Topic 11- Audit Evidence: Analytical Procedures

For risk assessment analytical procedures to be effective at identifying unusual relationships or trends, it is important that the auditor have an understanding of the client's business and its environment.

TRUE

The acceptable deviation used by the auditor can be thought of as the materiality threshold for the account balance being tested.

TRUE

The types of anlaysis performed as analytical procedures during the Planning phase and Final Review phase of the audit are similar in nature.

TRUE

According to AICPA (2008) guidance, the development of an expectation is the most important step when using analytical procedures.

TRUE According to AICPA (2008) guidance, the most important analytical procedure step for auditors to complete is to effectively set an expectation for the client's reported number.

Analytical procedures are evaluations that focus on comparisons of relevant information, whether in the current period or comparing with prior periods.

TRUE Analytical procedures are evaluations that can focus on comparisons to relevant information, which can include comparisons to industry data, prior periods, budgets, etc. This can include comparisons of data within the same period or comparisons made between two different periods.

If the difference between the client's reported number and the auditor's expectation is less than the predetermined acceptable deviation amount, the auditor would conclude that there is evidence that the client's reported balance is fairly stated.

TRUE Any difference between the client's reported number and the auditor's expectation that is less than the predetermined acceptable deviation amount would provide evidence that the client's reported balance is fairly stated. Unless the auditor has additional information that comes to light suggesting otherwise, there would not be a need to investigate differences that are less than the acceptable deviation amount.

If the difference between the client's reported number and the auditor's expectation is lower than the predetermined acceptable deviation amount, the auditor would conclude that there is some evidence that the client's reported balance is fairly stated.

TRUE Any difference between the client's reported number and the auditor's expectation that is less than the predetermined acceptable deviation amount would provide some evidence that the client's reported balance is fairly stated. If this difference is more than the predetermined acceptable deviation, the auditor would need to investigate further and determine potential causes for this significant difference.

One source an auditor could use to determine potential explanations for the significant differences between the client's reported number(s) and the auditor's expectation is a specialist on the audit engagement team.

TRUE The auditor can turn to multiple sources to come up with explanations for identified significant differences. While standards suggest going to management, the auditor can also rely on his or her own thoughts, analysis, and experience to generate explanations, or even turn to his or her firm's decision aids or other resources, such as specialists, to generate these explanations.

Analytical procedures performed during the _________________ phase are generally exploratory in nature as the auditor has not yet identified a specific account or assertion to be tested. a. Planning phase b. Fieldwork phase c. Final Review phase

A

The term "Risk Assessment Analytical Procedures" refers to procedures performed during which phase of the audit? a. Planning phase b. Fieldwork phase c. Final Review phase d. All of the above

A

Which of the following is the first step of the substantive analytical procedures process? a. set an acceptable deviation b. compare the client's number to the auditor's expectation c. determine hypotheses for significant differences d. set an expectation

A Auditors should first set an acceptable deviation amount, and can then use this amount, along with the auditor's expectation, to determine whether there is a significant difference between the client's reported number and the auditor's expectation.

Assume an auditor is trying to formulate an expectation for the client's reported warranty liability balance. If the auditor is examining financial relationships, which of the following account balances would likely be useful in formulating an expectation for the client's reported warranty liability balance? (select all that apply) a. Sales revenue b. Cost of goods sold c. Common stock

A and B The client's warranty liability will likely be driven, in large part, by the number of products the client sells. Therefore, revenues and cost of goods sold would both be expected to be associated with the client's true warranty liability. In contrast, common stock would not have a clear, expected association with the warranty liability account. Instead, this account would be more helpful to the auditor in the case where the auditor is forming an expectation for the dividend payable account.

In which stage(s) of the audit are analytical procedures required? (select all that apply) a. Planning b. Fieldwork c. Final Review d. Analytical procedures are not required at any of these stages

A and C Analytical procedures are required at the planning and overall review stages of the engagement.

Which of the following could help explain a significant difference between the client's reported number and the auditor's expectation? (Choose all that apply.) a. The client could be unaware of a material error in the financial statements b. The client could have entered into new business transactions that affected the reported number c. The client could be committing fraud

A, B, and C All three of these may explain significant differences between the client's reported number and the auditor's expectation. There are numerous potential explanations for significant differences between the client's reported number and the auditor's expectation. Two primary categories would be true business changes (that the auditor may not have been aware of when formulating an expectation for the client's reported result) and material misstatements (due to error or fraud).

