Analytical Procedures

Question 1

What are Analytical Procedures?

Answer 1

Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data (aka tests of reasonableness. May be simple comparisons or can be more involved)

Question 2

What are the objectives to having Analytical Procedures?

Answer 2

1 obtain relevant and reliable audit evidence
2 design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion about whether the financial statements are consistent with the auditor’s understanding of the entity

Question 3

What should the auditor do when performing analytical procedures for substantive purposes?

Answer 3

1 determine the suitability of the particular analytical procedures for given assertions
2 evaluate the reliability of the data from which the auditor developed the expectation
3 develop an expectation of recorded amounts (or ratios) and evaluate whether the expectation is sufficiently precise
4 compare the recorded amounts (or ratios) with the auditor’s expectations and determine whether any difference is acceptable without further investigation

Question 4

The effectiveness and efficiency of analytical procedures used for substantive purposes depends on four important considerations, what are they?

Answer 4

1 The nature of the assertion involved
2 The plausibility and predictability of the relationship
3 The availability and reliability of the data used as a basis for developing the expectation
4 The precision of the expectation

Question 5

What are Plausibility and predictability of relationships?

Answer 5

1 Stable environments are usually more predictable than those in a dynamic environment
2 Income statement accounts tend to be more predictable than balance sheet accounts (income statement deals with a period of time rather than a single moment in time)
3 transactions subject to management discretion tend to be less predictable

Question 6

When should auditor’s perform analytical procedures?

Answer 6

Near the end of the audit to assist the auditor in forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity

Question 7

What 3 purposes does analytical procedures serve? (two of which are required)

Answer 7

1 For risk assessment (required!)
2 For substantive purposes (widely used voluntarily, but not technically required)
3 As a final review (required!)

Question 8

What do substantive procedures consist of?

Answer 8

1 Substantive analytical procedures
2 tests of details
3 some combination of both

Question 9

Why does an auditor make judgements about the effectiveness and efficiency of Substantive procedures?

Answer 9

To limit the assessed risk of material misstatements to an acceptably low level