Transcript Chapter 6 Audit Evidence
CHAPTER 6
Audit Evidence
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An auditor must address four decisions regarding evidence accumulation:
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An auditor must address four decisions regarding evidence accumulation:
Which audit procedures should be used?
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Which audit procedures should be used?
What are audit procedures?
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Which audit procedures should be used?
An audit procedure is a detailed instruction for the collection of a type of audit evidence.
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Which audit procedures should be used?
In general, the auditor will seek the most appropriate procedures that are also cost-feasible.
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An auditor must address four decisions regarding evidence accumulation: MORE LESS
What sample size should be selected?
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An auditor must address four decisions regarding evidence accumulation:
Which items should be selected for testing?
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Which items should be selected for testing?
The auditor will consider: - random/judgmental selection
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Which items should be selected for testing?
The auditor will consider:
- random/judgmental selection
- materiality
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Which items should be selected for testing?
The auditor will consider:
- random/judgmental selection - materiality
- results of prior audits
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An auditor must address four decisions regarding evidence accumulation: When should the procedures be performed?
December
?
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When should the procedures be performed?
December The auditor will consider procedures that should be performed before, on, or after the balance sheet date.
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An auditor must address four decisions regarding evidence accumulation: Which audit procedures should be used?
What sample size should be selected?
Which items should be selected for testing?
When should the procedures be performed?
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Which audit procedures should be used?
What sample size should be selected?
Which items should be selected for testing?
When should the procedures be performed?
After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed.
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After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed.
What is an audit program?
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After these questions have been answered and the specific audit objectives have been identified, an audit program is constructed.
An audit program is a list of detailed audit procedures for each component or cycle specifying proce dure timing, sample sizes, and selection methods.
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Persuasiveness of evidence is determined by: relevance sufficiency appropriate ness timeliness
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Persuasiveness of evidence is determined by: relevance sufficiency appropriate ness timeliness Which of these are specifically mentioned in the 3rd examination standard?
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appropriate ness sufficiency Which of these are specifically mentioned in the 3rd examination standard?
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relevance
Evidence must pertain to the specific audit objective.
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Evidence must pertain to the specific audit objective.
relevance Example: An auditor is concerned about the completeness of accounts payable (a/p). Why would confirmation of a/p bal ances be an irrelevant procedure?
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relevance Example: An auditor is concerned about the completeness of accounts payable (a/p). Why would confirmation of a/p bal ances be an irrelevant procedure?
Confirmation addresses existence.
For completeness, a search is needed.
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appropriate ness Appropriateness concerns the believability and trustworthi ness of the evidence.
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appropriate ness Appropriateness concerns the believability and trustworthiness of the evidence.
Appropriateness is determined by: - independence of the evidence provider
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appropriate ness Appropriateness concerns the believability and trustworthiness of the evidence.
Appropriateness is determined by: - independence of the evidence provider effectiveness of client’s internal controls
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appropriate ness Appropriateness concerns the believability and trustworthiness of the evidence.
Appropriateness is determined by: - independence of the evidence provider effectiveness of client’s internal controls auditor’s direct knowledge
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appropriate ness Appropriateness concerns the believability and trustworthiness of the evidence.
Appropriateness is determined by: - independence of the evidence provider effectiveness of client’s internal controls auditor’s direct knowledge - qualifications of information provider
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appropriate ness Appropriateness concerns the believability and trustworthiness of the evidence.
Appropriateness is determined by: - independence of the evidence provider effectiveness of client’s internal controls auditor’s direct knowledge - qualifications of information provider - degree of objectivity 6 - 29
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appropriate ness Appropriateness concerns the believability and trustworthiness of the evidence.
Appropriateness is a measure of evidence quality, it cannot be enhanced by a larger sample size.
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sufficiency Sufficiency is a measure of quantity. In general, the larger the sample size, the more persuasive the evidence.
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MORE LESS More evidence yields more assurance and higher audit costs.
Less evidence yields less assurance and lower audit costs.
Auditors must balance the trade-off be tween gathering more or less evidence.
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sufficiency Sufficiency must be addressed for each audit test and each component of the financial statements.
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sufficiency Sufficiency must be addressed for each audit test and each component of the financial statements.
An appropriate sample size may be determined by auditor judgment and/or by statistical sampling.
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sufficiency In determining a sufficient sample size, an auditor will also consider: “representativeness”
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sufficiency In determining a sufficient sample size, an auditor will also consider: “representativeness” - materiality, large dollar amounts
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sufficiency In determining a sufficient sample size, an auditor will also consider: “representativeness” - materiality, large dollar amounts - items with high probability of misstatement
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timeliness
When should audit evidence be gathered?
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timeliness
When should audit evidence be gathered?
- evidence related to balance sheet accounts should be collected as close to the balance sheet date as possible
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timeliness
When should audit evidence be gathered?
- evidence related to balance sheet accounts should be collected as close to the balance sheet date as possible - evidence related to income statement accounts should be collected from throughout the period rather than from only part of the period
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relevance sufficiency appropriate ness timeliness Evidence is considered persuasive only if all four determinants have been met.
