1. SOMETIMES THE MOST IMPORTANT EVIDENCE IS NOT FOUND IN THE7
AUDIT EVIDENCE
SOMETIMES THE MOST IMPORTANT
EVIDENCE IS NOT FOUND IN THE
ACCOUNTING RECORDS

2. Four Evidence Decisions
Which audit procedures to use
What sample size to select for a given procedure
Which items to select from the population
When 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 7-1
Characteristics of Evidence for a Scientific Experiment,
Legal Case, and Audit of Financial Statements

5. Persuasiveness of Evidence
Relevance
Competence
Appropriateness
Independence of provider
Effectiveness of internal controls
Auditor’s direct knowledge
Qualifications of individual
Objective nature of evidence
Sufficiency
Timeliness

6. TYPES OF AUDIT EVIDENCE
1. Physical examination
2. Confirmation
3. Documentation
4. Observation
5. Inquiries of the client
6. Recalculation
7. Analytical procedures

7. TABLE 7 - 3 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 Public warehouse
Cash surrender value of life insurance Insurance company
Liabilities
Accounts payable Creditor
Notes payable Lender
Advances from customers Customer
Mortgages payable Mortgagor
Bonds payable Bondholder
Owners’ Equity
Shares outstanding Registrar and transfer agent
Other Information
Insurance coverage Insurance company
Contingent liabilities Bank, lender, and client’s counsel
Bond indenture agreements Bondholder
Collateral held by creditors Creditor

8. Criteria to Determine Competence
TABLE Competence to Types of Evidence
Criteria to Determine Competence

9. Timing and Purposes of Analytical Procedures
FIGURE
Timing and Purposes of Analytical Procedures
Phase
(Required)
Planning
Phase
(Required)
Completion
Phase
Purpose
Testing
Phase
Understand client’s
industry and
business
Primary
purpose
Assess going
concern
Secondary
purpose
Secondary
purpose
Indicate possible
misstatements
(attention directing)
Secondary
purpose
Primary
purpose
Primary
purpose
Reduce detailed
tests
Secondary
purpose
Primary
purpose

10. ANALYTICAL PROCEDURES
FIVE TYPES OF
ANALYTICAL PROCEDURES
1. Compare client and industry data.
2. Compare client data with similar
prior-period data.
3. Compare client data with
client-determined expected results.
4. Compare client data with
auditor-determined expected results.
5. Compare client data with expected results,
using nonfinancial data.

11. Compare Client and Industry Data
Inventory turnover
Gross margin percent % % 27.3% %

12. Internal Comparisons and Relationships
TABLE 7 - 7
Internal Comparisons and Relationships
Ratio or Comparison Possible Misstatement
Raw material turnover for a Misstatement of inventory or
manufacturing company cost of goods sold or obsolescence
of raw material inventory
Sales commissions divided by Misstatement of sales commissions
net sales
Sales returns and allowances Misclassified sales returns and
divided by gross sales allowances or unrecorded returns or
allowances subsequent to yearend
Cash surrender value of life insurance Failure to record the change in cash
(current year) divided by cash surrender surrender value or an error in recording
value of life insurance (preceding year) the change
Each of the individual manufacturing Significant misstatement of individual
expenses as a percentage of total expenses within a total
manufacturing expense

13. USING STATISTICAL TECHNIQUES AND COMPUTER SOFTWARE
The use of statistical techniques is desirable to make analytical
procedures more relevant.
Many auditors use computer software to make statistical
and nonstatistical calculations easier.

14. Common Financial Ratios
Short-Term Debt-Paying Ability
Short-Term Liquidity
Ability to Meet Long-Term Debt
Obligations and Preferred Dividends
Operating and Performance Ratios

15. Essential Terms Analytical Procedures Audit Procedure Audit Program
Budgets
Competence of Evidence
Confirmation
Documentation
External Document
Inquiry
Internal document
Observation
Persuasiveness of evidence
Physical examination
Reliability of evidence
Reperformance
Sufficiency of evidence
Unusual fluctuations
Vouching