Chapter 7 Instructor's Guide

Chapter 7 Instructor's Guide - Chapter 7 Audit Evidence The...

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Unformatted text preview: Chapter 7 Audit Evidence The amount of time you spend on this chapter is mostly dependent on the emphasis you want to put on audit documentation. The topics to cover are: Chapter opening vignette Overview Audit evidence decisions Persuasiveness of evidence Types of evidence Terms used in audit procedures Audit documentation Chapter Opening Vignette - “Sometimes the Most Important Evidence Is Not Found in the Accounting Records” This vignette illustrates a common weakness that occurs among auditors: getting caught up in the mechanics of a situation without grasping its substance. Here, the auditor failed to gain an adequate understanding of his client’s business. He didn’t recognize that the value of the client’s assets was a function of a market that essentially looks at cash flows. As cash flows declined, so did value and the Company’s ability to remain solvent. A class discussion of this vignette might be facilitated by presenting a simple economic model of a storage facility and asking students how they would value it. Overview It is useful to start by defining evidence and distinguishing among scientific, legal, and audit evidence. Table 7-1 (page 172) is useful to do that. (See Table 7-1) Audit Evidence Decisions (page 173) The four audit evidence decisions are explained throughout the course. List them on the overhead, define and discuss them. (See T-7-1) Also define an audit procedure. For the audit procedure, obtain accounts receivable confirmations, ask students to tell how and under what circumstances sample size, items to select, and timing should vary. The purpose is to get students to think about decision making. 7-1 Persuasiveness of Evidence (page 174) We spend a few minutes discussing what persuasiveness means and its distinction from certainty (and conclusive). We then cover the distinction between appropriateness and sufficiency. We also discuss the factors affecting reliability. (See T-7-2) It is also worthwhile to discuss the reliability of various types of evidence. Types of Audit Evidence (page 177) Define and distinguish between procedures, types of evidence, and generally accepted auditing standards. (See Figure 7-1) At that point, list on the overhead, ask questions, or make observations about each type of evidence: (See T-7-3) Physical Examination (page 178) Define Applies only to tangible assets Assets applicable to (cash, fixed assets, securities, etc.) Reliability For what purposes it is useful and not useful Provides an opportunity to have direct contact with business With regard to the last point, a useful teaching technique is to select an industry (e.g., cement manufacturing) and describe how it works and what assets the auditor might examine. The goal is to get the students to realize how important knowledge of the business is to performing rudimentary audit procedures in a...
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This note was uploaded on 01/23/2010 for the course ACCOUNTING auditing taught by Professor Pro-abuel-ezz during the Spring '10 term at Cairo University.

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Chapter 7 Instructor's Guide - Chapter 7 Audit Evidence The...

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