Audit Evidence Chapter 7 2010 Prentice Hall Business

Learning Objective 1 Contrast audit evidence with evidence used by other professions. 補充說明本章與我國審計公報有關者為 1. 審計公報第 4號查核之證據 2. 審計公報第 50號分析性程序 12號分析性複核 3. 審計公報第 38號函證 4. 審計公報第 45號查核作底稿準則 © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 -2

Nature of Evidence Ø The use of evidence is not unique to auditors Ø Evidence is also used by scientists, lawyers, and historians © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 -3

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

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 (timing) © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 -5

Audit procedure is the detailed instruction that explains the audit evidence to be obtained during the audit. Audit procedures often incorporate sample size, items to select, and timing into the procedure. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 -6

Audit Program It includes a list of the audit procedures the auditor considers necessary. Ø Sample sizes Items to select Ø Timing of the tests Ø Most auditors use computers to facilitate the preparation of audit programs. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 -7

Learning Objective 3 Specify the characteristics that determine the persuasiveness of evidence. © 2010

Persuasiveness of Evidence The two determinants of the persuasiveness of evidence are appropriateness and sufficiency, which are taken directly from the third standard of field work. Ø Appropriateness Ø Sufficiency © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 -9

Appropriateness of evidence is a measure of the quality of evidence, meaning its relevance and reliability in meeting audit objectives for classes of transactions, account balances, and related disclosures. If evidence is considered highly appropriate, it is great help in persuading the auditor that financial statements are fairly stated. 1. Relevance of Evidence 2. Reliability of evidence © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 10

Relevance of evidence Evidence must pertain to or be relevant to the audit objective that the auditor is testing before it can be appropriate. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 11

Six Characteristics of Reliable Evidence 1. Independence of provider 2. Effectiveness of client’s internal controls 3. Auditor’s direct knowledge 4. Qualification of individuals providing the information 5. Degree of objectivity 6. 6. Timeliness © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 12

Relationships Among Audit Evidence and Persuasiveness Audit Evidence Decisions Qualities Affecting Persuasiveness of Evidence Audit procedures and timing Appropriateness Relevance Reliability Independence of provider Effectiveness of internal controls Auditor's direct knowledge Qualifications of provider Objectivity of evidence Timeliness When procedures are performed Portion of period being audited Sample size and items to select Sufficiency Adequate sample size Selection of proper population items © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 13

Persuasiveness and Cost In making decisions about evidence for a given audit, both persuasiveness and cost must be considered. The auditor’s goal is to obtain a sufficient amount of appropriate evidence at the lowest total cost. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 14

Learning Objective 4 Identify and apply the eight 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. Recalculation 7. Reperformance 8. Observation © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 16

Relationships Broad guidelines concerning auditor qualifications and conduct, evidence accumulation, and reporting Auditing standards Qualifications and conduct Physical examination Confirmation Documentation Analytical procedures Inquiries of the client Recalculation Reperformance Observation FOUR AUDIT EVIDENCE DECISIONS Evidence accumulation Reporting Types of evidence Audit procedures Sample size and items to select © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley Broad categories of evidence available for the auditor’s accumulation Specific instructions for the accumulation of types of evidence Timing of tests 7 - 17

Physical Examination It is the inspection or count by the auditor of a tangible asset. This type of evidence is most often associated with inventory and cash. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 18

Confirmation Information Source Assets Cash in bank Marketable securities Accounts receivable Notes receivable Owned inventory out on consignment Inventory held in public warehouses Cash surrender value of life insurance © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley Bank Customer Maker Consignee Public warehouse Insurance company Investment custodian 7 - 19

Confirmation Information Source Liabilities Accounts payable Notes payable Advances from customers Mortgages payable Bonds payable © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley Creditor Lender Customer Mortgagor Bondholder 7 - 20

Confirmation Information Source Owners’ Equity Shares outstanding Registrar and transfer agent Other Information Insurance coverage Contingent liabilities Bond indenture agreements Collateral held by creditors © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley Insurance company Bank, lender, and client’s legal counsel Bond holder Creditor 7 - 21

Documentation It is the auditor’s inspection of the client’s documents and records. Internal documents © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley External documents 7 - 22

Analytical Procedures Ø Understand the client’s industry and business Ø Assess the entity’s ability to continue as a going concern Ø Indicate the presence of possible misstatements in the financial statements Ø Reduce detailed audit tests © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 23

Inquiries of the Client It is the obtaining of written or oral information from the client in response to questions from the auditor. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 24

