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Arens14e Ch07 Ppt

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5 - 5 Prentice Hall Business Publishing, Prentice Hall Business Publishing, Auditing 14/e, Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 1 Audit Evidence Audit Evidence Chapter 7 Chapter 7
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Page 1: Arens14e Ch07 Ppt

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

Page 2: Arens14e Ch07 Ppt

©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.

Page 3: Arens14e Ch07 Ppt

©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

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©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

Page 5: Arens14e Ch07 Ppt

©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.

Page 6: Arens14e Ch07 Ppt

©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)

Page 7: Arens14e Ch07 Ppt

©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

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©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.

Page 9: Arens14e Ch07 Ppt

©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

Page 10: Arens14e Ch07 Ppt

©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

Page 11: Arens14e Ch07 Ppt

©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

Page 12: Arens14e Ch07 Ppt

©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.

Page 13: Arens14e Ch07 Ppt

©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.

Page 14: Arens14e Ch07 Ppt

©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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©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 1515

Relationships Relationships

Page 16: Arens14e Ch07 Ppt

©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 1616

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.

Page 17: Arens14e Ch07 Ppt

©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

Page 18: Arens14e Ch07 Ppt

©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

Page 19: Arens14e Ch07 Ppt

©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

Page 20: Arens14e Ch07 Ppt

©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

Page 21: Arens14e Ch07 Ppt

©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 2121

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.

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©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.

Page 23: Arens14e Ch07 Ppt

©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.

Page 24: Arens14e Ch07 Ppt

©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.

Page 25: Arens14e Ch07 Ppt

©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

Page 26: Arens14e Ch07 Ppt

©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 7 - 7 - 2626

Application of Types of Application of Types of evidence to the four evidence to the four Evidence DecisionsEvidence Decisions

Page 27: Arens14e Ch07 Ppt

©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

Page 28: Arens14e Ch07 Ppt

©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.

Page 29: Arens14e Ch07 Ppt

©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.

Page 30: Arens14e Ch07 Ppt

©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

Page 31: Arens14e Ch07 Ppt

©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.

Page 32: Arens14e Ch07 Ppt

©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.

Page 33: Arens14e Ch07 Ppt

©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

Page 34: Arens14e Ch07 Ppt

©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.

Page 35: Arens14e Ch07 Ppt

©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

Page 36: Arens14e Ch07 Ppt

©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

Page 37: Arens14e Ch07 Ppt

©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

Page 38: Arens14e Ch07 Ppt

©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

Page 39: Arens14e Ch07 Ppt

©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

Page 40: Arens14e Ch07 Ppt

©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

Page 41: Arens14e Ch07 Ppt

©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.

Page 42: Arens14e Ch07 Ppt

©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

Page 43: Arens14e Ch07 Ppt

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


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