ch06 audting

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6 - 1Copyright 2003 Pearson Education Canada

CHAPTER 6Audit

Evidence


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An auditor must addressAn auditor must address four decisionsfour decisionsregardingregarding evidence accumulationevidence accumulation::


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Which audit proceduresWhich audit proceduresshould be used?should be used?



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What

are auditprocedures?


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An audit

procedure is a detailed

instruction for thecollection 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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What sample size should beWhat sample size should beselected?selected?



Which items should beWhich items should beselected for testing?selected for testing?




The auditor will consider:- random/judgmental

selection




The auditor will consider:- random/judgmental

selection- materiality




The auditor will consider:

- random/judgmentalselection

- materiality- results of prior audits

Which items should beWhich items should be

selected for testing?selected for testing?



When should the proceduresWhen should the proceduresbe performed?be performed?


December

?



When should the proceduresWhen should the procedures

be performed?be performed?

The auditor will consider procedures

that should be performed before, on,

or after the balance sheet date.

December



When should the procedures beWhen should the procedures beperformed?performed?


Which items should be selected forWhich items should be selected for

testing?testing?

What sample size should beWhat sample size should beselected?selected?

Which audit procedures shouldWhich audit procedures shouldbe used?be used?



When should the procedures be performed?When should the procedures be performed?

After these questions have been answeredand the specific audit objectives have been

identified, an audit program is constructed.

Which items should be selected for testing?Which items should be selected for testing?

What sample size should be selected?What sample size should be selected?

Which audit procedures should be used?Which audit procedures should be used?



What

is an auditprogram?

After these questions have been answered

and the specific audit objectives have been




After these questions have been answered

and the specific audit objectives have been


An audit

program is a list ofdetailed audit procedures

for each component or

cycle specifying proce-dure timing, sample sizes,

and selection methods.



PersuasivenessPersuasiveness of evidence isof evidence isdetermined by:determined by:

relevance

timeliness

sufficiency

appropriate-

ness



PersuasivenessPersuasiveness of evidence isof evidence isdetermined by:determined by:

relevance

timeliness

sufficiency

appropriate-

ness

Which of

these arespecifically

mentioned

in the 3rd

examination

standard?



sufficiency

appropriate-ness

Which of

these are

specificallymentioned

in the 3rd

examination

standard?



relevance

Evidence must pertain to theEvidence must pertain to the

specific audit objective.specific audit objective.



relevance

Example: An auditor is concerned aboutthe completeness of accounts payable

(a/p). Why would confirmation of a/p bal-

ances be an irrelevant procedure?

Evidence must pertain to theEvidence must pertain to the

specific audit objective.specific audit objective.


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relevance

Example: An auditor is concerned aboutthe completeness of accounts payable

(a/p). Why would confirmation of a/p bal-

ances be an irrelevant procedure?

Confirmation addresses existence.

For completeness, a search is needed.


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appropriate-

ness

Appropriateness concerns theAppropriateness concerns the

believabilitybelievability

andand

trustworthi-trustworthi-

nessness of the evidence.of the evidence.


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appropriate-

ness

Appropriateness is determined by:Appropriateness is determined by:

- independence of the evidence provider

AppropriatenessAppropriateness

concerns theconcerns the

believabilitybelievability andandtrustworthinesstrustworthiness

of the evidence.of the evidence.


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appropriate-

ness

Appropriateness is determined by:Appropriateness is determined by:- independence of the evidence provider

- effectiveness of clients internal controls






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appropriate-

ness


- effectiveness of clients internal controls- auditors direct knowledge






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appropriate-

ness



- qualifications of information provider






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appropriate-

ness



- qualifications of information provider

- degree of objectivity






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appropriate-

ness

Appropriateness is a measure ofAppropriateness is a measure of

evidenceevidence qualityquality, it can, it cannotnot bebe

enhanced by a larger sampleenhanced by a larger sample

size.size.






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sufficiency

Sufficiency is a measure ofSufficiency is a measure of

quantityquantity. In general, the. In general, the largerlarger

the sample size, thethe sample size, the moremore

persuasivepersuasive the evidence.the evidence.


