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Transcript of 5 - 5 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 1 Audit...
![Page 1: 5 - 5 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 1 Audit Evidence Chapter 7.](https://reader035.fdocuments.us/reader035/viewer/2022062300/56649e795503460f94b78b57/html5/thumbnails/1.jpg)
5 - 5©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 1
Audit Evidence
Chapter 7
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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 2
Learning Objective 1
Contrast audit evidence with evidence used by other professions.
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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 3
Nature 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, Auditing 14/e, Arens/Elder/Beasley 7 - 4
Nature of Evidence
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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 5
Learning Objective 2
Identify the four audit evidence decisions that are needed to create an audit program.
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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 6
Audit 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)
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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 7
Audit 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, Auditing 14/e, Arens/Elder/Beasley 7 - 8
Learning Objective 3
Specify the characteristics that determine the persuasiveness of evidence.
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Persuasiveness of EvidenceTwo determinants:
Appropriateness Sufficiency
The persuasiveness of evidence can be evaluated only after considering the combination of appropriateness and sufficiency
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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 10
Six Characteristics of Reliable 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
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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 11
Relationships Among Audit Evidence and
PersuasivenessAudit 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
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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 12
Persuasiveness 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.
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Learning Objective 4
Identify and apply the eight types of evidence used in auditing.
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Types of Audit Evidence
Documentation
Analytical procedures
Confirmation
Physical Examination
Inquiry
Observation
Reperformance
Recalculation
Audit Evidence
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Relationships
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Physical Examination
It is the inspection or count by theauditor of a tangible asset.
This type of evidence is most oftenassociated with inventory and cash.
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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 17
Confirmations
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
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Information often Confirmed
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Documentation
It is the auditor’s inspection of theclient’s documents and records.
Internaldocuments
Externaldocuments
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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 20
Analytical 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 Client
It is the obtaining of written or oral information from the client in response to questions from the auditor.
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Recalculation
It involves rechecking a sample of calculationsmade by the client.
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Reperformance
It is the auditor’s independent tests of clientaccounting procedures or controls thatwere originally done.
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Observation
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.
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Appropriateness of Types of Evidence
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Application of Types of evidence to the four Evidence Decisions
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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 27
Terms and Types of Evidence
Terms Type of Evidence
ExamineScanReadComputeRecomputeFootTraceCompareCountObserveInquireVouch
DocumentationAnalytical proceduresDocumentationAnalytical proceduresRecalculationRecalculationDocumentation/ReperformanceDocumentationPhysical examinationObservationInquiries of clientDocumentation
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Learning Objective 5
Understand the purposes of audit documentation.
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Audit Documentation
Audit documentation is the principal recordof auditing procedures applied, evidenceobtained, and conclusions reached bythe auditor in the engagement.
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Audit Documentation
Purposes of audit documentation
Ownership of audit files
Confidentiality of audit files
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Sarbanes-Oxley Act
The Sarbanes-Oxley Act requires auditors ofpublic companies to prepare and maintainaudit working papers for a period of noless than seven years.
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Learning Objective 6
Prepare organized audit documentation.
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Audit File Contents and Organization
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Permanent Files
These files are intended to containdata of a historical or continuingnature pertinent to the current audit.
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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 Documentation
to Financial Statements
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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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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 7 - 39
Preparation of Audit Documentation
Proper identification of each file
Files indexed and cross-referenced
Clear indication of work performed
Include sufficient information
State conclusions reached
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Preparation of Audit Documentation
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Learning Objective 7
Describe how technology affects audit evidence and audit documentation.
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Effect 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
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End of Chapter 7