Chapter 15: Analytical Procedures Flashcards
What are analytical procedures?
Analytical procedures involve evaluating financial information by analyzing plausible relationships with other financial and non-financial data. They include investigating significant differences between actual and expected values.
What are the types/examples of analytical procedures?
- Calculating relationships among current period’s financial information (e.g., depreciation to fixed assets, interest to loans).
- Comparing current year’s actual results with:
- Prior periods.
- Industry averages.
- Comparable parts of the same entity (e.g., branches).
- Budgets or auditor’s expected results.
What are the uses/purposes of analytical procedures?
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Risk assessment at the planning stage (preliminary analytical procedures):
- Understand the entity and its environment.
- Assess risk of material misstatement.
- Substantive procedures: Detect material misstatements at the assertion level.
- Final review: Assist in forming an overall conclusion on financial statements.
When are analytical procedures required?
Analytical procedures are required during:
1. Risk assessment at the planning stage.
2. Final review to form an overall conclusion on financial statements.
What are the steps for using analytical procedures as substantive procedures?
- Determine suitability: Assess if analytical procedures are efficient and effective for the given assertion.
- Evaluate reliability of data: Consider the source, controls, nature, and comparability of data.
- Develop precise expectations: Use available financial/non-financial data to predict amounts.
- Determine acceptable differences: Based on materiality, decide if further investigation is needed.
What factors affect the suitability of substantive analytical procedures?
- Plausible and predictable relationships: E.g., sales revenue vs. selling commission (plausible), but not sales revenue vs. admin expenses.
- Assertion and risk assessment: E.g., comparing GP ratio to confirm sales is not persuasive.
What factors affect the reliability of data for analytical procedures?
- Source of information: Internal vs. external data.
- Controls over accuracy and completeness: Strong controls increase reliability.
- Nature and relevance: E.g., budgets prepared based on expected results (not challenging targets).
- Comparability: Industry data may need adjustments for single-product companies.
How does an auditor develop precise expectations for analytical procedures?
- Availability of financial and non-financial data.
- Degree of disaggregation (e.g., splitting sales by product).
- Accuracy of predictions (e.g., using historical trends).
What are examples of substantive analytical procedures in different areas?
- Sales: Unit price × number of units sold.
- Depreciation: Depreciation rate × fixed asset balance (adjust for additions/disposals).
- Salaries: Average pay rate × number of employees × months.
- Commission: Commission rate × sales.
- Rent: Monthly rent × months occupied.
- Interest: Principal × interest rate × period.
- Accruals: Compare current year’s accruals with prior year’s list.
Can substantive analytical procedures alone provide sufficient evidence?
Yes, if:
1. Risk of material misstatement is low.
2. Analytical procedures provide accurate and predictable outcomes.
Otherwise, they are used in combination with tests of details.
What should an auditor do if analytical procedures show significant differences or inconsistencies?
- Inquire management: Ask for explanations.
- Evaluate responses: If explanations are inadequate, perform additional procedures (e.g., tests of details).
- Increase risk assessment: If unresolved, revise audit procedures.
What is the purpose of analytical procedures during the final review?
- Corroborate conclusions from individual audit components.
- Ensure financial statements are consistent with the auditor’s understanding of the entity.
- Identify previously unrecognized risks of material misstatements.
What if unrecognized risks are identified during the final review?
The auditor must:
1. Revise risk assessments.
2. Perform additional audit procedures to address the new risks.
What is the difference between preliminary and final analytical procedures?
- Preliminary: Used during planning to understand the entity and assess risks.
- Final: Used near the end of the audit to form an overall conclusion on financial statements.
What are examples of non-financial information used in analytical procedures?
- Number of employees (for payroll expenses).
- Units produced/sold (for sales revenue).
- Square footage (for rent expenses).
What is the role of professional judgment in analytical procedures?
Auditors use professional judgment to:
1. Determine the suitability of analytical procedures.
2. Evaluate the reliability of data.
3. Develop precise expectations.
4. Decide on acceptable differences and further investigation.
What are limitations of analytical procedures?
- Dependence on the quality and reliability of data.
- Inability to detect all types of misstatements (e.g., fraud).
- Requires significant auditor judgment and expertise.
What is the relationship between analytical procedures and materiality?
Analytical procedures help identify material misstatements by comparing actual results to expectations. Materiality determines the threshold for acceptable differences.
What are common errors auditors make when using analytical procedures?
- Over-reliance on management explanations without verification.
- Using unreliable or outdated data.
- Failing to investigate significant differences or inconsistencies.
