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5 - 5©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 11
Audit EvidenceAudit Evidence
Chapter 7Chapter 7
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 22
Learning Objective 1Learning Objective 1
Contrast audit evidence with evidence Contrast audit evidence with evidence used by other professions.used by other professions.
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 33
Nature of EvidenceNature of Evidence
Any information used by the auditor to determine whether the information being audited is stated in accordance with established criteria
The use of evidence is not unique to auditors
Evidence is also used by scientists, lawyers,and historians
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 44
Nature of EvidenceNature of Evidence
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 55
Learning Objective 2Learning Objective 2
Identify the four audit evidence Identify the four audit evidence decisions that are needed to create decisions that are needed to create an audit program.an audit program.
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 66
Audit Evidence DecisionsAudit Evidence Decisions
1. Which audit procedures to use
2. What sample size to select for a given procedure3. Which items to select from the population4. When to perform the procedures (timing)
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 77
Audit ProgramAudit Program
It includes a list of the audit proceduresthe auditor considers necessary.
Most auditors use audit software packages to generate audit programs.
Sample sizes Items to select Timing of the tests
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 88
Learning Objective 3Learning Objective 3
Specify the characteristics that Specify the characteristics that determine the persuasiveness of determine the persuasiveness of evidence.evidence.
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 99
Persuasiveness of EvidencePersuasiveness of EvidenceTwo determinants:
Appropriateness Sufficiency
The persuasiveness of evidence can be evaluated only after considering the combination of appropriateness and sufficiency
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 1010
Six Characteristics of Six Characteristics of Reliable EvidenceReliable Evidence
1. Independence of provider2. Effectiveness of client’s
internal controls3. Auditor’s direct knowledge4. Qualification of individuals
providing the information5. Degree of objectivity6. Timeliness
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 1111
Relationships Among Audit Relationships Among Audit Evidence and Evidence and
PersuasivenessPersuasivenessAudit Evidence Decisions
Qualities Affecting Persuasivenessof Evidence
Audit procedures and timing 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
Sample size and items to select Sufficiency Adequate sample size Selection of proper population items
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 1212
Persuasiveness and CostPersuasiveness and Cost
In making decisions about evidencefor a given audit, both persuasivenessand cost must be considered.
The auditor’s goal is to obtain asufficient amount of appropriateevidence at the lowest total cost.
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 1313
Learning Objective 4Learning Objective 4
Identify and apply the eight types of Identify and apply the eight types of evidence used in auditing.evidence used in auditing.
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 1414
Types of Audit EvidenceTypes of Audit Evidence
Documentation
Analytical procedures
Confirmation
Physical Examination
Inquiry
Observation
Reperformance
Recalculation
Audit Evidence
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Relationships Relationships
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Physical ExaminationPhysical Examination
It is the inspection or count by theauditor of a tangible asset.
This type of evidence is most oftenassociated with inventory and cash.
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 1717
ConfirmationsConfirmations
United States Auditor must confirm accounts receivableAuditors control the mailing and receipt of replies Electronic confirmations are permitted
International Confirmations are not required
Auditing Standards Requirements
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 1818
Information often ConfirmedInformation often Confirmed
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 1919
DocumentationDocumentation
It is the auditor’s inspection of theclient’s documents and records.
Internaldocuments
Externaldocuments
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 2020
Analytical ProceduresAnalytical 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
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Inquiries of the ClientInquiries of the Client
It is the obtaining of written or oral information from the client in response to questions from the auditor.
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 2222
RecalculationRecalculation
It involves rechecking a sample of calculationsmade by the client.
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 2323
ReperformanceReperformance
It is the auditor’s independent tests of clientaccounting procedures or controls thatwere originally done.
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 2424
ObservationObservation
Use one’s senses to assess client activities.
Tour plant to obtain a generalimpression of client’s facilities.
Observation is rarely sufficientby itself.
Often need to corroborate with another kind of evidence.
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 2525
Appropriateness of Types of Appropriateness of Types of EvidenceEvidence
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Application of Types of Application of Types of evidence to the four evidence to the four Evidence DecisionsEvidence Decisions
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 2727
Terms and Types of Terms and Types of EvidenceEvidence
Terms Type of Evidence
ExamineScanReadComputeRecomputeFootTraceCompareCountObserveInquireVouch
DocumentationAnalytical proceduresDocumentationAnalytical proceduresRecalculationRecalculationDocumentation/ReperformanceDocumentationPhysical examinationObservationInquiries of clientDocumentation
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 2828
Learning Objective 5Learning Objective 5
Understand the purposes of audit Understand the purposes of audit documentation.documentation.
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 2929
Audit DocumentationAudit Documentation
Audit documentation is the principal recordof auditing procedures applied, evidenceobtained, and conclusions reached bythe auditor in the engagement.
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 3030
Audit DocumentationAudit Documentation
Purposes of audit documentation
Ownership of audit files
Confidentiality of audit files
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 3131
Sarbanes-Oxley ActSarbanes-Oxley Act
The Sarbanes-Oxley Act requires auditors ofpublic companies to prepare and maintainaudit working papers for a period of noless than seven years.
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 3232
Learning Objective 6Learning Objective 6
Prepare organized audit Prepare organized audit documentation.documentation.
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 3333
Audit File Contents and Audit File Contents and OrganizationOrganization
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 3434
Permanent FilesPermanent Files
These files are intended to containdata of a historical or continuingnature pertinent to the current audit.
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 3535
Current FilesCurrent Files
Audit program
General information
Working trial balance
Adjusting and reclassification entries
Supporting schedules
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 3636
Relationship of Audit Relationship of Audit DocumentationDocumentation
to Financial Statementsto Financial Statements
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 3737
Types of Supporting Types of Supporting SchedulesSchedules
Analysis
Trial balance or list
Reconciliation of amounts
Tests of reasonableness
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 3838
Types of Supporting Types of Supporting SchedulesSchedules
Summary of procedures
Examination of supporting documents
Informational
Outside documentation
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 3939
Preparation of Audit Preparation of Audit DocumentationDocumentation
Proper identification of each file
Files indexed and cross-referenced
Clear indication of work performed
Include sufficient information
State conclusions reached
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 4040
Preparation of Audit Preparation of Audit DocumentationDocumentation
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 4141
Learning Objective 7Learning Objective 7
Describe how technology affects audit Describe how technology affects audit evidence and audit documentation.evidence and audit documentation.
©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 4242
Effect of TechnologyEffect of Technology
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
5 - 5©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 4343
End of Chapter 7End of Chapter 7