Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
7AUDIT EVIDENCE
SOMETIMES THE MOST IMPORTANT
EVIDENCE IS NOT FOUND IN THE
ACCOUNTING RECORDS
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Which audit procedures to use
What sample size to select for a given procedure
Which items to select from the population
When to perform the procedures
Four Evidence Decisions
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Audit program - Includes all audit procedures
the audit considers necessary in the circumstances.
Think:
P
E
R
C
V
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Characteristics of Evidence for a Scientific Experiment,
Legal Case,and Audit of Financial Statements
TABLE 7-1
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Relevance
Competence
Independence of provider
Effectiveness of internal controls
Auditor’s direct knowledge
Qualifications of individual
Objective nature of evidence
Sufficiency
Timeliness
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
TYPES OF AUDIT EVIDENCE
1,Physical examination
2,Confirmation
3,Documentation
4,Observation
5,Inquiries of the client
6,Reperformance
7,Analytical procedures
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
TABLE 7 - 3 Information Often Confirmed
Information Source
Assets
Cash in bank Bank
Accounts receivable Customer
Notes receivable Maker
Owned inventory out on consignment Consignee
Inventory held in public warehouses Public warehouse
Cash surrender value of life insurance Insurance company
Liabilities
Accounts payable Creditor
Notes payable Lender
Advances from customers Customer
Mortgages payable Mortgagor
Bonds payable Bondholder
Owners’ Equity
Shares outstanding Registrar and transfer agent
Other Information
Insurance coverage Insurance company
Contingent liabilities Bank,lender,and client’s counsel
Bond indenture agreements Bondholder
Collateral held by creditors Creditor
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Criteria to Determine Competence
TABLE 7 - 4 Competence to Types of Evidence
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Phase
FIGURE 7 - 2
Timing and Purposes of Analytical Procedures
Purpose
Understand client’s
industry and
business
(Required)
Planning
Phase
Testing
Phase
(Required)
Completion
Phase
Primary
purpose
Assess going
concern
Secondary
purpose
Secondary
purpose
Indicate possible
misstatements
(attention directing)
Primary
purpose
Primary
purpose
Secondary
purpose
Reduce detailed
tests
Secondary
purpose
Primary
purpose
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
FIVE TYPES OF
ANALYTICAL PROCEDURES
1,Compare client and industry data.
2,Compare client data with similar
prior-period data.
3,Compare client data with
client-determined expected results.
4,Compare client data with
auditor-determined expected results.
5,Compare client data with expected results,
using nonfinancial data.
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Client Industry
1999 1998 1999 1998
Inventory turnover 3.4 3.5 3.9 3.4
Gross margin percent 26.3% 26.4% 27.3% 26.2%
Compare Client and Industry Data
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Internal Comparisons and Relationships
Ratio or Comparison Possible Misstatement
Raw material turnover for a Misstatement of inventory or
manufacturing company cost of goods sold or obsolescence
of raw material inventory
Sales commissions divided by Misstatement of sales commissions
net sales
Sales returns and allowances Misclassified sales returns and
divided by gross sales allowances or unrecorded returns or
allowances subsequent to yearend
Cash surrender value of life insurance Failure to record the change in cash
(current year) divided by cash surrender surrender value or an error in recording
value of life insurance (preceding year) the change
Each of the individual manufacturing Significant misstatement of individual
expenses as a percentage of total expenses within a total
manufacturing expense
TABLE 7 - 7
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
USING STATISTICAL TECHNIQUES
AND COMPUTER SOFTWARE
The use of statistical techniques is desirable to make analytical
procedures more relevant,
Many auditors use computer software to make statistical
and nonstatistical calculations easier.
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Short-Term Debt-Paying Ability
Short-Term Liquidity
Ability to Meet Long-Term Debt
Obligations and Preferred Dividends
Operating and Performance Ratios
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Analytical Procedures
Audit Procedure
Audit Program
Budgets
Competence of Evidence
Confirmation
Documentation
External Document
Inquiry
Internal document
Observation
Persuasiveness of evidence
Physical examination
Reliability of evidence
Reperformance
Sufficiency of evidence
Unusual fluctuations
Vouching