Chapter 15 Analytical Procedures Flashcards
Define Analytical procedures.
Evaluation of financial information with financial and non-financial information through analysis of PLAUSIBLE RELATIONSHIP and COMPARISONS. It also includes INVESTIGATION if actual results are different from expected.
Give examples of analytical procedures.
1) Calculating plausible relationships among current years:
>Financial information (Debtors to sales, Sales to selling expenses)
> Financial and non-financial information (Payroll expense to no. of employees)
2) Comparison of the Current year’s actual results with:
>prior year
>Budgeted or Expected results
>Comparable segments of the same entity
>Industry average result’s
Explain the Uses/purposes/benefits of Analytical procedures.
1) As risk assessment procedures at planning stage:
>TO obtain understanding of entity and its environment
>To assess the risk of material misstatement
2) As substantive procedures:
To obtain evidence to detect material misstatement at assertion level.
3) At the end of the audit in forming the overall conclusion:
To assist auditor in forming the overall conclusion on whether F/S are consistent with auditor’s understanding of the entity.
How auditor uses the analytical procedures as substantive procedures?
OR
Factors that determine the extent to which an auditor may use analytical procedures as a form of substantive audit evidence.
1) Determine the suitability of analytical procedures for the given assertion:
> Suitability depends upon the auditor’s assessment of how efficient and effective it will be in detecting misstatements
> Analytical procedures are suitable when the relationships are plausible and predictable e.g. relation b/w sales and selling expense is plausible but there is no relationship b/w admin expense and sales.
> Analytical procedures depend on the nature of the assertion and the risk of misstatements.
2) Evaluate the reliability of data from which the auditor develops his expectations:
Reliability depends on the followings:
> Source of information
> Controls over the accuracy and completeness of the information
> Nature and relevance of information e.g. Budgets can be used if prepared based on expected results not based on challenging targets.
> Comparability of the information
3) Develop a precise expectation to detect misstatements:
It depends on the following:
> Availability of financial and non-financial information
> Degree to which the information can b disaggregated
> Accuracy with which the amounts can be predicted
4) Determine the difference which can be accepted without further investigation:
> It depends upon the MATERIALITY level.
Which Assertions can be verified from analytical procedures?
Analytical procedures give evidence about Accuracy and completeness
Can substantive analytical procedures alone give sufficient and appropriate audit evidence?
Yes, substantive analytical procedures can give sufficient and appropriate audit evidence if:
> Risk of material misstatements is assessed as low
> Analytical procedures can provide accurate predicted outcomes.
How auditor may respond to the situation when there is inconsistency b/w actual and expected results?
> Auditor shall inquire the management and evaluate the explanation
If the explanation is not adequate or management do not provide an explanation, risk the risk of misstatements and perform other audit procedure e.g. test of details.
How analytical procedures can be used in forming the overall conclusion on F/S?
> To corroborate the conclusions on individual components during the audit
To assist the auditor in forming the overall conclusion of whether the F/S are consistent with auditor’s understanding of the entity.
