Chapter 15 - Analytical Procedures Flashcards
What is analytical procedure?
Analytical procedure means evaluation of financial information through analysis of plausible relationships, with financial and non- financial information and comparisons.
analytical procedure also include investigation. If actual values are different from expected values
i.e.
depreciation to fixed assets, interest to loans
Explain types/nature of Analytical procedure.
1) Calculating Plausible relation among current
period :
* financial information ( depreciation to fixed assets, interest on loans)
* financial and non- financial information (e.g. Payroll expenses to number of employees)
2) Making comparison of current’s year actual financial results with:
* Prior accounting periods
* Industry average results
* Compareable parts of the same entity
* Budgets or auditor expected results
What are uses of analytical procedure ?
1) As risk assessment procedures
2) As substantive procedure
3) Overall conclusion near the end of Audit
Why Analytical procedure use as Risk assessment procedure?
- To obtain understanding of entity and its environment, and
- To assess risk of material misstatements, so that procedures can be increased on high-risk areas.
How analytical procedures can be use as substantive procedures?
To obtain evidence to detect material misstatements at assertion level
How analytical procedure can be used as overall conclusion near the end of audit?
To assist auditor in overall forming conclusions whether the financial statements are consistent with auditors’ understanding of the entity
What steps auditor should perform to use analytical procedure as substantive procedures?
1) Determine suitability of analytical procedures for given assertion
2) Evaluate the reliability of data from which auditor expectation is developed
3) Develop precise expectation to identify misstatement
4) Determine difference which can be accepted without further investigation
How an auditor can develop a precise expectation?
developing precise expectation depends on following factor:
1) Availability of financial and non-financial information
2) degree to which information can be disaggregated
3) Accuracy with which amounts can be predicted.
What is meant by suitability of analytical procedures?
Suitability of analytical procedure depends upon auditor’s assessment of how efficient and effective it will be in detecting a misstatement.
These are generally suitable when relationship is plausible and predictable e.g. relationship between sales revenue and selling commission is plausible
Suitability also depends on assertion on and risk assessment e.g. comparison of GP ratio to confirm sales is not a persuasive procedure
How auditor can evaluate the reliability of data?
1) Source of information
2) Controls over accuracy and completeness of information
3) Nature and relevance of information (budgets can be used if it is prepared on the basis of expected results not as challenging targets)
4) Comparability of financial information
Substantive analytical procedures provide evidence about?
Completeness and Accuracy
Can substantive analytical procedure alone provide sufficient appropriate evidence ?
Generally analytical procedures are performed in combination with test of details. However, analytical procedures can provide sufficient appropriate evidence if:
1) Risk of material misstatement is low
2) Analytical procedures provide accurate
predictable outcome
What is use of analytical procedure in forming overall conclusion/review?
1) To corroborate conclusion formed during audit of individual components.
2) To assist auditor in forming overall conclusion whether the financial statements are consistent with auditor’s understanding of the entity
These may also identify previously unrecognised risk of material misstatement, in which case auditor shall revise his risk of material misstatement
If analytical procedures show significant differences or inconsistent relations then what auditor should do?
Auditor shall inquire of management, and shall evaluate those responses.
If management does not provide explanation or explanation is not adequate, risk will increase and auditor shall perform other audit procedures
