©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Audit Evidence Chapter 7

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Learning Objective 1 Contrast audit evidence with evidence used by other professions.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Nature of Evidence The use of evidence is not unique to auditors. Evidence is also used by scientists, lawyers, and historians.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Learning Objective 2 Identify the four audit evidence decisions that are needed to create an audit program.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 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.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Learning Objective 3 Specify the characteristics that determine the persuasiveness of evidence.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Persuasiveness of Evidence Competence Sufficiency Combined effect Persuasiveness and cost

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Competence Relevance Independence of provider Effectiveness of internal controls Auditor’s direct knowledge Qualifications of provider Objectivity of evidence Timeliness

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Learning Objective 4 Identify and apply the seven types of evidence used in auditing.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Types of Audit Evidence 1. Physical evidence 2. Confirmation 3. Documentation 4. Analytical procedures 5. Inquiries of the client 6. Reperformance 7. Observation

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Relationships Auditingstandards Qualifications and conduct Reporting Evidenceaccumulation Types of evidence Broad guidelines Broad categories

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Relationships Types of evidence Auditprocedures Items to select Specific instructions SamplesizeTiming of tests

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Information Often Confirmed InformationSource Assets Cash in bankBank Accounts receivableCustomer Notes receivableMaker Owned inventory out on consignmentConsignee Inventory held in public warehousesWarehouse Cash surrender value of life insuranceInsurance co.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Information Often Confirmed InformationSource Liabilities Accounts payableCreditor Notes payableLender Advances from customersCustomer Mortgages payableMortgagor Bonds payableBondholder

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Information Often Confirmed InformationSource Owners’ Equity Shares outstandingRegistrar and transfer agent

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Information Often Confirmed InformationSource Other Information Insurance coverageInsurance company Contingent liabilitiesBank, lender,and client’s counsel Bond indenture agreementsBondholder Collateral held by creditorsCreditor

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Information Often Confirmed Documentation Analytical procedures Inquiries of the client Reperformance Observation

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Competence of Types of Evidence Type of evidence Effectiveness of client’s internal controls Qualifications of provider Independence Auditor’s direct knowledge Objectivity of evidence

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Terms and Types of Evidence ExamineScanReadComputeRecomputeFootTermsDocumentation Analytical procedures Documentation ReperformanceReperformance Types of Evidence

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Terms and Types of Evidence TraceCompareCountObserveInquireVouchDocumentationDocumentation Physical examination Observation Inquiries of client Documentation Terms Types of Evidence

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Learning Objective 5 Understand the purposes of audit documentation.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Audit Documentation Purposes of audit documentation Ownership of audit files Confidentiality of audit files

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Audit Documentation Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Audit Documentation 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.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Learning Objective 6 Prepare organized audit documentation.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Audit File Contents and Organization Derrickson Associates Trial Balance 12/31/2004 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

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to the current audit.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Current Files Audit program General information Working trial balance Adjusting and reclassification entries Supporting schedules

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Relationship of Audit Documentation to Financial Statements FINANCIAL STATEMENTS Cash122 Acc. …………………. FINANCIAL STATEMENTS Cash122 Acc. …………………. WORKING TRIAL BALANCE Prelim. AJE’s Final Prelim. AJE’s Final Cash212(90)122 AJE’s AJE’s Expense90 Cash90 LEAD SCHEDULE – CASHA-1 Per G/L AJE’sFinal Per G/L AJE’sFinal Petty Cash A Cash in Bank: General A-3186(90) 96 Payroll A (90)122

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley LEAD SCHEDULE – CASHA-1 Per G/L AJE’sFinal Per G/L AJE’sFinal Petty Cash A Cash in Bank: General A-3186(90) 96 Payroll A (90)122 Relationship of Audit Documentation to Financial Statements A-2 A-2 Cash Count Sheet A-3 A-3 Bank Reconciliation A-4 A-4 Bank Reconciliation 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

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Types of Supporting Schedules Analysis Trial balance or list Reconciliation of amounts Tests of reasonableness

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Types of Supporting Schedules Summary of procedures Examination of supporting documents Informational Outside documentation

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Learning Objective 7 Describe how e-commerce affects audit evidence and audit documentation.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley Effect of E-commerce Audit evidence is increasingly in electronic form. Auditors use computers to read and examine evidence. Software programs are typically Windows-based.

©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley End of Chapter 7