Audit Evidence Chapter 7

Contrast audit evidence Learning Objective 1 Contrast audit evidence with evidence used by other professions.

Nature of Evidence The use of evidence is not unique to auditors. Evidence is also used by scientists, lawyers, and historians.

Identify the four audit evidence decisions that are needed to Learning Objective 2 Identify the four audit evidence decisions that are needed to create an audit program.

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.

Specify the characteristics Learning Objective 3 Specify the characteristics that determine the persuasiveness of evidence.

Persuasiveness of Evidence Competence Sufficiency Combined effect Persuasiveness and cost

Competence Relevance Independence of provider Effectiveness of internal controls Auditor’s direct knowledge Qualifications of individuals Degree of objectivity Timeliness

seven types of evidence Learning Objective 4 Identify and apply the seven types of evidence used in auditing.

Types of Audit Evidence 1. Physical examination 2. Confirmation 3. Documentation 4. Analytical procedures 5. Inquiries of the client 6. Reperformance 7. Observation

Relationships Auditing standards Broad guidelines Qualifications and conduct Evidence accumulation Reporting Types of evidence Broad categories

Relationships Types of evidence Audit procedures Specific instructions Sample size Items to select Timing of tests

Information Often Confirmed Information Source Assets Cash in bank Bank Accounts receivable Customer Notes receivable Maker Owned inventory out on consignment Consignee Inventory held in public warehouses Warehouse Cash surrender value of life insurance Insurance co.

Information Often Confirmed Information Source Liabilities Accounts payable Creditor Notes payable Lender Advances from customers Customer Mortgages payable Mortgagor Bonds payable Bondholder

Information Often Confirmed Information Source Owners’ Equity Shares outstanding Registrar and transfer agent

Information Often Confirmed Information Source Other Information Insurance coverage Insurance company Contingent liabilities Bank, lender, and client’s counsel Bond indenture agreements Bondholder Collateral held by creditors Creditor

Criteria to Determine Competence Type of evidence Auditor’s direct knowledge Independence of provider Qualifications of provider Effectiveness of client’s internal controls Objectivity of evidence

Terms and Types of Evidence Examine Documentation Scan Analytical procedures Read Documentation Compute Analytical procedures Recompute Reperformance Foot Reperformance

Terms and Types of Evidence Trace Documentation Compare Documentation Count Physical examination Observe Observation Inquire Inquiries of client Vouch Documentation

Understand the purposes of audit documentation. Learning Objective 5 Understand the purposes of audit documentation.

Audit Documentation Purposes of audit documentation Ownership of audit files Confidentiality of audit files

Learning Objective 6 Prepare organized audit documentation.

Audit File Contents and Organization Financial Statements and Audit Report Analytical Procedures Test of Controls & Substantive TOT Working Trial Balance Derrickson Associates Trial Balance 12/31/2003 Cash $165,237 Accounts Receivable 275,050 Prepaid Insurance 37,795 Interest Receivable 20,493 Adjusting Journal Entries Internal Control Contingent Liabilities General Information Operations Liabilities and Equity Audit Programs Assets Permanent Files

Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to the current audit.

Adjusting and reclassification entries Current Files Audit program General information Working trial balance Adjusting and reclassification entries Supporting schedules

Relationship of Audit Documentation to Financial Statements Cash 122 Acc. …………………. WORKING TRIAL BALANCE Prelim. AIE’s Final Cash 212 (90) 122 AIE’s Expense 90 Cash 90

Relationship of Audit Documentation to Financial Statements LEAD SCHEDULE – CASH A-1 Per G/1 AIE’s Final Petty Cash A-2 5 5 Cash in Bank: General A-3 186 (90) 96 Payroll A-4 21 21 212 (90) 122

Relationship of Audit Documentation to Financial Statements Cash Count Sheet A-3 Bank Reconciliation A-3/1 Confirmation A-3/2 O/S Check List

Relationship of Audit Documentation to Financial Statements Bank Reconciliation A-4/1 Confirmation A-4/2 O/S Check List

Types of Supporting Schedules Analysis Trial balance Reconciliation of amounts Tests of reasonableness Summary of procedures Examination of supporting documents Informational Outside documentation

Describe how e-commerce affects audit evidence and Learning Objective 7 Describe how e-commerce affects audit evidence and audit documentation.

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.

End of Chapter 7