2. 7 - 1 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Audit Evidence Chapter 7

3. 7 - 2 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 1 Contrast audit evidence with evidence used by other professions.

4. 7 - 3 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Nature of Evidence The use of evidence is not unique to auditors. Evidence is also used by scientists, lawyers, and historians.

5. 7 - 4 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 2 Identify the four audit evidence decisions that are needed to create an audit program.

6. 7 - 5 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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. 7 - 6 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 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.  Sample sizes  Items to select  Timing of the tests

8. 7 - 7 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 3 Specify the characteristics that determine the persuasiveness of evidence.

9. 7 - 8 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Persuasiveness of Evidence Competence Sufficiency Combined effect Persuasiveness and cost

10. 7 - 9 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Competence  Relevance  Independence of provider  Effectiveness of internal controls  Auditor’s direct knowledge  Qualifications of providers  Degree of objectivity  Timeliness

11. 7 - 10 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 4 Identify and apply the seven types of evidence used in auditing.

12. 7 - 11 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Types of Audit Evidence 1.Physical examination 2.Confirmation 3.Documentation 4.Analytical procedures 5.Inquiries of the client 6.Reperformance 7.Observation

13. 7 - 12 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Relationships Auditingstandards Qualifications and conduct Reporting Evidenceaccumulation Types of evidence Broad guidelines Broad categories

14. 7 - 13 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Relationships Types of evidence Auditprocedures Items to select Specific instructions SamplesizeTiming of tests

15. 7 - 14 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Information Often Confirmed 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. InformationSource

16. 7 - 15 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Information Often Confirmed Liabilities Accounts payableCreditor Notes payableLender Advances from customersCustomer Mortgages payableMortgagor Bonds payableBondholder InformationSource

17. 7 - 16 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Information Often Confirmed Owners’ Equity Shares outstandingRegistrar and transfer agent Other Information Insurance coverageInsurance co. Contingent liabilitiesBank, lender, and clients legal counsel Bond indenture agreementsBondholder Collateral held by creditorsCreditor InformationSource

18. 7 - 17 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Information Often Confirmed Documentation Analytical procedures Inquiries of the client Reperformance Observation

19. 7 - 18 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Competence of Types of Evidence Type of evidence Effectiveness of client’s internal controls Qualifications of provider Independence of provider Auditor’s direct knowledge Objectivity of evidence

20. 7 - 19 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Terms and Types of Evidence ExamineDocumentation ScanAnalytical procedures ReadDocumentation ComputeAnalytical procedures RecomputeReperformance FootReperformance TermsType of Evidence

21. 7 - 20 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Terms and Types of Evidence TraceDocumentation/ Reperformance CompareDocumentation CountPhysical examination ObserveObservation InquireInquiries of client VouchDocumentation TermsType of Evidence

22. 7 - 21 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 5 Understand the purposes of audit documentation.

23. 7 - 22 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Audit Documentation Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement.

24. 7 - 23 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Audit Documentation Purposes of audit documentation Ownership of audit files Confidentiality of audit files

25. 7 - 24 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Sarbanes-Oxley Act 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.

26. 7 - 25 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 6 Prepare organized audit documentation.

27. 7 - 26 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Audit File Contents and Organization Robinson Associates Trial Balance 12/31/05 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

28. 7 - 27 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to the current audit.

29. 7 - 28 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Current Files Audit program General information Working trial balance Adjusting and reclassification entries Supporting schedules

30. 7 - 29 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Relationship of Audit Documentation to Financial Statements FINANCIAL STATEMENTS FINANCIAL STATEMENTS Cash122 Acc. …………………. FINANCIAL STATEMENTS FINANCIAL STATEMENTS Cash122 Acc. …………………. WORKING TRIAL BALANCE Prelim. AJE’s Final Prelim. AJE’s Final Cash212(90)122 AJE’s AJE’s Expense90 Cash 90 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

31. 7 - 30 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Relationship of Audit Documentation to Financial Statements 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 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 A-2 A-2 Cash Count Sheet A-3 A-3 Bank Reconciliation A-4 A-4 Bank Reconciliation

32. 7 - 31 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Types of Supporting Schedules Analysis Trial balance or list Reconciliation of amounts Tests of reasonableness

33. 7 - 32 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Types of Supporting Schedules Summary of procedures Examination of supporting documents Informational Outside documentation

34. 7 - 33 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Characteristics of Audit Documentation Each audit file should be properly identified. Documentation should be indexed and cross-referenced. Completed documentation must clearly indicate the audit work performed. It should include sufficient information. It should plainly state the conclusions reached.

35. 7 - 34 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Learning Objective 7 Describe how e-commerce affects audit evidence and audit documentation.

36. 7 - 35 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder Effect of E-commerce Audit evidence is increasingly in electronic form. Auditors must evaluate how electronic information affects their ability to gather evidence. Auditors use computers to read and examine evidence. Software programs are typically Windows-based.

37. 7 - 36 ©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder End of Chapter 7