Experienced auditors use analytical procedures in all stages of the audit. For example, analytical procedures may help the auditor during the planning stage to determine the nature, timing and extent of auditing procedures that will be used to obtain audit evidence for specific account balances or classes of transactions.
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Sometimes, the analytical test or the data itself is problematic, and the auditor needs to apply additional analytical procedures with more precise data. Other times, the discrepancy has a “plausible” explanation, usually related to unusual transactions or events or accounting or business changes.
Auditors use analytics to understand or test financial statement relationships or balances. Significant fluctuations or relationships that are materially inconsistent with other relevant information or that differ from expected values require additional investigation. How do auditors use analytical procedures?
The company being audited is likely to notice when an analytical procedure unearths a major difference between expected and reported results. How? First, the auditor will ask management to explain the discrepancy.
Final analytical review: Auditors use final analytical reviews at the end of the audit to review their work and check for inaccuracies. If they find errors, they complete the risk assessment process again. Here are some methods auditors use during analytical procedures:
It is also mandatory that the auditor should perform analytical procedures near the end of the audit that assess whether the financial statements are consistent with the auditor's understanding of the entity (ISA 520).
An analytical review is used by auditors to assess the reasonableness of account balances. A CPA does this by comparing changes in account balances over time, as well as by comparing related accounts.
Its role is to prevent, correct or detect material misstatements by examining a company's internal controls that affect financial reporting. This type of testing allows auditors to better understand the nature of a business as a whole.
Analytical procedures are performed at three stages of audit: at start, in middle and at end of audit. These three stages are risk assessment procedures, substantive analytical procedures, and final analytical procedures.
Auditors are required to engage in analytical procedures as part of an audit engagement.
02 Analytical procedures are an important part of the audit process and consist of evaluations of financial information made by a study of plausible re- lationships among both financial and nonfinancial data.
When applying analytical procedures during an audit, which of the following is the best approach for developing expectations? Identifying reasonable explanations for unexpected differences before talking to client management so you have a basis to determine what management's responses.
How are analytical procedures used in the verification of revenue? To investigate unusual fluctuations. Material amounts of unrecorded revenue, as well as significant misclassifications affecting revenue accounts, may be discovered by these procedures. Identify three items often misclassified as miscellaneous revenue.
Using analytical procedures Analytical procedures are often more efficient than traditional, manual audit testing procedures that typically require the business being audited to produce significant paperwork. Traditional procedures also usually require substantial time to verify account balances and transactions.
Which of the following phases of an audit engagement requires the use of analytical procedures according to auditing standards? The types of analysis performed as analytical procedures during the Planning phase and Final Review phase of the audit are similar in nature.
Which of the following is an analytical procedure that should be applied to the income statement? Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences.
What is the primary purpose of analytical procedures performed during the completion phase of an audit? The primary purposes is to give the auditor one last objective look at the financial statements and see if there are any possible places for misstatements.
Done right, analytical procedures can help make your audit less time-consuming, less expensive and more effective at detecting errors and omissions. But, to avoid surprises in the coming audit season, notify your auditor about any major changes to your operations, accounting methods or market conditions that occurred in 2017.
Analytical procedures are often more efficient than traditional, manual audit testing procedures, which tend to require the company being audited to produce significant paperwork. Traditional procedures also typically require substantial time to verify account balances and transactions.
First, the auditor will ask management to explain the discrepancy. Then the auditor might ask for supporting evidence to corroborate management’s response. In some cases, the auditor will conduct more in-depth testing than in previous years when analytical procedures reveal a major discrepancy.
Performing analytical procedures generally follows this four-step process: 1. Form an expectation. Here, the auditor develops an expectation of an account balance or financial relationship. Developing an independent expectation helps the auditor apply professional skepticism when evaluating reported amounts.
Auditors use analytics to understand or test financial statement relationships or balances. Significant fluctuations or relationships that are materially inconsistent with other relevant information or that differ from expected values require additional investigation.
Establishing the threshold for analytical procedures is a matter of the auditor’s professional judgment. The threshold should factor in the possibility that a combination of misstatements could aggregate to an unacceptable amount.
Auditors gather financial and non-financial information from clients/management to understand the business and assess overall risk in the audit engagement.
Different analytical procedures are performed by auditors depending on the objective of procedure performance. Let’s discuss different aspects of these procedures.
There are following four steps inherent in the process of performing analytical procedures,
It involves the development of reasonable and concise expectations of the account balance/quantitative output. The expectation is developed on the basis of the auditor’s understanding of the business, market condition, country’s economy, and overall understanding.
It involves setting up a certain level of acceptance for the variation. For instance, an auditor may decide if variation in the account balance is 10% or below; it stands for immaterial change.
It’s a simple mechanical step where expected values and the recorded values need to be compared. It should be considered normal if the resulting values are under the threshold set in the second stage. However, if the difference is more than the threshold, it should be investigated.
All the material thresholds must be investigated in full. The best practice is to fully understand why the specific figure is so different from previous periods or the industry average. The auditor should understand and carefully document the logic behind fluctuations in the account balance.
"The best means of verification of cash, inventory, office equipment, and nearly all other assets is a physical count of the units; only a physical count gives the auditors complete assurance as to the accuracy of the amounts listed on the balance sheet." Evaluate this statement.
NFB is a continuing audit client. Michael Green, CPA, is considering audit risk at the financial statement level in planning the audit of National Federal Bank (NFB) Company's financial statements for the year ended December 31, 20X1.
Analytical procedures are often more efficient than traditional, manual audit testing procedures, which tend to require the company being audited to produce significant paperwork. Traditional procedures also typically require substantial time to verify account balances and transactions.
Auditors use analytics to understand or test financial statement relationships or balances. Significant fluctuations or relationships that are materially inconsistent with other relevant information or that differ from expected values require additional investigation.
But analytics can have an even bigger impact when these procedures are used to supplement substantive testing during fieldwork.
Establishing the threshold for analytical procedures is a matter of the auditor’s professional judgment. The threshold should factor in the possibility that a combination of misstatements could aggregate to an unacceptable amount.
One type of ratio analysis involves comparing line items on a financial statement to assess them for concerns such as liquidity, profitability and efficiency. Auditors calculate ratios and map them over an extended period.
Auditors also use another type of ratio analysis, called industry comparison, to examine these ratios. This process involves the calculation of the same ratios for companies in the same industry to ensure their client's values are similar or higher than other companies.
Auditors can use trend analysis using revenue and cost analysis. They use this process internally to create a trend line that reveals whether the company's revenue and costs have remained consistent. Depending on the distribution of the data points, auditors can identify potential problems and help their clients resolve them.
The other type of trend analysis, called investment analysis, is more a part of investment strategy than an auditing method, but it can still affect a company's financial decisions. Investment analysis tracks the company's stock prices to see if investors can determine a cause for increases and decreases in the cost.
Auditors conduct reasonableness tests to confirm the validity of a company's transactions, balances and other financial events. They determine reasonableness based on the information provided on two or more sources of data. If the auditor notices possible inaccuracies, they address them with the client.
Auditors use regression analysis to determine how two sets of variables relate to each other. This type of analysis requires the dependence of one variable on the other. Using this, auditors can determine how one variable affects the other over an established time period.