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With regard to the adequacy and costs of audit evidence:
absolute certainty requires convincing evidence
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With regard to the adequacy and costs of audit evidence:
absolute certainty requires convincing evidence requires high audit costs
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With regard to the adequacy and costs of audit evidence:
absolute certainty requires convincing evidence requires reasonable certainty requires persuasive evidence high audit costs
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With regard to the adequacy and costs of audit evidence:
absolute certainty requires reasonable certainty requires convincing evidence requires persuasive evidence requires high audit costs reasonable audit costs
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Types of evidence
- physical examination - inspection or count by the auditor of a tangible asset very appropriate evidence!
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Types of evidence
- physical examination - confirmation - receipt of a written or oral response from an independent third party at the auditor’s request auditor
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client’s customer very appropriate evidence!
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Types of evidence
- physical examination - confirmation - receipt of a written or oral response from an independent third party at the auditor’s request The confirmation process must be controlled by the auditor.
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Types of evidence
- physical examination - confirmation - receipt of a written re sponse from an independent third party at the auditor’s request Whenever reasonable, a sample of accounts receivable should be confirmed by the auditor.
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Types of evidence
- physical examination - confirmation - documentation (vouching) - auditor examination of client documents and records
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What is the difference between internal and external documents?
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What is the difference between internal and external documents?
External documents are usually on the client’s premises but were either pre pared by a third party or processed by a third party (more persuasive).
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What is the difference between internal and external documents?
Internal documents have been prepared by the client and have not left the client’s premises (less persuasive).
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What is the primary determinant of the appropriateness of internal documents?
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What is the primary determinant of the appropriateness of internal documents?
internal control
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Types of evidence
- physical examination - confirmation - documentation What is the difference between physical examination and documentation?
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What is the difference between physical examination and documentation?
- physical examination - inspection or count by the auditor of a tangible asset - documentation (vouching) - auditor examination of client documents and records 6 - 57
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Types of evidence
- physical examination - confirmation - documentation (vouching) - observation - using the senses to audit; often an informal procedure requiring follow-up procedures
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Types of evidence
- physical examination - confirmation - documentation (vouching) - observation - inquiries of client - useful but biased and not persuasive unless supported by another form of evidence CPA 6 - 59
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Types of evidence
- physical examination - confirmation - documentation (vouching) - observation - inquiries of client - reperformance - checking the accuracy of client calculations and transfers of information (often performed by an audit software package).
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Types of evidence
- physical examination - confirmation - documentation (vouching) - observation - inquiries of client - reperformance - analytical procedures - involve analy sis of comparisons and interrelation ships in data (may be performed by an audit software package).
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Analytical procedures should be used during the planning and completion phases of the audit...
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Analytical procedures should be used during the planning and completion phases of the audit...
but they may also be beneficial at other times during the audit.
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Purposes of Analytical Procedures - facilitate understanding of client’s business and industry
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Purposes of Analytical Procedures - facilitate understanding of client’s business and industry - may indicate financial difficulty and the cli ent’s ability to con tinue as a going concern Bert’s Boutique
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Purposes of Analytical Procedures - facilitate understanding of client’s business and industry - may indicate financial difficulty and the client’s ability to continue as a going concern - may indicate misstatements in the financial statements
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Purposes of Analytical Procedures - facilitate understanding of client’s business and industry - may indicate financial difficulty and the client’s ability to continue as a going concern - may indicate misstatements in the financial statements - may result in a reduction of detailed audit tests 6 - 67
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Types of Analytical Procedures - industry comparisons
How do the client’s financial ratios compare with those of the industry?
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Types of Analytical Procedures - industry comparisons - comparisons with prior years Ace Company 2003 financial statements Ace Company 2004 financial statements
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Types of Analytical Procedures - industry comparisons - comparisons with prior years Ace Company Ace Company 2003 financial statements 2004 financial statements Conclusions from a 2-year analy sis may be erroneous. WHY?
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Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results, e.g.,
budgets
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Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples: account can be calculated from sales commissions ?????????????????
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Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples: account can be calculated from sales commissions sales depreciation expense ??????????????????
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Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples: account can be calculated from sales commissions sales depreciation expense fixed assets interest expense ??????????????????
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Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples: account can be calculated from sales commissions sales depreciation expense fixed assets interest expense notes/bonds payable 6 - 75
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Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results - comparisons with expected results, using nonfinancial data, example: account equipment maintenance can be calculated from expense ???????
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Types of Analytical Procedures - industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results - comparisons with expected results, using nonfinancial data, example: account equipment maintenance can be calculated from expense production
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Analytical proce dures are often facilitated by audit software.
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If analytical procedures disclose unusual fluc tuations or variances, the auditor should in vestigate by gathering additional evidence.
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If analytical procedures disclose unusual fluc tuations or variances, the auditor should investigate by gathering additional evidence.
The auditor should con sider whether fluctua tions or variances are material and whether they may be reasonably justifiable.
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