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ACTG 410
Analytical Procedures
21
Accounting
Undergraduate 4
02/12/2013

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Term
define ANALYTICAL PROCEDURES
Definition
"study of plausible relationships among financial and nonfinancial data...involving comparisons of recorded amounts to expectations developed by the auditor"
Term
Auditor may develop expectations from...
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.
Term
Who should apply analytical procedures and what do they require?
Definition
experienced staff; require judgement (someone needs to review our judgements relating to AP's)
Term
what are the 3 types of analytical procedures? (by stage)
Definition
1)Planning audit procedures
2)Substantive testing
3)Review (similar to #1)
Term
define ATTENTION-DIRECTING PROCEDURES
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)
Term
What does the law say about the 3 analytical procedures? (per standards)
Definition
Planing Audit Procedures-required
Substantive testing-prof. judgement
Review-required
Term
per practice concerning the 3 AP's (what the firms do)
Definition
Planning audit procedures-used heavily
Substantive testing-used heavily
Review-used heavily
Term
existence or occurrence, valuation, and completion (in regards to balances)
Definition
-If balance is above our prediction: (over) valuation and existence or occurrence
-If bal. is below predic., (under) valuation or completeness
Term
Effectiveness of substantive AP tests depends on...
Definition
-Nature of Assertion
-Plausibility & predictability
-Reliability of data used to predict
-Precision of expectation
Term
Substantive AP tests(b/c Plausibility and predictability) are good for _____ and _____.
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
Term
Substantive AP tests are NOT good for _____.(b/c of Plausibility and predictability)
Definition
mgmt. discretion items (mgmt. is unpredictable)
Term
the more _____ of _____, the harder it is for AP tests to hit
Definition
precision; expectation
Term
List the steps in the AP process
Definition
1)Develop expectations (form hypothesis)
2)Compare expectations w/recorded balance to identify potential misstatements
3)Investigate differences b/t expectations & results.
Term
what are possible explanations for differences b/t expectations & results during the AP process?
Definition
acct. principle changes, acct. errors, business conditions, and unusual events--managements explanations could be misleading and usually should be corroborated.
Term
AP can assess _____ issues.
Definition
going concern
Term
what are three types of AP's (specific)
Definition
1)Trend analysis
2)Ratio analysis
3)Reasonableness tests
Term
trend analysis (what?)
Definition
1)change in balance over time-could be used for planning and substantive AP
2)Regression
Term
Ratio analysis (what?)
Definition
1)within the firm (more for planning & analysis)
2)Compared to the industry
Term
when comparing to industry averages, what should you be careful of during ratio analysis?
Definition
1)Cost-based accounting hinders comparisons b/t firms w/different ages
2)Accounting differences b/t firms (e.g., LIFO vs. FIFO)
Term
Reasonableness tests (define)
Definition
-are numbers reasonable?
1)Non-financial data (can be for planning, substantive, & review)
2)Primarily I/S accounts
Term
Going concern issue: what can help address this?
Definition
Altman-2-Scope--> measures risk of bankruptcy
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