Audit Evidence. Chapter Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-1

Transcription

1 Audit Evidence Chapter Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-1

2 Learning Objective 1 Contrast audit evidence with evidence used by other professions Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-2

3 Nature of Evidence The use of evidence is not unique to auditors Evidence is also used by scientists, lawyers, and historians 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-3

4 Learning Objective 2 Identify the four audit evidence decisions that are needed to create an audit program Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-4

5 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) 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-5

6 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 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-6

7 Learning Objective 3 Specify the characteristics that determine the persuasiveness of evidence Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-7

8 Persuasiveness of Evidence Two determinants: Appropriateness Sufficiency 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-8

9 Six Characteristics of Reliable Evidence 1. Independence of provider 2. Effectiveness of client s internal controls 3. Auditor s direct knowledge 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-9

10 Six Characteristics of Reliable Evidence 4. Qualification of individuals providing the information 5. Degree of objectivity 6. Timeliness 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-10

11 Relationships Among Audit Evidence and Persuasiveness Audit Evidence Decisions Audit procedures and timing Sample size and items to select Qualities Affecting Persuasiveness of Evidence 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 Sufficiency Adequate sample size Selection of proper population items 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-11

12 Persuasiveness and Cost In making decisions about evidence for a given audit, both persuasiveness and cost must be considered. The auditor s goal is to obtain a sufficient amount of appropriate evidence at the lowest total cost Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-12

13 Learning Objective 4 Identify and apply the eight types of evidence used in auditing Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-13

14 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 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-14

15 Relationships Qualifications and conduct Physical examination Confirmation Documentation Analytical procedures Inquiries of the client Recalculation Reperformance Observation FOUR AUDIT EVIDENCE DECISIONS Sample size and items to select Auditing standards Evidence accumulation Types of evidence Audit procedures Timing of tests Broad guidelines concerning auditor qualifications and conduct, evidence accumulation, and reporting Reporting Broad categories of evidence available for the auditor s accumulation Specific instructions for the accumulation of types of evidence 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-15

16 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 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-16

17 Confirmation Information Source Assets Cash in bank Accounts receivable Notes receivable Owned inventory out on consignment Inventory held in public warehouses Cash surrender value of life insurance Bank Customer Maker Consignee Public warehouse Insurance company 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-17

18 Confirmation Information Source Liabilities Accounts payable Notes payable Advances from customers Mortgages payable Bonds payable Creditor Lender Customer Mortgagor Bondholder 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-18

19 Confirmation Information Source Owners Equity Shares outstanding Registrar and transfer agent Other Information Insurance coverage Contingent liabilities Bond indenture agreements Collateral held by creditors Insurance company Bank, lender, and client s legal counsel Bond holder Creditor 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-19

20 Documentation It is the auditor s inspection of the client s documents and records. Internal documents External documents 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-20

21 Analytical Procedures Understand the client s industry and business Assess the entity s ability to continue as a going concern Indicate the presence of possible misstatements in the financial statements Reduce detailed audit tests 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-21

22 Inquiries of the Client It is the obtaining of written or oral information from the client in response to questions from the auditor Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-22

23 Recalculation It involves rechecking a sample of calculations made by the client Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-23

24 Reperformance It is the auditor s independent tests of client accounting procedures or controls that were originally done Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-24

25 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 client s facilities Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-25

26 Appropriateness of Types of Evidence Type of evidence Independence of provider Effectiveness of client s internal controls Auditor s direct knowledge Qualifications of provider Objectivity of evidence 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-26

27 Terms and Types of Evidence Terms Examine Scan Read Compute Recompute Foot Trace Compare Count Observe Inquire Vouch Type of Evidence Documentation Analytical procedures Documentation Analytical procedures Recalculation Recalculation Documentation/Reperformance Documentation Physical examination Observation Inquiries of client Documentation 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-27

28 Learning Objective 5 Understand the purposes of audit documentation Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-28

29 Audit Documentation Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-29

30 Audit Documentation Purposes of audit documentation Ownership of audit files Confidentiality of audit files 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-30

31 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 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-31

32 Learning Objective 6 Prepare organized audit documentation Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-32

33 Audit File Contents and Organization Robinson Associates Trial Balance 12/31/07 Cash $165,237 Accounts Receivable 275,050 Prepaid Insurance 37,795 Interest Receivable 20,493 Financial Statements Financial and Audit Statements Report and Audit Working Report Trial Financial Balance Statements and Audit Adjusting Report Journal Financial Entries Statements and Audit Contingent Report Financial Liabilities Statements and Audit Report Operations Financial Statements and Audit Liabilities Report Financial and Equity Statements and Audit Report Assets Financial Statements Analytical and Audit Report Financial Procedures Statements Tests of Controls and Audit and Report Financial Substantive Statements TOT Internal and Audit Report Financial Control Statements General and Audit Report Financial Information Statements Audit and Audit Report Financial Programs Statements and Audit Report Permanent Files Financial Statements and Audit Report 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-33

34 Permanent Files These files are intended to contain data of a historical or continuing nature pertinent to the current audit Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-34

35 Current Files Audit program General information Working trial balance Adjusting and reclassification entries Supporting schedules 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-35

36 Relationship of Audit Documentation to Financial Statements FINANCIAL STATEMENTS Cash 122 Acc. WORKING TRIAL BALANCE Prelim. AJE s Final Cash 212 (90) 122 AJE s Expense 90 Cash 90 LEAD SCHEDULE CASH A-1 Per G/L AJE s Final Petty Cash A Cash in Bank: General A (90) 96 Payroll A (90) Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-36

37 Relationship of Audit Documentation to Financial Statements LEAD SCHEDULE CASH A-1 Per G/L AJE s Final Petty Cash A Cash in Bank: General A (90) 96 Payroll A (90) 122 A-2 Cash Count Sheet A-3/1 Confirmation A-3 Bank Reconciliation A-3/2 O/S Check List A-4 Bank Reconciliation A-4/1 Confirmation A-4/2 O/S Check List 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-37

38 Types of Supporting Schedules Analysis Trial balance or list Reconciliation of amounts Tests of reasonableness 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-38

39 Types of Supporting Schedules Summary of procedures Examination of supporting documents Informational Outside documentation 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-39

40 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 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-40

41 Learning Objective 7 Describe how e-commerce affects audit evidence and audit documentation Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-41

42 Effect of E-commerce 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 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-42

43 End of Chapter Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 7-43