Audit Evidence: 2003 Pearson Education Canada Inc

CHAPTER 6 Audit Evidence
Copyright 2003 Pearson Education Canada
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An auditor must address four decisions regarding evidence accumulation:
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2003 Pearson Education Canada
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Which audit procedures should be used?
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What are audit procedures?

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An audit procedure is a detailed instruction for the collection of a type of audit evidence.
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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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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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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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What is an audit program?

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An audit program is a list of detailed audit procedures for each component or cycle specifying procedure timing, sample sizes, and selection methods.
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Persuasiveness of evidence is determined by:

relevance sufficiency
appropriateness
timeliness
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Persuasiveness of evidence is determined by:

relevance sufficiency Which of these are specifically mentioned in the 3rd examination standard?
appropriateness
timeliness
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sufficiency
appropriateness
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 balances 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 balances be an irrelevant procedure? Confirmation addresses existence. For completeness, a search is needed.
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appropriateness
Appropriateness concerns the believability and trustworthiness of the evidence.

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appropriateness
Appropriateness is determined by:

- independence of the evidence provider
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appropriateness

- independence of the evidence provider - effectiveness of clients internal controls
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appropriateness

- independence of the evidence provider - effectiveness of clients internal controls - auditors direct knowledge
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appropriateness

- independence of the evidence provider - effectiveness of clients internal controls - auditors direct knowledge - qualifications of information provider
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appropriateness

- independence of the evidence provider - effectiveness of clients internal controls - auditors direct knowledge - qualifications of information provider - degree of objectivity
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appropriateness
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
More evidence yields more assurance and higher audit costs.
LESS
Less evidence yields less assurance and lower audit costs.
Auditors must balance the trade-off between 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

- representativeness - materiality, large dollar amounts
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sufficiency

- 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
- evidence related to balance sheet accounts should be collected as close to the balance sheet date as possible
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timeliness
- 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
appropriateness
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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absolute certainty requires convincing evidence requires high audit costs
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absolute certainty requires convincing evidence requires high audit costs reasonable certainty requires persuasive evidence
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absolute certainty requires convincing evidence requires high audit costs reasonable certainty requires persuasive evidence requires
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 auditors request
auditor
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clients 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 auditors request
The confirmation process must be controlled by the auditor.

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Types of evidence
- physical examination - confirmation - receipt of a written response from an independent third party at the auditors 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 clients premises but were either prepared 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 clients 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
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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
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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 analysis of comparisons and interrelationships 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 clients business and industry
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- facilitate understanding of clients business and industry - may indicate financial difficulty and the cliBerts Boutique ents ability to conl e! a sS es tinue as a going in s Bu f concern to Ou
ng oi G
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- facilitate understanding of clients business and industry - may indicate financial difficulty and the clients ability to continue as a going concern - may indicate misstatements in the financial statements
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- facilitate understanding of clients business and industry - may indicate financial difficulty and the clients ability to continue as a going concern - may indicate misstatements in the financial statements - may result in a reduction of detailed audit tests
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Types of Analytical Procedures

- industry comparisons
How do the clients financial ratios compare with those of the industry?
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- industry comparisons - comparisons with prior years
Ace Company 2003 financial statements
Ace Company 2004 financial statements

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- industry comparisons - comparisons with prior years
Ace Company 2003 financial statements Ace Company 2004 financial statements
Conclusions from a 2-year analysis may be erroneous. WHY?

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- industry comparisons - comparisons with prior years - comparisons with client-determined expected results, e.g.,
budgets
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- industry comparisons - comparisons with prior years - comparisons with client-determined expected results - comparisons with auditor-determined expected results, examples:
account sales commissions can be calculated from ?????????????????
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account sales commissions depreciation expense can be calculated from sales ??????????????????
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account sales commissions depreciation expense interest expense can be calculated from sales fixed assets ??????????????????
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account sales commissions depreciation expense interest expense can be calculated from sales fixed assets notes/bonds payable
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- 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 can be calculated from equipment maintenance expense ??????? 6 - 76

- 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 can be calculated from equipment maintenance expense production 6 - 77
Analytical procedures are often facilitated by audit software.
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If analytical procedures disclose unusual fluctuations or variances, the auditor should investigate by gathering additional evidence.
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If analytical procedures disclose unusual fluctuations or variances, the auditor should investigate by gathering additional evidence. The auditor should consider whether fluctuations or variances are material and whether they may be reasonably justifiable.
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Audit Evidence: 2003 Pearson Education Canada Inc

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CHAPTER 6 Audit Evidence

Copyright 2003 Pearson Education Canada

An auditor must address four decisions regarding evidence accumulation:

2003 Pearson Education Canada

An auditor must address four decisions regarding evidence accumulation:

Which audit procedures should be used?

2003 Pearson Education Canada

Which audit procedures should be used?

What are audit procedures?

Which audit procedures should be used?

Which audit procedures should be used?

2003 Pearson Education Canada

What sample size should be selected?

An auditor must address four decisions regarding evidence accumulation:

Which items should be selected for testing?

2003 Pearson Education Canada

An auditor must address four decisions regarding evidence accumulation:

When should the procedures be performed?

When should the procedures be performed?

What is an audit program?

Persuasiveness of evidence is determined by:

2003 Pearson Education Canada

Persuasiveness of evidence is determined by:

Which of these are specifically mentioned in the 3rd examination standard?

2003 Pearson Education Canada

Evidence must pertain to the specific audit objective.

Evidence must pertain to the specific audit objective.

Appropriateness concerns the believability and trustworthiness of the evidence.

Appropriateness concerns the believability and trustworthiness of the evidence.

Appropriateness is determined by:

2003 Pearson Education Canada

Appropriateness concerns the believability and trustworthiness of the evidence.

Appropriateness is determined by:

2003 Pearson Education Canada

Appropriateness concerns the believability and trustworthiness of the evidence.

Appropriateness is determined by:

2003 Pearson Education Canada

Appropriateness concerns the believability and trustworthiness of the evidence.

Appropriateness is determined by:

Appropriateness concerns the believability and trustworthiness of the evidence.

Appropriateness is determined by:

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.

In determining a sufficient sample size, an auditor will also consider:

2003 Pearson Education Canada

In determining a sufficient sample size, an auditor will also consider:

2003 Pearson Education Canada

In determining a sufficient sample size, an auditor will also consider:

When should audit evidence be gathered?

When should audit evidence be gathered?

2003 Pearson Education Canada

When should audit evidence be gathered?

2003 Pearson Education Canada

With regard to the adequacy and costs of audit evidence:

With regard to the adequacy and costs of audit evidence:

2003 Pearson Education Canada

With regard to the adequacy and costs of audit evidence:

2003 Pearson Education Canada

With regard to the adequacy and costs of audit evidence:

very appropriate evidence!

very appropriate evidence!

The confirmation process must be controlled by the auditor.