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Analytical procedures
Home Level 2 2.3 Audit & Assurance Archive by Category "Analytical procedures"

Category: Analytical procedures

2.3 Audit & AssuranceAnalytical proceduresLevel 2

May 2019 Q4 a.

You are the external auditor of Paa Willy Ltd (PW) for the year ended 31 March 2019. PW operates 12 convenience stores in the Greater Accra region:
• Each store sells food.
• Each store is responsible for its own inventory procurement and produces monthly management accounts which are sent to the centralised accounting department at PW head office.
PW is financed by a GH¢250,000 bank loan which is repayable at a rate of GH¢50,000 per annum over each of the next 5 years starting on 31 October 2019. It also has an overdraft facility of GH¢100,000 which it uses in full. The bank overdraft facility is due for renewal on 1 May 2020.
The bank has already told the company that it will need a cash flow forecast for two years from 1 February 2020 in order for the bank to decide whether or not the overdraft facility will be renewed. The bank has also said it will require a report from the external auditors to confirm the accuracy of the forecast.
Required:
Define the term analytical procedures.                                                                                                                           (2 marks)

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Analytical procedures involve evaluating financial and non-financial information and comparing actual results to expectations. They also involve identifying significant fluctuations and relationships that deviate from expectations. Expectations should be developed based on the auditor’s knowledge of the operations of the entity during the period under review and information obtained through performance of other audit tests.

In relation to the work of an external auditor:
Describe THREE (3) analytical procedures that should be performed to confirm PW’s revenue and profit.                (3 marks)

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Analytical procedures to confirm revenue and profit

  • Review monthly sales per outlet broken down per food products.
  • Compare profit margins for sales across shops.
  • Review sales mark up on cost and compare to revenue.
  • Review average level of shop inventory wastage per outlet.
  • Compare actual levels of sale per shop to budget.
                                                                                                                                                                                    (Any 3 points)

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2.3 Audit & AssuranceAnalytical proceduresLevel 2

Nov 2017 Q3 c.

ISA 520 Analytical procedures provides guidance to auditors on the use of analytical procedures during the course of the external audit.
Required:
When using analytical procedures as substantive audit procedures, list and briefly explain with examples THREE factors to consider when determining the extent of reliance that can be placed on the results of such procedures.                           (5 marks)

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Factors to consider when assessing the reliance that can be placed on the results of analytical procedures.

  • Materiality of the items involved
    If inventory balances are material, then auditors should not rely solely on analytical procedures.
  • Other audit procedures
    In the audit of receivables, other audit procedures such as the review of subsequent cash receipts may confirm or dispel questions arising from the application of analytical procedures to an aged profile of customers’ accounts.
  • Accuracy of predictions
    Auditors would expect greater consistency in comparing the relationship between gross profit and sales from one period to the next than in comparing discretionary expenses such as research costs or advertising expenditure.
  • Frequency with which relationship is observed
    A pattern repeated monthly as opposed to annually (for example, payroll costs).
  • Assessments of inherent and control risks
    If internal controls over sales order processing are weak, and control risk is assessed as high, the auditors may rely more on test of individual transactions or balances than on analytical procedures.

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