Chapter 7 Nature and Type of Audit Evidence

Learning Objectives Contrast audit evidence with evidence used by other professions. Identify the four

Learning Objectives Understand the purposes of audit documentation. Prepare organized audit documentation. Describe how

1 Contrast audit evidence with evidence used by other professions. 7 -4 Copyright ©

ØAny information used by the auditor to determine whether the information being audited is

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

1. Which audit procedures to use 2. What sample size to select for a

It includes a list of the audit procedures the auditor considers necessary. Ø Sample

3 Specify the characteristics that determine the persuasiveness of evidence. 7 -10 Copyright ©

Two determinants: Appropriateness Sufficiency The persuasiveness of evidence can be evaluated only after considering

1. Independence of provider 2. Effectiveness of client’s internal controls 3. Auditor’s direct knowledge

Audit Evidence Decisions Audit procedures and timing Qualities Affecting Persuasiveness of Evidence Appropriateness Relevance

In making decisions about evidence for a given audit, both persuasiveness and cost must

4 Identify and apply the eight types of evidence used in auditing. 7 -15

Types of Audit Evidence Physical Examination Observation Reperformance Recalculation 7 -16 Audit Evidence Client

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It is the inspection or count by the auditor of a tangible asset. This

Auditing Standards United States International 7 -19 Requirements ØAuditor must confirm accounts receivable ØAuditors

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It is the auditor’s examination of the client’s documents and records. Internal documents 7

Ø Understand the client’s industry and business Ø Assess the entity’s ability to continue

It is the obtaining of written or oral information from the client in response

Involves rechecking a sample of calculations made by the client. 7 -24 Copyright ©

The auditor’s independent tests of client accounting procedures or controls that were originally done

Ø Use one’s senses to assess client activities. Ø Tour plant to obtain a

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Terms Examine Scan Read Compute Recompute Foot Trace Compare Count Observe Inquire Vouch 7

5 Understand the purposes of audit documentation. 7 -30 Copyright © 2014 Pearson Education

Audit documentation is the record of the audit procedures performed, relevant audit evidence, and

ØPurposes of audit documentation ØOwnership of audit files ØConfidentiality of audit files ØRequirements for

The Sarbanes-Oxley Act requires auditors of public companies to prepare and maintain audit working

6 Prepare organized audit documentation. 7 -34 Copyright © 2014 Pearson Education

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These files are intended to contain data of a historical or continuing nature pertinent

ØAudit program ØGeneral information ØWorking trial balance ØAdjusting and reclassification entries ØSupporting schedules 7

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ØAnalysis ØTrial balance or list ØReconciliation of amounts ØTests of reasonableness 7 -39 Copyright

ØSummary of procedures ØExamination of supporting documents ØInformational ØOutside documentation 7 -40 Copyright ©

ØProper identification of each file ØFiles indexed and cross-referenced ØClear indication of work performed

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7 Describe how technology affects audit evidence and audit documentation. 7 -43 Copyright ©

Ø Audit evidence is increasingly in electronic form Ø Auditors must evaluate how electronic

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Copyright All rights reserved. No part of this publication may be reproduced, stored in

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Learning Objectives Contrast audit evidence with evidence used by other professions. Identify the four audit evidence decisions that are needed to create an audit program. Specify the characteristics that determine the persuasiveness of evidence. Identify and apply the eight types of evidence used in auditing. 7 -2 Copyright © 2014 Pearson Education

Learning Objectives Understand the purposes of audit documentation. Prepare organized audit documentation. Describe how technology affects audit evidence and audit documentation. 7 -3 Copyright © 2014 Pearson Education

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 7 -5 Copyright © 2014 Pearson Education

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) 7 -8 Copyright © 2014 Pearson Education

It includes a list of the audit procedures the auditor considers necessary. Ø Sample sizes Items to select Ø Timing of the tests Ø Many auditors use audit software packages to generate audit programs. 7 -9 Copyright © 2014 Pearson Education

Two determinants: Appropriateness Sufficiency The persuasiveness of evidence can be evaluated only after considering the combination of appropriateness and sufficiency 7 -11 Copyright © 2014 Pearson Education

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 7 -12 Copyright © 2014 Pearson Education

Audit Evidence Decisions Audit procedures and timing Qualities Affecting Persuasiveness of Evidence 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 7 -13 Copyright © 2014 Pearson Education

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. 7 -14 Copyright © 2014 Pearson Education

Types of Audit Evidence Physical Examination Observation Reperformance Recalculation 7 -16 Audit Evidence Client Inquiries Confirmation Inspection Analytical procedures Copyright © 2014 Pearson Education

Auditing Standards United States International 7 -19 Requirements ØAuditor must confirm accounts receivable ØAuditors control the mailing and receipt of replies ØElectronic confirmations are permitted ØConfirmations are not required Copyright © 2014 Pearson Education

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 7 -22 Copyright © 2014 Pearson Education

The auditor’s independent tests of client accounting procedures or controls that were originally done as part of the entity’s accounting and internal control system. 7 -25 Copyright © 2014 Pearson Education

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. 7 -26 Copyright © 2014 Pearson Education

Terms Examine Scan Read Compute Recompute Foot Trace Compare Count Observe Inquire Vouch 7 -29 Type of Evidence Inspection Analytical procedures Recalculation Inspection/Reperformance Inspection Physical examination Observation Inquiries of client Inspection Copyright © 2014 Pearson Education

ØProper identification of each file ØFiles indexed and cross-referenced ØClear indication of work performed ØInclude sufficient information ØState conclusions reached 7 -41 Copyright © 2014 Pearson Education

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 7 -44 Copyright © 2014 Pearson Education

Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. 7 -46 Copyright © 2014 Pearson Education