SECTION 3: 2D - Analytical Review Technique

Question 1

These are used to compare information against expectations, based on an independent source and the premise that certain relationships between information can be reasonably expected in the absence of conditions to the contrary.

a. Engagement procedures
b. Analytical procedures
c. Audit procedures
d. Benchmark procedures

Answer 1

b. Analytical procedures

Question 2

The following are examples of analytical procedures, except:

i. ratio, trend, and regression analysis
ii. reasonableness tests
iii. period-to-period comparisons
iv. forecasts
v. benchmarking information against similar industries or organizational units

a. i, ii, iv, v
b. v only
c. i, ii, iii, iv, v
d. iv, v

Answer 2

c. i, ii, iii, iv, v

Question 3

When there is a significant deviation from the expectation and the results, what should an internal auditor do?

Answer 3

They may conduct further investigation in order to determine the cause and/or the reasonableness of the variance.

Question 4

This may indicate a need for additional follow-up and may suggest the presence of a significant problem that should be communicated to senior management and the board.

Answer 4

Unexplainable results

Question 5

This examines the relationship between 2 pieces of information to determine the extent to which that relationship is reasonable.

a. Engagement procedures
b. Analytical procedures
c. Audit procedures
d. Benchmark procedures

Answer 5

b. Analytical procedures

Question 6

The pieces of information must be somehow related or potentially related, what are these information used for analytical procedures?

i. Financial
ii. Nonfinancial

a. i only
b. ii only
c. i and ii
d. none

Answer 6

c. i and ii

Question 7

The effectiveness of analytical procedures depends on, what?

Answer 7

1. Quality of the initial assertion about the relationship
2. Predictability of the relationship between the 2 items
3. Certainty of that relationship

Question 8

TAKE NOTE OF THIS 1:

Answer 8

Analytical procedures are based on expected relationships.
Take note of this: The following are some sources in order to determine the expected relationships:
1. Financial information from comparable prior periods
2. Anticipated results, forecasts, and actual results
3. Relationship between elements of financial data
4. Information about the industry in which the client operates
5. Relationships between financial and nonfinacial data.

Question 9

After the expected relationship has been projected, what is the next steps that an auditor will do?

Answer 9

1. Determine an acceptable level of difference between the expected relationship and the actual relationship
2. Calculate or determine the actual relationship

Question 10

When the actual relationship and the expected relationship matches, then the number being audited is correct - however if it is different than expected or exceeded the acceptable level of difference, what shall the auditor do?

Answer 10

The auditor needs to do more testing

NOTE:
A discrepancy does not automatically means that there is an error, but could indicate that the auditor needs to investigate the relationship in more detail with other procedures.

Question 11

This involves studying and comparing relationships among financial and nonfinancial indormation.

a. Engagement procedures
b. Analytical procedures
c. Audit procedures
d. Benchmark procedures

Answer 11

b. Analytical procedures

Question 12

The application of analytical procedures is based on the premise of what?

Answer 12

In the absence of known conditions to the contrary, relationships among information may reasonably be expected to exist and continue.

Question 13

Give examples of contrary conditions.

Answer 13

• unusual or non-recurring transactions or events;
• accounting, organizational, operational, environmental, and technological changes;
• inefficiencies;
• ineffectiveness;
• errors;
• fraud;
• illegal acts

Question 14

Analytical procedures are useful in identifying the following except:

i. Unexpected differences
ii. absence of differences when they are expected
iii. potential errors
iv. Potential fraud or illegal acts
v. Other unusual/non-recurring transactions or events

a. i only
b. i, ii, iv
c. i, ii, iii, iv, v
d. none of them

Answer 14

d. none of them

Question 15

What are the types of procedures?

Answer 15

• Comparing current period information with expectations based on similar information for prior periods as well as budgets and forecasts.
• Studying the relationships between financial and appropriate nonfinancial information
• Studying relationships among elements of information
• Comparing information with expectations based on similar information for other organizational units as well as for the industry in which the organization operates.

Question 16

TAKE NOTE 3:

Answer 16

It is important to determine the expected relationship before looking at the data - for if the data is first analyzed, then the auditor might unknowingly find an explanation for the data (even though it is unreasonable).

Question 17

What are the types of information that may be used for analytical procedures?

Answer 17

• Ratio, trend, and regression analysis
• reasonableness tests
• period-to-period comparisons
• comparisons with budgets
• forecasts
• external economic information

Question 18

Why would an auditor use an analytical procedure?

Ans:
This is because it identifies conditions that may require additional audit procedures.
The extent of analytical procedures depends on the following factors:
i. Significance of the area being audited
ii. Assessment of risk management in the area being audited
iii. Adequacy of the internal control system
iv. Availability and reliability of financial and nonfinancial information
v. Precision with which the results of analytical audit procedures can be predicted
vi. Availability and comparability of information regarding the industry in which the organization operates.
vii. Extent to which other procedures provide evidence.

