Set 2 - AU Chapter 10 Analytical Procedures

Question 1

Analytical procedures are performed as part of the risk assessment process. 2 reasons why?

Answer 1

• assist in gaining understanding of client

- determine any unusual fluctuations in accounts which may identify risk of material misstatement

Question 2

Name the three types of analysis

Answer 2

Horizontal, vertical, ratio

Question 3

What are the first two steps of analysis?

Answer 3

Ensuring reliability of data. Annualizing any interim income statement accounts.

Question 4

There are 4 steps in a case setting. Name them

Answer 4

• set expectations. Look at the case facts, including qualitative. do the financials meet these expectations at first glance?
• compute ratios and compare to either prior year/budget/benchmark. Comment on results.
• perform horizontal and vertical analysis. look for material differences.
  BALANCE SHEET ACCOUNTS SHOULD MOVE IN TANDEM e.g. bad debt expense - A/R and AFDA etc.
• discuss results. are they in line with expectations in step 1? discuss all analysis for an account together (i.e. vertical/horizontal/ratio etc).