Chapter 15 Analytical procedures ISA 520

Question 1

Define Analytical Procedures?

[Chapter 15]

Answer 1

Evaluation of financial information through:

• Plausible relationships and
• Comparisons.
  It also includes investigation.

Question 2

Give some examples of Analytical Procedures?

[Chapter 15]

Answer 2

Plausible relationships:
financial to financial (e.g. depreciation to fixed assets, interest to loan)
financial to non-financial (e.g. Payroll expenses to number of employees).
Comparison:
Prior accounting periods
Industry average results
Comparable parts of the same entity
Budgets or Auditor’s expected results.

Question 3

What are different uses/purposes of Analytical Procedures?

[Chapter 15]

Answer 3

• As Risk Assessment Procedures.
• As Substantive Procedures
• In forming overall conclusion

Question 4

An auditor is planning to perform analytical procedures as substantive procedures. Which step-wise procedures should he perform?

[Chapter 15]

Answer 4

1. Determine suitability of analytical procedures for given assertion.
2. Evaluate the reliability of data from which auditor’s expectation is developed.
3. Develop precise expectation to identify misstatement.
4. Determine difference which can be accepted without further investigation.
5. Investigating inconsistency or fluctuation in analytical procedures.

Question 5

How auditor determines suitability of analytical procedures for any give assertion?

[Chapter 15]

Answer 5

Suitability depends on auditor’s assessment of how efficient and effective analytical procedures will be in detecting a misstatement.

• analytical procedures are generally suitable when relationships are plausible and predictable.
• Suitability also depends on Assertion and Risk assessment.

Question 6

What factors auditor considers while evaluates reliability of data for analytical procedures?

[Chapter 15]

Answer 6

(i) Source of information
(ii) Controls over accuracy and completeness of information
(iii) Nature and Relevance of information
(iv) Comparability of financial information

Question 7

What are the factors on which development of precise expectation depend?

[Chapter 15]

Answer 7

(i) Availability of financial and non-financial information
(ii) Degree to which information can be disaggregated
(iii) Accuracy with which amounts can be predicted

Question 8

Can substantive analytical procedures alone provide sufficient appropriate evidence?

[Chapter 15]

Answer 8

Yes, if:

Risk of material misstatement is low.
Analytical procedures provide accurate predictable outcome.

Question 9

What procedures auditor should follow if analytical procedures show significant differences or inconsistent relations?

[Chapter 15]

Answer 9

1. Auditor shall inquire of management, and shall evaluate those responses.
2. If management does not provide explanation or explanation is not adequate, risk will increase and auditor shall perform other audit procedures (e.g. tests of details).

Question 10

What are auditor’s purposes while applying analytical procedures at overall review stage of an audit?

[Chapter 15]

Answer 10

• To corroborate conclusion formed during audit of individual components.
• To assist auditor in forming overall conclusion whether the financial statements are consistent with auditor’s understanding of the entity.
• To identify previously unrecognized risk of material misstatements.