7 - 1 ©2006 prentice hall business publishing, auditing 11/e, arens/beasley/elder audit evidence...
TRANSCRIPT
7 - 1©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Audit EvidenceAudit Evidence
Chapter 7Chapter 7
7 - 2©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 1Learning Objective 1
Contrast audit evidence withContrast audit evidence with
evidence used by otherevidence used by other
professions.professions.
7 - 3©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Nature of EvidenceNature of Evidence
The use of evidence is not unique to auditors.The use of evidence is not unique to auditors.
Evidence is also used by scientists, lawyers,Evidence is also used by scientists, lawyers,and historians.and historians.
7 - 4©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 2Learning Objective 2
Identify the four audit evidenceIdentify the four audit evidence
decisions that are needed todecisions that are needed to
create an audit program.create an audit program.
7 - 5©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Audit Evidence DecisionsAudit Evidence Decisions
1. Which audit procedures to use1. Which audit procedures to use
2. What sample size to select for a given procedure2. What sample size to select for a given procedure
3. Which items to select from the population3. Which items to select from the population
4. When to perform the procedures4. When to perform the procedures
7 - 6©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Audit ProgramAudit Program
It includes a list of the audit proceduresIt includes a list of the audit proceduresthe auditor considers necessary.the auditor considers necessary.
Most auditors use computers to facilitateMost auditors use computers to facilitatethe preparation of audit programs.the preparation of audit programs.
Sample sizesSample sizes Items to selectItems to select Timing of the testsTiming of the tests
7 - 7©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 3Learning Objective 3
Specify the characteristics thatSpecify the characteristics that
determine the persuasivenessdetermine the persuasiveness
of evidence.of evidence.
7 - 8©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Persuasiveness of EvidencePersuasiveness of Evidence
CompetenceCompetence
SufficiencySufficiency
Combined effectCombined effect
Persuasiveness and costPersuasiveness and cost
7 - 9©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
CompetenceCompetence
RelevanceRelevance Independence of providerIndependence of provider Effectiveness of internal controlsEffectiveness of internal controls Auditor’s direct knowledgeAuditor’s direct knowledge Qualifications of providersQualifications of providers Degree of objectivity Degree of objectivity TimelinessTimeliness
7 - 10©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 4Learning Objective 4
Identify and apply the seven typesIdentify and apply the seven types
of evidence used in auditing.of evidence used in auditing.
7 - 11©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Types of Audit EvidenceTypes of Audit Evidence
1.1. Physical examinationPhysical examination2.2. ConfirmationConfirmation3.3. DocumentationDocumentation4.4. Analytical proceduresAnalytical procedures5.5. Inquiries of the clientInquiries of the client6.6. ReperformanceReperformance7.7. ObservationObservation
7 - 12©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
RelationshipsRelationships
AuditingAuditingstandardsstandards
QualificationsQualificationsand conductand conduct ReportingReportingEvidenceEvidence
accumulationaccumulation
Types ofTypes ofevidenceevidence
Broadguidelines
Broadcategories
7 - 13©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
RelationshipsRelationships
Types ofTypes ofevidenceevidence
AuditAuditproceduresprocedures
Items toItems toselectselect
Specificinstructions
SampleSamplesizesize
TimingTimingof testsof tests
7 - 14©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Information Often ConfirmedInformation Often Confirmed
AssetsAssetsCash in bankCash in bank BankBankAccounts receivableAccounts receivable CustomerCustomerNotes receivableNotes receivable MakerMakerOwned inventory out on consignmentOwned inventory out on consignment ConsigneeConsigneeInventory held in public warehousesInventory held in public warehouses WarehouseWarehouseCash surrender value of life insuranceCash surrender value of life insurance Insurance co.Insurance co.
