Chapter 15: Analaytical Procedures Flashcards
What are analytical procedures in auditing?
Analytical procedures involve evaluating financial information by analyzing plausible relationships among financial data and between financial and non‑financial information. They also include investigating significant differences when actual values deviate considerably from expected values.
What are examples of calculating plausible relationships using analytical procedures?
Examples include calculating relationships among current period financial figures (e.g., comparing depreciation expense to the fixed asset balance or interest expense to loan balances) and relating financial information to non‑financial data (e.g., payroll expenses relative to the number of employees).
How are comparisons used in analytical procedures?
Comparisons are made by contrasting current year actual results with prior periods, industry averages, comparable parts within the same entity, or budgets/auditor’s expected results to identify unusual changes or validate reasonableness.
What are the main uses of analytical procedures during an audit?
They are used: During Risk Assessment (to understand the entity and assess risks), as Substantive Procedures (to obtain evidence at the assertion level), and at the End of the Audit (to corroborate conclusions and check consistency with the auditor’s understanding).
What factors determine the suitability of using analytical procedures as substantive procedures?
Suitability depends on whether the relationships are plausible and predictable (e.g., sales revenue to selling commission is plausible, but not sales revenue to administrative expenses), as well as the specific assertion being tested and the overall risk context.
What factors affect the reliability of the data used to develop auditor expectations?
Key factors include the source of information, controls over accuracy and completeness, the nature and relevance of the data (e.g., a budget based on expected results), and the comparability of financial information.
What factors are involved in developing a precise expectation in analytical procedures?
It depends on the availability of both financial and non‑financial information, the ability to disaggregate data (e.g., splitting sales by product), and the accuracy with which amounts can be predicted.
How does an auditor decide on the acceptable difference that does not require further investigation?
The acceptable difference is determined by the auditor’s materiality threshold. Any variance exceeding this threshold should be investigated further.
How are sales and depreciation calculated using analytical procedures?
Sales are calculated as the unit price multiplied by the number of units sold, while depreciation expense is determined by multiplying the depreciation rate by the balance of fixed assets, with adjustments for additions/disposals.
How can analytical procedures be applied to salaries, commission, and rent expenses?
Salaries may be computed by annualizing the first month’s pay (with adjustments for increments, joiners, and leavers) or using the average pay rate multiplied by the number of employees. Commission expense is computed as the commission rate multiplied by sales, and rent expense as the monthly rent multiplied by the number of months occupied.
How are interest expense and accruals evaluated using analytical procedures?
Interest expense is calculated by multiplying the principal by the interest rate and the period, while accruals are evaluated by comparing the detailed list of current year accruals with that of the previous year to ensure completeness.
When can analytical procedures alone provide sufficient audit evidence?
They may be sufficient if the risk of material misstatement is low and the outcomes are predictable, although they are typically used in combination with tests of details.
What should an auditor do if analytical procedures reveal significant differences or inconsistent relationships?
The auditor should inquire with management about the discrepancies and evaluate the explanations. If the response is inadequate, the risk assessment should be revised and further procedures, such as tests of details, performed.
How do analytical procedures help in forming an overall audit conclusion?
They are performed near the end of the audit to corroborate conclusions drawn from individual components and to ensure that the financial statements align with the auditor’s overall understanding of the entity. They may also reveal new risks, prompting adjustments to the audit plan.
What study tip should auditors keep in mind when using substantive analytical procedures?
Substantive analytical procedures provide evidence regarding completeness and accuracy. Unusual differences should prompt further investigation, and if the requirements are not met, tests of details should be performed.
In verifying payroll cost by projecting last year’s figures based on revenue increases, what factors should be considered for the analytical procedure’s suitability?
Auditors should assess whether payroll costs have a predictable relationship with revenue. Consider factors such as new hires, salary adjustments, or changes in revenue streams, which may require additional procedures or more detailed data for an accurate projection.
