Chapter 7Audit Planning and Analytical Procedures

Presentation OutlineDefining Audit EvidenceTypes of Audit EvidenceAudit Documentation

I. Defining Audit EvidenceAudit Evidence DecisionsPersuasiveness of Audit EvidenceCompetence Considerations

A. Audit Evidence DecisionsAudit procedures to use specific procedures should be spelled out for instruction during the audit.Sample size how many items should be tested for each audit procedure.Items to select determine which items in the population should be selected.Timing timing can vary from early in the accounting period to long after it has ended.

B. Persuasiveness of Audit EvidenceAudit evidence is any information used by the auditor to determine whether the information being audited is stated in accordance with established criteria. Two determinants of persuasiveness of evidence are:Competence the degree to which evidence can be considered trustworthy.Sufficiency amount of evidence is enough to form a reasonable opinion.

C. Competence ConsiderationsRelevance must pertain to the audit objective being tested.Independence evidence from outside the client is a stronger form of evidenceEffectiveness of client internal controls good internal controls can mean better information.Auditor direct knowledge auditor determinations are stronger that client comments.Qualifications individual is a qualified source.Degree of objectivity objective evidence is stronger than subjective evidence.Timeliness balance sheet account evidence is better when it is collected around the date of the financial statement. Income statement evidence should sample entire period.

II. Types of Audit EvidencePhysical examinationConfirmationsDocumentationAnalytical ProceduresInquiries of the ClientReperformanceObservation

A. Physical Examination

Inspection or count by the auditor of a tangible asset.Different from examining documentation is that the asset has inherent value.

B. ConfirmationsPositive ConfirmationsNegative ConfirmationsAsks for response even if balance is correct.Asks for a response only if balance is incorrect.More reliable than negative confirmations.Uncertainty associated with no response.The receipt of a written or oral response from an independent third party. Auditor has client request that the third party respond directly to the auditor.Confirmation of accounts receivable is normally required when practical reasonable (SAS 67)

B. Confirmations (Continued)1. Customers Confirm A/R balances2. Vendors Confirm A/P balancesBanks Confirm checking account and loan balances4. Attorneys Confirm contingent liabilities5. Inventory Agents Confirm consignments

C. DocumentationTypes of DocumentsDocument VouchingDocument Tracing

1. Types of DocumentsInternal DocumentsExternal DocumentsExamine supporting evidence in client files.Prepared and used within client company. Does not go outside the client.Document has been in hands of an outside party to the transaction.More reliable than internal documents.

2. Document VouchingExamination of documents that support a recorded transaction or amount.The direction of testing must be from the recorded item to the supporting document.Tests existence or occurrenceRecorded ItemSupportingDocument

3. Document TracingThe primary test for unrecorded items and therefore tests the completeness assertion.The direction of testing must be from the supporting document to the recorded item.SupportingDocumentRecordedItem

D. Analytical ProceduresAudits studies relationships among data. Unusual fluctuations occur when significant difference are not expected but do exist or when significant differences are expected but do not exist. Required during the planning and completion phases on all audits.

E. Inquiries of the ClientAuditor obtains information from the client in response to questions.Although much evidence is obtained through inquiry, it can not be regarded as conclusive and may be biased in the clients favor.

F. ReperformanceReperformance involves rechecking a sample of the computations and transfers of information. Rechecking of computations consists of testing mathematical accuracy. Rechecking of transfers of information involves seeing if information is recorded consistently in the accounting records.I dont think this is what they meant by reperformance!

H. ObservationAuditor witnesses the physical activities of the client.Differs from physical examination because physical examination counts assets, while observation focuses on client activities.

III. Audit DocumentationWorking Papers FilesTypical Working Paper FormatStorage of Working PapersOwnership of Working PapersThe Sarbanes-Oxley Act requires auditors of public companies to prepareand maintain audit working papers for a period of no less than 7 years.Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor.

A. Working Papers FilesPermanent FileCurrent FileWorking papers provide the principal record that the audit has conformed to GAAS. Also provide information for deciding on the proper report.Information that is relevant for multiple years on recurring engagements.(See examples on page 178)Information relevant for a given audit client for a particular audit year.(See examples on pages 178-182)

B. Typical Working Paper FormatHeadings audit client name, year under audit, etc.Indexing arrange papers in some common order.Tick marks symbols to key a footnote to an item.Sign-off indicates auditors that prepare and review.Ricky Corporation CashPrepared by: KM Reviewed by: J.S.A11st Savings234.00Traced to bank reconciliation.

C. Storage of Working PapersWorking papers of continuing clients are maintained indefinitely.Check with legal counsel before discarding any working papers.

D. Ownership of Working PapersThe working papers are the auditors property, not the clients.In most cases, an auditor can not reveal information in the working papers without the clients permission.

SummaryAudit Evidence and PersuasivenessTypes of Audit EvidenceWorking Paper Format, Storage, and Ownership

*Documentation is never as reliable as confirmations.*Temporary file may include audit program, working trial balance, lead and detailed schedules.*Physical, Representations by 3rd Parties, Mathematical, Documentation, Representations by Client Personnel, Data Interrelationships. Analytical, Observation and Inquiry, Tests of Transactions, Tests of Balances Tests of Controls, Substantive Testing Physical examination, Confirmation, Vouching, Tracing, Reperformance, Observation, Reconciliation, Inquiry, Inspection, Analytical procedures Permanent and current files