Question

Discuss how analytical procedures can be used as substantive audit procedures to provide audit evidence. Illustrate your answer with an example.

Answer 1

Such audit is done for detecting fraud in the activity level, such as there is material misstatement.

The analytical or systematical procedure of auditing may help for detecting this fraud. This is as below:

1) The auditor should develop his/her own expectation; suppose what is the expected sale based on the current trend and how much revenues have been earned.

2) The auditor should get an acceptable answer why the difference arises, suppose the sales manager explains that a natural calamity in recent past reduces the revenue earnings.

3) The auditor should calculate the significant difference; suppose the whole difference as above may not be the only cause of natural calamity, there might be some other factors. The tentative difference for natural calamity and the significant difference for other factors should be calculated here.

4) The significant difference due to some other factors should be investigated by the auditor. This is the area where frauds could be detected; suppose the amount of revenue earnings are not recorded in the books of accounts, rather appears as personal earnings.