1 / 26

ANALYTICAL PROCEDURES SECTION 7

ANALYTICAL PROCEDURES SECTION 7. What Are Analytical Procedures?. Evaluations of financial information made by a study of plausible relationships among financial and non-financial data Where used? Planning Substantive tests Overall review.

jerome-chapman
Download Presentation

ANALYTICAL PROCEDURES SECTION 7

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. ANALYTICAL PROCEDURES SECTION 7

  2. What Are Analytical Procedures? • Evaluations of financial information made by a study of plausible relationships among financial and non-financial data • Where used? • Planning • Substantive tests • Overall review

  3. Analytical involve comparisons of recorded amounts or ratios to expected amounts • Expected amounts developed from a variety of sources

  4. Nature of Analytical Procedures • Three common types: • Trend analysis: The analysis of the change of an acount over time • Ratio analysis: A comparison of relationships among financial statement accounts • Reasonableness Tests: Computations usually involving non-financial data used to estimate an account balance

  5. Trend Analysis • Most common approach • By analyzing changes in an account balance over past accounting periods • The causal approach • Requires auditor to develop expected results • The diagnostic approach • Compare the current amount to the trend to see if the current amount appears to be acceptable

  6. Client bought new store on line in November • Increased sales due to new store • Client uses straight line. New store increased fixed asset base. • Increase % of sales commissions • OK • Paid off debt • Added store location

  7. Simple Trend Analysis • Involves determining an expected amount based on the account balance in prior periods • E.g. A company may have an average annual increase in sales revenue of 10% • What could be the cause if current years sales did not increase by 10%?

  8. Regression Analysis • Sales revenues can be affected by a variety of factors • Can incorporate a number of variables • Best fit technique

  9. 46,640 x 45,560 x x x 42,480 x 40,400 x 38,320 x x x 36,240 34,160 x 32,080 x x 30,000 0 200 400 600 800 1,000

  10. From the graph Y = 30,000 + 16.64X • Job # 876 uses 962 DLH • What would be the expected job cost? • But if Job # 876 only cost $42,000 • Why?

  11. Ratio Analysis • Compares relationships among account balances • Useful for both income and balance sheet • Effective for income statement accounts because it typically compares the variations in operating activity

  12. Time Series Analysis • Ratios for an entity compared over time Cross-Sectional Analysis • Ratios compared at a given point in time

  13. Cross Sectional Analysis Time Series Analysis

  14. Methods of Ratio Analysis • Financial ratios and common size statements • Financial ratios • Analyzes relationships among account balances that the auditor expects to: • Remain stable over time • Be common across firms

  15. Common-Size Statements • In preparing common-size statement, the auditor converts the dollar amount of each account balance to a percentage of some relevant aggregate amount • Time-series or cross-sectional • Generally more useful for income statement accounts

  16. Use of Industry Ratios • When performing cross-sectional analysis the auditor may use industry ratios • Dun and Bradstreet • 840 different classifications

  17. Limitations in Using Ratio Analysis • Different accounting principles can make financial ratios non-comparable • Ratios may differ among entities depending upon individual differences • Auditor should exercise caution when comparing the client with the industry

  18. Reasonableness Tests • Computations that calculate an expected amount by using operating data • What could one use if trying to estimate passenger revenue for a bus company or an airline? • How about total room revenue for a hotel?

  19. One period model • Reasonableness tests typically involve operating data which measures flow over time • Can sometimes be excellent for the completeness assertion • E.g. Expected revenues for an electrical utility

  20. Timing of Analytical Procedures • Three phases of an audit: • Planning • Fieldwork; and • Final review • The purpose of the analytical procedure depends on the audit phase

  21. Planning • Analytical procedures can draw attention to audit areas with significant potential for misstatement • They can also enhance understanding of the client’s operations, transactions, and events • The sophistication of the procedure can vary widely depending on the size and complexity of the client • Determining risk

  22. Fieldwork • Used for substantive testing • For a test of transactions an balances for inventory, what type of procedures can we use? • How can an analytical procedures supply supporting or corroborating data for accounts receivable?

  23. Final Review • Analytical procedures are used in the overall or final review stage of the audit to assist the auditor in assessing • The adequacy of substantive tests. • The sufficiency of evidence • The validity of conclusions reached • Should be performed by a person with in-depth knowledge

  24. Reliability of Data Used to Develop Expectations • More reliable if • From an independent source • Maintained by people not in a position to manipulate relevant accounting records • Derived from an adequate internal control structure • Subjected to audit testing in a prior year

More Related