Question Tag: Analytical procedures

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  • 1 Marks

AAA – Nov 2013 – L3 – A – Q11 – Advanced Audit Planning and Strategy

This question tests knowledge of analytical procedures used to produce audit evidence.

Which of the following is an analytical procedure generally used to produce audit evidence?
A. Confirmations mailed directly to the auditor by the client’s customers
B. Physical observation of inventories
C. Relationship among current financial balances and prior balances, forecasts, and non-financial data
D. Detailed examination of external and internal documents
E. Circularisation letters to debtors and creditors of the company

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  • 15 Marks

AA – May 2017 – L2 – SC – Q7 – Audit-related services

Examination of analytical comparisons, precautions in substantive testing, and limitations of ratio analysis in auditing.

One essential feature of analytical procedures in auditing is ‘comparison’. The auditor will calculate key relationships between figures (non-financial figures as well as financial figures) and then make comparisons.

You are required to:

  1. (a) Identify FOUR areas of comparison when using analytical procedures and explain their purpose. You could tabulate your answers. (8 Marks)
  2. (b) List FOUR precautionary steps the Auditor is required to take before using analytical procedures in substantive testing. (4 Marks)
  3. (c) Describe THREE limitations of ratio analysis in its use in substantive testing. (3 Marks)

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  • 30 Marks

AA – May 2017 – L2 – SA – Q1 – Audit Evidence

Analysis and identification of unusual features in Abricon Nigeria Ltd.'s profit and loss for audit purposes.

The following is the statement of Profit or Loss and other comprehensive income of ABRICON NIGERIA LIMITED for the year ended December 31, 2016.

ABRICON NIGERIA LIMITED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2016

Requirements:

(a) Perform analytical tests on the figures given. (16 Marks)

(b) Identify unusual features. (8 Marks)

(c) Provide possible explanations why some apparently unusual items were not selected in (b) above. (6 Marks)

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  • 20 Marks

AA – May 2023 – L2 – SA – Q3 – Planning an Audit

Key preliminary audit activities, confidentiality characteristics, and stages of analytical review.

The following issues emanated from the pre-audit meeting of FIFO Limited:

  1. The operating environment has been affected by the COVID-19 pandemic. Management has responded with policy initiatives to stem negative impacts, resulting in financial contractions in Q2 2020 that affected half-year results and necessitated budget revisions. Effects included GDP shrinkage, lower investment yields, foreign exchange rate growth, and inflation.
  2. Increased accounts receivable due to customers’ repayment issues.
  3. Focus on liquidity to support daily operations.
  4. Volatile profit before tax, requiring alternative materiality benchmarks such as gross profit or total revenue.
  5. Firm’s software calculates materiality based on selected benchmarks, with auditor judgment essential in assessing materiality.
  6. Engagement team declaration of independence and confidentiality of client information.
  7. Completion of preliminary engagement activities on schedule for timely review.
  8. Use of preliminary analytical review as a risk assessment tool to identify unusual transactions, events, and trends that may indicate audit-relevant matters, including fraud risks. This should be handled with care.

Required:

a. State the preliminary activities to be undertaken before the commencement of the audit. (6 Marks)

b. State the characteristics of confidentiality in auditing. (7 Marks)

c. Explain briefly the purposes of analytical review. (4 Marks)

d. State at what stage of the audit an analytical review should be performed. (3 Marks)

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  • 10 Marks

AA – July 2023 – L2 – Q4a – Completion Procedures and Reporting, Planning and Approach for Audit and Assurance Engagements

Explanation of going concern indicators for Kitchenhub Ltd and the stages when analytical procedures can be used.

a) You are an Audit Assistant of Abinchi & Associate and your firm is planning the audit of a client. You have been provided with draft financial statements extracts and the following information is about your client, Kitchenhub Ltd, who is a kitchen equipment manufacturer. The company’s year-end is 30 April 2022.

Kitchenhub Ltd has recently been experiencing trading difficulties, as its major customer who owes GH¢0.6 million to Kitchenhub Ltd has ceased trading, and it is unlikely any of this will be received. However, the balance is included in the financial statements extracts below. The sales director has recently left Kitchenhub Ltd and is yet to be replaced.

The monthly cash flow has shown a net cash outflow for the last two months of the financial year and is forecast as negative for the forthcoming financial year. As a result of this, the company is unable to settle suppliers whose payments are due, and some are threatening legal action to recover the sums owing.

Due to its financial difficulties, Kitchenhub Ltd defaulted on a loan repayment, and as a result of this breach in the loan contract, the bank has asked that the loan of GH¢4.8 million be repaid in full within six months. In view of this, the directors have decided not to pay dividends for the period.

