Analytical Procedures

Analytical Procedures

Analytical Procedures in Audit

In audit Analytical Procedures that seek to provide evidence as to the completeness, accuracy, and validity of the information contained in the accounting records or in the financial statements.

Analytical Procedures consists of the systematic study and comparison of relationships among elements of financial information and the investigation of significant fluctuations and variances from the expected relationship

Examples of Analytical Procedures
Examples of Analytical Procedures

Steps involved in analytical procedures

  1. Expectation: This step involves developing an expectation of what the financial information figures should be. This can be agreed through comparisons of financial information or considerations of relationships (ratio analysis).
  2. Identification: This step involves the identification of significant variations between the actual data with the expected data.
  3. Investigation of unusual variances: Once the variation has been computed, and if significant variations are found, the auditor would consult the management in order to establish explanations for the variations revealed.
  4. Performance of alternate procedures: If the auditor or the management does not find the variation reasonable, then they investigate further and perform analytical procedures to satisfy themselves.

When performing an analytical procedure, the auditor compares numbers, ratios or even non-financial information in order to identify unexpected trends or unexpected relationships, which may indicate the existence of errors.

There are many different analytical procedures including the comparisons listed below

  1. Year on year (e.g. revenue this year compared to revenue last year);
  2. To budget or forecast (e.g. actual purchases compared to budgeted purchases);
  3. To predictions made by the auditors-proof in total (e.g. auditors calculation of depreciation compared to the client’s calculation);
  4. Through industry information (e.g. client’s revenue compared to competitor’s revenue).
  5. Comparison/analysis of relationships between different elements of the financial statements ( for example gross profit compared to sales)
  6. Comparison of financial info with non-financial info ( for e.g. payroll expense matched to the number of employees)
  7. Non-financial information. For Example, sales revenue for a client from the hotel industry may be available data as to room occupancy rates basis.
Analytical procedures at various stages of audit
Analytical procedures at various stages of audit
Analytical Procedures at the
Planning stage
To assist the auditor in the planning stage the
nature, timing, and extent of other
audit procedures. Use at this stage
should add to the firm’s
understanding of the business and
identify the risky areas to which audit
resources should
be targeted.
Analytical Procedures at 
substantive testing stage
at the detailed testing stage –
in most instances analytical
procedures should be used in
conjunction with tests of detail
to achieve a particular audit
the objective in relation to specific
financial statement assertions..
Analytical Procedures at 
the Review stage
At the final review stage the
the auditor must design and perform
analytical procedures that assist
him when forming an overall
conclusion as to whether the
financial statements are consistent with the auditor’s understanding
of the entity and that all of the
audit
objectives with regard to the
financial statements have been
met.

Using Ratios

In the Paper Audit and Assurance exam, you may be asked to compute and interpret the key ratios used in analytical procedures at both the audit planning stage and when collecting audit evidence. Ratios and comparisons can be used to identify where the accounts can be wrong, and where additional auditing effort needs to be spent.

Ratio’s

Ratio Analysis Plays a key Roll to determine the business circumstance, here are few Ratios are given below.

In the examination, you will be asked to calculate and interpret the ratios used in analytical procedures at the audit planning stage and when collecting audit evidence. Ratios and comparisons can be used to identify where the accounts might be wrong or right, and where additional auditing effort should be a need to spent. 

Calculating a ratio is an easy step, divide a number by another number, the calculations are so basic that they can be calculated using a spreadsheet.

The real skill is the interpretation of results and using that information to conduct out a better audit. Saying that a ratio has increased because the top line in the calculation has increased or the bottom line decreased is rather had no point, this is simply translating the calculation into words. the interpretation is another thing. 

Gross Profit Margin: Gross profit/Sales Revenue x 100

Operating profit margin =Operating profit/Sales Revenue x 100

Return on capital employed (ROI) = Operating profit/ Capital employed x 100

Current Ratio= Current Assets/Current Liabilities

Quick ( or asset test) ratios =Current assets minus inventory/ current liabilities

Inventory holding period or Inventory days =Inventory/Cost of sales x 365

Receivable days/ Receivables collection period =Trade receivables/Sales x 365

Trade payable Days/Payables payment period =Trade payables/Cost of sales x 365

Interest cover = profit before interest/ interest

Gearing = Long-term loan finance/ equity finance x 100  The gearing ratio can also be defined 
in other words, particularly by comparing long-term loan finance to total finance.

