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Audit Evidence. Chapter 7. Generally Accepted Auditing Standards Third Standard of Field Work.

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generally accepted auditing standards third standard of field work
Generally Accepted Auditing StandardsThird 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.
audit evidence decisions
Audit Evidence Decisions

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 Program

It includes a list of the audit procedures

the auditor considers necessary.

  • Sample sizes
  • Items to select
  • Timing of the tests

Most auditors use computers to facilitate

the preparation of audit programs.

persuasiveness of evidence
Persuasiveness of Evidence

Competence and sufficiency are determinants

of the persuasiveness of evidence.

Factors affecting competence include:

  • Relevance to audit objective
  • Independence of provider
  • Effectiveness of internal controls
  • Auditor’s direct knowledge
  • Qualifications of providers
  • Degree of objectivity
  • Timeliness
types of audit evidence
Types of Audit Evidence
  • Physical examination (tangible assets)
  • Confirmation (positive and negative)
  • Documentation
  • Analytical procedures
  • Inquiries of the client
  • Reperformance
  • Observation
confirmations and information often confirmed

Information Source

Assets

Cash in bank (example) Bank

Accounts receivable Customer

Notes receivable Maker

Owned inventory out on consignment Consignee

Inventory held in public warehouses Warehouse

Cash surrender value of life insurance Insurance co.

Confirmations and Information Often Confirmed

Confirmations may be positive or negative.

Procedures for non-response positives

information often confirmed
Information Often Confirmed

Information Source

Liabilities

Accounts payable Creditor

Notes payable Lender

Advances from customers Customer

Mortgages payable Mortgagor

Bonds payable Bondholder

information often confirmed10
Information Often Confirmed

Information Source

Owners’ Equity

Shares outstanding Registrar and

transfer agent

Other Information

Insurance coverage Insurance co.

Contingent liabilities Bank, lender,

and clients

legal counsel

Bond indenture agreements Bondholder

Collateral held by creditors Creditor

other forms of evidence
Other Forms of Evidence

Documentation – Client’s documents and records

Internal vs. External documents

Tracing vs. Vouching – see next slide

tracing vs vouching figure 6 7 is from another text
Tracing vs. Vouching (Figure 6-7 is from another text)
  • Inspection of Documents or Records
    • Vouching
    • Tracing

Note: students should understand the differences

between tracing and vouching.

other forms of evidence analytical procedures
Other Forms of Evidence: Analytical procedures

Importance of context – understanding the

client’s business and industry

  • Analytical procedures are used for:
  • Assessing going concern
  • Finding possible misstatements in the financials
  • Reducing detailed audit tests
other forms of evidence15
Other Forms of Evidence

Inquiries of the client – written or oral

Reperformance – verifying calculations or

information processing

Observation

terms and types of evidence table 7 6 p 175

Terms Type of Evidence

Examine Documentation

Scan Analytical procedures

Read Documentation

Compute Analytical procedures

Recompute Reperformance

Foot Reperformance

Terms and Types of Evidence,Table 7-6, (p. 175)
terms and types of evidence
Terms and Types of Evidence

Terms Type of Evidence

Trace Documentation/

Reperformance

Compare Documentation

Count Physical examination

Observe Observation

Inquire Inquiries of client

Vouch Documentation

audit documentation
Audit Documentation

Audit documentation is the principal record

of auditing procedures applied, evidence

obtained, and conclusions reached by

the auditor in the engagement.

audit documentation20
Audit Documentation

Purposes of audit documentation – primary

meansto support that the audit was

conducted in accordance with GAAS.

Ownership of audit files

Confidentiality of audit files – rule 301, chapter 4.

sarbanes oxley act
Sarbanes-Oxley Act

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

Financial

Statements and

Audit Report

Analytical

Procedures

Test of Controls

& Substantive

TOT

Working

Trial Balance

Robinson Associates

Trial Balance

12/31/05

Cash $165,237

Accounts Receivable 275,050

Prepaid Insurance 37,795

Interest Receivable 20,493

Adjusting

Journal Entries

Internal

Control

Contingent

Liabilities

General

Information

Operations

Liabilities

and Equity

Audit

Programs

Assets

Permanent

Files

Audit File Contents and Organization
permanent files
Permanent Files
  • These files are intended to contain data of a
  • historical or continuing nature pertinent to the
  • current audit. Examples include:
  • Articles of incorporation
  • Loan agreements
  • Documents related to understanding I/C
  • Leases
current files
Current Files

Audit program

General information

Working trial balance

Adjusting and reclassification entries

Supporting schedules

relationship of audit documentation to financial statements

FINANCIAL STATEMENTS

Cash 122

Acc. ………………….

WORKING TRIAL BALANCE

Prelim.AJE’sFinal

Cash 212 (90) 122

AJE’s

Expense 90

Cash 90

LEAD SCHEDULE – CASHA-1

Per G/LAJE’sFinal

Petty Cash A-2 5 5

Cash in Bank:

General A-3 186 (90) 96

Payroll A-4 21 21

212 (90) 122

Relationship of Audit Documentationto Financial Statements
relationship of audit documentation to financial statements26

A-2

Cash Count Sheet

A-3

Bank Reconciliation

A-4

Bank Reconciliation

A-3/1

Confirmation

A-3/2

O/S Check List

A-4/1

Confirmation

A-4/2

O/S Check List

Relationship of Audit Documentationto Financial Statements

LEAD SCHEDULE – CASHA-1

Per G/LAJE’sFinal

Petty Cash A-2 5 5

Cash in Bank:

General A-3 186 (90) 96

Payroll A-4 21 21

212 (90) 122

types of supporting schedules
Types of Supporting Schedules

Analysis

Trial balance or list

Reconciliation of amounts

Tests of reasonableness

types of supporting schedules28
Types of Supporting Schedules

Summary of procedures

Examination of supporting documents

Informational

Outside documentation

characteristics of audit documentation
Characteristics of Audit Documentation

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 of E-commerce

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.