6 - 1 Copyright 2003 Pearson Education Canada Inc. CHAPTER 6 Audit Evidence.
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Transcript of 6 - 1 Copyright 2003 Pearson Education Canada Inc. CHAPTER 6 Audit Evidence.
6 - 1Copyright 2003 Pearson Education Canada Inc.
CHAPTER 6 AuditEvidence
6 - 2Copyright 2003 Pearson Education Canada Inc.
An auditor must address An auditor must address four decisionsfour decisions regarding regarding evidence accumulationevidence accumulation::
6 - 3Copyright 2003 Pearson Education Canada Inc.
Which audit procedures Which audit procedures should be used?should be used?
An auditor must address An auditor must address four decisionsfour decisions regarding regarding evidence accumulationevidence accumulation::
6 - 4Copyright 2003 Pearson Education Canada Inc.
Which audit procedures Which audit procedures should be used?should be used?
Whatare audit
procedures?
6 - 5Copyright 2003 Pearson Education Canada Inc.
Which audit procedures Which audit procedures should be used?should be used?
An audit procedure is a detailed
instruction for thecollection of a type of
audit evidence.
6 - 6Copyright 2003 Pearson Education Canada Inc.
Which audit procedures Which audit procedures should be used?should be used?
In general, the auditor will seekthe most appropriate procedures
that are also cost-feasible.
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MORE LESS
An auditor must address An auditor must address four decisionsfour decisions regarding regarding evidence accumulationevidence accumulation::
What sample size should What sample size should be selected?be selected?
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Which items should be Which items should be selected for testing?selected for testing?
An auditor must address An auditor must address four decisionsfour decisions regarding regarding evidence accumulationevidence accumulation::
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The auditor will consider:- random/judgmental selection
Which items should be Which items should be selected for testing?selected for testing?
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The auditor will consider:- random/judgmental selection- materiality
Which items should be Which items should be selected for testing?selected for testing?
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The auditor will consider:- random/judgmental selection- materiality- results of prior audits
Which items should be Which items should be selected for testing?selected for testing?
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When should the procedures When should the procedures be performed?be performed?
An auditor must address An auditor must address four decisionsfour decisions regarding regarding evidence accumulationevidence accumulation::
December
?
6 - 13Copyright 2003 Pearson Education Canada Inc.
When should the procedures When should the procedures be performed?be performed?
The auditor will consider proceduresthat should be performed before, on,
or after the balance sheet date.
December
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When should the procedures be When should the procedures be performed?performed?
An auditor must address An auditor must address four decisionsfour decisions regarding regarding evidence accumulationevidence accumulation::
Which items should be selected Which items should be selected for testing?for testing?
What sample size should be What sample size should be selected?selected?
Which audit procedures should Which audit procedures should be used?be used?
6 - 15Copyright 2003 Pearson Education Canada Inc.
When should the procedures be performed?When should the procedures be performed?
After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed.
Which items should be selected for testing?Which items should be selected for testing?
What sample size should be selected?What sample size should be selected?
Which audit procedures should be used?Which audit procedures should be used?
6 - 16Copyright 2003 Pearson Education Canada Inc.
Whatis an auditprogram?
After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed.
6 - 17Copyright 2003 Pearson Education Canada Inc.
After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed.
An auditprogram is a list of
detailed audit procedures for each component or cycle specifying proce-
dure timing, sample sizes, and selection methods.
6 - 18Copyright 2003 Pearson Education Canada Inc.
PersuasivenessPersuasiveness of evidence is of evidence is determined by:determined by:
relevance
timeliness
sufficiency
appropriate-ness
6 - 19Copyright 2003 Pearson Education Canada Inc.
PersuasivenessPersuasiveness of evidence is of evidence is determined by:determined by:
relevance
timeliness
sufficiency
appropriate-ness
Which ofthese are
specificallymentioned in the 3rd
examinationstandard?
6 - 20Copyright 2003 Pearson Education Canada Inc.
sufficiency
appropriate-ness
Which ofthese are
specificallymentioned in the 3rd
examination standard?
6 - 21Copyright 2003 Pearson Education Canada Inc.
relevance
Evidence must pertain to the Evidence must pertain to the specific audit objective.specific audit objective.
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relevance
Example: An auditor is concerned aboutthe completeness of accounts payable(a/p). Why would confirmation of a/p bal-ances be an irrelevant procedure?
Evidence must pertain to the Evidence must pertain to the specific audit objective.specific audit objective.
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relevance
Example: An auditor is concerned aboutthe completeness of accounts payable(a/p). Why would confirmation of a/p bal-ances be an irrelevant procedure?
Confirmation addresses existence.For completeness, a search is needed.
