Risk Assessment Part 1 M7

Question 1

What is Analytical Procedures?

Answer 1

• Comparison of recorded amounts to independent expectations developed by the auditor.
• The auditor considers relevant nonfinancial information, which generally is related to financial data in some way.
• Are evaluations of financial information made by a study of plausible relationships among data, and they include comparisons between current year and prior year financial information.
• Always required in an audit, during the planning and overall review stages.

Question 2

What should analytical procedures NOT be used for?

Answer 2

• Analytical procedures used in planning are not designed to identify material misstatements or to reduce tests of controls or substantive test
• Analytical procedures cannot replace tests of controls to assess control risk.

Question 3

What type of analytical procedures are used during the planning phase?

Answer 3

• The square footage of selling space and the level of sales.
• The comparison of current year to prior year sales volumes.
• Comparison of the financial statements with budgeted or anticipated results.
• In identifying the risks of material misstatement due to fraud.
• Financial data, such as unaudited information from internal quarterly reports.
• Financial and nonfinancial data aggregated at a high level.
• Procedures that focuses on enhancing the auditor’s understanding of the OVERALL performance that have occurred since the last audit. like sales..
• Procedures that focuses on enhancing the auditor’s understanding of the transactions and events that have occurred since the last audit.
• Understanding clients business.

Question 4

What is the primary objectives of a Auditor obtaining an understanding of the clients entity?

Answer 4

• To assess the risk of material misstatement and to design and perform further audit procedures.
• To better understand events, transactions, and practices that may affect the financial statements, to plan and perform appropriate audit tests, and to properly understand and evaluate the results of those tests.
• To discover unusual transactions or events that may have an impact on the planning of the financial statement audit.

Question 5

What type of analytical procedures are used during the field-work phase?

Answer 5

• Inquiries are typically made of the client’s attorney
• Testing individual account balances that depend on accounting
  estimates would be a substantive application of analytical procedures.

Question 6

What type of analytical procedures are used during the final review phase?

Answer 6

• To assess the adequacy of evidence.

Question 7

What are the testing procedures in a audit?

Answer 7

• Analytical procedures are evaluations of financial information made by a study of plausible relationships among data, and they include comparisons between current year and prior year financial information.
• Tests of transactions involve selecting specific transactions and evaluating whether they were properly recorded.
• Tests of controls are performed to evaluate the effectiveness of controls.
• Tests of details are audit procedures used to gather evidence to support specific account balances.

Question 8

What procedures do an Auditor perform when understanding a clients business?

Answer 8

• Reading public information about the company.
• SEC information about the company.
• Information from public meetings with investors and ratings agencies.

Question 9

What are the risk assessment procedures performed in planning phase?

Answer 9

• The auditor must assess the risk of material misstatement, which includes both inherent risk and control risk, in order to determine the appropriate level of detection risk.
• The level of detection risk is then used to determine the nature, timing, and extent of substantive tests.

Question 10

What are some recommended risk assessment procedures when auditing a issuer?

Answer 10

• Understanding of the client’s internal control over financial reporting.
• Make inquiries to client management, the audit committee, and to others within the company regarding any potential risks of material misstatement.
• Perform analytical procedures especially related to client’s revenue.