Docsity
Log inSign up
Docsity
Prepare for your exams
Prepare for your exams

Study with the several resources on Docsity

Earn points to download
Earn points to download

Earn points by helping other students or get them with a premium plan

Guidelines and tips
Guidelines and tips
Sell on Docsity
Sell on Docsity
Log inSign up

Prepare for your exams

Study with the several resources on Docsity

Find documents

Prepare for your exams with the study notes shared by other students like you on Docsity

Search Store documents

The best documents sold by students who completed their studies

Search through all study resources
Docsity AINEW

Summarize your documents, ask them questions, convert them into quizzes and concept maps

Explore questions

Clear up your doubts by reading the answers to questions asked by your fellow students

Earn points to download

Earn points by helping other students or get them with a premium plan

Share documents
download point icon20 Points

For each uploaded document

Answer questions
download point icon5 Points

For each given answer (max 1 per day)

All the ways to get free points
Get points immediately

Choose a premium plan with all the points you need

Study Opportunities

Choose your next study program

Get in touch with the best universities in the world. Search through thousands of universities and official partners

Community

Ask the community

Ask the community for help and clear up your study doubts

University Rankings

Discover the best universities in your country according to Docsity users

Free resources

Our save-the-student-ebooks!

Download our free guides on studying techniques, anxiety management strategies, and thesis advice from Docsity tutors

From our blog

Exams and Study
Go to the blog

Analytical Procedures - A Powerful Tools for Auditors - Lectures Notes | ACCT 4250, Study notes of Auditing

California State University (CSU) - East BayAuditing
Prof. John Tan

Test of Control Substantive Test Material Type: Notes; Professor: Tan; Class: Auditing I; Subject: Accounting; University: California State University-East Bay;

Typology: Study notes

2011/2012

Uploaded on 03/16/2012

mejiaritch
mejiaritch 🇺🇸

18 documents

1 / 4

Toggle sidebar

This page cannot be seen from the preview

Don't miss anything!

bg1
T/Dialogue April 2009
(Relevant to Paper 8 – Principles of Auditing and
Management Information Systems)
David Chow FCCA, FCPA, CPA (Practising)
Analytical Procedures –
A Powerful Tool for Auditors
Learning
Zone
Audit tests
Auditors normally carry out the following types
of audit tests to determine whether financial
statements are fairly stated:
(i) procedures to obtain an understanding of
internal control
(ii) tests of controls
(iii) substantive tests:
• substantivetestsoftransactions;
• analyticalprocedures;and
• testsofdetailsofbalances.
Auditors perform types (i) and (ii) audit
tests to reduce assessed control risk,
whereas substantive tests are used to reduce
planneddetection risk.There are three
types of substantive test: substantive tests of
transactions, analytical procedures, and tests of
detailsofbalances.
Auditors perform audit procedures (see below)
in the form of deta ile d audit ste ps so as to
achievethe specificaudit objectives.Indeed all
audit procedures fall into any one of the five
types of tests, and some of them may serve as
morethanonetypeoftest.
Tests of controls
Auditors perform tests of controls when their
assessment of risks of material misstatement
at the assertion level includes an expectation
thatcontrols are operatingeffectively.This
means that auditors perform tests of controls
onlywhen: (i) asystem exists; and(ii) the
systemhas controls.Theperformance of
tests of controls is to establish whether those
controls in the systems are actually functioning
properly and effectively so that the auditors can
determine whether or not they can rely upon the
controls.
Substantive tests
Substantive tests (also known as substantive
procedures) are procedures designed to test for
dollar errors or irregularities directly affecting
thecorrectness of financialstatement balances.
Auditors perform substantive tests in an audit
to detect material misstatement at the assertion
level.
Substantive tests of transactions emphasize
theverification of transactionsrecorded in the
journals andthenpostedin the general ledger.
Analytical procedures e mphas ize the overall
reasonableness of transactions and the general
ledgerbalances. Testsof detailsof balances
consider the closing balances in the general
ledger.
pf3
pf4

Partial preview of the text

Download Analytical Procedures - A Powerful Tools for Auditors - Lectures Notes | ACCT 4250 and more Study notes Auditing in PDF only on Docsity!

T/Dialogue April 2009

(Relevant to Paper 8 –^ Principles of Auditing and

Management Information Systems)

David Chow FCCA, FCPA, CPA (Practising)

Analytical Procedures –

A Powerful Tool for Auditors

Zone

Audit tests

Auditors normally carry out the following types of audit tests to determine whether financial statements are fairly stated: (i) procedures to obtain an understanding of internal control (ii) tests of controls (iii) substantive tests:

  • substantive tests of transactions;
  • analytical procedures; and
  • tests of details of balances.

Auditors perform types (i) and (ii) audit t e s t s t o r e d u c e a s s e s s e d c o n t r o l r i s k , whereas substantive tests are used to reduce planned detection risk. There are three types of substantive test: substantive tests of transactions, analytical procedures, and tests of details of balances.

