Question 1

Analytical procedures are:

Accepted Answer

Analytical procedures are required during the planning phase to understand the entity and its environment and during the overall review stage of the audit to assist in forming an overall conclusion on the financial report. They are not mandated for substantive testing but can be used at the auditor's discretion.

Question 2

In applying analytical procedures, the identification of the relationships and types of data used, as well as conclusions reached when recorded amounts are compared to expectations, requires:

Accepted Answer

In applying analytical procedures, the auditor needs to exercise their judgment to identify the relationships and types of data used in the comparison of recorded amounts to expectations. This requires an understanding of the client's business and industry, as well as the ability to evaluate the reasonableness of expectations. Participation by senior audit team members and a knowledge of complex models or advanced training in plausibility formulation may be useful, but they are not necessary for applying analytical procedures.

Question 3

Which of the following is the most likely first step that an auditor will perform after accepting an initial audit engagement?

Accepted Answer

Touring the client's facilities and reviewing the general records would be the most likely first step for an auditor to perform after accepting an initial audit engagement. This helps the auditor to gain an understanding of the client's business and operations, which is necessary for planning the audit and identifying risks that may impact the financial statements. The other options listed would occur later in the audit process.

Question 4

Which of the following is not a benefit of analytical procedures?

Accepted Answer

Analytical procedures provide substantive evidence for detecting material misstatements in the financial statements. They do not provide adjustments to error levels during tests of control, as that is the purpose of control testing.

Question 5

Which of the following is not an important consideration in an auditor's evaluation of an entity's business risk?

Accepted Answer

Auditing standards require the auditor to evaluate the entity's business risk in order to identify areas of the financial statements that may be more susceptible to material misstatements. The purpose of this evaluation is to design audit procedures that address the identified risks, not to provide suggestions to improve the entity's profitability.

Question 6

The auditor is most likely to rely on analytical procedures alone if a balance is:

Accepted Answer

When a balance is immaterial and internal controls are good, the auditor is likely to rely on analytical procedures alone. This is because good internal controls provide a lower level of inherent risk, making the risk of material misstatement lower overall. Analytical procedures are sufficient in this scenario to provide reasonable assurance that there are no material misstatements in the financial statements.

Question 7

Analytical procedures used in planning an audit should focus on identifying:

Accepted Answer

Analytical procedures used in planning an audit should focus on identifying areas that may represent specific risk relevant to the audit. While understanding the predictability of financial data from individual transactions and identifying material weaknesses in internal control may be important, they are not the primary focus of analytical procedures used in planning an audit. Similarly, while identifying various assertions embodied in the financial report may be important in planning an audit, it is not the primary focus of analytical procedures used in this stage of the audit.

Question 8

Significant unexpected differences identified by analytical procedures will usually necessitate:

Accepted Answer

If significant unexpected differences are identified by analytical procedures, it is the auditor's responsibility to perform further investigation to determine the cause of such differences. This may involve additional audit procedures to gather more evidence and information to corroborate the amounts and disclosures in the financial statements. Therefore, choice C is the best option as it outlines the appropriate action for the auditor in such circumstances.  Options A and D may not be necessary at this stage and Option B is not specific to addressing unexpected differences identified by analytical procedures.

Question 9

Analytical procedures may be classified as being primarily:

Accepted Answer

Analytical procedures are primarily used as substantive tests, which means they are used to obtain evidence about the completeness, accuracy, and validity of the financial statements. They involve the analysis of relationships among financial and non-financial data to identify unusual or unexpected patterns, changes, or discrepancies that may indicate a material misstatement in the financial statements. While they may also be used as part of tests of control or as a preliminary assessment of risk, their primary purpose is to provide substantive evidence.

Question 10

Which of the following is not a typical analytical procedure?

Accepted Answer

Comparison of recorded amounts of major disbursements with appropriate invoices is not a typical analytical procedure. It is a part of a substantive testing procedure. The other options listed are all typical analytical procedures used in financial analysis.

Question 11

Which of the following procedures would not be used to obtain an understanding of the entity and its environment?

Accepted Answer

Verifying the proper evaluation of inventory subject to technological obsolescence is more related to the execution of substantive procedures rather than obtaining an understanding of the entity and its environment. Observing operations, re-performing processes, and reviewing prior audit documentation are all methods to understand the entity's environment and operations.

Question 12

Which of the following is not a threat in a SWOT analysis?

Accepted Answer

Diversifying into related products is not a threat, it would be considered an opportunity in a SWOT analysis. Threats are external factors that could potentially harm the business, such as changing buyer tastes, additional regulatory requirements, or rising sales of substitute products.

Question 13

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests?

Accepted Answer

Relationships involving income statement accounts tend to be more predictable due to the recurring nature of revenue and expense transactions, which makes them useful for analytical procedures in substantive tests.

Question 14

An auditor compares this year's revenues and expenses with those of the previous year and investigates all changes exceeding 10 per cent. By carrying out this procedure the auditor would be most likely to learn that:

Accepted Answer

The auditor is likely to learn about changes in accounting policies, such as a change in the capitalisation policy for small tools, by investigating significant changes in expenses.

Question 15

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:

Accepted Answer

An auditor who does not possess the industry expertise of the business entity should obtain knowledge of matters that relate to the nature of the entity's business. This will enable the auditor to plan and perform the audit effectively and gather sufficient evidence to support the audit opinion. Engaging financial experts familiar with the nature of the business entity or referring a substantial portion of the audit to another auditor may not be necessary in all cases. Informing management that an unmodified auditor's opinion cannot be issued should be done only after conducting a thorough audit and gathering sufficient evidence.

Question 16

An example of an analytical procedure is the comparison of:

Accepted Answer

Analytical procedures involve comparing financial information with similar information regarding the industry in which the entity operates. This type of comparison is useful in identifying unusual or unexpected patterns or relationships that may indicate a material misstatement in the financial statements. Option A involves testing for completeness and accuracy, while Option B involves statistical sampling. Option C involves testing for accuracy and completeness of computer-generated data.

Question 17

One reason why the independent auditor performs analytical procedures of the client's operations is to identify:

Accepted Answer

The independent auditor performs analytical procedures to identify unusual transactions. Analytical procedures involve the analysis of financial information through comparisons and relationships to identify potential unusual or unexpected variances, which can indicate errors or fraud.

Question 18

Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

Accepted Answer

The answer of Auditors sometimes use comparison of ratios as...

Question 19

The auditor generally gives most emphasis to ratio and trend analysis in the examination of:

Accepted Answer

Ratio and trend analysis is most commonly used in examining income, as it helps auditors assess the company's performance over time and identify any unusual fluctuations or trends in revenue and expenses.

Question 20

Analytical procedures that are required in all audits of financial reports are analytical procedures:

Accepted Answer

Analytical procedures are required at the planning stage to understand the entity and its environment and at the overall review stage to assess the conclusions drawn from audit evidence. These procedures are not mandated for specific assertions or solely because they are efficient, effective, or based on available data, but they are a necessary part of the audit process at the beginning and end of an audit.

Quiz 6: Planning, Understanding the Entity and Evaluating Business Risk