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Chapter 7 Audit Planning and Analytical Procedures. Presentation Outline. Defining Audit Evidence Types of Audit Evidence Audit Documentation. I. Defining Audit Evidence. Audit Evidence Decisions Persuasiveness of Audit Evidence Competence Considerations. A. Audit Evidence Decisions.
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Presentation Outline • Defining Audit Evidence • Types of Audit Evidence • Audit Documentation
I. Defining Audit Evidence • Audit Evidence Decisions • Persuasiveness of Audit Evidence • Competence Considerations
A. Audit Evidence Decisions • Audit procedures to use – specific procedures should be spelled out for instruction during the audit. • Sample size – how many items should be tested for each audit procedure. • Items to select – determine which items in the population should be selected. • Timing – timing can vary from early in the accounting period to long after it has ended.
B. Persuasiveness of Audit Evidence Audit evidence is any information used by the auditor to determine whether the information being audited is stated in accordance with established criteria. Two determinants of persuasiveness of evidence are: • Competence – the degree to which evidence can be considered trustworthy. • Sufficiency – amount of evidence is enough to form a reasonable opinion.
C. Competence Considerations • Relevance – must pertain to the audit objective being tested. • Independence – evidence from outside the client is a stronger form of evidence • Effectiveness of client internal controls – good internal controls can mean better information. • Auditor direct knowledge – auditor determinations are stronger that client comments. • Qualifications – individual is a qualified source. • Degree of objectivity – objective evidence is stronger than subjective evidence. • Timeliness – balance sheet account evidence is better when it is collected around the date of the financial statement. Income statement evidence should sample entire period.
Physical examination Confirmations Documentation Analytical Procedures Inquiries of the Client Reperformance Observation II. Types of Audit Evidence
A. Physical Examination • Inspection or count by the auditor of a tangible asset. • Different from examining documentation is that the asset has inherent value.
Positive Confirmations Negative Confirmations B. Confirmations The receipt of a written or oral response from an independent third party. Auditor has client request that the third party respond directly to the auditor. Asks for response even if balance is correct. Asks for a response only if balance is incorrect. More reliable than negative confirmations. Uncertainty associated with no response. Confirmation of accounts receivable is normally required when practical reasonable (SAS 67)
B. Confirmations (Continued) 1. Customers – Confirm A/R balances 2. Vendors – Confirm A/P balances • Banks – Confirm checking account and loan balances 4. Attorneys – Confirm contingent liabilities 5. Inventory Agents – Confirm consignments
C. Documentation • Types of Documents • Document Vouching • Document Tracing
Internal Documents External Documents 1. Types of Documents Examine supporting evidence in client files. Document has been in hands of an outside party to the transaction. Prepared and used within client company. Does not go outside the client. More reliable than internal documents.
Recorded Item 2. Document Vouching Supporting Document • Examination of documents that support a recorded transaction or amount. • The direction of testing must be from the recorded item to the supporting document. • Tests existence or occurrence
Supporting Document 3. Document Tracing Recorded Item • The primary test for unrecorded items and therefore tests the completeness assertion. • The direction of testing must be from the supporting document to the recorded item.
D. Analytical Procedures Audits studies relationships among data. Unusual fluctuations occur when significant difference are not expected but do exist or when significant differences are expected but do not exist. Required during the planning and completion phases on all audits.
E. Inquiries of the Client • Auditor obtains information from the client in response to questions. • Although much evidence is obtained through inquiry, it can not be regarded as conclusive and may be biased in the client’s favor.
F. Reperformance Reperformance involves rechecking a sample of the computations and transfers of information. Rechecking of computations consists of testing mathematical accuracy. Rechecking of transfers of information involves seeing if information is recorded consistently in the accounting records. I don’t think this is what they meant by reperformance!
H. Observation • Auditor witnesses the physical activities of the client. • Differs from physical examination because physical examination counts assets, while observation focuses on client activities.
III. Audit Documentation Audit documentation is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor. • Working Papers Files • Typical Working Paper Format • Storage of Working Papers • Ownership of Working Papers The Sarbanes-Oxley Act requires auditors of public companies to prepare and maintain audit working papers for a period of no less than 7 years.
Permanent File Current File A. Working Papers Files Working papers provide the principal record that the audit has conformed to GAAS. Also provide information for deciding on the proper report. Information that is relevant for multiple years on recurring engagements. (See examples on page 178) Information relevant for a given audit client for a particular audit year. (See examples on pages 178-182)
B. Typical Working Paper Format Prepared by: KM Reviewed by: J.S. • Headings – audit client name, year under audit, etc. • Indexing – arrange papers in some common order. • Tick marks – symbols to key a footnote to an item. • Sign-off – indicates auditors that prepare and review. A1 Ricky Corporation Cash 1st Savings 234.00 Traced to bank reconciliation.
C. Storage of Working Papers • Working papers of continuing clients are maintained indefinitely. • Check with legal counsel before discarding any working papers.
D. Ownership of Working Papers • The working papers are the auditor’s property, not the clients. • In most cases, an auditor can not reveal information in the working papers without the client’s permission.
Summary • Audit Evidence and Persuasiveness • Types of Audit Evidence • Working Paper Format, Storage, and Ownership
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