Analytical Procedures

Question 1

what are analytical procedures

Answer 1

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

Question 2

when are analytical procedures required to be performed?

Answer 2

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

Question 3

highest risk area?

Answer 3

revenue cycle

Question 4

analytical procedures are used as substantive procedures to…

Answer 4

test whether the precision and reliability of data was used to develop expectations

Question 5

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

Answer 5

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)

Question 6

compare repairs and maintenance balances with..

Answer 6

fixed assets and capital improvements

Question 7

substantive test are used by auditors to detect material misstatements. what are the two types

Answer 7

1. tests of details: focuses on areas that indicate possible misstatements
2. analytical procedures: most likely first

Question 8

standard deviation

Answer 8

the square root of the variance

Question 9

expected value

Answer 9

uses probabilities by an appropriate weight (probability)

Question 10

coefficient of variation

Answer 10

the standard deviation divided by the expected value

Question 11

objective function

Answer 11

a decision model which quantifies a goal

Question 12

income statement represents the whole year so its generally better for

Answer 12

analytical procedures

Question 13

range test

Answer 13

an input control that automatically prevents an amount outside a certain predefined
range from being entered in a system

Question 14

tests of details are a type of

Answer 14

substantive procedures used to directly test an element of F/S

Question 15

analytical procedures start with

Answer 15

developing expectations and acceptable ranges of deviation which is achieved by the auditor understanding the client and its environment

Question 16

how do you perform analytical procedures

Answer 16

1. develop expecation of amount based on other informaiton
2. compare expectation to recorded amounts and consider whether differences are reasonable
3. investigate significant differences

Question 17

inventory turnover

Answer 17

COGS / inventory

indicates the number of times during a fiscal period that inventory is sold and replenished

Question 18

receivables turnover

Answer 18

Credit sales / Average AR

Increase turnover ratio indicates receivables were collected faster

If inventory turns over more slowly, costs increased and overstatement of balance

Question 19

current ratio

Answer 19

Current assets / current liabilities

Question 20

quick ratio

Answer 20

Quick assets* / current liabilities

*quick assets = cash equivalents + AR + marketable securities

Question 21

debt-to-equity ratio

Answer 21

liabilities / equity

Question 22

when MUST analytical procedures be performed?

Answer 22

during risk assessment

Question 23

relationship between bond payable and

Answer 23

interest

Question 24

Limit test

Answer 24

Numbers are compared against predefined limits to prevent an unreasonably large or small number from being entered

Question 25

Check digit

Answer 25

One digit of a number is determined by applying a formula to the other digits

Question 26

Validity check

Answer 26

Data is compared against a predefined list of acceptable entries to ensure it is among the valid possibilities

Question 27

Field check

Answer 27

Data is checked to ensure it is in the correct form