Audit Evidence Chapter 7 2012 Prentice Hall Business

Learning Objective 1 Contrast audit evidence with evidence used by other professions. © 2012

Nature of Evidence ØAny information used by the auditor to determine whether the information being audited is stated in accordance with established criteria ØThe use of evidence is not unique to auditors ØEvidence is also used by scientists, lawyers, and historians © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 -3

Nature of Evidence © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 -4

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) © 2012 Prentice Hall Business Publishing, Auditing 14/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 audit software packages to generate audit programs. © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 -7

Learning Objective 3 Specify the characteristics that determine the persuasiveness of evidence. © 2012

Persuasiveness of Evidence Two determinants: Appropriateness Sufficiency The persuasiveness of evidence can be evaluated only after considering the combination of appropriateness and sufficiency © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 -9

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. Timeliness © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 10

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 © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 11

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. © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 12

Learning Objective 4 Identify and apply the eight types of evidence used in auditing.

Types of Audit Evidence Physical Examination Observation Reperformance Audit Evidence Confirmation Documentation Analytical procedures Recalculation Inquiry © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 14

Relationships © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 15

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. © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 16

Confirmations Auditing Standards United States International Requirements ØAuditor must confirm accounts receivable ØAuditors control the mailing and receipt of replies ØElectronic confirmations are permitted ØConfirmations are not required © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 17

Information often Confirmed © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 -

Documentation It is the auditor’s inspection of the client’s documents and records. Internal documents © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley External documents 7 - 19

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 © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 20

Inquiries of the Client It is the obtaining of written or oral information from the client in response to questions from the auditor. © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 21

Recalculation It involves rechecking a sample of calculations made by the client. © 2012

Reperformance It is the auditor’s independent tests of client accounting procedures or controls that were originally done. © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 23

Observation Ø Use one’s senses to assess client activities. Ø Tour plant to obtain a general impression of client’s facilities. Ø Observation is rarely sufficient by itself. Ø Often need to corroborate with another kind of evidence. © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 24

Appropriateness of Types of Evidence © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

Application of Types of evidence to the four Evidence Decisions © 2012 Prentice Hall

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 © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 27

Learning Objective 5 Understand the purposes of audit documentation. © 2012 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. © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 29

Audit Documentation Ø Purposes of audit documentation ØOwnership of audit files ØConfidentiality of audit

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. © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 31

Learning Objective 6 Prepare organized audit documentation. © 2012 Prentice Hall Business Publishing, Auditing

Audit File Contents and Organization © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to the current audit. © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 34

Current Files Ø Audit program ØGeneral information ØWorking trial balance ØAdjusting and reclassification entries ØSupporting schedules © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 35

Relationship of Audit Documentation to Financial Statements © 2012 Prentice Hall Business Publishing, Auditing

Types of Supporting Schedules Ø Analysis ØTrial balance or list ØReconciliation of amounts ØTests

Types of Supporting Schedules Ø Summary of procedures ØExamination of supporting documents ØInformational ØOutside documentation © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 38

Preparation of Audit Documentation ØProper identification of each file ØFiles indexed and cross-referenced ØClear indication of work performed ØInclude sufficient information ØState conclusions reached © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 39

Preparation of Audit Documentation © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7

Learning Objective 7 Describe how technology affects audit evidence and audit documentation. © 2012

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 © 2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 42