Audit Evidence

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Audit Evidence

• Chapter 7

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Generally Accepted Auditing StandardsThird
Standard of Field Work

• Sufficient competent evidential matter is to be
  obtained through inspection, observation,
  inquiries, and confirmations to afford a
  reasonable basis for an opinion regarding the
  financial statements under audit.

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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 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.
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Persuasiveness of Evidence
Competence and sufficiency are determinants of
the persuasiveness of evidence. Factors affecting
competence include

• Relevance to audit objective
• Independence of provider
• Effectiveness of internal controls
• Auditors direct knowledge
• Qualifications of providers
• Degree of objectivity
• Timeliness

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Table 7-2, (p. 167)
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Types of Audit Evidence

1. Physical examination (tangible assets)
2. Confirmation (positive and negative)
3. Documentation
4. Analytical procedures
5. Inquiries of the client
6. Reperformance
7. Observation

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Confirmations and Information Often Confirmed
Confirmations may be positive or negative.
Procedures for non-response positives
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Information Often Confirmed
Information Source
Liabilities Accounts payable Creditor Notes
payable Lender Advances from
customers Customer Mortgages payable Mortgago
r Bonds payable Bondholder
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Information Often Confirmed
Information Source
Owners Equity Shares outstanding Registrar
and transfer agent
Other Information Insurance coverage Insurance
co. Contingent liabilities Bank,
lender, and clients legal
counsel Bond indenture agreements Bondholder Col
lateral held by creditors Creditor
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Other Forms of Evidence
Documentation Clients documents and records
Internal vs. External documents
Tracing vs. Vouching see next slide
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Tracing vs. Vouching (Figure 6-7 is from another
text)

• Inspection of Documents or Records
• Vouching
• Tracing

Note students should understand the differences
between tracing and vouching.
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Reliability of Documentary Evidence(Figure 6-5
is from another text)
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Other Forms of Evidence Analytical procedures
Importance of context understanding the
clients business and industry

• Analytical procedures are used for
• Assessing going concern
• Finding possible misstatements in the financials
• Reducing detailed audit tests

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Other Forms of Evidence
Inquiries of the client written or oral
Reperformance verifying calculations or
information processing
Observation
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Competence of Types of Evidence, Table 7-4 (p.
172)
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Terms and Types of Evidence,Table 7-6, (p. 175)
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Terms and Types of Evidence
Terms Type of Evidence
Trace Documentation/ Reperformance Compare
Documentation Count Physical
examination Observe Observation Inquire Inquir
ies of client Vouch Documentation
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Audit Documentation
Audit documentation is the principal record of
auditing procedures applied, evidence obtained,
and conclusions reached by the auditor in the
engagement.
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Audit Documentation
Purposes of audit documentation primary means
to support that the audit was conducted in
accordance with GAAS.
Ownership of audit files
Confidentiality of audit files rule 301,
chapter 4.
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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.
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Audit File Contents and Organization
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Permanent Files

• These files are intended to contain data of a
• historical or continuing nature pertinent to the
• current audit. Examples include
• Articles of incorporation
• Loan agreements
• Documents related to understanding I/C
• Leases

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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 Documentationto Financial
Statements
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Relationship of Audit Documentationto Financial
Statements
LEAD SCHEDULE CASH A-1 Per
G/L AJEs 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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Types of Supporting Schedules
Analysis
Trial balance or list
Reconciliation of amounts
Tests of reasonableness
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Types of Supporting Schedules
Summary of procedures
Examination of supporting documents
Informational
Outside documentation
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Characteristics 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.
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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.