The nature of evidence in a legal case and in an

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Unformatted text preview: ditors, other more reliable types of evidence such as confirmation with third parties, physical examination, and documentation are also used extensively. A legal case also differs from an audit because of the nature of the conclusions made. In a legal case, a judge or jury decides the guilt or innocence of the defendant. In an audit, the auditor issues one of several audit opinions after evaluating the evidence. 7-2 are: The four major audit evidence decisions that must be made on every audit 1. 2. 3. 4. Which audit procedures to use. What sample size to select for a given procedure. Which items to select from the population. When to perform the procedure. 7-3 An audit procedure is the detailed instruction for the collection of a type of audit evidence that is to be obtained. Because audit procedures are the instructions to be followed in accumulating evidence, they must be worded carefully to make sure the instructions are clear. 7-4 An audit program for accounts receivable is a list of audit procedures that will be used to audit accounts receivable for a given client. The audit procedures, sample size, items to select, and timing should be included in the audit program. 7-5 7-5 The auditor must obtain sufficient appropriate evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit. There are three major phrases of the standard. PHRASE MEANING OF PHRASE Obtain sufficient appropriate evidence The auditor must obtain evidence that is reliable and there must be a reasonable quantity of that evidence. By performing audit procedures The auditor performs audit procedures to meet audit objectives using the eight types of evidence. To afford a reasonable basis for an opinion regarding the financial statements The auditor cannot expect to be completely certain that the financial statements are fairly presented but there must be persuasive evidence. The collection of evidence gathered by the auditor provides the basis for the auditor's opinion. 7-6 There are two primary reasons why the auditor can only be persuaded with a reasonable level of assurance, rather than be convinced that the financial statements are correct: 1. The cost of accumulating evidence. It would be extremely costly for the auditor to gather enough evidence to be completely convinced. 2. Evidence is normally not sufficiently reliable to enable the auditor to be completely convinced. For example, confirmations from customers may come back with erroneous information, which is the fault of the customer rather than the client. 7-7 The two determinants of the persuasiveness of evidence are appropriateness and sufficiency. Appropriateness refers to the relevance and reliability of evidence, or the degree to which evidence can be considered believable or worthy of trust. Appropriateness relates to the audit procedures selected, including the timing of when those procedures are performed. Sufficiency refers to the quantity of evidence and it is related to sample size and items to select. 7-6 7.8 Following are six characteristics that determine reliability and an example of each. FACTOR DETERMINING RELIABILITY EXAMPLE OF RELIABLE EVIDENCE Independence of provider Confirmation of a bank balance Effectiveness of client's internal controls Use of duplicate sales invoices for a large well-run company Auditor's direct knowledge Physical examination of inventory by the auditor Qualifications of provider Letter from an attorney dealing with the client's affairs Degree of objectivity Count of cash on hand by auditor Timeliness Observe inventory on the last day of the fiscal year 7-9 TYPES OF AUDIT EVIDENCE EXAMPLES 1. Physical examination 2. Confirmation 3. Documentation 4. Analytical procedures 5. Inquiries of the client Count petty cash on hand Examine fixed asset additions Confirm accounts receivable balances of a sample of client customers Confirm client’s cash balance with bank Examine cancelled checks returned with cutoff bank statement Examine vendors’ invoices supporting a sample of cash disbursement transactions throughout the year Evaluate reasonableness of receivables by calculating and comparing ratios Compare expenses as a percentage of net sales with prior year’s percentages Inquire of management whether there is obsolete inventory Inquire of management regarding the collectibility of large accounts receivable balances 7-7 7-9 (continued) TYPES OF AUDIT EVIDENCE EXAMPLES 6. Recalculation Recompute invoice total by multiplying item price times quantity sold Foot the sales journal for a one-month period and compare all totals to the general ledger 7. Reperformance 8. Observation Agree sales invoice price to approved price list Match quantity on purchase invoice to receiving report Observe client employees in the process of counting inventory Observe whether employees are restricted from access to the check signing machine 7-10 The four characteristics of the definition of a confirmation are: 1. 2. 3. 4. Receipt Written or oral response From independent third party Requested by the auditor A confirmation is prepared specifically for the auditor and comes from an external source. External documentation is in the hands of the client at the time of the audit and was prepared for...
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This note was uploaded on 02/04/2014 for the course ACCOUNTING 211 taught by Professor Alikapur during the Fall '13 term at American University of Sharjah.

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