1. 6 - 1 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Audit Evidence Chapter 6

2. 6 - 2 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 1 Contrast audit evidence with evidence used by other professions.

3. 6 - 3 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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.

4. 6 - 4 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 2 Identify the four audit evidence decisions that are needed to create an audit program.

5. 6 - 5 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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

6. 6 - 6 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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.

7. 6 - 7 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 3 Specify the characteristics that determine the persuasiveness of evidence.

8. 6 - 8 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Persuasiveness of Evidence Competence Sufficiency Combined effect Persuasiveness and cost

9. 6 - 9 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Competence Relevance Independence of provider Effectiveness of internal controls Auditor’s direct knowledge Qualifications of individuals Degree of objectivity Timeliness

10. 6 - 10 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 4 Identify and apply the seven types of evidence used in auditing.

11. 6 - 11 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Relationships Auditing standards Qualifications and conduct Reporting Evidence accumulation Types of evidence Broad guidelines Broad categories

12. 6 - 12 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Relationships Types of evidence Audit procedures Sample size Timing of tests Items to select Specific instructions

13. 6 - 13 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Types of Audit Evidence 1. Physical examination 3. Documentation 5. Inquiries of the client 6. Reperformance 2. Confirmation 4. Analytical procedures 7. Observation

14. 6 - 14 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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.

15. 6 - 15 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Information Often Confirmed InformationSource Liabilities Accounts payableCreditor Notes payableLender Advances from customersCustomer Mortgages payableMortgagor Bonds payableBondholder

16. 6 - 16 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Information Often Confirmed InformationSource Owners’ Equity Shares outstandingRegistrar and transfer agent

17. 6 - 17 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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

18. 6 - 18 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Criteria to Determine Competence Type of evidence Independence of provider Effectiveness of client’s internal controls Auditor’s direct knowledge Qualifications of provider Objectivity of evidence

19. 6 - 19 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Terms and Types of Evidence TermsTypes of Evidence ExamineDocumentation ScanAnalytical proceduresReadDocumentationAnalytical proceduresComputeRecomputeReperformanceFootReperformance

20. 6 - 20 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Terms and Types of Evidence TermsTypes of Evidence TraceDocumentation CompareDocumentationCountPhysical examinationObservationObserveInquireInquiries of clientVouchDocumentation

21. 6 - 21 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 5 Understand the purposes of audit documentation.

22. 6 - 22 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Audit Documentation Purposes of audit documentation Ownership of audit files Confidentiality of audit files

23. 6 - 23 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 6 Prepare organized audit documentation.

24. 6 - 24 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Audit File Contents and Organization Robinson Associates Trial Balance 12/31/2003 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 Contingent Liabilities Operations Liabilities and Equity Assets Analytical Procedures Test of Controls & Substantive TOT Internal Control General Information Audit Programs Permanent Files

25. 6 - 25 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to the current audit.

26. 6 - 26 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Current Files Audit program General information Working trial balance Adjusting and reclassification entries Supporting schedules

27. 6 - 27 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 7 Describe how e-commerce affects audit evidence and audit documentation.

28. 6 - 28 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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.

29. 6 - 29 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Summary of Audit Documentation Audit documentation is an essential part of every audit. Audit documentation provides a record of the evidence accumulated and the result of the tests. CPA firms make sure that audit documentation is properly prepared and is appropriate.

30. 6 - 30 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley End of Chapter 6