Chapter 7
Audit Planning and Analytical
Procedures
Presentation Outline
I. Defining Audit Evidence II. Types of Audit Evidence
III. Audit Documentation
I. Defining Audit Evidence
A. Audit Evidence Decisions
B. Persuasiveness of Audit Evidence
C. Competence Considerations
A. 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.
B. Persuasiveness of Audit Evidence
Audit evidence is any information used by the auditor to determine whether the information
being audited is stated in accordance with established criteria. Two determinants of
persuasiveness of evidence are:
Competence – the degree to which evidence can be considered trustworthy.
Sufficiency – amount of evidence is enough to form a reasonable opinion.
C. 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.
II. Types of Audit Evidence
A. Physical examination B. Confirmations
C. Documentation
D. Analytical Procedures E. Inquiries of the Client F. Reperformance
G. Observation
A. Physical Examination
Inspection or count by the auditor of a
tangible asset.
Different from examining
documentation is that the asset has inherent value.
B. Confirmations
Positive Confirmations Negative Confirmations Asks for response even
if balance is correct.
Asks for a response only if balance is
incorrect.
More reliable than negative
confirmations.
Uncertainty associated with no response.
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.
Confirmation of accounts receivable is normally required when practical reasonable (SAS 67)
B. Confirmations (Continued)
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
1. Types of Documents 2. Document Vouching
3. Document Tracing
1. Types of Documents
Internal Documents External Documents
Examine supporting evidence in client files.
Prepared and used within client company.
Does not go outside the client.
Document has been in hands of an outside
party to the transaction.
More reliable than internal documents.
2. Document Vouching
Examination of
documents that support a recorded transaction or amount.
The direction of testing must be from the
recorded item to the supporting document.
Tests existence or occurrence
Recorded Item Supporting
Document
3. Document Tracing
The primary test for unrecorded items and therefore tests the
completeness assertion.
The direction of
testing must be from the supporting
document to the recorded item.
Supporting Document
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.
I don’t think this is what they
meant by reperformance!
H. 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
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.
Audit documentation is the principal record of auditing procedures applied, evidence obtained, and
conclusions reached by the auditor.
A. Working Papers Files
Permanent File Current File
Working papers provide the principal record that the audit has conformed to GAAS. Also provide
information for deciding on the proper report.
Information that is relevant for multiple
years on recurring engagements.
(See examples on page 178)
Information relevant for a given audit client
for a particular audit year.
(See examples on pages 178-182)
B. Typical Working Paper Format
Headings – audit client
name, year under audit, etc.
Indexing – arrange papers in some common order.
Tick marks – symbols to key a footnote to an item.
Sign-off – indicates auditors that prepare and review.
Ricky
Corporation Cash
Prepared by: KM
Reviewed by: J.S. A1
1st Savings 234.00
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.