6 - 24Copyright 2003 Pearson Education Canada Inc.
appropriate-ness
Appropriateness concerns the Appropriateness concerns the believabilitybelievability and and trustworthi-trustworthi-
nessness of the evidence. of the evidence.
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appropriate-ness
Appropriateness is determined by:Appropriateness is determined by:- independence of the evidence provider
Appropriateness Appropriateness concerns the concerns the
believabilitybelievability and and trustworthinesstrustworthinessof the evidence.of the evidence.
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appropriate-ness
Appropriateness is determined by:Appropriateness is determined by:- independence of the evidence provider- effectiveness of client’s internal controls
Appropriateness Appropriateness concerns the concerns the
believabilitybelievability and and trustworthinesstrustworthinessof the evidence.of the evidence.
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appropriate-ness
Appropriateness is determined by:Appropriateness is determined by:- independence of the evidence provider- effectiveness of client’s internal controls- auditor’s direct knowledge
Appropriateness Appropriateness concerns the concerns the
believabilitybelievability and and trustworthinesstrustworthinessof the evidence.of the evidence.
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appropriate-ness
Appropriateness is determined by:Appropriateness is determined by:- independence of the evidence provider- effectiveness of client’s internal controls- auditor’s direct knowledge- qualifications of information provider
Appropriateness Appropriateness concerns the concerns the
believabilitybelievability and and trustworthinesstrustworthinessof the evidence.of the evidence.
6 - 29Copyright 2003 Pearson Education Canada Inc.
appropriate-ness
Appropriateness is determined by:Appropriateness is determined by:- independence of the evidence provider- effectiveness of client’s internal controls- auditor’s direct knowledge- qualifications of information provider- degree of objectivity
Appropriateness Appropriateness concerns the concerns the
believabilitybelievability and and trustworthinesstrustworthinessof the evidence.of the evidence.
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appropriate-ness
Appropriateness is a measure of Appropriateness is a measure of evidence evidence qualityquality, it can, it cannotnot be be enhanced by a larger sample enhanced by a larger sample
size.size.
Appropriateness Appropriateness concerns the concerns the
believabilitybelievability and and trustworthinesstrustworthinessof the evidence.of the evidence.
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sufficiency
Sufficiency is a measure of Sufficiency is a measure of quantityquantity. In general, the . In general, the largerlarger
the sample size, the the sample size, the more more persuasivepersuasive the evidence. the evidence.
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Less evidence yields
less assurance and
lower auditcosts.
More evidence yields
more assurance and
higher audit costs.
MORE LESS
Auditors must balance the trade-off be-Auditors must balance the trade-off be-tween gathering more or less evidence.tween gathering more or less evidence.
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sufficiency
SufficiencySufficiency must be addressed for must be addressed foreach audit test and each componenteach audit test and each component
of the financial statements.of the financial statements.
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An appropriate sample size may be An appropriate sample size may be determined by auditor determined by auditor judgmentjudgment
and/or by and/or by statistical samplingstatistical sampling..
sufficiency
SufficiencySufficiency must be addressed for must be addressed foreach audit test and each componenteach audit test and each component
of the financial statements.of the financial statements.
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sufficiency
In determining a sufficient sampleIn determining a sufficient samplesize, an auditor will also consider:size, an auditor will also consider:- “representativeness”
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sufficiency
- “representativeness”- materiality, large dollar amounts
In determining a sufficient sampleIn determining a sufficient samplesize, an auditor will also consider:size, an auditor will also consider:
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sufficiency
- “representativeness”- materiality, large dollar amounts- items with high probability of misstatement
In determining a sufficient sampleIn determining a sufficient samplesize, an auditor will also consider:size, an auditor will also consider:
6 - 38Copyright 2003 Pearson Education Canada Inc.
timeliness
When should auditWhen should auditevidence be gathered?evidence be gathered?
6 - 39Copyright 2003 Pearson Education Canada Inc.
timeliness
When should auditWhen should auditevidence be evidence be gathered?gathered?
- evidence related to balance sheet accounts should be collected as close to the balance sheet date as possible
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timeliness
When should auditWhen should auditevidence be evidence be gathered?gathered?
- evidence related to balance sheet accounts should be collected as close to the balance sheet date as possible- evidence related to income statement accounts should be collected from throughout the period rather than from only part of the period
6 - 41Copyright 2003 Pearson Education Canada Inc.
relevance
timeliness
sufficiency
appropriate-ness
Evidence isconsideredpersuasiveonly if all
four determinants
have been met.
6 - 42Copyright 2003 Pearson Education Canada Inc.
