Analytical Procedures Flashcards
What are analytical procedures? These are sometimes referred to as?
Evaluations of financial information through analysis of relationships among both financial and non financial data
Sometimes referred to as “tests of reasonableness”
Analytical procedures might include?
Simple comparisons (current year F/S with last year F/S)
Can be more involved such as ratios and trend analysis
What is the purpose of analytical procedures? 3 broad purposes?
1) Required in PLANNING (for risk assessment)
2) used for SUBSTANTIVE PURPOSE (not required)
3) Required for FINAL REVIEW
What is the key to analytical procedures usefulness?
The quality of the auditors “expectation” is the key to usefulness of analytics
When is reliability of data enhanced?
1) When data have been subject to audit test
2) Obtained from external sources other than the client
3) When data obtained from the client are developed under conditions of effective internal controls
Example of precision of the expectation?
The likelihood of detecting a misstatement increases as the level of aggregation of data decreases
Simply comparing last years sales to this years sales (high level of aggregation); a more precise analysis (at a lower level of aggregation) would be analyzing the sales by month
Relationships involving the income statement tend to be more predictable than the balance sheet, why?
Income statement deals with a period of time rather than a single moment in time.
How can an auditor identify unusual year-end transactions?
Analytical procedures
If the relationships between the auditors expectations differ from the actual analytical results, the auditor should consider?
Identifying risks of material misstatements due to error or fraud
