Ch. 10 Analytical Procedures

Question 1

Technical Competencies:
- Assesses the entity’s risk assessment process,

• Assesses issues related to the undertaking of the engagement or project
• assesses the risks of the project, of assesses the risks of material misstatement at the financial statement level and at the assertion level for classes of transactions, account balances, and disclosures.

Answer 1

Technical Competencies:
- Assesses the entity’s risk assessment process,

• Assesses issues related to the undertaking of the engagement or project
• assesses the risks of the project, of assesses the risks of material misstatement at the financial statement level and at the assertion level for classes of transactions, account balances, and disclosures. he assertion level for classes of transactions, account balances, and disclosures.

Question 2

What is the purpose of Analytical Procedures in Audit Planning?

Answer 2

After determining the RMM at the OFSL and Assertion level, the practitioner then looks to reduce Audit Risk. We will perform analytical procedures to help with identifying significant risks to then do further testing.

Question 3

What does it mean to annualize?

Answer 3

If we are doing an interim report, we divide the account on the income statement by the number of months included and then multiply by 12 to extrapolate the data.

Note: Balance sheet represents the value of accounts at a single point in time and does not require annualizing.

Question 4

What are some types of Analytical Procedures?

Answer 4

Horizontal analysis, vertical analysis and ratio analysis

Question 5

What are some common ratios that are used to evaluate corporations to a benchmark?

Answer 5

AR turnover, Inventory turnover, Current ratio, debt-to-equity ratio, Gross Profit margin

Question 6

What is the general approach in Case Settings?

Answer 6

1) Set your expectations
2) Compute ratios
3) Perform horizontal and vertical analysis
4) Interpret the results

Question 7

What is vertical analysis?

Answer 7

Is when you calculate one account or a subset of accounts as a percentage of another account. this is done to various expense accounts on the income statement as a percentage of revenue

Question 8

What is horizontal analysis?

Answer 8

Comparing balances from one year to the next and considering why these balances have changed from one period to another.

Question 9

Can you explain and tell me what the AR turnover ratio is?

Answer 9

IT determines how quickly the company s collection their receivables. A decreasing ratio indicates a slowdown in the collection of receivables.

Net Credit Sales / Average AR

AR turnover / 365

Question 10

Can you explain and tell me what the Inventory turnover ratio and days sales are?

Answer 10

Determines how quickly the company is selling their inventory.

COGS/Average Inventory

Inventory Turnover/365

Question 11

Can you explain and tell me what the current ratio tells us?

Answer 11

It tells us about about a companies liquidity issue - may be a sign of a going-concern issue.

Current assets / Current liability

Question 12

Can you explain and tell me what the debt-to-equity ratio is?

Answer 12

The solvency of a company Total Debt/Liabilities / Total equity (SE)

Tells us about how the company’s financial leverage is being used. Is it financing its operations through debt or its own equity?

Question 13

What is gross profit margin, and what is the formula?

Answer 13

Determines how much gross profit per dollar of sales is available.

Revenue - COGS / Revenue