Analytical Procedures (AP's)

Describe Analytical Procedures

The comparison of figures, trends and ratios by auditors in order to support the audit opinion. 

Comparisons should be made with:

- Comparable information from prior periods

- Anticipated results such as forecasts and budgets

- Predictions made by auditors

- Similar company & industry averages

Relevant non-financial data may also be used to make comparisons, such as the relationship between sales and square footage of selling space.

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What ISA provides guidance on AP's?

ISA 520

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Which 3 phases are AP's applicable?

1. Risk assessment (planning) stage

2. The detailed testing phase

3. When forming an overall conclusion

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What must auditors consider when using AP's as sub

Availability, relevance and comparibility of information available.

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At what stages is the use of AP's mandatory?

Planning phase & finalisation stages.

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Describe how and why an auditor would use AP's dur

ISA 315 provides guidance on using AP's during the planning stage of the audit. 

The choice of procedures is a matter of professional judgement by the auditor however this may include using ratios and trends and identifying unusal transactions or events which may highlight potential audit implications. 

This also assists the auditor in identifying risks of material misstatement. 

Additionally aids to ensure appropriate resources are directed to the areas of highest risk during the audit.

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Describe how and why an auditor would use AP's dur

Helps to collect sufficient audit evidence on specific areas of an entity's financial statements.

Commonly used ratios include:

- Inventory turnover

- Debtor days (Recivevables collection period)

- Creditor days (Payables payment period)

Generally an auditor would perform tests of detatil of transactions, account balances, disclsoures and/or substansive procedures or a combination of both.

Based upon the auditors judgement about risk.

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Name some financial statements assertions

- Accuracy, valuation & allocation

- Completeness

- Classification

- Cut-off

- Existence

- Rights and obligations

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Describe how and why an auditor would use AP's whe

ISA 520 requires an auditor to design and perform AP's that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditors understanding of the entity.

At this stage, AP's help confirm consistency of the detailed work with the overall view of the financial statements.

May help identify any previously unrecognised risks of material misstatements. 

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Stock (Inventory) turnover formula

Cost of sales

Closing stock

(Times per year)

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Debtor (days) turnover

Trade debtors

Sales                               

(x365)

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Creditor (days) turnover

Trade creditors

Cost of goods sold

(x365)

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