Audit

Evidence
Chapter 7

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

Contrast audit evidence with

evidence used by other
professions.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7-2
 Nature of Evidence

The use of evidence is

not unique to auditors.
Evidence is also used
by scientists, lawyers,
and historians.

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 Learning Objective 2

Identify the FIVE audit evidence

decisions that are needed to
create an audit program.

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 Audit Evidence Decisions
1. Which audit procedures to use = nature, research:
by far the hardest – especially related to fraud.
2. What sample size to select for a given
procedure / budget = extent
3. Which items to select from the population = nature
4. When to perform the procedures = timing
5. Who should perform the procedure = staffing
WHAT AFFECTS THESE DECISIONS????????
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7-5
 Audit Program

It includes a list of the audit procedures (tests)

the auditor considers necessary. Table of contents
covering objectives / To do list for account.

Most auditors use computers to facilitate

the preparation of audit programs.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7-6
 Learning Objective 3

Specify the characteristics

that determine the
persuasiveness
of evidence.

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 Persuasiveness of Evidence
Appropriateness - Quality
Sufficiency - Qty
Combined effect (mums vs. roses):
Examine client supporting doc. to support
sales transaction: sample size = 120.
Obtain external confirmation of A/R (sales
transaction): sample size = 25.
Persuasiveness and cost: Inspecting inventory
for Nordstrom’s 7-8
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
 Appropriateness
Relevance – to objective
Independence of provider – source objectivity
Effectiveness of internal controls
Auditor’s direct knowledge
Qualifications of individuals – source competence
Mgt (A/P), IT auditor research (CR Assessment)
Degree of objectivity – b/w or grey
Timeliness – B/S vs. I/S
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 Learning Objective 4

Identify and apply the

eight types of evidence
used in auditing.

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 Types of Audit Evidence – Tools!
1. Physical examination - Inventory
2. Confirmation – A/R
3. Documentation – Sales transaction
4. Analytical procedures – Expectation for allowance
5. Inquiries of the client – A/P difference - Corroborate
6. Recalculation – Dep. Expense, FMV of invest. quant
7. Reperformance – Credit check, posting and summ.
8. Observation – Tour, Seg of duties
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 Terms and Types of Evidence
Terms Types of Evidence
Examine Documentation
Scan Analytical procedures
Read Documentation
Compute Analytical procedures
Recompute Recalculation
Simulation Reperformance
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 Terms and Types of Evidence
Terms Types of Evidence
Trace Documentation
Compare Documentation
Count Physical examination
Observe Observation
Inquire Inquiries of client
Vouch Documentation
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 Learning Objective 5

Understand the purposes

of audit documentation.

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 Why keep a record of
audit/WPs/Documentation?

Legal (story – AR confirmation)

Planning
Learning (research SALY)
Review (FtF vs. Electronic)
SOX – keep WPs for 7 yrs and
PCAOB inspection
Client changes auditors: Babysitting
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 Learning Objective 6

Prepare organized
audit documentation.

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 Audit File Contents
and Organization
Financial Analytical
Statements and Procedures
Audit Report
Working Test of Controls
Trial Balance & Substantive
Derrickson Associates TOT
Trial Balance Adjusting
Journal Entries Internal
12/31/2003 Control
Contingent
Liabilities General
Cash $165,237 Information
Accounts Receivable 275,050 Operations
Prepaid Insurance 37,795 Liabilities Audit
Interest Receivable 20,493 and Equity Programs
Assets Permanent
Files

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 Permanent Files

These files are intended to contain

data of a historical or continuing
nature pertinent to the current audit.
Update and carryforward to CY
WPs.
Examples????

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 Example – WP Structure
 1000 series = Planning WPs (ex. 1100 =
Planning Memo)
 2000 series = Reporting (ex. 2100 = Trial
balance)
 5000 series = Assets, 5100 = Cash, 5110 =
Cash Audit Program, 5120 = Cash Leadsheet,
5130 = Bank reconciliation for acct #XXXX.
 8000 series = Income statement accounts

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 Current Files
Audit program – for each account
General administration - budget
Working trial balance – agreed to leadsheets and F/S
Adjusting and reclassification entries – from
supporting schedules and booked to
T/B or passed.
Supporting schedules – bank reconciliation,
confirmation of A/R, completeness tests
of sales transactions
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 Relationship of Audit
Documentation
to Financial Statements
FINANCIAL STATEMENTS
Cash 122
Acc. ………………….

WORKING TRIAL AJE’s

BALANCE Expense 90
Prelim. AIE’s Final Cash 90
Cash 212 (90) 122

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 Relationship of Audit
Documentation
to Financial Statements

LEAD SCHEDULE – CASH A-1

Per G/1 AJE’s Final
Petty Cash A-2 5 5
Cash in Bank:
General A-3 186 (90) 96
Payroll A-4 21 21
212 (90) 122

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 Relationship of Audit
Documentation
to Financial Statements
A-2 A-3
Observe cash Bank
b/c pettty Reconciliation
cash Agreed to L/S

A-3/1 A-3/2
Confirmation O/S Check List
Dep. in transit, etc.
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 Relationship of Audit
Documentation
to Financial Statements
A-4
Bank
Reconciliation
Agreed to L/S

A-4/1 A-4/2
Confirmation O/S Check List
Dep. in transit, etc.
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 Learning Objective 7

Describe how technology affects

audit evidence and audit
documentation.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 25
 Effect of Technology

Audit evidence is increasingly in electronic form.

IT audit specialists!

Auditors use computers to read

and examine evidence (e.g., ACL) – Examples???

Software programs are typically Windows-based.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 26
 End of Chapter 7

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7 - 27