CHAPTER 7:

gathering and evaluating audit

evidences
 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.
 Persuasiveness of Audit Evidence

Two determinants of persuasiveness of

evidence:

Competence – the degree to which

evidence can be considered trustworthy.
Sufficiency – amount of evidence is
enough to form a reasonable opinion.
 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.
 Types of Audit Evidence

A. Physical examination E. Inquiries of the Client

B. Confirmations F. Reperformance
C. Documentation G. Observation
D. Analytical Procedures
 A. Physical Examination

• Inspection or count by
the auditor of a
tangible asset.
 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.

Positive Confirmations Negative Confirmations

Asks for a response
Asks for response even
only if balance is
if balance is correct.
incorrect.
More reliable than Uncertainty
negative associated with no
confirmations. response.
 B. Confirmations

1. Customers – Confirm A/R balances

2. Vendors – Confirm A/P balances
3. Banks – Confirm checking account and loan
balances
4. Attorneys – Confirm contingent liabilities
5. Inventory Agents – Confirm consignments
c. Documentation MADE BY CLIENTS

1. Types of Documents
2. Document Vouching
3. Document Tracing
 Types of Documents
Examine supporting evidence in client files.

Internal Documents External Documents

Document has been in
Prepared and used hands of an outside
within client company. party to the
Does not go outside transaction.
the client. More reliable than
internal documents.
 Document Vouching

• Examination of
Recorded Item documents that support a
recorded transaction or
Supporting
amount.
Document • The direction of testing
must be from the
recorded item to the
supporting document.
• Tests existence or
occurrence
 Document Tracing
Supporting
Document
• The primary test for
Recorded unrecorded items and
Item 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.
 G. 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.
A. Working Papers Files
B. Typical Working Paper Format
C. Storage of Working Papers
D. 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.
 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.
Permanent File Current File

Information that is Information

relevant for multiple relevant for a
years on recurring given audit client
engagements. for a particular
audit year.
 B. Typical Working Paper Format

Prepared by: KM Reviewed by:

• Headings – audit client name, J.S. A1
year under audit, etc.
• Indexing – arrange papers in Ricky Corporation
some common order. Cash
• Tick marks – symbols to key a 1st Savings 234.00
footnote to an item.
• Sign-off – indicates auditors
that prepare and review.
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.