Chapter 7Audit Planning and Analytical

Procedures

Presentation Outline

I.I. Defining Audit EvidenceDefining Audit EvidenceII.II. Types of Audit EvidenceTypes of Audit Evidence

III.III. Audit DocumentationAudit Documentation

I. Defining Audit Evidence

A.A. Audit Evidence DecisionsAudit Evidence DecisionsB.B. Persuasiveness of Audit EvidencePersuasiveness of Audit Evidence

C.C. Competence ConsiderationsCompetence Considerations

A. Audit Evidence Decisions Audit procedures to use – specific procedures Audit procedures to use – specific procedures

should be spelled out for instruction during the should be spelled out for instruction during the audit.audit.

Sample size – how many items should be tested Sample size – how many items should be tested for each audit procedure.for each audit procedure.

Items to select – determine which items in the Items to select – determine which items in the population should be selected.population should be selected.

Timing – timing can vary from early in the Timing – timing can vary from early in the accounting period to long after it has ended.accounting period to long after it has ended.

B. Persuasiveness of Audit Evidence

Audit evidence is any information used by the Audit evidence is any information used by the auditor to determine whether the information auditor to determine whether the information

being audited is stated in accordance with being audited is stated in accordance with established criteria. Two determinants of established criteria. Two determinants of

persuasiveness of evidence are:persuasiveness of evidence are: Competence – the degree to which evidence can Competence – the degree to which evidence can

be considered trustworthy.be considered trustworthy. Sufficiency – amount of evidence is enough to Sufficiency – amount of evidence is enough to

form a reasonable opinion.form a reasonable opinion.

C. Competence Considerations Relevance – must pertain to the audit objective being Relevance – must pertain to the audit objective being

tested.tested. Independence – evidence from outside the client is a Independence – evidence from outside the client is a

stronger form of evidencestronger form of evidence Effectiveness of client internal controls – good internal Effectiveness of client internal controls – good internal

controls can mean better information.controls can mean better information. Auditor direct knowledge – auditor determinations are Auditor direct knowledge – auditor determinations are

stronger that client comments.stronger that client comments. Qualifications – individual is a qualified source.Qualifications – individual is a qualified source.

Degree of objectivity – objective evidence is stronger Degree of objectivity – objective evidence is stronger than subjective evidence.than subjective evidence.

Timeliness – balance sheet account evidence is better Timeliness – balance sheet account evidence is better when it is collected around the date of the financial when it is collected around the date of the financial

statement. Income statement evidence should sample statement. Income statement evidence should sample entire period.entire period.

II. Types of Audit Evidence

A.A. Physical examinationPhysical examinationB.B. ConfirmationsConfirmationsC.C. DocumentationDocumentationD.D. Analytical Analytical

ProceduresProcedures

E.E. Inquiries of the Inquiries of the ClientClient

F.F. ReperformanceReperformanceG.G. ObservationObservation

A. Physical Examination

Inspection or count by Inspection or count by the auditor of a the auditor of a tangible asset.tangible asset.

Different from Different from examining examining documentation is that documentation is that the asset has inherent the asset has inherent value.value.

B. Confirmations

Positive ConfirmationsPositive Confirmations Negative ConfirmationsNegative Confirmations

Asks for response even if balance is correct.

Asks for a response only if balance is

incorrect.More reliable than negative

confirmations.Uncertainty associated

with no response.

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.

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 balances3. Banks – Confirm checking account and loan

balances4. Attorneys – Confirm contingent liabilities5. Inventory Agents – Confirm consignments

C. Documentation

1.1. Types of DocumentsTypes of Documents2.2. Document VouchingDocument Vouching

3.3. Document TracingDocument Tracing

1. Types of Documents

Internal DocumentsInternal Documents External DocumentsExternal Documents

Examine supporting evidence in client files.

Prepared and used within client company. Does not go outside the

client.

Document has been in hands of an outside

party to the transaction.

More reliable than internal documents.