Answer 18

FAMILIARIZE THEM

Question 19

What would the auditor do if there are unexpected results or relationships?

Answer 19

1. The internal auditor evaluates such results
2. Determine if the difference from expectation and result came from fraud, error, or a change in conditions.
3. The internal auditor must be satisfied with the explanation of the management
4. The IA may then modify expectations and recalculate the difference.

Take note that unexplained results may be indicative of a significant problem and must be communicated to senior management and the board in accordance with Standard 2060.

Question 20

This means that internal auditor determine the exact reason as to why there were variances.

a. Regression Analysis
b. Reasonableness tests
c. Forecasts
d. Root cause analysis

Answer 20

d. Root cause analysis

Question 21

Root cause analysis is often conducted because of what?

a. underlying reason for the occurrence of an error, problem, missed opportunity, or instance of noncompliance
b. enables IA to add insights hat improve the effectiveness and efficiency of the organization’s governance, risk management, and control processes.
c. identifies why an issue occur.
d. all of the above

Answer 21

d. all of the above

Question 22

It is defined as a problem, error, instance of noncompliance, or missed opportunities.

Answer 22

Issue

Question 23

Take note of the following:

Answer 23

• Since the root cause analysis require extensive resources, such as time and subject matter expertise, the internal auditor must exercise due professional care by considering the effort in relation to the potential benefits.
• This analysis is as simple as asking a series of “why?”
• Most root causes will be traced back to decisions, actions, or inaction by a person or multiple people
• TRUE ROOT CAUSE = hard to know and is subjective
• there are instances where auditors may PROVIDE A VARIETY OF POSSIBLE ROOT CAUSES
• This add insights that improve longer-term effectiveness and efficiency of business processes.

Question 24

Internal auditors are considered the best candidate in performing the root cause analysis and the following are a reasons why, except:

i. Independence and objectivity
ii. Have worked across various reporting chains and departments of an organization, hence they may have developed a broad deep understanding of the underlying issues that may exceed that of any single member of management.
iii. Since the internal auditors would be looking at the issue in a subjective manner.

a. i, ii
b. i only
c. iii only
d. ii, iii

Answer 24

c. iii only

Question 25

What benefit does the root cause analysis give?

Answer 25

By identifying the underlying causes of an issue.

Question 26

The following are the benefits that a root cause analysis offers, which of them does not give a benefit?

i. Provides a long-term perspective for the improvement of business processes.
ii. Helps prevent additional rework and proactively addresses future recurrences of the issue.

a. i and ii
b. i only
c. ii only
d. none of the above

Answer 26

d. none of the above

Question 27

Prior to commencing the root cause analysis, the internal auditors should consider their competencies and knowledge on the issue. Which of the following must be considered?

i. There might be some changes with regards to the root cause analysis, from a simple and quick analysis to an extensive and time consuming analysis
ii. Auditors may not have all the skill sets necessary to conduct the specific root cause analysis under consideration
iii. The anticipated time commitment or necessary skill levels exceed that available within the internal audit activity.

a. i only
b. ii, iii
c. ii only
d. i, ii, iii

Answer 27

d. i, ii, iii

Question 28

An auditor before performing the root cause analysis must anticipate potential barrier, what are these?

Answer 28

1. Business management may be reluctant to support internal auditor’s role in root cause analysis
2. Business management may resist conducting a root case analysis due to the necessary time and resource commitment from their staff
3. Determining true root cause may be difficult and subjective
4. Internal auditors could be perceived as replacing the role of management (perception risk).

LOOK AT 115

Question 29

What are the 4 important analytical procedures that was mentioned in the implementation guide 2320?

Answer 29

1. Comparisons with budgets (Variance analysis)
2. Trend analysis
3. Regression analysis
4. Ratio analysis

Question 30

This is an analytical procedure that compares actual performance with the budgeted or anticipated results and determined the reasons for any differences.

a. Comparisons with budgets (Variance analysis)
b. Regression analysis
c. Ratio analysis
d. Trend analysis

Answer 30

a. Comparisons with budgets (variance analysis)

TAKE NOTE:

• the most common variances connected to sales are:
• > direct labor
• > direct materials

Question 31

This type of analysis analyzes changes over time in account balances and other different types of historical data.

a. Comparisons with budgets (Variance analysis)
b. Regression analysis
c. Ratio analysis
d. Trend analysis

Answer 31

d. Trend analysis

Question 32

The most applicable type of data that a trend analysis use is…

Answer 32

Income statement

Question 33

This data reflects historical activity for one variable over a sequence of past time periods that can be forecasted.

Answer 33

Time series data

Question 34

This type of analysis looks at patterns of the variable over time (to be used for forecasting)

Answer 34

Time series analysis