Chapter 7 Instructors Guide.docx

Chapter 7 Instructors Guide.docx

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Chapter7InstructorsGuide

Chapter7

AuditEvidence

Theamountoftimeyouspendonthischapterismostlydependentontheemphasisyouwanttoputonauditdocumentation.Thetopicstocoverare:

⏹Chapteropeningvignette

⏹Overview

⏹Auditevidencedecisions

⏹Persuasivenessofevidence

⏹Typesofevidence

⏹Termsusedinauditprocedures

⏹Auditdocumentation

ChapterOpeningVignette-“SometimestheMostImportantEvidenceIsNotFoundintheAccountingRecords”

Thisvignetteillustratesacommonweaknessthatoccursamongauditors:

gettingcaughtupinthemechanicsofasituationwithoutgraspingitssubstance.Here,theauditorfailedtogainanadequateunderstandingofhisclient’sbusiness.Hedidn’trecognizethatthevalueoftheclient’sassetswasafunctionofamarketthatessentiallylooksatcashflows.Ascashflowsdeclined,sodidvalueandtheCompany’sabilitytoremainsolvent.

Aclassdiscussionofthisvignettemightbefacilitatedbypresentingasimpleeconomicmodelofastoragefacilityandaskingstudentshowtheywouldvalueit.

Overview

Itisusefultostartbydefiningevidenceanddistinguishingamongscientific,legal,andauditevidence.Table7-1（page172）isusefultodothat.

（SeeTable7-1）

AuditEvidenceDecisions（page173）

Thefourauditevidencedecisionsareexplainedthroughoutthecourse.Listthemontheoverhead,defineanddiscussthem.

（SeeT-7-1）

Alsodefineanauditprocedure.Fortheauditprocedure,obtainaccountsreceivableconfirmations,askstudentstotellhowandunderwhatcircumstancessamplesize,itemstoselect,andtimingshouldvary.Thepurposeistogetstudentstothinkaboutdecisionmaking.

PersuasivenessofEvidence（page174）

Wespendafewminutesdiscussingwhatpersuasivenessmeansanditsdistinctionfromcertainty（andconclusive）.Wethencoverthedistinctionbetweenappropriatenessandsufficiency.Wealsodiscussthefactorsaffectingreliability.

（SeeT-7-2）

Itisalsoworthwhiletodiscussthereliabilityofvarioustypesofevidence.

TypesofAuditEvidence（page177）

Defineanddistinguishbetweenprocedures,typesofevidence,andgenerallyacceptedauditingstandards.

（SeeFigure7-1）

Atthatpoint,listontheoverhead,askquestions,ormakeobservationsabouteachtypeofevidence:

（SeeT-7-3）

PhysicalExamination（page178）

⏹Define

⏹Appliesonlytotangibleassets

⏹Assetsapplicableto（cash,fixedassets,securities,etc.）

⏹Reliability

⏹Forwhatpurposesitisusefulandnotuseful

⏹Providesanopportunitytohavedirectcontactwithbusiness

Withregardtothelastpoint,ausefulteachingtechniqueistoselectanindustry（e.g.,cementmanufacturing）anddescribehowitworksandwhatassetstheauditormightexamine.Thegoalistogetthestudentstorealizehowimportantknowledgeofthebusinessistoperformingrudimentaryauditproceduresinaproperfashion.

Confirmation（page179）

⏹Fourcharacteristics-

1.Receipt（Notenegativeconfirmationofreceivablesasanexception.）

2.Oralorinwriting

3.Fromindependentthirdparty

4.Informationrequestedbyauditor

⏹Typeofinformationconfirmed（Table7-3,page180）

⏹Reliabilityandcost

⏹Whyitisnotusuallyusedfortestsofcontrolsandsubstantivetestsoftransactions

（SeeTable7-3）

Documentation（page180）

⏹Define

⏹Examples

⏹Distinguishfromphysicalexamination

⏹Internalversusexternaldocuments

-Reliability

-Examples

⏹Whereitislikelytobeused

⏹Electronicevidence

Problem7-31isusefulatthispoint.

AnalyticalProcedures（page181）

Webelieveanalyticalproceduresareanessentialpartofauditing.Studentsareintroducedtothepurposesofanalyticalproceduresinthischapter.Moredetailedcoverageofratiosandtheuseofanalyticalproceduresinunderstandingtheclient’sbusinessandassessingriskisincludedinthenextchapteronauditplanning.Analyticalproceduresforspecificaccountsarediscussedthroughoutsubsequentchapters.

⏹Define

⏹Whentheyareused

⏹Purposes（T-7-4,T-7-6）

⏹Examples（T-7-5）

⏹Reliability

（SeeT-7-4,T-7-5andT-7-6）

ForT-7-6,theanswersare:

1.A,D6.B

2.B7.A,D

3.C8.C

4.A,E9.A,D

5.C10.B

InquiriesoftheClient（page182）

⏹Define

⏹Oralandwritten

⏹Examples

⏹Reliability

⏹Defineletterofrepresentation（whichwillbediscussedinChapter24）

⏹Whytheyareused

⏹Legalimplicationsifcorroborativeevidencenotadded

⏹TieintoBarChriscaseinChapter5

Recalculation（page182）

⏹Define

⏹Examples

⏹Reliability

Reperformance（page182）

⏹Define

⏹Examples

⏹Reliability

⏹Needforotherevidencetotestdetailsevenifnomisstatements

Observation（page182）

⏹Define

⏹Distinguishfromphysicalexaminationanddocumentation

⏹Reliability

⏹Whenitisused

⏹Definecorroborativeevidenceandwhyneeded

Problem7-32isonewealwaysusetoteststudents'knowledgeoftypesofevidence.Problems7-33,7-34,and7-37arealsogoodonesatthispoint.Problem7-37isespeciallyusefultodiscussreliabilityofevidenceindifferentsituations.Ifthereistime,itisalsousefultosummarizethisdiscussionbyhavingthestudentsdevelopahierarchyofevidenceintermsofitsprobablereliability.Wesuggesttheyshouldarriveatthethree-levelhierarchyshowninT-7-7.

