Question

Auditing and Assurance Services: An Integrated Approach, Ch. 18

In this chapter, focus on the following:

-analytical procedures

-tests of controls

-transactions and account balances

Answer 1

Answer :

• Analytical procedures are a type of evidence used during an audit. These procedures can indicate possible problems with the financial records of a client, which can then be investigated more thoroughly. Analytical procedures involve comparisons of different sets of financial and operational information, to see if historical relationships are continuing forward into the period under review. In most cases, these relationships should remain consistent over time. If not, it can imply that the financial records are incorrect, possibly due to errors or fraudulent reporting activity.

• A test of controls is an audit procedure to test the effectiveness of a control used by a client entity to prevent or detect materialmisstatements. Depending on the results of this test, auditors may choose to rely upon a client's system of controls as part of their auditing activities. However, if the test reveals that controls are weak, the auditors will enhance their use of substantive testing, which usually increases the cost of an audit. The following are general classifications of tests of controls:

  Reperformance. Auditors may initiate a new transaction, to see which controls are used by the client and the effectiveness of those controls.
  Observation. Auditors may observe a business process in action, and in particular the control elements of the process.Inspection. Auditors may examine business documents for approval signatures, stamps, or review check marks, which indicate that controls have been performed.

• Transactions and account balances : Audit assertions make up an important element in the different stages of financial statement audits. An auditor uses audit assertions and procedures to perform tests on a company’s policies, guidelines or internal controls, and financial reporting processes. In financial statements, assertions about the recognition, measurement, presentation, and disclosure of financial information are included.