Term
| define ANALYTICAL PROCEDURES |
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Definition
| "study of plausible relationships among financial and nonfinancial data...involving comparisons of recorded amounts to expectations developed by the auditor" |
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Term
| Auditor may develop expectations from... |
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Definition
-Prior period info. (modified for new conditions)
-Anticipated results (ex. budgeted, forecasted, and projected fin. info.)
-Relationships b/t financial info. (ex. sales goes up, COGS goes up)
-Industry characteristics (in relation to client-industry averages)
-Relationships b/t non-financial(e.g., # employees, vol. goods produced) & financial information. |
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Term
| Who should apply analytical procedures and what do they require? |
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Definition
| experienced staff; require judgement (someone needs to review our judgements relating to AP's) |
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Term
| what are the 3 types of analytical procedures? (by stage) |
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Definition
1)Planning audit procedures
2)Substantive testing
3)Review (similar to #1) |
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Term
| define ATTENTION-DIRECTING PROCEDURES |
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Definition
| AP procedures performed during the planning stage; often represent "circumstantial evidence" and help auditor to understand the client & assist in planning the nature, timing, and extent of other audit procedures (like a smoke detector- warns for further investigation, not a fire alarm) |
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Term
| What does the law say about the 3 analytical procedures? (per standards) |
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Definition
Planing Audit Procedures-required
Substantive testing-prof. judgement
Review-required |
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Term
| per practice concerning the 3 AP's (what the firms do) |
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Definition
Planning audit procedures-used heavily
Substantive testing-used heavily
Review-used heavily |
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Term
| existence or occurrence, valuation, and completion (in regards to balances) |
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Definition
-If balance is above our prediction: (over) valuation and existence or occurrence
-If bal. is below predic., (under) valuation or completeness |
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Term
| Effectiveness of substantive AP tests depends on... |
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Definition
-Nature of Assertion
-Plausibility & predictability
-Reliability of data used to predict
-Precision of expectation |
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Term
| Substantive AP tests(b/c Plausibility and predictability) are good for _____ and _____. |
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Definition
-I/S items b/c it is a period of time rather than a snapshot (like a B/S-these change constantly and rapidly)
-Stable environment |
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Term
| Substantive AP tests are NOT good for _____.(b/c of Plausibility and predictability) |
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Definition
| mgmt. discretion items (mgmt. is unpredictable) |
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Term
| the more _____ of _____, the harder it is for AP tests to hit |
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Definition
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Term
| List the steps in the AP process |
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Definition
1)Develop expectations (form hypothesis)
2)Compare expectations w/recorded balance to identify potential misstatements
3)Investigate differences b/t expectations & results. |
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Term
| what are possible explanations for differences b/t expectations & results during the AP process? |
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Definition
| acct. principle changes, acct. errors, business conditions, and unusual events--managements explanations could be misleading and usually should be corroborated. |
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Term
| AP can assess _____ issues. |
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Definition
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Term
| what are three types of AP's (specific) |
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Definition
1)Trend analysis
2)Ratio analysis
3)Reasonableness tests |
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Term
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Definition
1)change in balance over time-could be used for planning and substantive AP
2)Regression |
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Term
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Definition
1)within the firm (more for planning & analysis)
2)Compared to the industry |
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Term
| when comparing to industry averages, what should you be careful of during ratio analysis? |
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Definition
1)Cost-based accounting hinders comparisons b/t firms w/different ages
2)Accounting differences b/t firms (e.g., LIFO vs. FIFO) |
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Term
| Reasonableness tests (define) |
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Definition
-are numbers reasonable?
1)Non-financial data (can be for planning, substantive, & review)
2)Primarily I/S accounts |
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Term
| Going concern issue: what can help address this? |
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Definition
| Altman-2-Scope--> measures risk of bankruptcy |
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