Analytical Procedures Flashcards
what are analytical procedures
involve developing expectation about what financial amounts should be and comparing that expectation with the recorded amounts
analysis of expected relationships among financial and non-financial data
when are analytical procedures required to be performed?
at planning (required)—->enhance understanding of entity; identify high risk accounts/assertions
optional substantive testing—->verify reasonableness of accounts/assertions
overall review (required)—->used during this stage to identify relationships that were not identified earlier or did not exist earlier; evaluates the overall F/S presentation and comparing it with auditor’s expectations
highest risk area?
revenue cycle
analytical procedures are used as substantive procedures to…
test whether the precision and reliability of data was used to develop expectations
if auditor performs substantive procedures at interim:
Jan 1 - interim date is covered
interim date - Dec 31 is not covered
so the remaining period should be covered by either of the following which provides reasonable basis for a conclusion
substantive procedures
Jan 1 - interim date (substantive procedures)
Interim date - Dec 31 (substantive procedures)
OR
substantive procedures and tests of controls
Jan 1 - interim date (substantive procedures)
Interim date - Dec 31 (substantive procedures and tests of controls)
compare repairs and maintenance balances with..
fixed assets and capital improvements
substantive test are used by auditors to detect material misstatements. what are the two types
- tests of details: focuses on areas that indicate possible misstatements
- analytical procedures: most likely first
standard deviation
the square root of the variance
expected value
uses probabilities by an appropriate weight (probability)
coefficient of variation
the standard deviation divided by the expected value
objective function
a decision model which quantifies a goal
income statement represents the whole year so its generally better for
analytical procedures
range test
an input control that automatically prevents an amount outside a certain predefined
range from being entered in a system
tests of details are a type of
substantive procedures used to directly test an element of F/S
analytical procedures start with
developing expectations and acceptable ranges of deviation which is achieved by the auditor understanding the client and its environment
how do you perform analytical procedures
- develop expecation of amount based on other informaiton
- compare expectation to recorded amounts and consider whether differences are reasonable
- investigate significant differences
inventory turnover
COGS / inventory
indicates the number of times during a fiscal period that inventory is sold and replenished
receivables turnover
Credit sales / Average AR
Increase turnover ratio indicates receivables were collected faster
If inventory turns over more slowly, costs increased and overstatement of balance
current ratio
Current assets / current liabilities
quick ratio
Quick assets* / current liabilities
*quick assets = cash equivalents + AR + marketable securities
debt-to-equity ratio
liabilities / equity
when MUST analytical procedures be performed?
during risk assessment
relationship between bond payable and
interest
Limit test
Numbers are compared against predefined limits to prevent an unreasonably large or small number from being entered
Check digit
One digit of a number is determined by applying a formula to the other digits
Validity check
Data is compared against a predefined list of acceptable entries to ensure it is among the valid possibilities
Field check
Data is checked to ensure it is in the correct form
