1. When in the course of an audit might the auditor find it useful to apply anal
ID: 2518165 • Letter: 1
Question
1. When in the course of an audit might the auditor find it useful to apply analytical procedures? 2. Analytical procedures are extremely useful throughout the audit. Required: a. Explain how analytical procedures are useful in o (1) The risk assessment stage of the audit. 2) The substantive procedures stage of the audit. o(3) Near the end of the audi a. List the five sources of information that are available to the auditors in developing expectations for analytical procedures. b. List and describe four techniques that may be used by the auditors in developing expectations for analytical procedures.Explanation / Answer
1. As per AU Section 329 issued by AICPA, Analytical procedures are the evaluations of financial information made by a study of plausible relationships among both financial and non-financial data and an important part of the audit process. In simpler words, various items of financial records (such as sales and receivables; current assets and current liabilities etc.) and non-financial information (such as number of employees, square footage of selling space etc) move in certain patterns and under normal circumstances, follow a consistent relationship between and/or among them over a period of time. Comparison of this information with historical figures is largely what we call as 'analytical procedures'. For example, the days sales outstanding metric reflects the relationship between sales and receivables and should remain about the same over time unless there have been changes in the customer base, the credit policy of the organization, or its collection practices. Comparing this metric with the figures for prior years can reveal clues to the hidden misstatements or misrepresentations in the accounting records.
These procedures range from simple comparisons to the use of complex models involving many relationships and elements of data. A basic premise underlying the application of analytical procedures is that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. Particular conditions that can cause variations in these relationships include, for example, specific unusual transactions or events, accounting changes, business changes, random fluctuations, or misstatements.
Analytical procedures are used for the following purposes during the course of audit:
a. To assist the auditor in planning the nature, timing, and extent of other auditing procedures
b. As a substantive test to obtain audit evidence about particular assertions related to account balances or classes of transactions
c. As an overall review of the financial information in the final review stage of the audit.
2.
a). Usefulness of analytical procedures in the:
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