Question

you are the senior on an audit of Teleko, a large public company. the company recently completed an acquisition of its fifth largest competitor. the competitor is known for historical accounting manipulations related to purchasing such as under- or over-statement of liabilities and expenses. list at least 6 most relevant analytical procedures that can be used to test purchasing-related accounts. what potential misstatements are indicated by each of these analytical procedures?

Answer 1

ANALYTICAL PROCEDURES

Analytical procedures are one of the major financial audit processes of an organization,which helps an auditor to understand the business of it's client. It also helpful to analyse the changes in the business. Such procedures also covers the potential risk areas of the business. It performed as an overall review of financial statements. It is used as an substantiative tool to obtain evidences about certain matters of financial statements.

ANALYTICAL PROCEDURES FOR PURCHASING-ACCOUNT TEST

These are the main relevant analytical procedures that are used by the auditors of an organization in respect to the purchases :-

• A close analytical review of the purchasing figures of different periods of the same year/ current year have to be done.
• Enquiry in to the unusual fluctuations have to be made.
• Preparation of the reconciliation statements.
• A comparison has to be done between the figures of actual and budgeted purchases.
• Current year purchase and previous year purchase have to closely monitered and compared.
• Along with the above , a ratio comparison is also needed to be done. It means that, current years ratios of each item to the total purchase have to be compared with the previous years ratios.
• Atlast, the current year & previous years gross profit ratios have to be compared, and also with the industry average.

The auditor has to identify and examines the application procedures inorder to know;whether there is an unusual fluctuations occured or not and also have to made a satisfactory opinion.

• Auditor has to examine whether the purchases have been classified properly and also disclosed properly under the proper accounting heads.
• Efficient internal control over the accounts payable and other liabilities have to be done.

POTENTIAL MISSTATEMENTS INDICATED BY ANALYTICAL PROCEDURES

Mainly there are two analytical procedures to identify major misstatements of purchase account& they are:

- consideration of the industry related factors : One of the main industry related factor is demand and supply of rawmaterials or the goods for it's resale. If the audit client is using scarse rawmaterials , then the costs can be volatile along with that the profitability fluctuations also occurs. So while preparing the balancesheet , it has to be considered well.

- Prior misstaments checking has to be done : Yet another factor is the checking of prior misstaments , to know the types of misstaments existed. Understatable of accounts payable are one of the main main issue with purchases. So that these understatements have to be presented and rectified in the current auditing process.