Audit

Evidence
Chapter 7

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 7-1
 Learning Objective 1

Contrast audit evidence

with evidence used by
other professions.

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 Nature of Evidence

The use of evidence is

not unique to auditors.
Evidence is also used
by scientists, lawyers,
and historians.

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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

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 Audit Program

It includes a list of the audit procedures

the auditor considers necessary.

Most auditors use computers to facilitate

the preparation of audit programs.

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 Learning Objective 3

Specify the characteristics

that determine the
persuasiveness
of evidence.

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 Persuasiveness of Evidence

Competence
Sufficiency
Combined effect
Persuasiveness and cost

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 Competence
Relevance
Independence of provider
Effectiveness of internal controls
Auditor’s direct knowledge
Qualifications of individuals
Degree of objectivity
Timeliness
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 Learning Objective 4

Identify and apply the

seven types of evidence
used in auditing.

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 Types of Audit Evidence
1. Physical examination
2. Confirmation
3. Documentation
4. Analytical procedures
5. Inquiries of the client
6. Reperformance
7. Observation
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 Relationships
Auditing Broad
standards guidelines

Qualifications Evidence
Reporting
and conduct accumulation

Types of Broad
evidence categories
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 Relationships
Types of
evidence

Audit Specific
procedures instructions

Sample Items to Timing

size select of tests
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 Information
Often Confirmed

Information Source
Assets
Cash in bank Bank
Accounts receivable Customer
Notes receivable Maker
Owned inventory out on consignment Consignee
Inventory held in public warehouses Warehouse
Cash surrender value of life insurance Insurance co.
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 Information
Often Confirmed

Information Source
Liabilities
Accounts payable Creditor
Notes payable Lender
Advances from customers Customer
Mortgages payable Mortgagor
Bonds payable Bondholder

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 Information
Often Confirmed

Information Source
Owners’ Equity
Shares outstanding Registrar and
transfer agent

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 Information
Often Confirmed

Information Source
Other Information
Insurance coverage Insurance company
Contingent liabilities Bank, lender, and
client’s counsel
Bond indenture agreements Bondholder
Collateral held by creditors Creditor

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 Criteria to Determine
Competence
Type of Auditor’s
evidence direct
knowledge
Independence
of provider Qualifications
of provider
Effectiveness of
client’s Objectivity
internal controls of evidence
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 Terms and Types of Evidence
Terms Types of Evidence
Examine Documentation
Scan Analytical procedures
Read Documentation
Compute Analytical procedures
Recompute Reperformance
Foot Reperformance
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 Terms and Types of Evidence
Terms Types of Evidence
Trace Documentation
Compare Documentation
Count Physical examination
Observe Observation
Inquire Inquiries of client
Vouch Documentation
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 Learning Objective 5

Understand the purposes

of audit documentation.

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 Audit Documentation

Purposes of audit documentation

Ownership of audit files

Confidentiality of audit files

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 Learning Objective 6

Prepare organized
audit documentation.

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 Audit File Contents
and Organization
Financial Analytical
Statements and Procedures
Audit Report
Working Test of Controls
Trial Balance & Substantive
Derrickson Associates TOT
Trial Balance Adjusting
Journal Entries Internal
12/31/2003 Control
Contingent
Liabilities General
Cash $165,237 Information
Accounts Receivable 275,050 Operations
Prepaid Insurance 37,795 Liabilities Audit
Interest Receivable 20,493 and Equity Programs
Assets Permanent
Files

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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
FINANCIAL STATEMENTS
Cash 122
Acc. ………………….

WORKING TRIAL AIE’s

BALANCE Expense 90
Prelim. AIE’s Final Cash 90
Cash 212 (90) 122

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 Relationship of Audit
Documentation
to Financial Statements

LEAD SCHEDULE – CASH A-1

Per G/1 AIE’s Final
Petty Cash A-2 5 5
Cash in Bank:
General A-3 186 (90) 96
Payroll A-4 21 21
212 (90) 122

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 Relationship of Audit
Documentation
to Financial Statements
A-2 A-3
Cash Bank
Count Reconciliation
Sheet

A-3/1 A-3/2
Confirmation O/S Check List
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 Relationship of Audit
Documentation
to Financial Statements
A-4
Bank
Reconciliation

A-4/1 A-4/2
Confirmation O/S Check List
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 Types of Supporting Schedules
Analysis
Trial balance
Reconciliation of amounts
Tests of reasonableness
Summary of procedures
Examination of supporting documents
Informational
Outside documentation
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 Learning Objective 7

Describe how e-commerce

affects audit evidence and
audit documentation.

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 Effect of E-commerce

Audit evidence is increasingly in electronic form.

Auditors use computers to read

and examine evidence.

Software programs are typically Windows-based.

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 End of Chapter 7

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