Below is the Financial Statement extract for Kitchenhub Ltd for the year ended 30 April:

Draft 2022 (GH¢) Actual 2021 (GH¢)
Current assets
Inventory 3.4 1.6
Receivables 1.4 2.2
Cash – 1.2
Current liabilities
Trade payables 1.9 0.9
Overdraft 0.8 –
Loans 4.8 0.2

Required:
i) Explain SEVEN (7) factors that indicate that Kitchenhub Ltd may not be operating as a going concern entity. (7 marks)
ii) Identify THREE (3) stages of an audit when analytical procedures can be used by Abinchi & Associate. (3 marks)

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  • 5 Marks

AA – Nov 2017 – L2 – Q3c – Audit and Assurance Evidence

List and explain three factors to consider when determining the extent of reliance on analytical procedures as substantive audit evidence.

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.

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  • 10 Marks

AA – Dec 2022 – L2 – Q4a – Audit and Assurance Evidence

Explains the term "analytical procedures" and discusses the types and uses of analytical procedures in an audit.

You are an Audit Assistant of Apakye & Associates, a firm of Chartered Accountants. Your firm engaged an intern who would like to know more about analytical procedures.

Required:
With reference to ISA 520: Analytical Procedures,
i) Explain the term ‘analytical procedures’.
ii) Explain the different types of analytical procedures available to the auditor.
iii) Describe THREE (3) situations in the course of audit when analytical procedures can be used.

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  • 5 Marks

AA – Dec 2022 – L2 – Q3b – Audit and Assurance Evidence

Explains four limitations of using ratio analysis in auditing and their impact on financial statement assertions.

You have been presented with the Financial Statements of Asiki Ltd, an audit client that has been consistent in reporting good financial performance. As part of obtaining audit evidence your Audit Manager has asked you to perform analytical procedures on the company’s General and Administrative Expenses using ratio analysis.

Required:
Explain to the Audit Manager FOUR (4) limitations of ratio analysis and how these could impact on assertions.

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  • 6 Marks

AA – Nov 2016 – L2 – Q2e – Audit and Assurance Evidence

List factors to consider when relying on the results of analytical procedures as substantive audit procedures.

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. (6 marks

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  • 15 Marks

AA – May 2019 – L2 – Q4 – Audit and Assurance Evidence

Defines analytical procedures and outlines substantive procedures for revenue, profit, inventory, payables, and bank loan verification.

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:
a) Define the term analytical procedures.
(2 marks)

b) In relation to the work of an external auditor:
i) Describe THREE (3) analytical procedures that should be performed to confirm PW’s revenue and profit.
(3 marks)
ii) Outline THREE (3) substantive procedures that should be adopted to verify each of the following assertions:

  • The valuation of inventory.
    (3 marks)
  • The completeness of payables.
    (3 marks)

c) Recommend FOUR (4) appropriate substantive procedures that should be performed to confirm PW’s bank loan.
(4 marks)

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  • 1 Marks

AAA – Nov 2013 – L3 – A – Q11 – Advanced Audit Planning and Strategy

This question tests knowledge of analytical procedures used to produce audit evidence.

Which of the following is an analytical procedure generally used to produce audit evidence?
A. Confirmations mailed directly to the auditor by the client’s customers
B. Physical observation of inventories
C. Relationship among current financial balances and prior balances, forecasts, and non-financial data
D. Detailed examination of external and internal documents
E. Circularisation letters to debtors and creditors of the company

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  • 15 Marks

AA – May 2017 – L2 – SC – Q7 – Audit-related services

Examination of analytical comparisons, precautions in substantive testing, and limitations of ratio analysis in auditing.

One essential feature of analytical procedures in auditing is ‘comparison’. The auditor will calculate key relationships between figures (non-financial figures as well as financial figures) and then make comparisons.

You are required to:

  1. (a) Identify FOUR areas of comparison when using analytical procedures and explain their purpose. You could tabulate your answers. (8 Marks)
  2. (b) List FOUR precautionary steps the Auditor is required to take before using analytical procedures in substantive testing. (4 Marks)
  3. (c) Describe THREE limitations of ratio analysis in its use in substantive testing. (3 Marks)

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  • 30 Marks

AA – May 2017 – L2 – SA – Q1 – Audit Evidence

Analysis and identification of unusual features in Abricon Nigeria Ltd.'s profit and loss for audit purposes.

The following is the statement of Profit or Loss and other comprehensive income of ABRICON NIGERIA LIMITED for the year ended December 31, 2016.

ABRICON NIGERIA LIMITED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2016

Requirements:

(a) Perform analytical tests on the figures given. (16 Marks)

(b) Identify unusual features. (8 Marks)

(c) Provide possible explanations why some apparently unusual items were not selected in (b) above. (6 Marks)

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  • 20 Marks

AA – May 2023 – L2 – SA – Q3 – Planning an Audit

Key preliminary audit activities, confidentiality characteristics, and stages of analytical review.

