• 6 Marks

AA – Nov 2016 – L2 – Q2e – Audit and Assurance Evidence

List factors to consider when relying on the results of analytical procedures as substantive audit procedures.

ISA 520 Analytical procedures provides guidance to auditors on the use of analytical procedures during the course of the external audit.

Required:
When using analytical procedures as substantive audit procedures, list and briefly explain with examples THREE factors to consider when determining the extent of reliance that can be placed on the results of such procedures. (6 marks

  1. Materiality of Items: Material items like inventory balances should not rely solely on analytical procedures but require additional substantive testing.
  2. Other Audit Procedures: For receivables, subsequent cash receipts may confirm or disprove the results of analytical procedures applied to an aged profile of customers.
  3. Accuracy of Predictions: Greater reliance is placed on areas with consistent relationships (e.g., gross profit and sales) than on discretionary expenses like research or advertising.
  4. Frequency of Observations: A pattern observed monthly is more reliable than one observed annually, e.g., payroll costs.
  5. Assessment of Inherent and Control Risks: If control risks are high, auditors may rely more on tests of transactions than on analytical procedures.
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