Analytical Procedures

Question 1

What is the purpose of the analytical procedures in audit planning?

Answer 1

In planning process - identify significant risk areas

Risk Identification - gain better understanding of client and identify accounts that are at RMM due to fluctuations

Question 2

What are most used ratios

Answer 2

AR turnover - decreasing = collection slows down

Inventory turnover - decreasing = too much inventory on hand

Current ratio - decrease = liquidity issues

Gross profit margin - increase = accting errors and Inc. prices and decreases in costs

Question 3

what is the indicators changes in Debt to equity ratio?

Answer 3

An increasing debt-to-equity ratio could indicate the possibility of a going-concern issue or errors in debt and/or equity / income statement accounts.

A decreasing debt-to-equity ratio could indicate understatement of debt and/or errors in the income statement accounts

Question 4

What are the types of analytical procedures

Answer 4

horizontal analysis
vertical analysis
ratio analysis

Question 5

What is the approach in a case setting

Answer 5

Step 1: Set your expectations
Step 2: Compute ratios
Step 3: Perform horizontal and vertical analysis
Step 4: Interpret the results
Step 5: Accounts and assertions impacted
Step 6: Procedures to address accounts and assertions identified

Question 6

What things to consider when setting expectations

Answer 6

impact on FS by the following
•     a slowdown in the economy
•     an expansion during the year
•     new competition in the market
•     a new product introduced during the year
•     discontinued operation

Question 7

What is vertical Analysis

Answer 7

Calculate one account or a subset of accounts as a percentage of another account.

Question 8

What is Horizontal analysis?

Answer 8

compare balances from one year to the next and considering why these balances have changed from period to period