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Less evidence

yieldsless assurance

and

lower audit

costs.

More evidence

yieldsmore assurance

and

higher audit

costs.

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Auditors must balance the trade-off be-Auditors must balance the trade-off be-

tween gathering more or less evidence.tween gathering more or less evidence.


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sufficiency

SufficiencySufficiency must be addressed formust be addressed for

each audit test and each componenteach audit test and each componentof the financial statements.of the financial statements.


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An appropriate sample size may beAn appropriate sample size may be

determined by auditordetermined by auditorjudgmentjudgment

and/or byand/or by statistical samplingstatistical sampling..

sufficiency

SufficiencySufficiency must be addressed formust be addressed foreach audit test and each componenteach audit test and each component

of the financial statements.of the financial statements.


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sufficiency

In determining a sufficient sampleIn determining a sufficient sample

size, an auditor will also consider:size, an auditor will also consider:- representativeness


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sufficiency

- representativeness

- materiality, large dollar amounts

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


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sufficiency

- representativeness- materiality, large dollar amounts

- items with high probability of

misstatement

In determining a sufficient sampleIn determining a sufficient sample

size, an auditor will also consider:size, an auditor will also consider:


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timeliness

When should auditWhen should audit

evidence be gathered?evidence be gathered?


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timeliness


evidence beevidence begathered?gathered?

- evidence related to balance sheetaccounts should be collected as close

to the balance sheet date as possible


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timeliness


evidence beevidence begathered?gathered?

- evidence related to balance sheetaccounts should be collected as close

to the balance sheet date as possible

- evidence related to income statementaccounts should be collected from

throughout the period rather than

from only part of the period


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relevance

timeliness

sufficiency

appropriate-

ness

Evidence isconsidered

persuasive

only if allfour

determinants

have beenmet.


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With regard to the adequacyWith regard to the adequacyand costs of audit evidenceand costs of audit evidence::

absolute

certainty

convincingevidence

requires

With regard to the adequacyWith reg

ard to the adequacy


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requires

requires


absolutecertainty

convincing

evidence

high audit

costs


ard to the adequacy


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requires

requires

absolutecertainty

convincing

evidence

high audit

costs

requires

reasonable

certainty

persuasive

evidence


ard to the adequacy


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requires

requires

absolutecertainty

convincing

evidence

high audit

costs

requires

requires

reasonable

certainty

persuasive

evidence

reasonable

audit costs

T f idT

f id


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Types of evidenceTypes of evidence- physical examination - inspection or

count by the auditor of a tangible

asset

veryvery appropriate evidence!appropriate evidence!

T f idT

pes of e idence


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auditor

clients customer

- physical examination

- confirmation - receipt of a written or

oral response from an independent

third party at the auditors request

veryvery appropriate evidence!appropriate evidence!

Types of evidenceTypes of evidence

Canada 46

T f idTy

pes of evidence


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The confirmation

process must be controlledby the auditor.

- physical examination- confirmation - receipt of a written or

oral response from an independent

third party at the auditors request

T f idTy

pes of evidence


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Whenever reasonable,

a sample of accounts receivableshould be confirmed by the

auditor.

- physical examination- confirmation - receipt of a written re-

sponse from an independent third party

at the auditors request

T f idTy

pes of evidence


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- confirmation

- documentation (vouching) - auditor

examination of client documents and

records



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What is the differenceWhat is the difference

betweenbetween internalinternal andandexternal documentsexternal documents??


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External documents are usually on the

clients premises but were either pre-

pared by a third party or processedby a third party (more persuasive).

What is the differenceWhat is the differencebetweenbetween internalinternal andandexternal documentsexternal documents??


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Internal documents have been

prepared by the client and have

not left the clients premises

(less persuasive).

What is the differenceWhat is the differencebetweenbetween internalinternal andandexternal documentsexternal documents??


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What is the primaryWhat is the primary

determinant of thedeterminant of theappropriateness ofappropriateness of

internal documentsinternal documents??

