Analytical Procedures -- Audit Planning and Risk Assessments Flashcards
What is a primary purpose of the auditor in designing the audit plan?
To implement the audit strategy
E.g. An audit plan is developed and documented based on the overall audit strategy
Note: An Audit Plan is more detailed than the Audit Strategy in;
- it includes the nature, timing, and extent of work to be performed
What is a likely procedure performed by an Auditor during the planning of a financial statement audit?
Comparing the financial statements with anticipated results
E.g. Analytical procedures should be applied as risk assessment procedures
What is an auditor most likely to do if he increases the assessed risks of material misstatement (RMM)?
He would most likely increase the extent of test of details
E.g. As the RMMs increase (controls are determined to be less effective), the acceptable detection risk decreases, and the auditor requires more persuasive audit evidence
What would be considered a fraudulent activity?
Misappropriation of assets
E.g. Two types of fraud that are relevant to the auditor are:
(1) misstatements arising from fraudulent financial reporting; and
(2) misstatements arising from misappropriation of assets
What type of analytical procedure would I perform in developing relationships among balance sheet accounts when reviewing the financial statements of a nonissuer?
Ratio Analysis - In order to develop expectations about (predictions of) recorded balances or ratios
E.g. In analyzing relationships among balance sheet accounts, comparisons of one balance sheet account with another, or ratio analysis, would be particularly appropriate
When should a complete audit plan for an engagement usually be developed?
After the auditor has obtained an understanding of existing internal control
E.g. Only after the understanding of the entity and its environment, including its internal control, is obtained and the risks of material misstatement have been assessed can;
- the auditor determine the nature, timing, and extent of further audit procedures
What are the Five Sources of Information used to develop Analytical Procedures?
(1) Financial Information from Comparable Period(s)
(2) Anticipated Results
(3) Relationships among Elements of Financial Information
(4) Comparable Information from the Client’s Industry
(5) Relationships between Financial and Relevant Non-Financial Information
What do Analytical procedures used to form an overall audit conclusion include?
Considering unusual or unexpected account balances that were not previously identified
E.g. Analytical procedures should be applied;
At the beginning and near the end of the audit
The purpose is to form an overall audit conclusion about whether the statements are consistent with the auditor’s understanding of the entity
What type of transactions are Analytical Procedures most appropriate for testing?
Operating expense transactions
Why? - Because as an Income statement account, they represent transactions over a period of time; and
- are more predictable than balance sheet accounts
What is a procedure I would use to obtain an understanding of a continuing client in planning an audit?
Read internal audit reports
E.g. The auditor performs risk assessment procedures to obtain the understanding of the entity and its environment, including its internal control
