Auditing and Assurance Services
Seventeenth Edition, Global Edition
Chapter 6
Audit Evidence
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Learning Objectives (1 of 2)
6.1 Contrast audit evidence with evidence used by other
professions
6.2 Identify the four audit evidence decisions that are
needed to create an audit program
6.3 Specify the characteristics that determine the
persuasiveness of evidence
6.4 Identify and apply the eight types of evidence used in
auditing
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Learning Objectives (2 of 2)
6.5 Know the types of analytical procedures and their
purposes
6.6 Identify how auditors incorporate data analytics and
other advanced technologies in an audit
6.7 Compute common financial ratios
6.8 Understand the purposes of audit documentation
6.9 Prepare organized audit documentation
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Learning Objective 6.1
Contrast audit evidence with evidence used by other
professions
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Nature of Evidence
• Evidence is defined as
– Any information used by the auditor to determine
whether the information being audited is stated in
accordance with the established criteria
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Table 6.1 Characteristics of Evidence for a
Scientific Experiment, Legal Case, and
Audit of Financial Statements (1 of 2)
Scientific Experiment
Basis of Legal Case Involving an Audit of Financial
Involving Testing a
Comparison Accused Thief Statements
Medicine
Use of the Determine effects of Decide guilt or innocence Determine whether
evidence using the medicine of accused statements are fairly
presented
Nature of Results of repeated Direct evidence and Various types of audit
evidence used experiments testimony by witnesses evidence generated by
and parties involved the auditor, third parties,
and the client
Party or parties Scientist Jury and judge Auditor
evaluating
evidence
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Table 6.1 Characteristics of Evidence for a
Scientific Experiment, Legal Case, and
Audit of Financial Statements (2 of 2)
Scientific Experiment
Basis of Legal Case Involving an Audit of Financial
Involving Testing a
Comparison Accused Thief Statements
Medicine
Certainty of Vary from uncertain to Requires guilt beyond a High level of assurance
conclusions near certainty reasonable doubt
from evidence
Nature of Recommend or not Innocence or guilt of party Issue one of several
conclusions recommend use of alternative types of audit
medicine reports
Typical Society uses ineffective Guilty party is not Statement users make
consequences or harmful medicine penalized or innocent incorrect decisions and
of incorrect party is found guilty auditor may be sued
conclusions
from evidence
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Learning Objective 6.2
Identify the four audit evidence decisions that are needed to
create an audit program
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Audit Evidence Decisions
• There are four decisions auditor needs to make
about what evidence to gather and how much of it to
accumulate:
– 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
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Let’s Discuss (1 of 9)
• Discuss the similarities and differences between evidence
in a legal case and evidence in an audit of financial
statements.
• List the four major evidence decisions that must be made
on every audit.
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Learning Objective 6.3
Specify the characteristics that determine the persuasiveness
of evidence
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Persuasiveness of Evidence (1 of 4)
• Audit standards require the auditor to accumulate
sufficient appropriate evidence to support the opinion
issued
• The two determinants of the persuasiveness of
evidence are:
– Appropriateness
– Sufficiency
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Persuasiveness of Evidence (2 of 4)
• Appropriateness of evidence is a measure of the
quality of evidence, which includes:
– Relevance—evidence must pertain to or be relevant to
the audit objective that the auditor is testing
– Reliability—the degree to which evidence can be
believable or worthy of trust
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Persuasiveness of Evidence (3 of 4)
• The quantity of evidence obtained determines its
sufficiency. It is measured:
– Primarily by the sample size the auditor selects, which
is determined by
▪ Auditor’s expectation of misstatements
▪ The effectiveness of the client’s internal controls
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Persuasiveness of Evidence (4 of 4)
• The persuasiveness of evidence can be evaluated only
after considering the combination of appropriateness and
sufficiency, including the effects of the factors influencing
appropriateness and sufficiency
• In making decisions about evidence for a given audit, both
persuasiveness and cost must be considered
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Table 6.2 Relationships Among Evidence
Decisions and Persuasiveness
Audit Evidence Decisions Qualities Affecting Persuasiveness of
Evidence
Audit procedures and timing Appropriateness
Relevance
Reliability
Independence of provider
Effectiveness of internal controls
Auditor’s direct knowledge
Qualifications of provider
Objectivity of evidence
Timeliness
When procedures are performed
Portion of period being audited
Sample size and items to select Sufficiency
Adequate sample size
Selection of proper population items
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Learning Objective 6.4
Identify and apply the eight types of evidence used in
auditing
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Types of Audit Evidence (1 of 3)
• Physical examination
– The inspection or count by the auditor of a tangible
asset
• Confirmation
– The receipt of a direct written response from a third
party verifying the accuracy of information that was
requested
• Inspection
– The auditor’s examination of the client’s documents
and records
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Types of Audit Evidence (2 of 3)
• Analytical procedures
– The evaluations of financial information through
analysis of plausible relationships among both
financial and nonfinancial data
• Inquiries of the client
– The obtaining of written or oral information from the
client in response to questions from the auditor
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Types of Audit Evidence (3 of 3)
• Recalculation
– Rechecking a sample of calculations made by the
client
• Reperformance
– The auditor’s independent tests of client accounting
procedures or controls
• Observation
– Consists of looking at a process or procedure being
performed by others
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Figure 6.1 Relationships Among Auditing
Standards, Types of Evidence, and the
Four Audit Evidence Decisions
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Table 6.4 Appropriateness of Types
of Evidence
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Let’s Discuss (2 of 9)
• Identify the six characteristics that determine the
reliability of evidence.
– For each characteristic, provide one example of a
type of evidence that is likely to be reliable.
• List the eight types of audit evidence included in this
chapter and give two examples of each.
