Analytical Procedures Flashcards
Define Analytical Procedures?
Means evaluation of financial information through analysis of PLAUSIBLE RELATIONSHIPS, with other financial and non financial information and COMPARISONS.
Also includes Investigation, if Actual values are significantly different from the expected values.
State the Nature/Examples/Types of Analytical Procedures?
Calculating PLAUSIBLE RELATIONSHIPS among current period’s
1- financial information, or
2- Financial and other non-financial information.
Making COMPARISONS of current year’s Actual Financial results with:
1- Prior Accounting periods (to indentify unsual changes in current financial Statements), or
2- Industry Average Results (with individual entities or with industry as whole, to determine whether the figures are reseanable), or
3- comparable parts of the same entity (e.g. branches or divisions doing same business)
4- Budgets or Auditor’s expected results.
Describe the Uses/Puposes/Benefits of Analytical Procedures?
1- As RISK ASSESSMENT Procedures at Planning stage (called Prelimenary Analytical Procedures)
2- As SUBSTANTIVE Procedures (called Substantive Analytical Procedures): To obtain Evidence to detect material misstatments at assertion level.
3- Forming OVERALL CONCLUSION (called Final Analytical Procedures)
Analytical procedures are required to be performed in risk assessment and in forming overall conclusion on financial statments.
How to use analytical procedures as Substantive procedures?
Following steps should be followed:
1- Determine SUITABILITY of analytical procedures for give Assertion.
2- Evaluate the REALIBILITY of Data from which auditor’s expectation is developed.
3- Developed PRECISE EXPECTATION to identify misstatement.
4- Determine the DIFFERENCE wich can be accepted without further investigation.
Investigate inconsistency or fluctuations in analytical procedures (if any)
How to determine that Analytical procedures are suitable for use as substantive procedures?
1- Depends on auditor’s Assessment of how effecient and effective it will be to detect a misstatment.
2- Generally Suitable when relationships are plausible and predictable.
3- Also depends on Assertion and Risk Assessment (Cram)
How to evaluate the Reliability of Data used for Analytical procedures?
Following factors effect:
1- Source of information.
2- controls over Accuracy and completeness of information.
3- Nature and Relevance of information.
4- comparability (like with like) of financial informaion.
How Develop precise expectaion to identify Misstatment?
Precise expectation depends on following factors.
1- Availability of financial and non financial information.
2- Degree to which information can be disaggregated.
3- Accuracy with which amounts can be predicted.
Can Substantive Analytical procedures alone provide Suffient appropriate Evidence?
Generally, analytical procedures are performed in combination with test of details. However, Analytical procedures alone can provide sufficient appropriate evidence if:
1- Risk of material misstatment is low.
2- Analytical procedures provide accurate predictable outcome.
How to investigate inconsistency or fluctuations in analytical procedures?
1- Inquire of management, and shall evaluate those responses.
2- If management does not provide explanation or explanation is not adequate, risk will increase and auditor shall perfomr other audit procedures (e.g. test of details
How Analytical procedures are used in forming overall conclusion/Review?
Analytical procedures are performed near the end of the audit.
1- To Corroborate (support) conclusion formed during audit of individual components.
2- To Assist Auditor in forming OVERALL CONCLUSION whether financial statments are consistent with auditor’s understanding of the entity.
Also identify previously unrecognized risk of material misstatements, in which case auditor shall revise his risk and audit procedures.
