Question

9. Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. They range from simple comparisons to the use of complex models involving many relationships and elements of data. They involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by auditors (11 points).

Required:
A. Describe the broad purposes of analytical procedures.                                        

B. Describe three of the five general forms of analytical procedures.

C. For each form, describe a typical source of the information from which an auditor develops expectations.

Answer 1

A.

Analytical Procedure:

Analytical procedures are an important part of the audit process and consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. Analytical procedures range from simple comparisons to the use of complex models involving many relationships and elements of data.

The broad purpose of analytical Procedure are :

1. To assist the auditor in planning the nature, timing, and extent of other auditing procedures.
2. As a substantive test to obtain evidential matter about particular assertions related to account balances or classes of transactions.
3. As an overall review of the financial information in the final review stage of the audit.

Analytical procedures should be applied to some extent for the purposes referred to in (a) and (c) above for all audits of financial statements made in accordance with generally accepted auditing standards. In addition, in some cases, analytical procedures can be more effective or efficient than tests of details for achieving particular substantive testing objectives.

B.

Three of the five general forms of analytical procedure :

A)i.Comparison of current-year account balances to one or more prior periods.ii. Comparison of the current-year account balances to budgets and forecasts prepared by the company.iii. Evaluation of the relationships of current-year account balances to other current-year balances to determine if they conform to expectations based on the company's historical experience.iv. Comparison of current-year account balances and financial ratios with similar information for the industry in which the company operates.v. Study of the relationships of current-year account balances with relevant non-financial information (e.g., physical production statistics).

B) The five sources of information for analytical procedures arei. Financial account information for prior period(s). Company budgets and forecasts.ii. Financial relationships among accounts in the current period.iii. Industry statistics.iv. Non-financial information, such as physical production statistics.

C). Concerns about relevance and reliability of the sources of information arei. Has the financial information from prior period(s) been audited?ii. Are company budgets or forecasts generally accurate? What processes does the client go through to develop these?iii. Are the industry statistics from a reliable source? Are the industry statistics specific enough to the client or the particular segment or division of the client being examined?iv. Has the non-financial information been audited? Have the controls over the production of the non-financial information has been tested?

C.

​​​​Information from which an auditor develops expectations :

i. Financial information for comparable prior periods giving consideration to known changes.

ii. Anticipated results—for example, budgets, forecasts, and extrapolations.

iii. Relationships among elements of financial information within the period.iv. Information regarding the industry in which the client operates.v. Relationships of financial information with relevant nonfinancial information.