InformationInformation SourceSource
7 - 15©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Information Often ConfirmedInformation Often Confirmed
LiabilitiesLiabilitiesAccounts payableAccounts payable CreditorCreditorNotes payableNotes payable LenderLenderAdvances from customersAdvances from customers CustomerCustomerMortgages payableMortgages payable MortgagorMortgagorBonds payableBonds payable BondholderBondholder
InformationInformation SourceSource
7 - 16©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Information Often ConfirmedInformation Often Confirmed
Owners’ EquityOwners’ EquityShares outstandingShares outstanding Registrar andRegistrar and
transfer agenttransfer agent
Other InformationOther InformationInsurance coverageInsurance coverage Insurance co.Insurance co.Contingent liabilitiesContingent liabilities Bank, lender,Bank, lender,
and clientsand clientslegal counsellegal counsel
Bond indenture agreementsBond indenture agreements BondholderBondholderCollateral held by creditorsCollateral held by creditors CreditorCreditor
InformationInformation SourceSource
7 - 17©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Information Often ConfirmedInformation Often Confirmed
DocumentationDocumentation
Analytical proceduresAnalytical procedures
Inquiries of the clientInquiries of the client
ReperformanceReperformance
ObservationObservation
7 - 18©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Competence of Types of EvidenceCompetence of Types of Evidence
Type of evidenceType of evidence
Effectiveness of client’s internal controlsEffectiveness of client’s internal controls
Qualifications of providerQualifications of provider
Independence of providerIndependence of provider
Auditor’s direct knowledgeAuditor’s direct knowledge
Objectivity of evidenceObjectivity of evidence
7 - 19©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Terms and Types of EvidenceTerms and Types of Evidence
ExamineExamine DocumentationDocumentationScanScan Analytical proceduresAnalytical proceduresReadRead DocumentationDocumentationComputeCompute Analytical proceduresAnalytical proceduresRecomputeRecompute ReperformanceReperformanceFootFoot ReperformanceReperformance
TermsTerms Type of EvidenceType of Evidence
7 - 20©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Terms and Types of EvidenceTerms and Types of Evidence
TraceTrace Documentation/Documentation/ReperformanceReperformance
CompareCompare DocumentationDocumentationCountCount Physical examinationPhysical examinationObserveObserve ObservationObservationInquireInquire Inquiries of clientInquiries of clientVouchVouch DocumentationDocumentation
TermsTerms Type of EvidenceType of Evidence
7 - 21©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 5Learning Objective 5
Understand the purposes ofUnderstand the purposes of
audit documentation.audit documentation.
7 - 22©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Audit DocumentationAudit Documentation
Audit documentation is the principal recordAudit documentation is the principal recordof auditing procedures applied, evidenceof auditing procedures applied, evidenceobtained, and conclusions reached byobtained, and conclusions reached bythe auditor in the engagement.the auditor in the engagement.
7 - 23©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Audit DocumentationAudit Documentation
Purposes of audit documentation Purposes of audit documentation
Ownership of audit filesOwnership of audit files
Confidentiality of audit filesConfidentiality of audit files
7 - 24©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Sarbanes-Oxley ActSarbanes-Oxley Act
The Sarbanes-Oxley ActThe Sarbanes-Oxley Actrequires auditors of publicrequires auditors of publiccompanies to prepare andcompanies to prepare andmaintain audit workingmaintain audit workingpapers for a period of nopapers for a period of noless than seven years.less than seven years.
7 - 25©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 6Learning Objective 6
Prepare organized auditPrepare organized audit
documentation.documentation.
7 - 26©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Audit File Contents and Audit File Contents and OrganizationOrganization
Robinson AssociatesRobinson AssociatesTrial BalanceTrial Balance
12/31/0512/31/05
CashCash $165,237$165,237Accounts ReceivableAccounts Receivable 275,050 275,050Prepaid InsurancePrepaid Insurance 37,795 37,795Interest ReceivableInterest Receivable 20,493 20,493
FinancialFinancialStatements andStatements and
Audit ReportAudit Report
WorkingWorkingTrial BalanceTrial Balance
AdjustingAdjustingJournal EntriesJournal Entries
ContingentContingentLiabilitiesLiabilities
OperationsOperations
Liabilities Liabilities and Equityand Equity
AssetsAssets
AnalyticalAnalyticalProceduresProcedures
Test of ControlsTest of Controls& Substantive& Substantive
TOTTOT
InternalInternalControlControl
GeneralGeneralInformationInformation
AuditAuditProgramsPrograms
PermanentPermanentFilesFiles
7 - 27©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Permanent FilesPermanent Files
These files are intended to containThese files are intended to containdata of a data of a historical or continuinghistorical or continuingnaturenature pertinent to the current audit. pertinent to the current audit.
