1) Analytical procedures can assist the auditor in planning by (1) enhancing the auditor's understanding of the client's business, and (2) identifying areas of greater risk of misstatement.
The effective use of analytical procedures in the planning phase involves the systematic completion of the following steps:
1. Identify the calculations/comparisons to be made.
2. Develop an expectation range.
3. Perform the calculations.
4. Analyze data and identify significant differences.
5. Investigate significant unexpected differences.
6. Determine effects on audit planning.
2) Calculations and comparisons commonly used in analytical procedures include (1) absolute date comparisons, (2) common-size financial statements, (3) ratio analysis, and (4) trend analysis.
The basic premise underlying the use of analytical procedures in auditing is that relationships among data may be expected to continue in the absence of known conditions to the contrary.
Several sources of information that may be used by the auditor in developing expectations include:
1. Client financial information for comparable prior period(s) giving consideration to known changes.
2. Anticipated results based on formal budgets or forecasts.
3. Relationships among elements of financial information within the period.
4. Industry data.
5. Relationships of financial information with relevant non-financial information.
1) The key words are the "effective use of analytical procedures." One of the main issues is that each of the six steps listed needs to be performed very competently by the auditor, so an extensive understanding of audit procedure is crucial to actually performing the audit. If the auditor fails in his or her judgment in any one of the six areas or performs the calculations incorrectly, it can skew the entire audit. This is the main reason why many new auditors aren't permitted to ever work alone on an audit, even if it is for a small client. There always has to be a senior auditor, with more experience ...
This solution provides detailed comments based on the auditing information presented by the student. Full explanations regarding the information are given.