Chapter 6 Audit Evidence

Report
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 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
appropriateness
timeliness
Which of
these are
specifically
mentioned
in the 3rd
examination
standard?
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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
concerns the
believability and
trustworthiness
of the evidence.
Appropriateness is determined by:
- independence of the evidence provider
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appropriateness
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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appropriateness
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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appropriateness
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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appropriateness
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
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appropriateness
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 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
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
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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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
high audit
costs
reasonable
certainty
requires
persuasive
evidence
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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
Canada 46
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 response 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 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 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
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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 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 cliBert’s Boutique
ent’s ability to continue as a going
concern
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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
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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
Ace
Company
2003
financial
statements
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 analysis 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
sales commissions
can be calculated from
?????????????????
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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
sales commissions
depreciation expense
can be calculated from
sales
??????????????????
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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
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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
can be calculated from
equipment maintenance
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
can be calculated from
equipment maintenance
expense
production
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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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