With regard to the adequacy With regard to the adequacy and costs of audit evidenceand costs of audit evidence::
absolutecertainty
convincingevidence
requires
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requires
requires
With regard to the adequacy With regard to the adequacy and costs of audit evidenceand costs of audit evidence::
absolutecertainty
convincingevidence
high auditcosts
6 - 44Copyright 2003 Pearson Education Canada Inc.
With regard to the adequacy With regard to the adequacy and costs of audit evidenceand costs of audit evidence::
requires
requires
absolutecertainty
convincingevidence
high auditcosts
requires
reasonablecertainty
persuasiveevidence
6 - 45Copyright 2003 Pearson Education Canada Inc.
With regard to the adequacy With regard to the adequacy and costs of audit evidenceand costs of audit evidence::
requires
requires
absolutecertainty
convincingevidence
high auditcosts
requires
requires
reasonablecertainty
persuasiveevidence
reasonableaudit costs
6 - 46Copyright 2003 Pearson Education Canada Inc.
Types of evidence Types of evidence - physical examination - inspection or count by the auditor of a tangible asset
veryvery appropriate evidence! appropriate evidence!
6 - 47Copyright 2003 Pearson Education Canada Inc.
auditor
client’s customer
- physical examination - confirmation - receipt of a written or oral response from an independent third party at the auditor’s request
veryvery appropriate evidence! appropriate evidence!
Types of evidence Types of evidence
Canada 46
6 - 48Copyright 2003 Pearson Education Canada Inc.
Types of evidence Types of evidence
The confirmationprocess must be controlled
by the auditor.
- physical examination - confirmation - receipt of a written or oral response from an independent third party at the auditor’s request
6 - 49Copyright 2003 Pearson Education Canada Inc.
Types of evidence Types of evidence
Whenever reasonable,a sample of accounts receivable
should be confirmed by theauditor.
- physical examination - confirmation - receipt of a written re- sponse from an independent third party at the auditor’s request
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- physical examination - confirmation - documentation (vouching) - auditor examination of client documents and records
Types of evidence Types of evidence
6 - 51Copyright 2003 Pearson Education Canada Inc.
What is the difference What is the difference between between internalinternal and and external documentsexternal documents??
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External documents are usually on theclient’s premises but were either pre-pared by a third party or processedby a third party (more persuasive).
What is the difference What is the difference between between internalinternal and and external documentsexternal documents??
6 - 53Copyright 2003 Pearson Education Canada Inc.
Internal documents have beenprepared by the client and have
not left the client’s premises(less persuasive).
What is the difference What is the difference between between internalinternal and and external documentsexternal documents??
6 - 54Copyright 2003 Pearson Education Canada Inc.
What is the primary What is the primary determinant of the determinant of the appropriateness of appropriateness of
internal documentsinternal documents??
6 - 55Copyright 2003 Pearson Education Canada Inc.
What is the primary What is the primary determinant of the determinant of the appropriateness of appropriateness of
internal internal documentsdocuments??
internalinternalcontrolcontrol
6 - 56Copyright 2003 Pearson Education Canada Inc.
- physical examination - confirmation - documentation
What is the difference What is the difference between between physicalphysicalexaminationexamination and and documentationdocumentation??
Types of evidenceTypes of evidence
6 - 57Copyright 2003 Pearson Education Canada Inc.
- documentation (vouching) - auditor examination of client documents and records
- physical examination - inspection or count by the auditor of a tangible asset
What is the difference What is the difference between between physicalphysicalexaminationexamination and and documentationdocumentation??
6 - 58Copyright 2003 Pearson Education Canada Inc.
- physical examination - confirmation - documentation (vouching)- observation - using the senses to audit; often an informal procedure requiring follow-up procedures
Types of evidence Types of evidence
6 - 59Copyright 2003 Pearson Education Canada Inc.
- physical examination - confirmation - documentation (vouching)- observation - inquiries of client - useful but biased and not persuasive unless supported by another form of evidence
CPA
Types of evidence Types of evidence
6 - 60Copyright 2003 Pearson Education Canada Inc.
- physical examination - confirmation - documentation (vouching)- observation - inquiries of client - reperformance - checking the accuracy of client calculations and transfers of information (often performed by an audit software package).
Types of evidence Types of evidence
6 - 61Copyright 2003 Pearson Education Canada Inc.
- physical examination - confirmation - documentation (vouching)- observation - inquiries of client - reperformance - analytical procedures - involve analy- sis of comparisons and interrelation- ships in data (may be performed by an audit software package).
Types of evidence Types of evidence
6 - 62Copyright 2003 Pearson Education Canada Inc.
Analytical procedures Analytical procedures should be used during the should be used during the planningplanning and and completioncompletion
phases of the audit...phases of the audit...
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Analytical procedures Analytical procedures should be used during the should be used during the planningplanning and and completioncompletion
phases of the audit...phases of the audit...
butbut they may they may alsoalso be bebeneficial at otherbeneficial at other
times during the audit.times during the audit.
