Chapter 1 – The Demand for Audit and Other Assurance Services · 1 Audit Evidence Chapter 7...
Transcript of Chapter 1 – The Demand for Audit and Other Assurance Services · 1 Audit Evidence Chapter 7...
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Audit Evidence
Chapter 7
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Learning Objective 1
Contrast audit evidence with evidence used by other professions.
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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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Nature of Evidence
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Learning Objective 2
Identify the four audit evidence decisions that are needed to create an audit program.
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Audit Evidence Decisions
1. Which audit procedures to use
2. What sample size to select for a given procedure
3. Which items to select from the population
4. When to perform the procedures (timing)
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Audit Program
It includes a list of the audit procedures the 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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Learning Objective 3
Specify the characteristics that determine the persuasiveness of evidence.
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Persuasiveness of Evidence Two determinants:
Appropriateness Sufficiency
The persuasiveness of evidence can be evaluated only after considering the combination of appropriateness and sufficiency
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Six Characteristics of Reliable Evidence
1. Independence of provider 2. Effectiveness of client’s internal controls 3. Auditor’s direct knowledge 4. Qualification of individuals providing the information 5. Degree of objectivity 6. Timeliness
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Relationships Among Audit Evidence and Persuasiveness
Audit Evidence Decisions Qualities Affecting Persuasiveness of 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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Persuasiveness and Cost
In making decisions about evidence for a given audit, both persuasiveness and cost must be considered.
The auditor’s goal is to obtain a sufficient amount of appropriate evidence 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 the auditor of a tangible asset.
This type of evidence is most often associated with inventory and cash.
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Confirmations
United States Auditor must confirm accounts receivable Auditors 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 the client’s documents and records.
Internal documents
External documents
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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 calculations made by the client.
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Reperformance
It is the auditor’s independent tests of client accounting procedures or controls that were originally done.
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Observation
Use one’s senses to assess client activities. Tour plant to obtain a general impression of client’s facilities. Observation is rarely sufficient by 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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Terms and Types of Evidence
Terms Type of Evidence
Examine Scan Read Compute Recompute Foot Trace Compare Count Observe Inquire Vouch
Documentation Analytical procedures Documentation Analytical procedures Recalculation Recalculation Documentation/Reperformance Documentation Physical examination Observation Inquiries of client Documentation
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Learning Objective 5
Understand the purposes of audit documentation.
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Audit Documentation
Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the 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 of public companies to prepare and maintain audit working papers for a period of no less 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 contain data of a historical or continuing nature 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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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