Audit Evidence

Chapter 7

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

7-1

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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Nature of Evidence
The use of evidence is not unique to auditors
Evidence is also used by scientists, lawyers,
and historians

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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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 Program
It includes a list of the audit procedures
the auditor considers necessary.
Sample sizes
Items to select
Timing of the tests

Most auditors use computers to facilitate

the preparation of audit programs.
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Persuasiveness of Evidence
Two determinants:
Appropriateness
Sufficiency

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Six Characteristics of Reliable

Evidence
1. Independence of provider
2. Effectiveness of clients
internal controls
3. Auditors direct knowledge
4. Qualification of individuals
providing the information
5. Degree of objectivity
6. Timeliness
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

7-9

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

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Persuasiveness and Cost

In making decisions about evidence
for a given audit, both persuasiveness
and cost must be considered.
The auditors 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

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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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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

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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 auditors
accumulation
Specific instructions
for the accumulation
of types of evidence
Timing
of tests

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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

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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

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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

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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
clients legal counsel
Bond holder
Creditor
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Documentation
It is the auditors inspection of the
clients documents and records.

Internal
documents

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

External
documents

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Analytical Procedures
Understand the clients industry and business
Assess the entitys ability to continue as a
going concern
Indicate the presence of possible misstatements
in the financial statements
Reduce detailed audit tests

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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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

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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Reperformance
It is the auditors independent tests of client
accounting procedures or controls that
were originally done.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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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 clients facilities.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Appropriateness of Types of
Evidence
Type of evidence
Independence of provider
Effectiveness of clients internal controls
Auditors direct knowledge
Qualifications of provider
Objectivity of evidence

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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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 clients 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 clients counts

120 items

40 items with
large dollar
value, plus 80
randomly
selected

Balance
sheet date

Documentation

Compare quantity on
clients perpetual records
to quantity on clients
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

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Terms and Types of Evidence

Terms

Type of Evidence

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

Documentation
Analytical procedures
Documentation
Analytical procedures
Recalculation
Recalculation
Documentation/Reperformance
Documentation
Physical examination
Observation
Inquiries of client
Documentation

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Learning Objective 5
Understand the purposes of
audit documentation.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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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

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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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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

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Learning Objective 6
Prepare organized audit
documentation.

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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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
Financial
Statements
and Audit
Report
Working
Trial
Balance
Financial
Statements
and Audit
ReportJournal
Adjusting
Entries
Financial
Statements
and AuditContingent
Report
Liabilities
Financial
Statements
and Audit Report
Operations
Financial Statements
and Audit Liabilities
Report
and
Financial Equity
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 Report
General
Information
Financial
Statements
and Audit Report
Audit
Programs
Financial
Statements
and Audit Report
Permanent Files
Financial Statements
and Audit Report

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Permanent Files
These files are intended to contain
data of a historical or continuing
nature pertinent to the current audit.

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Current Files
Audit program
General information
Working trial balance
Adjusting and reclassification entries
Supporting schedules

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Relationship of Audit Documentation

to Financial Statements
FINANCIAL STATEMENTS
Cash
122
Acc.
WORKING TRIAL BALANCE
Prelim.
AJEs
Cash
212
(90)
LEAD SCHEDULECASH
Petty Cash A-2
Cash in Bank:
General A-3
Payroll A-4

Per G/L
5

AJEs

Final
122

Expense
Cash

AJEs

186
21
212

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

(90)
(90)

90

Final
5

90
A-1

96
21
122
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Relationship of Audit Documentation

to Financial Statements
LEAD SCHEDULECASH
Petty Cash A-2
Cash in Bank:
General A-3
Payroll A-4

Per G/L
5

AJEs

186
21
212

(90)
(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

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Types of Supporting Schedules

Analysis
Trial balance or list
Reconciliation of amounts
Tests of reasonableness

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Types of Supporting Schedules

Summary of procedures
Examination of supporting documents
Informational
Outside documentation

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Preparation 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
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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Effect of Technology
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

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley

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End of Chapter 7

2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

7 - 43