As the gearing ratio increases so risk that the interest can’t be paid. But it is difficult to define a
‘safe’ level of gearing. an example is , a property company with properties leased to tenants will have a fairly rental income for one year. 

Such a company can probably safely sustain substantial borrowings (though it could be in trouble if interest rates increased significantly). 

A company with volatile streams of income would have to keep its gearing lower as it must ensure that they have the ability to pay interest during the lean times. 

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AUDIT RISK and Auditor Response

AUDIT RISK and Auditor Response ACCA

AUDIT RISK and Auditor Response

Importance of AUDIT RISK and Auditor Response assessment

AUDIT RISK and Auditor Response
AUDIT RISK and Auditor Response

1. Assessing engagement risks at the planning stage, this will ensure that attention is focused early on the areas most likely to cause material misstatements.

2. It will help the auditor to fully understand the entity, which is vital for an effective audit.

3. Any unusual transactions or balances would also be identified early so that these could be addressed in a timely manner.

4. Assessing risks early is an efficient practice by auditors. The auditors will only focus their time and effort on key areas as opposed to transactions or balances that might be immaterial or unlikely to contain errors.

5. As well as assessing risk early should ensure that the most appropriate or most experienced team is selected and staff allocated to higher risk audits and high-risk balances.

6. A thorough risk summary should sequentially reduce the risk of an inappropriate audit opinion being presented.

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Audit planning

Audit planning Importance of audit planning

Audit planning ( Audit Strategy and Audit Plan)

Importance of audit planning

  1. It helps the auditor to devote applicable attention to big areas of the audit.
  2. It helps the auditor to spot and resolve potential issues on a timely basis.
  3. This helps the auditor to properly organize and manage the audit engagement so it’s performed in a {efficient|a good} and efficient manner.
  4. It assists within the choice of engagement team members with applicable levels of capabilities and ability to reply to anticipated risks and also the correct assignment of labor to them.
  5. It facilitates the direction and management of engagement team members and also the review of their work.
  6. This assists, where applicable, in the coordination of work done by experts
Audit Planning
Audit Planning

Audit Strategy: Associate in Nursing audit strategy sets the scope, timing, and direction of the audit and guides the development of the more detailed audit plan.

Audit plan: Once the overall strategy has been planned, detailed consideration can be given to each individual audit objective and how it can be best met.

Audit strategy and audit plan
Audit strategy and audit plan

A. UNDERSTANDING THE CLIENT

KNOWLEDGE OF THE BUSINESS / UNDERSTANDING THE CLIENT

Understanding the client
Understanding the client

The auditor obtains Associate in the Nursing understanding of the entity, its control environment, and its detailed internal controls:

  1. To identify and assess the risks of material misstatements in the financial statements and to provide a basis for designing and implementing responses to these risks
  2. To determine the extent to which the auditor would rely on the internal control system.
  3. For assess whether the team is competent to perform the audit
  4. To understand relevant law and regulations impacting the entity
  5. To consider the reliability of various evidence sources.

Understanding to be gained about– Industry, regulatory and other external factors
( for example financial reporting framework, laws and regulations, stakeholders, economic conditions like the volatility of exchange rates, competition, level of technology.

type of entity and accounting policies ( legal structure, ownership, and governance, main sources of finance).

Objectivesstrategies…related business risks!– Measurement and review of Financial performance ( measures important to the client, KPIs, budgets, targets).

Internal control (gain an understanding of the design and implementation of internal controls)

other issues that arose in the prior year audit and how these were resolved.
Also whether any points brought forward were noted for consideration for this year’s audit.
Internal control deficiencies noted in the prior year;
if these have not been rectified by management then they could arise in the current year audit as well as significant changes in the entity as compared to prior years. Is the company using e-commerce?