Auditors perform audit procedures (see below) in the form of detailed audit steps so as to achieve the specific audit objectives. Indeed all audit procedures fall into any one of the five types of tests, and some of them may serve as more than one type of test.

Tests of controls Auditors perform tests of controls when their

assessment of risks of material misstatement at the assertion level includes an expectation that controls are operating effectively. This means that auditors perform tests of controls only when: (i) a system exists; and (ii) the system has controls. The performance of tests of controls is to establish whether those controls in the systems are actually functioning properly and effectively so that the auditors can determine whether or not they can rely upon the controls.

Substantive tests Substantive tests (also known as substantive procedures) are procedures designed to test for dollar errors or irregularities directly affecting the correctness of financial statement balances. Auditors perform substantive tests in an audit to detect material misstatement at the assertion level.

Substantive tests of transactions emphasize the verification of transactions recorded in the journals and then posted in the general ledger. Analytical procedures emphasize the overall reasonableness of transactions and the general ledger balances. Tests of details of balances consider the closing balances in the general ledger.

April 2009 T/Dialogue

Zone

Relationship between tests of controls and substantive tests In tests of controls, an exception is only an indication of the likelihood of errors or irregularities affecting the dollar value of the financial statements, whereas an exception in substantive tests is a financial statement misstatement. Exceptions in tests of controls are significant only if they occur with sufficient frequency to cause the auditors to believe that there may be material dollar misstatements in the financial statements. Auditors would then need to plan to perform substantive tests to determine whether dollar misstatements have actually occurred.

Audit procedures

Auditors utilize the following types of audit procedures to collect audit evidence: (i) inspection (ii) observation (iii) inquiry (iv) confirmation (v) recalculation (vi) re-performance (vii) analytical procedures.

They document the findings and conclusions from the audit procedures performed so as to provide: (i) a sufficient and appropriate record of the basis for the auditors’ report; and (ii) evidence that the audit was performed in accordance with Hong Kong Standards on Auditing and applicable legal and regulatory requirements.

Analytical procedures

Bright readers may have noticed that analytical procedures serve as both audit tests and audit procedure. Let’s study the roles of analytical procedures in an audit.

Analytical procedures refers to the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or which deviate from predicted amounts.

Nature of analytical procedures T h e s e m a y b e a c h i e v e d t h r o u g h t h e consideration of comparisons of the entity’s financial information with, for example:

  • Comparable information for prior periods
  • The entity’s anticipated results
  • Similar industry information.

When performing analytical procedures, the auditors examine both financial data and non- financial data, such as the number of employees. Before starting their analytical procedures, auditors estimate the expected value (of the ratio/ trend/ account balance/ transaction, etc.) before calculating the actual value so as to avoid the actual value being biased for the auditor’s estimate of the expected value. The expected results are estimated based on preliminary discussions with the clients.

After having performed their analytical procedures, the auditors then compare the actual results with those expected and look for reasons for any significant variations. Unexplained variations may indicate a misstatement in

April 2009 T/Dialogue

performance, which involves re-calculation and tracing. Tests of details of balances are often the most expensive because of the cost involved in sending confirmations and performing physical counts.

Design of analytical procedures as substantive procedures The expected effectiveness and efficiency of an analytical procedure in identifying potential misstatements depends on: (i) the nature of the assertion (ii) the plausibility and predictability of relationship (iii) the availability and reliability of the data used to develop the expectation (iv) the precision of the expectation.

Documentation of analytical procedures as substantive procedures The identification of the relationships and types of data used, as well as conclusions reached when recorded amounts are compared with expectations and require judgment by the auditors, should be documented using all of the following: (i) the expectation and factors considered in its development (ii) results of the comparison of the expectation with the recorded amounts or ratios developed from the recorded amounts (iii) any additional auditing procedures performed in response to significant unexpected differences arising from the analytical procedures and the results of such additional procedures.

Investigating unusual items In practice not all the actual results obtained from analytical procedures will be close to the expected results estimated by auditors. As mentioned above, auditors then have to investigate and obtain adequate explanations and appropriate corroborative audit evidence. Auditors seldom jump to the conclusion that fraud exists, but have to at least reveal the suitability and reliability of data adopted in the estimation. If the auditors are confident with their data, they normally start by making inquiries of management. This should be followed by a corroboration of management’s response. However, if management is unable to provide an explanation or if the explanation is not considered adequate, auditors should consider the need to apply other audit procedures based on the results of their inquiries.

Advice on the use of analytical procedure Analytical procedure is a powerful tool that has the potential to increase the efficiency of audits since it is a relatively low-cost procedure that seems to have considerable power in identifying errors or irregularities and in guiding audits. Although the calculation of ratios and comparison of trends are relatively easy tasks, the analysis of ratios and trends requires a good understanding of the client’s business and industry. Hence analytical procedures are preferably handled by a more senior auditor within the audit team.

Zone