（SeeT-7-7）

Afterdiscussingtypesofevidence,itisdesirabletoreturntotheappropriatenessofeachtypeofevidence.Table7-4（page183）isusefulforthat.

（SeeTable7-4）

Ifyouhavetime,relatethetypesofevidencetobalance-relatedauditobjectivesinChapter6.ThiscanbedoneconvenientlywithProblem7-36.

TermsUsedinAuditProcedures（page185）

Wecoverthetermsfordefinitionalpurposes.First,gooverthetermsbriefly.Problem7-38isusefultohelpstudentslearnthecorrectuseofterms.

AuditDocumentation（page185）

Theendofthechaptervignetteonpage193–“WillitStandUpinCourt?

”–isagoodstartingpointforyourdiscussionofauditdocumentation.Thevignetteisanexcerptfromthedepositionofanauditorwhowasinchargeofanauditsixyearsago.Itillustrateswhatcanhappenwhenauditfilesdonotadequatelydocumenttheauditproceduresperformed.

Wespendlittletimeonauditdocumentationformatbecausefirmshavetheirowntechniques.Studentsoftenhavedifficultyunderstandingwhateachtypeofauditschedulemeans.Brieflycoverthefollowing:

⏹Purposes

⏹Relationshipofauditdocumentationtofinancialstatements

⏹Commoncharacteristicsofauditdocumentation

⏹Ownershipofauditfiles

⏹Confidentialityofauditfiles

Ifyouwishtoassignproblemmaterialforauditdocumentation,Problem7-40isagoodone.

Wediscusshowinformationtechnologyhaschangedthenatureoftheevidenceavailabletoauditors,andthewayauditsareconductedanddocumented.Wenotethattheterm“auditdocumentation”isnowusedinsteadoftheterm“workingpapers”,althoughthelattertermisstillacceptable.

Weliketogiveafewexamplesofhowinformationtechnologyhasmadetheauditmoreefficient.Ifmanyofthestudentsinyourclasshaveinternshipexperience,youcanaskthemtogiveexamplesofhowtheydocumentedtheiraudittesting.

RequirementsforRetentionofAuditDocumentation（page187）

BesuretoemphasizethenewSarbanes-Oxleyrequirementsforauditorsofpubliccompaniestoprepareandretainauditworkingpapersandotherinformationrelatedtoanyauditreportforaperiodofsevenyears.ThiscomponentoftheSarbanes-OxleyActislargelyinresponsetotheallegeddocumentshreddingbyAndersenemployeesrelatedtotheEnronaudit.Weliketodiscussthedifferenttypesofdocumentationthatnowmustbemaintained.Studentsfinditinterestingtolearnthatevenemailrelateddocumentationmaybesubjecttotheretentionrequirements.

CHAPTER7

CROSS-REFERENCEOFLEARNINGOBJECTIVESANDPROBLEMMATERIAL

LearningObjectives

Review

Questions

Multiple

Choice

Questions

Discussion

Questionsand

Problems

ACLProblemandCases

7-1Contrastauditevidencewithevidenceusedbyotherprofessions.

7-1

7-2Identifythefourauditevidencedecisionsthatareneededtocreateanauditprogram.

7-2,7-3,7-4

7-6

7-3Specifythecharacteristicsthatdeterminethepersuasivenessofevidence.

7-5,7-6,7-7,

7-8

7-29

7-37

7-4Identifyandapplytheeighttypesofevidenceusedinauditing.

7-9,7-10,

7-11,7-12,

7-13,7-14,

7-15,7-16

7-29

7-31,7-32,

7-33,7-34,

7-35,7-36,

7-37,7-38

7-41,7-43

7-5Understandthepurposesofauditdocumentation.

7-17,7-18,

7-19,7-25,

7-26

7-30

7-39,7-40

7-42

7-6Prepareorganizedauditdocumentation.

7-18,7-19,

7-20,7-21,

7-22,7-23,

7-24

7-30

7-39,7-40

7-42

7-7Describehowe-commerceaffectsauditevidenceandauditdocumentation.

7-27,7-28

FOUREVIDENCEDECISIONS

●Auditprocedures

●Samplesizeforagivenprocedure

●Itemstoselectfromthepopulation

●Timing

FACTORSAFFECTINGRELIABILITY

OFEVIDENCE

●Independenceofprovider

●Effectivenessofclient'sinternalcontrol

●Auditor'sdirectknowledge

●Qualificationsofprovider

●Objectivity

●Timeliness

TYPESOFEVIDENCE

●Physicalexamination

●Confirmation

●Documentation

●Analyticalprocedures

●Inquiriesoftheclient

●Recalculation

●Reperformance

●Observation

PURPOSESOFANALYTICAL

PROCEDURES

●Understandtheclient'sindustryandbusiness

●Assessgoingconcern

●Indicatepossiblemisstatements（attentiondirecting）

●Reducedetailedtests

USEOFINTERNALRATIOS

Explainhoweachofthefollowinganalyticalprocedurescanbeusefultotheauditorindeterminingevidencetoaccumulate.Whenwouldeachonebemost