In which stages are analytical procedures required? a. Planning and Evidence gathering b. Planning, Evidence gathering, and Final review c. Planning and Final review d. Evidence gathering and Final review e. Analytical procedures are not required at any of these stages

C Analytical procedures are required at the planning and overall review stages of the engagement.

Assume an auditor is trying to formulate an expectation for the client's reported warranty liability balance. If the auditor is examining financial relationships, which of the following account balances would NOT be useful in formulating an expectation for the client's reported warranty liability balance? a. Cost of goods sold b. Sales revenue c. Common stock d. All of the above would be useful in formulating an expectation for the warranty liability balance

C The client's warranty liability will likely be driven, in large part, by the number of products the client sells. Therefore, revenues and cost of goods sold would both be expected to be associated with the client's true warranty liability. In contrast, common stock would not have a clear, expected association with the warranty liability account. Instead, this account would be more helpful to the auditor in the case where the auditor is forming an expectation for the dividend payable account.

Which of the following types of analytical procedures would involve comparing current period revenue to the number of new customers obtained? a. Ratio analysis b. Regression analysis c. Trend analysis d. Reasonableness test

D

Which of the following is one of the types of analytical procedures? a. Ratio analysis b. Trend analysis c. Regression analysis d. All of the above are examples of the types of analytical procedures

D Each of these is an example of analytical procedures. There are multiple types of analytical procedures. For examples, auditors can make comparisons of financial ratios over time (ratio analysis), comparisons of relevant information across time (trend analysis), statistical analyses (e.g., regression analysis), etc.

Which of the following could be a source an auditor could use to determine potential explanations for the significant differences between the client's reported number(s) and the auditor's expectation? Select the best option below. a. Client management b. The auditor could come up with his or her own explanations c. The auditor could turn to others on the audit team, including a specialist from the audit firm, to identify potential explanations d. All of the above would be able to provide potentially relevant explanations for significant analytical procedure differences

D The auditor can turn to multiple sources to come up with explanations for identified significant differences. While standards suggest going to management, the auditor can also rely on his or her own thoughts, analysis, and experience to generate explanations, or even turn to his or her firm's decision aids or other resources, such as specialists, to generate these explanations.

Which of the following phases of an audit engagement requires the use of anlaytical procedures according to auditing standards? a. Planning phase b. Fieldwork phase c. Final Review phase d. All of the above e. Two of the above

E

Which of the following is NOT one of the types of analytical procedures? a. Ratio analysis b. Trend analysis c. Reasonableness tests d. Regression analysis e. All of the above are examples of the types of analytical procedures

E Each of these is an example of analytical procedures. There are multiple types of analytical procedures. For examples, auditors can make comparisons of financial ratios over time (ratio analysis), comparisons of relevant information across time (trend analysis), statistical analyses (e.g., regression analysis), etc.

Aggregated data used in a substantive analytical procedure usually provides stronger evidence to the auditor than disaggregated data.

FALSE

If the auditor's expectation is close to the client's reported number, she should conclude that she has NOT formed a precise expectation.

FALSE A precise expectation is achieved when the auditor has formed an expectation that is close to what the client should be reporting, even if this is not close to the number that the client is reporting.

Analytical procedures are evaluations that center exclusively on non-financial information.

FALSE Analytical procedures are evaluations that can center on financial or non-financial information.

Analytical procedures are evaluations that exclusively focus on comparisons of relevant information across time.

FALSE Analytical procedures are evaluations that can focus on comparisons to relevant information, which can include comparisons to industry data, prior periods, budgets, etc.There is no requirement that analytical procedures compare information across time.

If the difference between the client's reported number and the auditor's expectation is more than the predetermined acceptable deviation amount, the auditor would conclude that there is evidence that the client's reported balance is fairly stated.

FALSE Any difference between the client's reported number and the auditor's expectation that is less than the predetermined acceptable deviation amount would provide evidence that the client's reported balance is fairly stated. If this difference is more than the predetermined acceptable deviation, the auditor would need to investigate further and determine potential causes for this significant difference.

If the difference between the client's reported number and the auditor's expectation is less than the predetermined acceptable deviation amount, the auditor would conclude that there is not evidence that the client's reported balance is fairly stated.

FALSE Any difference between the client's reported number and the auditor's expectation that is less than the predetermined acceptable deviation amount would provide evidence that the client's reported balance is fairly stated. Unless the auditor has additional information that comes to light suggesting otherwise, there would not be a need to investigate differences that are less than the acceptable deviation amount.

