- 15 Marks
Question
One essential feature of analytical procedures in auditing is ‘comparison’. The auditor will calculate key relationships between figures (non-financial figures as well as financial figures) and then make comparisons.
You are required to:
- (a) Identify FOUR areas of comparison when using analytical procedures and explain their purpose. You could tabulate your answers. (8 Marks)
- (b) List FOUR precautionary steps the Auditor is required to take before using analytical procedures in substantive testing. (4 Marks)
- (c) Describe THREE limitations of ratio analysis in its use in substantive testing. (3 Marks)
Answer
(a) Areas of Comparison in Analytical Procedures
| Area of Comparison | Purpose |
|---|---|
| Prior Accounting Periods | Establishes patterns and trends, highlights unusual fluctuations compared to previous years. |
| Expected Results | Compares actual results with budget or forecast, revealing deviations from planned figures. |
| Industry Average Results | Provides benchmark comparisons with peers or industry norms for performance evaluation. |
| Comparable Parts of the Same Entity | Allows comparison of divisions or branches, identifying discrepancies within the entity. |
(b) Precautionary Steps Before Using Analytical Procedures
- Determine the suitability of specific analytical procedures for detecting material misstatements.
- Develop a precise expectation for recorded amounts or ratios to aid in identifying discrepancies.
- Verify the reliability of the underlying data used for creating expectations.
- Establish a threshold for acceptable differences from expected amounts before triggering further investigation.
(c) Limitations of Ratio Analysis in Substantive Testing
- Requires thorough understanding of the client’s business to interpret ratios accurately.
- Dependent on the quality of underlying financial data; poor data quality undermines analysis reliability.
- Comparability issues arise if ratios are not calculated consistently across periods or entities.
- Tags: Analytical procedures, Audit Limitations, Comparison, Ratios, Substantive Testing
- Level: Level 2
- Topic: Audit-related services
- Series: MAY 2017
- Uploader: Theophilus