Understanding can be gained from prior year financial statements:

  • It provides information in relation to the size of the client as well as the key accounting policies, disclosure notes and whether the audit opinion was modified or not.
  • Discussions with the previous auditors/access to their files: Provides data on key problems known throughout the previous year audit further because the audit approach adopted.
  • Previous year report back to management: If this may be obtained from the previous auditors or from management, it can provide information on the internal control deficiencies noted last year. If these haven’t been corrected by management, then they could arise in the current year audit as well and may impact the audit approach.
  • The client ‘s accounting systems notes/procedural manuals: Provides information on how each of the key accounting systems operates and this will be used to identify areas of potential control risk and help determine the audit approach.
  • Discussions with management: Provides information in relation to the business, any important issues which have arisen or changes to accounting policies from the prior year.
  • Review of board minutes: Provides an outline of key problems that have arisen throughout the year and the way those charged with governance have self-addressed them.
  • Current year budgets and management accounts: Provides relevant financial information for the year to date. It will facilitate the auditor throughout the look stage for preliminary limited review and risk identification.
  • The client’s website: Recent press releases from the company may provide background on the business during the year as this will help in identifying the key audit risks.

Important: Risks in companies using E-commerce

  • Loss of transaction integrity
  • Security risk e.g. virus attacks
  • Adoption of improper accounting policies e.g.improper revenue recognition
  • Non- compliance with tax and legal requirements
  • Failure to ensure that e-commerce contracts are binding in a court of law
  • Over-reliance on e-commerce
  • Systems and infrastructure crashes

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Engagement Letter Precondition of Audit

audit planning

Preconditions for an audit

ISA 210 Agreeing with the Terms of Audit Engagements provides steerage to auditors on the steps they must absorb acceptive a brand new audit or continued on AN existing audit engagement. It sets out a variety of processes that the auditor ought to perform together with agreeing whether or not the preconditions square measure gift, agreement of audit terms in AN engagement letter, continual audits and changes in engagement terms.

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How to Pass ACCA AA

How to pass ACCA AA

Audit and Assurance Exam Tips

  • In September 2017 ACCA introduced Computer-based Exams for skill level papers.
  • According to The New Pattern ACCA F8 AA Exam Formate as following.
  • Section A: 3 case studies, each case study have 5 questions of 2 marks each.
  • Section B: 3 long questions, Each Question have 30 marks and two questions of 20 marks each.

How to pass ACCA AA

ACCA Testing Some topics frequently in past exam’s

  1. Ethics
  2. Audit risks and responses
  3. Purchases, revenue, Payroll
  4. Auditor’s reports
  5. Limited assurance engagements
  6. Auditor rights and duties
  7. Engagement letters
  8. Fraud and error
  9. Inherent limitations of internal control
  10. Risk
  11. Financial statement assertions
  12. inventory, purchases, Cash

  • How to pass ACCA AA exam you must be familiar with IAS and IFRS deeply,
  • However near 40% of AA exam depends on IAS and IFRS,
  • you need to support your statements with evidence to complete sentences.
  • in AA many area’s Examiner tests straightforwardly,
  • so straightforward knowledge must be rote-learning to gain easy marks.
  • Practice: Practice plays a key roll in pass ACCA exams, so practice as much as you can it’s very important

Some important terms you need to be comfortable with

  • Classes of transactions for the period under review: (Means area in the statement of Profit and loss)
  • Account balance at the period end (Means area in Statement of Financial Position)
  • F/s Disclosure (Notes to the Accounts)
  • Public company vs Public sector Org
    • Pubic Company means a listed company
    • And Public sector Org means  Government controlled Org which is not for profit Org

Some Common Reason for Unsuccessful F8 AA attempt

  1. Insufficient number of relevant points to obtain a pass stander
  2. Not explaining comments made in the answer in sufficient detail
  3. lack of understanding of audit procedures and the audit method
  4. Not applying knowledge to the scenario in question
  5. Not answering all the questions (Time Management issue?)
  6. Insufficient number of relevant points to obtain a pass stander

How to pass ACCA AA

  • Understanding of concepts of Audit and Finance reporting (FR, like IASs & IFRS) is essential to pass Audit assurance
  • Do practice the questions again which you did in the classes regularly at least once in a week, Keep revising your concepts, If you keep revising your concepts you will forget your concepts.
  • Do practice other questions from Exam kits and Past papers as well
  • Make your habit to read the requirement first so that you will know your direction then read the scenario, Contact your knowledge to the scenario.
  • Remember, If you write the knowledge only and not connect to the scenario, you will gain only 0.5 marks which won’t help you to pass.

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