Ch.10 Analytical approach

Question 1

purpose of an analytical procedure

Answer 1

practitioner performs analytical procedures on the client’s financial information to help with identifying significant risk areas
• assist the practitioner in gaining a better understanding of the client
• identify accounts that are at risk of material misstatement by highlighting unusual fluctuations or changes in accounts

Question 2

Annualize

Answer 2

divide each account on the income statement by the number of months included in the interim income statement and then multiply each account by the number of months in a year (12).
The BS represents the value of accounts at a single point in time and does not require annualizing.

Question 3

Types of analytical

Answer 3

• horizontal analysis
• vertical analysis
• ratio analysis
AR turnover =dec=uncollectable rec or rec overstated
Inventory turn= dec=old unusable inv
current ratio - asset/liab= dec=going concern
debt-equity=inc=going concern
gross profit margin=inc=overstated rev,wrong cut-off margin

Question 4

Case writing Step 1 :set expectations

Answer 4

things that can cause an impact
•     a slowdown in the economy
•     an expansion during the year
•     new competition in the market
•     a new product introduced during the year
•     discontinued operations

Question 5

step 2: compute ratios

Answer 5

• applicable key ratios

- ratio is often compared to the prior-year ratio and sometimes industry standards

Question 6

Step 3: Perform horizontal and vertical analysis

Answer 6

Horizontal analysis involves comparing balances from one year to the next and considering why these balances have changed from period to period
Vertical analysis is when you calculate one account or a subset of accounts as a percentage of another account
“You will usually focus on the IS accounts when performing horizontal and vertical analysis. When you are looking at the IS accounts, be sure to reflect back on the BS to see what is happening with the related account. Certain accounts should move together. When they don’t, this may indicate a problem.”

Question 7

Step 4: Interpret the results

Answer 7

Refer back to the expectations set in Step 1. Determine if the results are in accordance with your expectations
If they are not, you should discuss the issue and then create a course of action that is consistent with your role — in this case, as the practitioner in the risk assessment stage of the audit.
A course of action should always be provided with the analysis.
clearly discuss which accounts and assertions are at risk of material misstatement and what procedures should be performed to mitigate that risk