Are analytical procedures required during an audit and, if so, when?
Yes
During both the planning and final review stages.
They are not required, but are frequently used, to obtain substantive procedures
What is the difference between standard analytical procedures and substantiveanalytical procedures?
Standard: comparisons among data.
Substantive - Step 1: The auditor evaluates whether an expectation can be developed that is sufficiently precise to identify material misstatement.
Step 2: The auditor develops an expectation of recorded amounts or ratios, which can be created from
[CPA Exam tests this order b/c the expectation should always be developed before performing the procedure]
** financial information from comparable prior periods
** anticipated results from budgets and forecasts
** relationships among data within the current period
** industry norms
** relationships of financial data with nonfinancial information
Step 3: Compare the results of the analytical procedures with the expectation
Step 4: Investigate significant differences
Which 4 factors impact the efficiency and effectiveness of analytical procedures? Give a brief description.
(1) Nature of the assertion being tested: best for data in which potential misstatements are not apparent from the details or details aren't available
(2) Plausibility / Predictability of the Data Relationship: good correlation between the data being analyzed. Correlation is improved with...
** a stable, rather than dynamic, environment
** income statement accounts rather than only balance sheet accts
** transactions that don't involve mgmt discretion
(3) Availability and Reliability of Data Used to Develop the Expectation: Reliability is based on the A-E-I-O heirarchy, or data previously audited, or under effective internal control
(4) Precision of the Expectation: Must be at a sifficiently detailed level.
Required documentation for using substantive analytical procedures
The auditor's expectation
Factors considered in the development of the expectation
Results of the comparison
Addl audit procedures performed if differences found
Results of the addl procedures
True / False: When performing substantive analytical procedures, differences between expected and actual results do not necessarily indicate errors or fraud, but should be investigated.
True
True / False: When the auditor is provided direct access to information held by (1) a third party and (2) the entity, via their own access code or to a secure site, the information gather is considered external confirmation.
False
Access to the third party info is considered external confirmation
Access to the entity's information is not external
What is the difference between a positive vs negative confirmation?
Positive: The info (such as acct balance) is provided to the 3rd party and they merely agree or disagree. (Must respond)
Negative: The 3rd party need only contact the auditor if it disagrees with the info provided. (No news = good news)
What if management refuses to allow external confirmation procedures?
If the refusal is unreasonable, and
Sufficient appropriate evidence is not obtainable via alternate procedures
Then speak with those in governance and
Possibly alter the auditor's opinion due to scope limitation (GAAS) = modified or disclaimer of opinion
True / False: An oral response to an external confirmation request = an external confirmation
False
Perform alternate procedures
What is an exception? What causes them?
A response that indicates a difference between the information in the entity's records and the informaton provided by the confirming party (external confirmation request).
Exceptions may result from timing, measurement differences, clerical errors = does not represent a material misstatement
Exceptions not from above should be explored as it may be a deficiency in internal control.
True / False: Inquiry alone provides substantial evidence on which to form an audit opinion on a specific transaction or account.
False
Inquiry should be used in conjunction with more authoritative audit procedures.
True / False: Observation provides direct personal knowledge (strong evidence) that can be applied to the entire period.
False
Observation may actually skew results as some people perform differently when being watched. Plus, the observation was for a specific period of time and cannot be extrapolated or assumed to be the same performance that occurred throughout the period.
Substantive Procedures are designed to detect material misstatement at the _______ level.
