©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 1

Audit EvidenceChapter 7

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Learning Objective 1

Contrast audit evidence

with 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 evidence

decisions that are needed to

create an audit program.

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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

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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 characteristics

that determine the

persuasiveness

of evidence.

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Persuasiveness of Evidence

Competence

Sufficiency

Combined effect

Persuasiveness and cost

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Competence

Relevance

Independence of provider

Effectiveness of internal controls

Auditor’s direct knowledge

Qualifications of individuals

Degree of objectivity

Timeliness

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Learning Objective 4

Identify and apply the

seven 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. Analytical procedures

7. Observation

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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

Type ofevidence

Independenceof provider

Effectiveness ofclient’s

internal controls

Auditor’sdirect

knowledge

Qualificationsof provider

Objectivityof evidence

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Terms and Types of Evidence

Terms Types of Evidence

Examine Documentation

Scan Analytical procedures

Read

Analytical procedures

Documentation

Compute

Recompute Reperformance

Foot Reperformance

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Terms and Types of Evidence

Terms Types of Evidence

Trace Documentation

Compare Documentation

Count

Observation

Physical examination

Observe

Inquire Inquiries of client

Vouch Documentation

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Learning Objective 5

Understand the purposes

of 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 organized

audit 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 Report

WorkingTrial Balance

AdjustingJournal Entries

ContingentLiabilities

Operations

Liabilities and Equity

Assets

AnalyticalProcedures

Test of Controls& Substantive

TOT

InternalControl

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 program

General information

Working trial balance

Adjusting 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-commerce

affects 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