7 - 28©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Current FilesCurrent Files
Audit programAudit program
General informationGeneral information
Working trial balanceWorking trial balance
Adjusting and reclassification entriesAdjusting and reclassification entries
Supporting schedulesSupporting schedules
7 - 29©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Relationship of Audit DocumentationRelationship of Audit Documentationto Financial Statementsto Financial Statements
FINANCIAL STATEMENTSFINANCIAL STATEMENTSCashCash 122122Acc.Acc. …………………. ………………….
FINANCIAL STATEMENTSFINANCIAL STATEMENTSCashCash 122122Acc.Acc. …………………. ………………….
WORKING TRIAL BALANCEWORKING TRIAL BALANCE Prelim.Prelim. AJE’sAJE’s FinalFinal
CashCash 212212 (90)(90) 122122
AJE’sAJE’sExpenseExpense 9090
CashCash 90 90
LEAD SCHEDULE – CASHLEAD SCHEDULE – CASH A-1A-1 Per G/LPer G/L AJE’sAJE’s FinalFinal
Petty Cash A-2Petty Cash A-2 5 5 5 5Cash in Bank:Cash in Bank:
General A-3General A-3 186186 (90)(90) 96 96Payroll A-4Payroll A-4 21 21 21 21
212212 (90)(90) 122122
7 - 30©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Relationship of Audit DocumentationRelationship of Audit Documentationto Financial Statementsto Financial StatementsLEAD SCHEDULE – CASHLEAD SCHEDULE – CASH A-1A-1
Per G/LPer G/L AJE’sAJE’s FinalFinalPetty Cash A-2 Petty Cash A-2 5 5 5 5Cash in Bank:Cash in Bank:
General A-3General A-3 186186 (90)(90) 96 96Payroll A-4Payroll A-4 21 21 21 21
212212 (90)(90) 122122
A-3/1A-3/1ConfirmationConfirmation
A-3/2A-3/2O/S Check ListO/S Check List
A-4/2A-4/2O/S Check ListO/S Check List
A-4/1A-4/1ConfirmationConfirmation
A-2A-2Cash Count SheetCash Count Sheet
A-3A-3Bank ReconciliationBank Reconciliation
A-4A-4Bank ReconciliationBank Reconciliation
7 - 31©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Types of Supporting SchedulesTypes of Supporting Schedules
AnalysisAnalysis
Trial balance or listTrial balance or list
Reconciliation of amountsReconciliation of amounts
Tests of reasonablenessTests of reasonableness
7 - 32©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Types of Supporting SchedulesTypes of Supporting Schedules
Summary of proceduresSummary of procedures
Examination of supporting documentsExamination of supporting documents
InformationalInformational
Outside documentationOutside documentation
7 - 33©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Characteristics of Audit Characteristics of Audit DocumentationDocumentationEach audit file should be properly identified.Each audit file should be properly identified.
Documentation should be indexed andDocumentation should be indexed andcross-referenced.cross-referenced.
Completed documentation must clearly indicateCompleted documentation must clearly indicatethe audit work performed.the audit work performed.
It should include sufficient information.It should include sufficient information.
It should plainly state the conclusions reached.It should plainly state the conclusions reached.
7 - 34©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 7Learning Objective 7
Describe how e-commerceDescribe how e-commerce
affects audit evidence andaffects audit evidence and
audit documentation.audit documentation.
7 - 35©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Effect of E-commerceEffect of E-commerce
Audit evidence is increasingly in electronic form.Audit evidence is increasingly in electronic form.
Auditors must evaluate how electronic informationAuditors must evaluate how electronic informationaffects their ability to gather evidence.affects their ability to gather evidence.
Auditors use computers to read and examineAuditors use computers to read and examineevidence.evidence.
Software programs are typically Windows-based.Software programs are typically Windows-based.
7 - 36©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
End of Chapter 7End of Chapter 7