SECTION 3: 2D - Analytical Review Technique Flashcards
These are used to compare information against expectations, based on an independent source and the premise that certain relationships between information can be reasonably expected in the absence of conditions to the contrary.
a. Engagement procedures
b. Analytical procedures
c. Audit procedures
d. Benchmark procedures
b. Analytical procedures
The following are examples of analytical procedures, except:
i. ratio, trend, and regression analysis
ii. reasonableness tests
iii. period-to-period comparisons
iv. forecasts
v. benchmarking information against similar industries or organizational units
a. i, ii, iv, v
b. v only
c. i, ii, iii, iv, v
d. iv, v
c. i, ii, iii, iv, v
When there is a significant deviation from the expectation and the results, what should an internal auditor do?
They may conduct further investigation in order to determine the cause and/or the reasonableness of the variance.
This may indicate a need for additional follow-up and may suggest the presence of a significant problem that should be communicated to senior management and the board.
Unexplainable results
This examines the relationship between 2 pieces of information to determine the extent to which that relationship is reasonable.
a. Engagement procedures
b. Analytical procedures
c. Audit procedures
d. Benchmark procedures
b. Analytical procedures
The pieces of information must be somehow related or potentially related, what are these information used for analytical procedures?
i. Financial
ii. Nonfinancial
a. i only
b. ii only
c. i and ii
d. none
c. i and ii
The effectiveness of analytical procedures depends on, what?
- Quality of the initial assertion about the relationship
- Predictability of the relationship between the 2 items
- Certainty of that relationship
TAKE NOTE OF THIS 1:
Analytical procedures are based on expected relationships.
Take note of this: The following are some sources in order to determine the expected relationships:
1. Financial information from comparable prior periods
2. Anticipated results, forecasts, and actual results
3. Relationship between elements of financial data
4. Information about the industry in which the client operates
5. Relationships between financial and nonfinacial data.
After the expected relationship has been projected, what is the next steps that an auditor will do?
- Determine an acceptable level of difference between the expected relationship and the actual relationship
- Calculate or determine the actual relationship
When the actual relationship and the expected relationship matches, then the number being audited is correct - however if it is different than expected or exceeded the acceptable level of difference, what shall the auditor do?
The auditor needs to do more testing
NOTE:
A discrepancy does not automatically means that there is an error, but could indicate that the auditor needs to investigate the relationship in more detail with other procedures.
This involves studying and comparing relationships among financial and nonfinancial indormation.
a. Engagement procedures
b. Analytical procedures
c. Audit procedures
d. Benchmark procedures
b. Analytical procedures
The application of analytical procedures is based on the premise of what?
In the absence of known conditions to the contrary, relationships among information may reasonably be expected to exist and continue.
Give examples of contrary conditions.
- unusual or non-recurring transactions or events;
- accounting, organizational, operational, environmental, and technological changes;
- inefficiencies;
- ineffectiveness;
- errors;
- fraud;
- illegal acts
Analytical procedures are useful in identifying the following except:
i. Unexpected differences
ii. absence of differences when they are expected
iii. potential errors
iv. Potential fraud or illegal acts
v. Other unusual/non-recurring transactions or events
a. i only
b. i, ii, iv
c. i, ii, iii, iv, v
d. none of them
d. none of them
What are the types of procedures?
- Comparing current period information with expectations based on similar information for prior periods as well as budgets and forecasts.
- Studying the relationships between financial and appropriate nonfinancial information
- Studying relationships among elements of information
- Comparing information with expectations based on similar information for other organizational units as well as for the industry in which the organization operates.
TAKE NOTE 3:
It is important to determine the expected relationship before looking at the data - for if the data is first analyzed, then the auditor might unknowingly find an explanation for the data (even though it is unreasonable).
What are the types of information that may be used for analytical procedures?
- Ratio, trend, and regression analysis
- reasonableness tests
- period-to-period comparisons
- comparisons with budgets
- forecasts
- external economic information
Why would an auditor use an analytical procedure?
Ans:
This is because it identifies conditions that may require additional audit procedures.
The extent of analytical procedures depends on the following factors:
i. Significance of the area being audited
ii. Assessment of risk management in the area being audited
iii. Adequacy of the internal control system
iv. Availability and reliability of financial and nonfinancial information
v. Precision with which the results of analytical audit procedures can be predicted
vi. Availability and comparability of information regarding the industry in which the organization operates.
vii. Extent to which other procedures provide evidence.
FAMILIARIZE THEM
What would the auditor do if there are unexpected results or relationships?
- The internal auditor evaluates such results
- Determine if the difference from expectation and result came from fraud, error, or a change in conditions.
- The internal auditor must be satisfied with the explanation of the management
- The IA may then modify expectations and recalculate the difference.
Take note that unexplained results may be indicative of a significant problem and must be communicated to senior management and the board in accordance with Standard 2060.
This means that internal auditor determine the exact reason as to why there were variances.
a. Regression Analysis
b. Reasonableness tests
c. Forecasts
d. Root cause analysis
d. Root cause analysis
Root cause analysis is often conducted because of what?
a. underlying reason for the occurrence of an error, problem, missed opportunity, or instance of noncompliance
b. enables IA to add insights hat improve the effectiveness and efficiency of the organization’s governance, risk management, and control processes.
c. identifies why an issue occur.
d. all of the above
d. all of the above
It is defined as a problem, error, instance of noncompliance, or missed opportunities.
Issue
Take note of the following:
- Since the root cause analysis require extensive resources, such as time and subject matter expertise, the internal auditor must exercise due professional care by considering the effort in relation to the potential benefits.
- This analysis is as simple as asking a series of “why?”
- Most root causes will be traced back to decisions, actions, or inaction by a person or multiple people
- TRUE ROOT CAUSE = hard to know and is subjective
- there are instances where auditors may PROVIDE A VARIETY OF POSSIBLE ROOT CAUSES
- This add insights that improve longer-term effectiveness and efficiency of business processes.
Internal auditors are considered the best candidate in performing the root cause analysis and the following are a reasons why, except:
i. Independence and objectivity
ii. Have worked across various reporting chains and departments of an organization, hence they may have developed a broad deep understanding of the underlying issues that may exceed that of any single member of management.
iii. Since the internal auditors would be looking at the issue in a subjective manner.
a. i, ii
b. i only
c. iii only
d. ii, iii
c. iii only