When auditors perform substantive analytical procedures, they are encouraged, but not required, by auditing standards to evaluate the reliability of the data they use.

FALSE Auditing standards require the auditor to evaluate the reliability of the data they use.

Developing an expectation is the first step in the substantive analytical procedures process.

FALSE Auditors should first set an acceptable deviation amount, and can then use this amount, along with the auditor's expectation, to determine whether there is a significant difference between the client's reported number and the auditor's expectation.

When an auditor performs an analytical procedure on the revenue account, it will always be the same quality as long as they follow the steps outlined in this topic.

FALSE Even if the auditor follows the steps outlined in this topic, they need also to consider other factors such as the quality of the data they used in their test. These factors can also impact the reliability of the evidence obtained from analytical procedures.

The acceptable deviation used by the auditor is usually higher than the materiality threshold for the account balance being tested.

FALSE The acceptable deviation is another term for the materiality threshold for an account balance being tested.

When an auditor performs an analytical procedure on the revenue account, it will always be the same quality since it comes from the same source.

FALSE The auditor needs to consider factors such as the quality of the data they used in their test. These factors can also impact the reliability of the evidence obtained from analytical procedures.

If the difference between the auditor's estimate and the reported balance is less than the tolerable difference identified by the auditor, the auditor should always conclude that the account balance is fairly stated.

FALSE The auditor should evaluate the quality of the analytical procedure. Assuming a strong analytical procedure has been used, and other sources of audit evidence provide consistent findings, the auditor would likely conclude that the account balance is fairly stated.

If the difference between the auditor's estimate and the reported balance is greater than the tolerable difference identified by the auditor, the auditor should always conclude that the account balance is NOT fairly stated.

FALSE The auditor should next determine possible explanations as to why the difference is greater than the tolerable difference. Some of these explanations may include the fact that the procedure was a weak procedure. The auditor should obtain corroborating evidence before concluding that the balance is not fairly stated.

While an auditor would have to find evidence to corroborate a management-provided explanation for a significant difference, the auditor would not have to find evidence to corroborate an explanation that the auditor generated by himself or herself.

FALSE The auditor will have to find evidence to support any explanation that the auditor wants to conclude explains a significant difference between the client's reported number and the auditor's expectation when performing a substantive analytical procedure.

If an auditor understands the logic of an explanation provided by management, the auditor is not required to obtain evidence to corroborate management's explanation for a significant difference.

FALSE Whether or not management's explanation appears feasible or logical, if the auditor is going to conclude that management's explanation helps explain a significant difference the auditor is required to corroborate (i.e., verify) this explanation.

According to AICPA (2008) guidance, the most important analytical procedure step for the auditor to complete is to form the expectation for the client's reported balance.

TRUE

Disaggregated data used in a substantive analytical procedure usually provides stronger evidence to the auditor than aggregated data.

TRUE

Before drawing conclusions from the results of the analytical procedure, the auditor should ensure that he or she has adequate evidence to support any explanations for differences between reported balances and the auditor's expectation.

TRUE The auditor should draw a conclusion from the test after they are comfortable with the explanation they have as to why the reported and expected amounts differ.

An auditor would have to find evidence to corroborate an explanation for a significant difference whether that explanation was provided by management or generated by the auditor.

TRUE The auditor will have to find evidence to support any explanation that the auditor wants to conclude explains a significant difference between the client's reported number and the auditor's expectation when performing a substantive analytical procedure.

After developing their own expectation and comparing it to the client's reported amount, the auditor should compare the difference to the tolerable difference.

TRUE The difference should be less than the tolerable difference for the auditor to be able to conclude that the account is fairly stated.

If the auditor observes a significant difference between the client's reported number and the auditor's expectation, one explanation could be that the client is unaware of a material error in the financial statements.

TRUE There are numerous potential explanations for significant differences between the client's reported number and the auditor's expectation. Two primary categories would be true business changes (that the auditor may not have been aware of when formulating an expectation for the client's reported result) and material misstatements (due to error or fraud).

Once the auditor feels that he or she has adequate evidence to determine the cause of the difference between the reported amount and the auditor's estimate, he or she is ready to draw a conclusion regarding the results of the analytical procedure.

TRUE This is the last step in the application of substantive analytical procedures. As such, the auditor should draw a conclusion from the test after they are comfortable with the explanation they have as to why the reported and expected amounts differ.

After developing their own expectation and comparing it to the tolerable difference, the auditor should compare the difference to the client's reported amount.

The auditor first compares their expectation to the client's reported balance. They would then compare the difference to the tolerable difference.