6 - 64Copyright 2003 Pearson Education Canada Inc.
Purposes of Analytical ProceduresPurposes of Analytical Procedures
- facilitate understanding of client’s business and industry
6 - 65Copyright 2003 Pearson Education Canada Inc.
Purposes of Analytical ProceduresPurposes of Analytical Procedures
- facilitate understanding of client’s business and industry- may indicate financial difficulty and the cli- ent’s ability to con- tinue as a going concern
Bert’s Boutique
Going Out o
f Business Sale!
6 - 66Copyright 2003 Pearson Education Canada Inc.
Purposes of Analytical ProceduresPurposes of Analytical Procedures
- facilitate understanding of client’s business and industry- may indicate financial difficulty and the client’s ability to continue as a going concern- may indicate misstatements in the financial statements
6 - 67Copyright 2003 Pearson Education Canada Inc.
Purposes of Analytical ProceduresPurposes of Analytical Procedures
- facilitate understanding of client’s business and industry- may indicate financial difficulty and the client’s ability to continue as a going concern- may indicate misstatements in the financial statements- may result in a reduction of detailed audit tests
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- industry comparisons
Types of Analytical ProceduresTypes of Analytical Procedures
How do theclient’s financial ratios
compare with thoseof the industry?
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- industry comparisons - comparisons with prior years
AceCompany
2003financial
statements
Types of Analytical ProceduresTypes of Analytical Procedures
AceCompany
2004financial
statements
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- industry comparisons - comparisons with prior years
AceCompany
2003financial
statements
Conclusions from a 2-year analy-Conclusions from a 2-year analy-sis may be erroneous. sis may be erroneous. WHYWHY??
Types of Analytical ProceduresTypes of Analytical Procedures
AceCompany
2004financial
statements
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- industry comparisons - comparisons with prior years- comparisons with client-determined expected results, e.g.,
budgetsbudgets
Types of Analytical ProceduresTypes of Analytical Procedures
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account can be calculated from sales commissions ?????????????????
Types of Analytical ProceduresTypes of Analytical Procedures
- industry comparisons - comparisons with prior years- comparisons with client-determined expected results- comparisons with auditor-determined expected results, examples:
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account can be calculated from sales commissions sales depreciation expense ??????????????????
Types of Analytical ProceduresTypes of Analytical Procedures
- industry comparisons - comparisons with prior years- comparisons with client-determined expected results- comparisons with auditor-determined expected results, examples:
6 - 74Copyright 2003 Pearson Education Canada Inc.
account can be calculated from sales commissions sales depreciation expense fixed assets interest expense ??????????????????
Types of Analytical ProceduresTypes of Analytical Procedures
- industry comparisons - comparisons with prior years- comparisons with client-determined expected results- comparisons with auditor-determined expected results, examples:
6 - 75Copyright 2003 Pearson Education Canada Inc.
account can be calculated from sales commissions sales depreciation expense fixed assets interest expense notes/bonds payable
Types of Analytical ProceduresTypes of Analytical Procedures
- industry comparisons - comparisons with prior years- comparisons with client-determined expected results- comparisons with auditor-determined expected results, examples:
6 - 76Copyright 2003 Pearson Education Canada Inc.
Types of Analytical ProceduresTypes of Analytical Procedures- industry comparisons - comparisons with prior years- comparisons with client-determined expected results- comparisons with auditor-determined expected results- comparisons with expected results, using nonfinancial data, example:
account can be calculated fromequipment maintenance expense ???????
6 - 77Copyright 2003 Pearson Education Canada Inc.
Types of Analytical ProceduresTypes of Analytical Procedures- industry comparisons - comparisons with prior years- comparisons with client-determined expected results- comparisons with auditor-determined expected results- comparisons with expected results, using nonfinancial data, example:
account can be calculated fromequipment maintenance expense production
6 - 78Copyright 2003 Pearson Education Canada Inc.
Analytical proce-dures are oftenfacilitated by
audit software.
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If analytical procedures If analytical procedures disclose unusual fluc-disclose unusual fluc-tuations or variances, tuations or variances, the auditor should the auditor should in-in-vestigatevestigate by gathering by gatheringadditional evidence.additional evidence.
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If analytical procedures If analytical procedures disclose unusual fluc-disclose unusual fluc-tuations or variances, the tuations or variances, the auditor should auditor should investigateinvestigateby gathering additional by gathering additional evidence.evidence.
The auditor should con-The auditor should con-sider whether fluctua-sider whether fluctua-tions or variances are tions or variances are materialmaterial and whether they and whether they may be may be reasonablyreasonablyjustifiablejustifiable..