Chapter 7

Chapter 7 - Audit Evidence Audit Chapter 7 Generally...

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Unformatted text preview: Audit Evidence Audit Chapter 7 Generally Accepted Auditing Standards Generally Third Standard of Field Work Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit. financial Audit Evidence Decisions Audit 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 Audit Program Audit It includes a list of the audit procedures the auditor considers necessary. Sample sizes Sample Items to select Items Timing of the tests Timing Most auditors use computers to facilitate the preparation of audit programs. Persuasiveness of Evidence Persuasiveness Competence and sufficiency are determinants of the persuasiveness of evidence. Factors affecting competence include: Relevance to audit objective Relevance Independence of provider Independence Effectiveness of internal controls Auditor’s direct knowledge Auditor’s Qualifications of providers Qualifications Degree of objectivity Timeliness Timeliness Table 7-2, (p. 167) (p. Types of Audit Evidence Types 1. 2. 2. 3. 4. 4. 5. 6. 7. Physical examination (tangible assets) Physical Confirmation (positive and negative) Documentation Documentation Analytical procedures Inquiries of the client Reperformance Observation Confirmations and Information Often Confirmed Confirmations Confirmations may be positive or negative. Procedures for non-response positives Procedures Information Assets Cash in bank (example) Accounts receivable Notes receivable Owned inventory out on consignment Inventory held in public warehouses Cash surrender value of life insurance Source Bank Customer Maker Consignee Warehouse Insurance co. Information Often Confirmed Information Information Liabilities Accounts payable Notes payable Advances from customers Mortgages payable Bonds payable Source Creditor Lender Customer Mortgagor Bondholder Information Often Confirmed Information Information Owners’ Equity Shares outstanding Source Registrar and transfer agent Other Information Insurance coverage Contingent liabilities Bond indenture agreements Collateral held by creditors Insurance co. Bank, lender, and clients legal counsel Bondholder Creditor Other Forms of Evidence Other Documentation – Client’s documents and records Internal vs. External documents Tracing vs. Vouching – see next slide Tracing vs. Vouching Tracing (Figure 6-7 is from another text) Inspection of Documents or Records Inspection Vouching Vouching Tracing Tracing Note: students should understand the differences Note: between tracing and vouching. between Reliability of Documentary Evidence Reliability (Figure 6-5 is from another text) Other Forms of Evidence: Analytical procedures procedures Importance of context – understanding the Importance client’s business and industry client’s Analytical procedures are used for: • Assessing going concern Assessing • Finding possible misstatements in the financials Finding • Reducing detailed audit tests Reducing Other Forms of Evidence Other Inquiries of the client – written or oral Reperformance – verifying calculations or Reperformance information processing information Observation Observation Competence of Types of Evidence, Table 7-4 (p. 172) Table Terms and Types of Evidence, Terms Table 7-6, (p. 175) Terms Examine Scan Read Compute Recompute Foot Type of Evidence Documentation Analytical procedures Documentation Analytical procedures Reperformance Reperformance Terms and Types of Evidence Terms Terms Trace Compare Count Observe Inquire Vouch Type of Evidence Documentation/ Reperformance Documentation Physical examination Observation Inquiries of client Documentation Audit Documentation Audit Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement. Audit Documentation Audit Purposes of audit documentation – primary means to support that the audit was conducted in accordance with GAAS. Ownership of audit files Ownership Confidentiality of audit files – rule 301, chapter 4. Sarbanes-Oxley Act Sarbanes-Oxley 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. Audit File Contents and Organization Audit Financial Statements and Audit Report Robinson Associates Trial Balance 12/31/05 Cash Accounts Receivable Prepaid Insurance Interest Receivable $165,237 275,050 37,795 20,493 Working Trial Balance Adjusting Journal Entries Contingent Liabilities Operations Liabilities Liabilities and Equity and Assets Analytical Procedures Test of Controls & Substantive TOT Internal Control General Information Audit Programs Permanent Files Permanent Files Permanent These files are intended to contain data of a historical or continuing nature pertinent to the nature current audit. Examples include: current • Articles of incorporation Articles • Loan agreements Loan • Documents related to understanding I/C Documents • Leases Leases Current Files Current Audit program General information Working trial balance Adjusting and reclassification entries Supporting schedules Relationship of Audit Documentation Relationship to Financial Statements FINANCIAL STATEMENTS FINANCIAL Cash 122 Acc. …………………. WORKING TRIAL BALANCE Prelim. AJE’s Final Prelim. Cash 212 (90) 122 LEAD SCHEDULE – CASH Per G/L Per Petty Cash A-2 5 Cash in Bank: General A-3 186 Payroll A-4 21 212 AJE’s AJE’s Expense 90 Cash AJE’s (90) (90) 90 A-1 Final 5 96 21 122 Relationship of Audit Documentation Relationship to Financial Statements LEAD SCHEDULE – CASH Per G/L Per Petty Cash A-2 5 Petty Cash in Bank: General A-3 186 Payroll A-4 21 212 A-2 A-2 Cash Count Sheet A-3/1 A-3/1 Confirmation A-3 A-3 Bank Reconciliation AJE’s (90) (90) A-1 Final 5 96 21 122 A-4 A-4 Bank Reconciliation A-4/2 A-4/2 O/S Check List A-3/2 A-3/2 O/S Check List A-4/1 A-4/1 Confirmation Types of Supporting Schedules Types Analysis Trial balance or list Reconciliation of amounts Tests of reasonableness Types of Supporting Schedules Types Summary of procedures Examination of supporting documents Informational Outside documentation Characteristics of Audit Documentation Characteristics Each audit file should be properly identified. Documentation should be indexed and cross-referenced. Completed documentation must clearly indicate the audit work performed. It should include sufficient information. It should plainly state the conclusions reached. Effect of E-commerce Effect 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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