2. Document Vouching Examination of Examination of

documents that support a documents that support a recorded transaction or recorded transaction or amount.amount.

The direction of testing The direction of testing must be from the must be from the recorded item to the recorded item to the supporting document.supporting document.

Tests existence or Tests existence or occurrenceoccurrence

Recorded Item

SupportingDocument

3. Document Tracing

The primary test for The primary test for unrecorded items and unrecorded items and therefore tests the therefore tests the completeness completeness assertion.assertion.

The direction of The direction of testing must be from testing must be from the supporting the supporting document to the document to the recorded item.recorded item.

SupportingDocument

RecordedItem

D. Analytical ProceduresAudits studies relationships among data. Unusual Audits studies relationships among data. Unusual

fluctuations occur when significant difference are fluctuations occur when significant difference are not expected but do exist or when significant not expected but do exist or when significant

differences are expected but do not exist. differences are expected but do not exist. Required during the planning and completion Required during the planning and completion

phases on all audits.phases on all audits.

E. Inquiries of the Client Auditor obtains Auditor obtains

information from the information from the client in response to client in response to questions.questions.

Although much Although much evidence is obtained evidence is obtained through inquiry, it can through inquiry, it can not be regarded as not be regarded as conclusive and may be conclusive and may be biased in the client’s biased in the client’s favor.favor.

F. ReperformanceReperformance involves rechecking a sample of the Reperformance involves rechecking a sample of the

computations and transfers of information. Rechecking of computations and transfers of information. Rechecking of computations consists of testing mathematical accuracy. computations consists of testing mathematical accuracy. Rechecking of transfers of information involves seeing if Rechecking of transfers of information involves seeing if

information is recorded consistently in the accounting records.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 Auditor witnesses the physical activities of the client.the client.

Differs from physical examination because Differs from physical examination because physical examination counts assets, while physical examination counts assets, while observation focuses on client activities.observation focuses on client activities.

III. Audit Documentation

A.A. Working Papers FilesWorking Papers FilesB.B. Typical Working Paper FormatTypical Working Paper Format

C.C. Storage of Working PapersStorage of Working PapersD.D. Ownership of Working PapersOwnership of Working Papers

The Sarbanes-Oxley Act requires auditors of public companies to prepareand maintain audit working papers for a period of no less than 7 years.

Audit documentation is the principal record of auditing procedures applied, evidence obtained, and

conclusions reached by the auditor.

A. Working Papers Files

Permanent FilePermanent File Current FileCurrent File

Working papers provide the principal record that the audit has conformed to GAAS. Also provide information for deciding on the proper report.

Information that is relevant for multiple years on recurring

engagements.

(See examples on page 178)

Information relevant for a given audit client for a particular audit

year.

(See examples on pages 178-182)

B. Typical Working Paper Format

Headings – audit client Headings – audit client name, year under audit, etc.name, year under audit, etc.

Indexing – arrange papers in Indexing – arrange papers in some common order.some common order.

Tick marks – symbols to key Tick marks – symbols to key a footnote to an item.a footnote to an item.

Sign-off – indicates auditors Sign-off – indicates auditors that prepare and review.that prepare and review.

Ricky Corporation Cash

Prepared by: KM Reviewed by: J.S.

A1

1st Savings 234.00

Traced to bank reconciliation.

C. Storage of Working Papers Working papers of Working papers of

continuing clients are continuing clients are maintained maintained indefinitely.indefinitely.

Check with legal Check with legal counsel before counsel before discarding any discarding any working papers.working papers.

D. Ownership of Working Papers

The working papers are the auditor’s The working papers are the auditor’s property, not the clients.property, not the clients.

In most cases, an auditor can not reveal In most cases, an auditor can not reveal information in the working papers without information in the working papers without the client’s permission.the client’s permission.

Summary

I.I. Audit Evidence and PersuasivenessAudit Evidence and PersuasivenessII.II. Types of Audit EvidenceTypes of Audit EvidenceIII.III. Working Paper Format, Storage, Working Paper Format, Storage,

and Ownershipand Ownership