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Let’s Discuss (3 of 9)
• Explain why the auditor can be persuaded only with a
reasonable level of assurance, rather than convinced,
that the financial statements are correct.
• Identify the most important reasons for performing
analytical procedures.
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Learning Objective 6.5
Know the types of analytical procedures and their purposes
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Analytical Procedures (1 of 2)
• Analytical procedures may be performed at any of
three times during an engagement:
– In the planning phase (required)
– During the testing phase
– During the completion phase (required)
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Analytical Procedures (2 of 2)
• The usefulness of analytical procedures as audit
evidence depends significantly on appropriate
comparison data
• Auditors typically compare client data with:
– Industry data
– Similar prior-period data
– Client-determined expected results
– Auditor-determined expected results
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Table 6.6 Internal Comparisons and
Relationships
Ratio or Comparison Possible Misstatement
Raw material turnover for a Misstatement of inventory or cost of goods
manufacturing company sold or obsolescence of raw material
inventory
Sales commissions divided by net sales Misstatement of sales commission
Sales return and allowances divided by Misclassified sales returns and allowances
gross sales or unrecorded returns or allowances
subsequent to year end
Bad debt expense divided by net sales Misstatement in the allowance for bad
debts
Each of the individual manufacturing Significant misstatement of individual
expenses as a percent of total expenses within a total
manufacturing expense
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Learning Objective 6.6
Identify how auditors incorporate data analytics and other
advanced technologies in an audit
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Audit Data Analytics (1 of 3)
• Audit data analytics (ADA) are:
– The science and art of discovering and analyzing
patterns, identifying anomalies, and extracting other
useful information in data underlying or related to the
subject matter of an audit through analysis, modeling,
and visualization for purpose of planning or
performing the audit.
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Audit Data Analytics (2 of 3)
• Fundamental considerations that need to be made by
the auditor to evaluate the appropriate use of ADAs
as an audit evidence-gathering tool include:
– Accessing the data
– Preparing the data
– Evaluate the relevance and reliability of the data
– Address circumstances in which an ADA identifies a
large number of exceptions for further consideration
– Document use of ADA
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Audit Data Analytics (3 of 3)
• Other advanced technologies that auditors can
leverage to increase the effectiveness and efficiency
of their audit procedures include:
– Artificial intelligence
– Robotics
– Machine learning
– Deep learning
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Let’s Discuss (4 of 9)
Describe how the use of audit data analytics might
increase both the effectiveness and efficiency of the audit.
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Learning Objective 6.7
Compute common financial ratios
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Common Financial Ratios (1 of 2)
• Auditors’ analytical procedures often include the use of
general financial ratios during planning and final review
of the audited financial statements
• When using these ratios, auditors must be sure to make
appropriate comparisons
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Common Financial Ratios (2 of 2)
• Some widely used financial ratios categories include:
– Short-term debt-paying ability
– Liquidity activity ratios
– Ability to meet long-term debt obligations
– Profitability ratios
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Let’s Discuss (5 of 9)
• When are analytical procedures required in an audit?
What is the primary purpose of analytical procedures
during each phase of the audit?
• Name the four categories of financial ratios and give an
example of a ratio in each category.
– What is the primary information provided by each
financial ratio category?
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Let’s Discuss (6 of 9)
• What is the primary purpose of analytical procedures
performed during the completion phase of the audit?
• Describe the liquidity activity ratios and explain why
these ratios are useful to auditors.
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Learning Objective 6.8
Understand the purposes of audit documentation
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Audit Documentation (1 of 2)
• Audit documentation is the record of the audit procedures
performed, relevant audit evidence obtained, and
conclusions the auditor reached
• It provides:
– A basis for planning the audit
– A record of the evidence accumulated and the results
of the tests
– Data for determining the proper type of audit report
– A basis for review by supervisors and partners
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Audit Documentation (2 of 2)
• Audit documentation is the property of the auditor
• A member in public practice shall not disclose any
confidential client information without the specific consent
of the client
• Auditing standards require that records for audits of:
– Private companies be retained for a minimum of 5
years
– Public companies to be retained for a period of not
less than 7 years
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Let’s Discuss (7 of 9)
• Identify the six characteristics that determine the
reliability of evidence.
– For each characteristic, provide one example of a
type of evidence that is likely to be reliable.
• List the eight types of audit evidence included in this
chapter and give two examples of each.
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Learning Objective 6.9
Prepare organized audit documentation
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Contents and Organization
• There is logic to the type of audit documentation
prepared for an audit and the way it is arranged in the
files
• Audit files include:
– Permanent files
▪ Contain data of a historical or continuing nature
pertinent to the current audit
– Current files
▪ Include all audit documentation applicable to the
year under audit
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Figure 6.3 Audit File Contents and Organization
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Let’s Discuss (8 of 9)
• List the purposes of audit documentation and explain
why each purpose is important.
• Explain why it is important for audit documentation to
include each of the following:
– identification of the name of the client, period
covered, description of the contents.
– initials of the preparer and the reviewer, dates of the
preparation and review, and an index code.
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Let’s Discuss (9 of 9)
• Who owns the audit files?
– Under what circumstances can they be used by other
people?
• Define what is meant by a permanent file, and list several
types of information typically included.
– Why does the auditor not include the contents of the
permanent file with the current year’s audit file?
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Copyright
This work is protected by United States copyright laws and is
provided solely for the use of instructors in teaching their
courses and assessing student learning. Dissemination or sale of
any part of this work (including on the World Wide Web) will
destroy the integrity of the work and is not permitted. The work
and materials from it should never be made available to students
except by instructors using the accompanying text in their
classes. All recipients of this work are expected to abide by these
restrictions and to honor the intended pedagogical purposes and
the needs of other instructors who rely on these materials.
Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