Wh t i th i


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What is the primaryWhat is the primarydeterminant of thedeterminant of theappropriateness ofappropriateness of

internalinternal

documentsdocuments??

internalinternalcontrolcontrol

T f idT

f id


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- physical examination- confirmation

- documentation

What is the differenceWhat is the differencebetweenbetween physicalphysical

examinationexamination andanddocumentationdocumentation??




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- documentation (vouching) - auditor

examination of client documents and

records

- physical examination - inspection orcount by the auditor of a tangible

asset


betweenbetween physicalphysical

examinationexamination andanddocumentationdocumentation??

Types of evidenceTyp

es of evidence


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- confirmation

- documentation (vouching)

- observation - using the senses to audit;

often an informal procedure requiring

follow-up procedures


T f idTy

pes of evidence


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- confirmation


- observation

- inquiries of client - useful but biased

and not persuasive unless supported

by anotherform of

evidenceCPA


T pes of e idenceTy

pes of evidence


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- confirmation


- observation

- inquiries of client

- reperformance - checking the accuracy

of client calculations and transfers ofinformation (often

performed by an audit

software package).


Types of evidenceTy

pes of evidence


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- confirmation


- observation

- inquiries of client

- reperformance

- analytical procedures - involve analy-sis of comparisons and interrelation-

ships in data (may be performed by an

audit software package).



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Analytical proceduresAnalytical procedures

should be used during theshould be used during theplanningplanning andand completioncompletionphases of the audit...phases of the audit...

A l ti l dA l ti l d


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Analytical proceduresAnalytical procedures

should be used during theshould be used during theplanningplanning andand completioncompletionphases of the audit...phases of the audit...

butbut they maythey may alsoalso bebe

beneficial at otherbeneficial at othertimes during the audit.times during the audit.

Purposes of Analytical ProceduresPurp

oses of Analytical Procedures


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Purposes of Analytical ProceduresPurposes of Analytical Procedures

- facilitate understanding of clients

business and industry




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business and industry- may indicate financial

difficulty and the cli-

ents ability to con-tinue as a going

concern

Berts Boutique

Going

Outo

fBus

ines

sSale

!




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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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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

Types of Analytical ProceduresTy

pes of Analytical Procedures


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- industry comparisons

Types of Analytical ProceduresTypes of Analytical Procedures

How do the

clients financial ratios

compare with those

of the industry?




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- comparisons with prior years

AceCompany

2003

financial

statements


AceCompany

2004

financial

statements




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Ace

Company

2003

financial

statements

Conclusions from a 2-year analy-Conclusions from a 2-year analy-

sis may be erroneous.sis may be erroneous. WHYWHY??


Ace

Company

2004

financial

statements




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- comparisons with client-determined

expected results, e.g.,

budgetsbudgets


T f A l ti l P dTy



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account can be calculated fromsales commissions ?????????????????





expected results- comparisons with auditor-determined

expected results, examples:

T pes of Anal tical Proced resTy



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account can be calculated fromsales commissions sales

depreciation expense ??????????????????










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account can be calculated from sales commissions sales

depreciation expense fixed assets

interest expense ??????????????????










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account can be calculated from sales commissions sales

depreciation expense fixed assets

interest expense notes/bonds payable










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Types of Analytical ProceduresTypes 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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- 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

A l ti l


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Analytical proce-

dures are often

facilitated byaudit software.


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If analytical proceduresIf analytical proceduresdisclose unusual fluc-disclose unusual fluc-

tuations or variances,tuations or variances,

the auditor shouldthe auditor should in-in-vestigatevestigate by gatheringby gathering

additional evidence.additional evidence.

If analytical proceduresIf analytical procedures

di l l fldi l l fl


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disclose unusual fluc-disclose unusual fluc-

tuations or variances, thetuations or variances, the

auditor shouldauditor should investigateinvestigateby gathering additionalby gathering additional

evidence.evidence.

The auditor should con-The auditor should con-

sider whether fluctua-sider whether fluctua-

tions or variances aretions or variances are

materialmaterial and whether theyand whether they

may bemay be reasonablyreasonably

justifiablejustifiable

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