audit evidence chapter 7. generally accepted auditing standards third standard of field work...
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Audit EvidenceAudit Evidence
Chapter 7Chapter 7
Generally Accepted Auditing StandardsGenerally Accepted Auditing StandardsThird Standard of Field WorkThird Standard of Field Work
Sufficient competent evidential matterSufficient competent evidential matter is to be is to be obtained through inspection, observation, obtained through inspection, observation, inquiries, and confirmations to afford a inquiries, and confirmations to afford a reasonable basis for an opinion regarding the reasonable basis for an opinion regarding the financial statements under audit.financial statements under audit.
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
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
Persuasiveness of EvidencePersuasiveness of Evidence
Competence and sufficiency are determinantsCompetence and sufficiency are determinantsof the persuasiveness of evidence.of the persuasiveness of evidence.Factors affecting competence include:Factors affecting competence include:
Relevance to audit objectiveRelevance to audit objective Independence of providerIndependence of provider Effectiveness of internal controls Effectiveness of internal controls Auditor’s direct knowledgeAuditor’s direct knowledge Qualifications of providersQualifications of providers Degree of objectivity Degree of objectivity TimelinessTimeliness
Table 7-2, Table 7-2, (p. 167)(p. 167)
Types of Audit EvidenceTypes of Audit Evidence
1.1. Physical examination (tangible assets) Physical examination (tangible assets) 2.2. Confirmation (positive and negative)Confirmation (positive and negative)3.3. Documentation Documentation 4.4. Analytical proceduresAnalytical procedures5.5. Inquiries of the clientInquiries of the client6.6. ReperformanceReperformance7.7. ObservationObservation
Confirmations and Information Often ConfirmedConfirmations and Information Often Confirmed
AssetsAssetsCash in bank (example)Cash in bank (example) 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
Confirmations may be positive or negative.Confirmations may be positive or negative. Procedures for non-response positivesProcedures for non-response positives
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
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
Other Forms of EvidenceOther Forms of Evidence
Documentation – Client’s documents and recordsDocumentation – Client’s documents and records
Internal vs. External documentsInternal vs. External documents
Tracing vs. Vouching – see next slideTracing vs. Vouching – see next slide
Tracing vs. VouchingTracing vs. Vouching (Figure 6-7 is from another text) (Figure 6-7 is from another text)
Inspection of Documents or RecordsInspection of Documents or Records
Vouching Vouching
TracingTracing
Note: students should understand the differences Note: students should understand the differences between tracing and vouching.between tracing and vouching.
Reliability of Documentary EvidenceReliability of Documentary Evidence(Figure 6-5 is from another text)(Figure 6-5 is from another text)
Other Forms of Evidence: Other Forms of Evidence: Analytical Analytical proceduresprocedures
Importance of context – understanding the Importance of context – understanding the client’s business and industryclient’s business and industry
Analytical procedures are used for:Analytical procedures are used for:• Assessing going concernAssessing going concern• Finding possible misstatements in the financialsFinding possible misstatements in the financials• Reducing detailed audit testsReducing detailed audit tests
Other Forms of EvidenceOther Forms of Evidence
Inquiries of the client – written or oralInquiries of the client – written or oral
Reperformance – verifying calculations or Reperformance – verifying calculations or information processinginformation processing
Observation Observation
Competence of Types of Evidence, Competence of Types of Evidence, Table 7-4 (p. 172)Table 7-4 (p. 172)
Terms and Types of Evidence,Terms and Types of Evidence,Table 7-6, (p. 175)Table 7-6, (p. 175)
ExamineExamine DocumentationDocumentationScanScan Analytical proceduresAnalytical proceduresReadRead DocumentationDocumentationComputeCompute Analytical proceduresAnalytical proceduresRecomputeRecompute ReperformanceReperformanceFootFoot ReperformanceReperformance
TermsTerms Type of EvidenceType of Evidence
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
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.
Audit DocumentationAudit Documentation
Purposes of audit documentation – primaryPurposes of audit documentation – primarymeansmeans to support that the audit was to support that the audit was conducted in accordance with GAAS. conducted in accordance with GAAS.
Ownership of audit filesOwnership of audit files
Confidentiality of audit files – rule 301, chapter 4.Confidentiality of audit files – rule 301, chapter 4.
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.
Audit File Contents and OrganizationAudit File Contents and Organization
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
Permanent FilesPermanent Files
These files are intended to contain data of aThese files are intended to contain data of a historical or continuing historical or continuing naturenature pertinent to the pertinent to the current audit. Examples include:current audit. Examples include:• Articles of incorporationArticles of incorporation• Loan agreementsLoan agreements• Documents related to understanding I/CDocuments related to understanding I/C• LeasesLeases
Current FilesCurrent Files
Audit programAudit program
General informationGeneral information
Working trial balanceWorking trial balance
Adjusting and reclassification entriesAdjusting and reclassification entries
Supporting schedulesSupporting schedules
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
Relationship of Audit DocumentationRelationship of Audit Documentationto Financial Statementsto Financial Statements
LEAD SCHEDULE – CASHLEAD SCHEDULE – CASH A-1A-1 Per G/LPer G/L AJE’sAJE’s FinalFinal
Petty 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
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
Types of Supporting SchedulesTypes of Supporting Schedules
Summary of proceduresSummary of procedures
Examination of supporting documentsExamination of supporting documents
InformationalInformational
Outside documentationOutside documentation
Characteristics of Audit DocumentationCharacteristics of Audit Documentation
Each 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.
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.