Analytical Procedures in Auditing

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Questions and Answers

What should be considered when revising materiality in an audit?

The budgeted results must be kept constant.

Only the auditor's preferences should be considered.

Only the actual results matter.

Impact on planned procedures must be evaluated. (correct)

What does performance materiality typically represent?

50% of materiality for increased caution.

75% of materiality to account for uncorrected misstatements. (correct)

No specific percentage, as it varies by audit.

100% of the total materiality threshold.

Which type of audit opinion is referred to as an 'unqualified' opinion?

A qualified opinion with reservations.

A clean opinion without any material misstatements. (correct)

A compilation with no auditing efforts made.

A negative assurance stating no issues.

In the context of a going concern, what should an auditor do if material uncertainties are disclosed?

Issue an unmodified audit opinion with additional disclosures. Signup and view all the answers

Which section is essential in an unmodified independent auditor's report?

Opinion Paragraph. Signup and view all the answers

When auditors discover substantial differences between budgeted results and actual results, what is the recommended action?

Assess whether materiality thresholds have been met. Signup and view all the answers

Which phrase denotes middle assurance in an audit report?

Nothing has come to our attention... Signup and view all the answers

When evaluating non-recurring transactions, what should an auditor do to assess normalized income?

Add back non-recurring gains and costs to financial results. Signup and view all the answers

What is one situation that may necessitate an Emphasis of Matter paragraph?

Significant uncertainty regarding the outcome of litigation. Signup and view all the answers

What distinguishes an Other Matter paragraph from an Emphasis of Matter paragraph?

Other Matter deals with information not present in the financial statements, while Emphasis emphasizes already disclosed matters. Signup and view all the answers

Which of the following circumstances might lead an auditor to issue a qualified opinion?

Significant transactions with related parties are inadequately disclosed. Signup and view all the answers

What type of misstatement is NOT commonly addressed in Emphasis of Matter paragraphs?

Errors in the calculation of financial figures. Signup and view all the answers

Which of the following scenarios would not typically require an Other Matter paragraph?

Exceptional litigation outcomes are disclosed in the FS. Signup and view all the answers

In what situation might an auditor emphasize the application of a new accounting standard?

When it has a pervasive effect on the financial statements. Signup and view all the answers

What is a key characteristic of a reservation in the audit report?

It suggests that there is a departure from GAAP. Signup and view all the answers

Which of the following would NOT typically be included in an audit report's Emphasis of Matter paragraph?

The completion of an audit without any findings. Signup and view all the answers

What does a qualified report indicate about financial statements?

There are some material but not pervasive misstatements. Signup and view all the answers

What is the title of the opinion paragraph in an adverse report?

Adverse Opinion Signup and view all the answers

Which of the following is a cause of financial misstatements according to CAS 705.A3?

Expensing capital assets inappropriately Signup and view all the answers

What does the term 'scope limitation' refer to in auditing?

Inability to obtain sufficient and appropriate evidence Signup and view all the answers

What is indicated by an adverse opinion in an auditor's report?

Material and pervasive misstatements affect the overall financial statements. Signup and view all the answers

Which of the following best describes a disclaimer in auditing?

A statement of uncertainty about the fairness of financial statements. Signup and view all the answers

Which of the following represents a material misstatement in financial statements?

Failure in disclosing essential information. Signup and view all the answers

Which opinion statement is used to communicate that a company's financial statements have been materially misstated?

Adverse Opinion Signup and view all the answers

Study Notes

Analytical Procedures as Substantive Evidence

Analytical procedures in planning/review stages cannot be used as substantive evidence
If properly designed, analytical procedures can test assertions for income statement items
Develop expectations for account balances using plausible relationships
Material differences between actual and estimated balances must be investigated

Quality of Analytical Procedures Evidence

Evidence quality depends on data reliability and estimate precision
Data reliability improves with strong internal controls
Precise estimates depend on detailed data disaggregation and considering variations in components

Materiality at Account Level

Representative sample errors at account level are extrapolated to the population to determine likely misstatements.
Example: If $20,000 errors are found in a $250,000 sample of a $1 million account, the likely misstatement is $80,000.
Aggregate all account-level errors and compare to account-level materiality.
Account sampling is used to represent a population, but could lead to over or underrepresentation.

Materiality at Financial Statement Level

Account level errors are aggregated to the financial statement level
This is used to determine the impact on key items like net income and net assets
Compare the aggregate errors to financial statement materiality
Materiality is calculated based on the effect on a financial statement user's decision.

Materiality Evaluation

If aggregate misstatements exceed materiality:
- Management should recheck high-risk areas and correct any errors
- Perform more audit procedures
- Management should correct any remaining misstatements
If misstatements remain material, the audit report needs qualification

Types of Misstatements

Factual/Known: Obvious misstatements
Judgmental: Misstatements resulting from unreasonable management estimates or inappropriate GAAP application
Projected: Misstatements projected from a sample to a larger population

Communication of Misstatements

Uncorrected misstatements should be communicated to management and their audit committee
Small misstatements may not need to be communicated to the board
Larger misstatements should be communicated to the board

Revisions to Materiality

Materiality is not always revised but should be reviewed if new information arises to cause a different initial determination.
If revisions are made, consider the implications for planned procedures

Case Writing Tips: Materiality

Determine performance materiality (e.g., 75% of materiality) as a buffer for uncorrected/undetected misstatements
Add back non-recurring transactions to normalize income

Levels of Assurance

High assurance (Audit): Positive assurance ("In our opinion...")
Middle assurance (Review): Negative assurance ("Nothing has come to our attention")
No assurance (Compilation): No attempt to verify accuracy or completeness

Unqualified Independent Auditor's Report

The most common audit report type
Many companies require an unqualified opinion

Key Audit Matters (KAMs)

Relevant to listed entities, required in some cases
Key matters communicated with the audit committee
Maters that require significant auditor attention
Identify areas of high risk

Departures from GAAP

Financial statements need to follow GAAP. Departures may result in a Qualified, Adverse, or Disclaimer of opinion
Materiality: If material but not pervasive, a qualified opinion results
If material and pervasive, an adverse opinion is expressed

Scope Limitations

Scope limitations involve an inability to obtain sufficient evidence which can lead to a qualified opinion or disclaimer of opinion
Conditions beyond the client's control or management imposed limitations can cause scope limitations.

Reliance on Another Auditor or Specialist

Group auditors are responsible for the group audit opinion.
Auditors must evaluate the work of specialists to ensure it is reasonable.

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Description

This quiz covers analytical procedures used as substantive evidence in auditing, discussing how they can test income statement assertions and the factors that affect the quality of evidence. It also addresses materiality at the account level and methods to estimate likely misstatements based on sample errors.