2. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 1 Audit Evidence Chapter 7

3. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 2 Learning Objective 1 Contrast audit evidence with evidence used by other professions.

4. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 3 Nature of Evidence The use of evidence is not unique to auditors. Evidence is also used by scientists, lawyers, and historians.

5. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 4 Learning Objective 2 Identify the four audit evidence decisions that are needed to create an audit program.

6. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 5 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

7. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 6 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.

8. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 7 Learning Objective 3 Specify the characteristics that determine the persuasiveness of evidence.

9. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 8 Persuasiveness of Evidence Competence Sufficiency Combined effect Persuasiveness and cost

10. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 9 Competence Relevance Independence of provider Effectiveness of internal controls Auditor’s direct knowledge Qualifications of provider Objectivity of evidence Timeliness

11. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 10 Learning Objective 4 Identify and apply the seven types of evidence used in auditing.

12. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 11 Types of Audit Evidence 1. Physical evidence 2. Confirmation 3. Documentation 4. Analytical procedures 5. Inquiries of the client 6. Reperformance 7. Observation

13. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 12 Relationships Auditingstandards Qualifications and conduct Reporting Evidenceaccumulation Types of evidence Broad guidelines Broad categories

14. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 13 Relationships Types of evidence Auditprocedures Items to select Specific instructions SamplesizeTiming of tests

15. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 14 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.

16. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 15 Information Often Confirmed InformationSource Liabilities Accounts payableCreditor Notes payableLender Advances from customersCustomer Mortgages payableMortgagor Bonds payableBondholder

17. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 16 Information Often Confirmed InformationSource Owners’ Equity Shares outstandingRegistrar and transfer agent

18. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 17 Information Often Confirmed InformationSource Other Information Insurance coverageInsurance company Contingent liabilitiesBank, lender,and client’s counsel Bond indenture agreementsBondholder Collateral held by creditorsCreditor

19. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 18 Information Often Confirmed Documentation Analytical procedures Inquiries of the client Reperformance Observation

20. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 19 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

21. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 20 Terms and Types of Evidence ExamineScanReadComputeRecomputeFootTermsDocumentation Analytical procedures Documentation ReperformanceReperformance Types of Evidence

22. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 21 Terms and Types of Evidence TraceCompareCountObserveInquireVouchDocumentationDocumentation Physical examination Observation Inquiries of client Documentation Terms Types of Evidence

23. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 22 Learning Objective 5 Understand the purposes of audit documentation.

24. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 23 Audit Documentation Purposes of audit documentation Ownership of audit files Confidentiality of audit files

25. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 24 Audit Documentation Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement.

26. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 25 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.

27. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 26 Learning Objective 6 Prepare organized audit documentation.

28. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 27 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

29. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 28 Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to the current audit.

30. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 29 Current Files Audit program General information Working trial balance Adjusting and reclassification entries Supporting schedules

31. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 30 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-2 5 5 Cash in Bank: General A-3186(90) 96 Payroll A-4 21 21 212(90)122

32. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 31 LEAD SCHEDULE – CASHA-1 Per G/L AJE’sFinal Per G/L AJE’sFinal Petty Cash A-2 5 5 Cash in Bank: General A-3186(90) 96 Payroll A-4 21 21 212(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

33. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 32 Types of Supporting Schedules Analysis Trial balance or list Reconciliation of amounts Tests of reasonableness

34. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 33 Types of Supporting Schedules Summary of procedures Examination of supporting documents Informational Outside documentation

35. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 34 Learning Objective 7 Describe how e-commerce affects audit evidence and audit documentation.

36. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 35 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.

37. ©2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 7 - 36 End of Chapter 7