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©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Nature of Evidence The use of evidence is not unique to auditors. Evidence is also used by scientists, lawyers, and historians.TRANSCRIPT
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 1
Audit EvidenceChapter 7
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 2
Learning Objective 1
Contrast audit evidencewith evidence used by
other professions.
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Nature of Evidence
The use of evidence isnot unique to auditors.
Evidence is also usedby scientists, lawyers,
and historians.
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Learning Objective 2
Identify the four audit evidencedecisions that are needed to
create an audit program.
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Audit Evidence Decisions
1. Which audit procedures to use2. What sample size to select for a given procedure3. Which items to select from the population4. When to perform the procedures
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Audit Program
It includes a list of the audit proceduresthe auditor considers necessary.
Most auditors use computers to facilitatethe preparation of audit programs.
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Learning Objective 3
Specify the characteristicsthat determine the
persuasivenessof evidence.
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Persuasiveness of Evidence
CompetenceSufficiency
Combined effectPersuasiveness and cost
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Competence
RelevanceIndependence of provider
Effectiveness of internal controlsAuditor’s direct knowledgeQualifications of individuals
Degree of objectivityTimeliness
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Learning Objective 4
Identify and apply theseven types of evidence
used in auditing.
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Types of Audit Evidence
1. Physical examination
3. Documentation
5. Inquiries of the client 6. Reperformance
2. Confirmation
4. Observation
7. Analytical procedures
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Types of Audit Evidence
Physical examination : inspection or count by the auditor of a tangible asset.
Confirmation : receipt of a written or oral response from an independent third party verifying the accuracy of information that was requested by the auditor
Documentation : auditor’s examination of the client’s documents and records
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Types of Audit Evidence Observation : the use of senses to assess certain
activities Inquiry : written or oral information from the
client in response to questions from the auditor Reperformance : rechecking the computations
and transfers of information Analytical procedure : using comparison and
relationships to assess whether data appear reasonable
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Relationships
Auditingstandards
Qualificationsand conduct ReportingEvidence
accumulation
Types ofevidence
Broadguidelines
Broadcategories
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Relationships
Types ofevidence
Samplesize
Timingof tests
Auditprocedures
Items toselect
Specificinstructions
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InformationOften Confirmed
Information SourceAssetsCash in bank BankAccounts receivable CustomerNotes receivable MakerOwned inventory out on consignment ConsigneeInventory held in public warehouses WarehouseCash surrender value of life insurance Insurance co.
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InformationOften Confirmed
Information SourceLiabilitiesAccounts payable CreditorNotes payable LenderAdvances from customers CustomerMortgages payable MortgagorBonds payable Bondholder
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InformationOften Confirmed
Information SourceOwners’ EquityShares outstanding Registrar and
transfer agent
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InformationOften Confirmed
Information SourceOther InformationInsurance coverage Insurance companyContingent liabilities Bank, lender, and
client’s counselBond indenture agreements BondholderCollateral held by creditors Creditor
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Criteria to DetermineCompetence
For each Type of evidence:
Independenceof provider
Effectiveness ofclient’s
internal controls
Auditor’sdirect
knowledge
Qualificationsof provider
Objectivityof evidence
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Criteria to DetermineCompetence
Type of EvidenceIndependence
of Provider
Effectiveness of Internal Controls
Auditor's Direct
Knowledge
Qualification of Provider
Objectivity of Evidence
Physical Examination
Confirmation N/A
Documentation ±
Observation N/A
Inquiries of client <
Reperformance
Analytical procedure
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Terms and Types of Evidence
Terms Types of EvidenceRead Documentation
Examine Documentation
Foot Reperformance
Trace Doc/Reperformance
Compare DocumentationVouch Documentation
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Terms and Types of Evidence
Terms Types of Evidence
ObservationObserveInquire Inquiries of clientScan Analytical procedures
Analytical proceduresCompute
Recompute ReperformanceCount Physical examination
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Learning Objective 5
Understand the purposesof audit documentation.
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Audit Documentation
Purposes of audit documentation
Ownership of audit files
Confidentiality of audit files
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Learning Objective 6
Prepare organizedaudit documentation.
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Audit File Contentsand Organization
Derrickson AssociatesTrial Balance
12/31/2003
Cash $165,237Accounts Receivable 275,050Prepaid Insurance 37,795Interest Receivable 20,493
FinancialStatements andAudit ReportWorking
Trial BalanceAdjusting
Journal EntriesContingentLiabilities
Operations
Liabilities and Equity
Assets
AnalyticalProcedures
Test of Controls& Substantive
TOTInternalControl
GeneralInformation
AuditPrograms
PermanentFiles
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Permanent Files
These files are intended to containdata of a historical or continuing
nature pertinent to the current audit.
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Current Files
Audit programGeneral information
Working trial balanceAdjusting and reclassification entries
Supporting schedules
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Relationship of Audit Documentation
to Financial Statements
FINANCIAL STATEMENTSCash 122Acc. ………………….
WORKING TRIALBALANCE
Prelim. AIE’s FinalCash 212 (90) 122
AIE’sExpense 90
Cash 90
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Relationship of Audit Documentation
to Financial Statements
LEAD SCHEDULE – CASH A-1 Per G/1 AIE’s Final
Petty Cash A-2 5 5Cash in Bank:
General A-3 186 (90) 96Payroll A-4 21 21
212 (90) 122
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Relationship of Audit Documentation
to Financial Statements
A-2CashCountSheet
A-3BankReconciliation
A-3/1Confirmation
A-3/2O/S Check List
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Relationship of Audit Documentation
to Financial Statements
A-4BankReconciliation
A-4/1Confirmation
A-4/2O/S Check List
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Types of Supporting Schedules
AnalysisTrial balance
Reconciliation of amountsTests of reasonablenessSummary of procedures
Examination of supporting documentsInformational
Outside documentation
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Learning Objective 7
Describe how e-commerceaffects audit evidence and
audit documentation.
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Effect of E-commerce
Audit evidence is increasingly in electronic form.
Auditors use computers to readand examine evidence.
Software programs are typically Windows-based.
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End of Chapter 7