Recalculation It involves rechecking a sample of calculations made by the client. © 2010

Reperformance It is the auditor’s independent tests of client accounting procedures or controls that were originally done. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 26

Observation It is the use of the senses to assess client activities. The auditor may tour the plant to obtain a general impression of the client’s facilities. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 27

Appropriateness of Types of Evidence Ø Type of evidence Ø Independence of provider Ø Effectiveness of client’s internal controls Ø Auditor’s direct knowledge Ø Qualifications of provider Ø Objectivity of evidence © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 28

Types of Evidence and Four Evidence Decisions for a Balance-Related Audit Objective for Inventory* Evidence Decisions Type of Evidence Audit Procedure Sample Size Items to Select Timing Observation Observes client’s personnel All count teams counting inventory to determine whether they are properly following instructions Not applicable Balance sheet date Physical examination Count a sample of inventory and compare quantity and description to client’s counts 120 items 40 items with large dollar value, plus 80 randomly selected Balance sheet date Documentation Compare quantity on client’s perpetual records to quantity on client’s counts 70 items 30 items with large dollar value, plus 40 randomly selected Balance sheet date © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 29

Terms and Types of Evidence Terms Type of Evidence Examine Scan Read Compute Recompute Foot Trace Compare Count Observe Inquire Vouch Documentation Analytical procedures Recalculation Documentation/Reperformance Documentation Physical examination Observation Inquiries of client Documentation © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 30

Learning Objective 5 Understand the purposes of audit documentation. © 2010 Prentice Hall Business

Audit Documentation Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 32

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

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. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 34

Learning Objective 6 Prepare organized audit documentation. © 2010 Prentice Hall Business Publishing, Auditing

Audit File Contents and Organization Robinson Associates Trial Balance 12/31/09 Cash Accounts Receivable Prepaid Insurance Interest Receivable $165, 237 275, 050 37, 795 20, 493 Financial Statements and Audit Report Working Trial Balance Financial Statements and Audit Report. Journal Adjusting Entries Financial Statements and Audit. Contingent Report Liabilities Financial Statements and Audit Report Operations Financial Statements and Audit Liabilities Report and Equity Financial Statements and Audit Report Assets Financial Statements and Audit Report Analytical Procedures Financial Statements and Audit Report Tests of Controls and Substantive TOT Financial Statements and Audit Report Internal Control Financial Statements and Audit General Report Information Financial Statements and Audit Report Audit Programs Financial Statements and Audit Report Permanent Files Financial Statements and Audit Report © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 36

Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to the current audit. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 37

Current Files Ø Audit program Ø General information Ø Working trial balance Ø Adjusting and reclassification entries Ø Supporting schedules © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 38

Relationship of Audit Documentation to Financial Statements FINANCIAL STATEMENTS Cash 122 Acc. WORKING TRIAL BALANCE Prelim. AJE’s Cash 212 (90) LEAD SCHEDULE–CASH Petty Cash A-2 Cash in Bank: General A-3 Payroll A-4 Per G/L 5 AJE’s Final 122 Expense Cash AJE’s 186 21 212 © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley (90) 90 Final 5 90 A-1 96 21 122 7 - 39

Relationship of Audit Documentation to Financial Statements LEAD SCHEDULE–CASH Petty Cash A-2 Cash in Bank: General A-3 Payroll A-4 Per G/L 5 AJE’s 186 21 212 (90) Final 5 A-1 96 21 122 A-2 Cash Count Sheet A-3 Bank Reconciliation A-4 Bank Reconciliation A-3/1 Confirmation A-3/2 O/S Check List A-4/1 Confirmation © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley A-4/2 O/S Check List 7 - 40

Types of Supporting Schedules Ø Analysis Ø Trial balance or list Ø Reconciliation of amounts Ø Tests of reasonableness © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 41

Types of Supporting Schedules Ø Summary of procedures Ø Examination of supporting documents Ø Informational Ø Outside documentation © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 42

Preparation of Audit Documentation Ø Each audit file should be properly identified Ø Documentation should be indexed and cross-referenced Ø Completed documentation must clearly indicate the audit work performed Ø It should include sufficient information Ø It should plainly state the conclusions reached © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 43

Learning Objective 7 Describe how technology affects audit evidence and audit documentation. © 2010

Effect of Technology Ø Audit evidence is increasingly in electronic form Ø Auditors must evaluate how electronic information affects their ability to gather evidence Ø Auditors use computers to read and examine evidence Ø Software programs are typically Windows-based © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 7 - 45