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Chapter 7

Audit Planning and Analytical


Procedures
Presentation Outline
I. Defining Audit Evidence
II. Types of Audit Evidence
III. Audit Documentation
I. Defining Audit Evidence

A. Audit Evidence Decisions


B. Persuasiveness of Audit Evidence
C. Competence Considerations
A. Audit Evidence Decisions
Audit procedures to use – specific procedures
should be spelled out for instruction during the
audit.
Sample size – how many items should be tested
for each audit procedure.
Items to select – determine which items in the
population should be selected.
Timing – timing can vary from early in the
accounting period to long after it has ended.
B. Persuasiveness of Audit Evidence

Audit evidence is any information used by the


auditor to determine whether the information
being audited is stated in accordance with
established criteria. Two determinants of
persuasiveness of evidence are:
Competence – the degree to which evidence can
be considered trustworthy.
Sufficiency – amount of evidence is enough to
form a reasonable opinion.
C. Competence Considerations
Relevance – must pertain to the audit objective being
tested.
Independence – evidence from outside the client is a
stronger form of evidence
Effectiveness of client internal controls – good internal
controls can mean better information.
Auditor direct knowledge – auditor determinations are
stronger that client comments.
Qualifications – individual is a qualified source.
Degree of objectivity – objective evidence is stronger
than subjective evidence.
Timeliness – balance sheet account evidence is better
when it is collected around the date of the financial
statement. Income statement evidence should sample
entire period.
II. Types of Audit Evidence
A. Physical examination E. Inquiries of the
B. Confirmations Client
C. Documentation F. Reperformance
D. Analytical G. Observation
Procedures
A. Physical Examination
 Inspection or count by
the auditor of a
tangible asset.
 Different from
examining
documentation is that
the asset has inherent
value.
B. Confirmations
The receipt of a written or oral response from an
independent third party. Auditor has client request
that the third party respond directly to the auditor.
Positive Confirmations Negative Confirmations

Asks for response even Asks for a response


if balance is correct. only if balance is
More reliable than incorrect.
negative Uncertainty associated
confirmations. with no response.
Confirmation of accounts receivable is normally required when practical
reasonable (SAS 67)
B. Confirmations (Continued)
1. Customers – Confirm A/R balances
2. Vendors – Confirm A/P balances
3. Banks – Confirm checking account and loan
balances
4. Attorneys – Confirm contingent liabilities
5. Inventory Agents – Confirm consignments
C. Documentation

1. Types of Documents
2. Document Vouching
3. Document Tracing
1. Types of Documents
Examine supporting evidence in client files.

Internal Documents External Documents


Document has been in
Prepared and used hands of an outside
within client company. party to the
Does not go outside the transaction.
client. More reliable than
internal documents.
Recorded Item
2. Document Vouching
Supporting  Examination of
Document documents that support a
recorded transaction or
amount.
 The direction of testing
must be from the
recorded item to the
supporting document.
 Tests existence or
occurrence
Supporting
Document
3. Document Tracing
Recorded
Item  The primary test for
unrecorded items and
therefore tests the
completeness
assertion.
 The direction of
testing must be from
the supporting
document to the
recorded item.
D. Analytical Procedures
Audits studies relationships among data. Unusual
fluctuations occur when significant difference are
not expected but do exist or when significant
differences are expected but do not exist.
Required during the planning and completion
phases on all audits.
E. Inquiries of the Client
 Auditor obtains
information from the
client in response to
questions.
 Although much
evidence is obtained
through inquiry, it can
not be regarded as
conclusive and may be
biased in the client’s
favor.
F. Reperformance
Reperformance involves rechecking a sample of the
computations and transfers of information.
Rechecking of computations consists of testing
mathematical accuracy. Rechecking of transfers
of information involves seeing if information is
recorded consistently in the accounting records.

I don’t think
this is what they
meant by
reperformance!
H. Observation
 Auditor witnesses the physical activities of
the client.
 Differs from physical examination because
physical examination counts assets, while
observation focuses on client activities.
III. Audit Documentation
Audit documentation is the principal record of auditing
procedures applied, evidence obtained, and
conclusions reached by the auditor.
A. Working Papers Files
B. Typical Working Paper Format
C. Storage of Working Papers
D. Ownership of Working Papers

The Sarbanes-Oxley Act requires auditors of public companies to prepare


and maintain audit working papers for a period of no less than 7 years.
A. Working Papers Files
Working papers provide the principal record that the
audit has conformed to GAAS. Also provide
information for deciding on the proper report.
Permanent File Current File
Information that is Information relevant
relevant for multiple for a given audit client
years on recurring for a particular audit
engagements. year.
(See examples on (See examples on
page 178) pages 178-182)
B. Typical Working Paper Format
Prepared by: KM A1
 Headings – audit client Reviewed by: J.S.
name, year under audit, etc.
 Indexing – arrange papers in Ricky
some common order. Corporation Cash
 Tick marks – symbols to key 1st Savings 234.00
a footnote to an item.
 Sign-off – indicates auditors
that prepare and review.
Traced to bank
reconciliation.
C. Storage of Working Papers
 Working papers of
continuing clients are
maintained
indefinitely.
 Check with legal
counsel before
discarding any
working papers.
D. Ownership of Working Papers
 The working papers are the auditor’s
property, not the clients.
 In most cases, an auditor can not reveal
information in the working papers without
the client’s permission.
Summary
I. Audit Evidence and Persuasiveness
II. Types of Audit Evidence
III. Working Paper Format, Storage,
and Ownership