financial statements Types of Analytical Procedures Ace Company 2004 financial statements

70. 6 - 70 Copyright  2003 Pearson Education Canada Inc. - industry comparisons - comparisons with prior years Ace Company 2003 financial statements Conclusions from a 2-year analy- sis may be erroneous. WHY? Types of Analytical Procedures Ace Company 2004 financial statements

71. 6 - 71 Copyright  2003 Pearson Education Canada Inc. - industry comparisons - comparisons with prior years - comparisons with client-determined expected results, e.g., budgets Types of Analytical Procedures

72. 6 - 72 Copyright  2003 Pearson Education Canada Inc. account can be calculated from sales commissions ????????????????? Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples:

73. 6 - 73 Copyright  2003 Pearson Education Canada Inc. account can be calculated from sales commissions sales depreciation expense ?????????????????? Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples:

74. 6 - 74 Copyright  2003 Pearson Education Canada Inc. account can be calculated from sales commissions sales depreciation expense fixed assets interest expense ?????????????????? Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples:

75. 6 - 75 Copyright  2003 Pearson Education Canada Inc. account can be calculated from sales commissions sales depreciation expense fixed assets interest expense notes/bonds payable Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples:

76. 6 - 76 Copyright  2003 Pearson Education Canada Inc. Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results - comparisons with expected results, using nonfinancial data, example: account can be calculated from equipment maintenance expense ???????

77. 6 - 77 Copyright  2003 Pearson Education Canada Inc. Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results - comparisons with expected results, using nonfinancial data, example: account can be calculated from equipment maintenance expense production

78. 6 - 78 Copyright  2003 Pearson Education Canada Inc. Analytical proce- dures are often facilitated by audit software.

79. 6 - 79 Copyright  2003 Pearson Education Canada Inc. If analytical procedures disclose unusual fluc- tuations or variances, the auditor should in- vestigate by gathering additional evidence.

80. 6 - 80 Copyright  2003 Pearson Education Canada Inc. If analytical procedures disclose unusual fluc- tuations or variances, the auditor should investigate by gathering additional evidence. The auditor should con- sider whether fluctua- tions or variances are material and whether they may be reasonably justifiable.