The following issues emanated from the pre-audit meeting of FIFO Limited:

  1. The operating environment has been affected by the COVID-19 pandemic. Management has responded with policy initiatives to stem negative impacts, resulting in financial contractions in Q2 2020 that affected half-year results and necessitated budget revisions. Effects included GDP shrinkage, lower investment yields, foreign exchange rate growth, and inflation.
  2. Increased accounts receivable due to customers’ repayment issues.
  3. Focus on liquidity to support daily operations.
  4. Volatile profit before tax, requiring alternative materiality benchmarks such as gross profit or total revenue.
  5. Firm’s software calculates materiality based on selected benchmarks, with auditor judgment essential in assessing materiality.
  6. Engagement team declaration of independence and confidentiality of client information.
  7. Completion of preliminary engagement activities on schedule for timely review.
  8. Use of preliminary analytical review as a risk assessment tool to identify unusual transactions, events, and trends that may indicate audit-relevant matters, including fraud risks. This should be handled with care.

Required:

a. State the preliminary activities to be undertaken before the commencement of the audit. (6 Marks)

b. State the characteristics of confidentiality in auditing. (7 Marks)

c. Explain briefly the purposes of analytical review. (4 Marks)

d. State at what stage of the audit an analytical review should be performed. (3 Marks)

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  • 10 Marks

AA – July 2023 – L2 – Q4a – Completion Procedures and Reporting, Planning and Approach for Audit and Assurance Engagements

Explanation of going concern indicators for Kitchenhub Ltd and the stages when analytical procedures can be used.

a) You are an Audit Assistant of Abinchi & Associate and your firm is planning the audit of a client. You have been provided with draft financial statements extracts and the following information is about your client, Kitchenhub Ltd, who is a kitchen equipment manufacturer. The company’s year-end is 30 April 2022.

Kitchenhub Ltd has recently been experiencing trading difficulties, as its major customer who owes GH¢0.6 million to Kitchenhub Ltd has ceased trading, and it is unlikely any of this will be received. However, the balance is included in the financial statements extracts below. The sales director has recently left Kitchenhub Ltd and is yet to be replaced.

The monthly cash flow has shown a net cash outflow for the last two months of the financial year and is forecast as negative for the forthcoming financial year. As a result of this, the company is unable to settle suppliers whose payments are due, and some are threatening legal action to recover the sums owing.

Due to its financial difficulties, Kitchenhub Ltd defaulted on a loan repayment, and as a result of this breach in the loan contract, the bank has asked that the loan of GH¢4.8 million be repaid in full within six months. In view of this, the directors have decided not to pay dividends for the period.

Below is the Financial Statement extract for Kitchenhub Ltd for the year ended 30 April:

Draft 2022 (GH¢) Actual 2021 (GH¢)
Current assets
Inventory 3.4 1.6
Receivables 1.4 2.2
Cash – 1.2
Current liabilities
Trade payables 1.9 0.9
Overdraft 0.8 –
Loans 4.8 0.2

Required:
i) Explain SEVEN (7) factors that indicate that Kitchenhub Ltd may not be operating as a going concern entity. (7 marks)
ii) Identify THREE (3) stages of an audit when analytical procedures can be used by Abinchi & Associate. (3 marks)

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  • 5 Marks

AA – Nov 2017 – L2 – Q3c – Audit and Assurance Evidence

List and explain three factors to consider when determining the extent of reliance on analytical procedures as substantive audit evidence.

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.

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  • 10 Marks

AA – Dec 2022 – L2 – Q4a – Audit and Assurance Evidence

Explains the term "analytical procedures" and discusses the types and uses of analytical procedures in an audit.

You are an Audit Assistant of Apakye & Associates, a firm of Chartered Accountants. Your firm engaged an intern who would like to know more about analytical procedures.

Required:
With reference to ISA 520: Analytical Procedures,
i) Explain the term ‘analytical procedures’.
ii) Explain the different types of analytical procedures available to the auditor.
iii) Describe THREE (3) situations in the course of audit when analytical procedures can be used.

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  • 5 Marks

AA – Dec 2022 – L2 – Q3b – Audit and Assurance Evidence

Explains four limitations of using ratio analysis in auditing and their impact on financial statement assertions.

You have been presented with the Financial Statements of Asiki Ltd, an audit client that has been consistent in reporting good financial performance. As part of obtaining audit evidence your Audit Manager has asked you to perform analytical procedures on the company’s General and Administrative Expenses using ratio analysis.

Required:
Explain to the Audit Manager FOUR (4) limitations of ratio analysis and how these could impact on assertions.

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  • 6 Marks

AA – Nov 2016 – L2 – Q2e – Audit and Assurance Evidence

List factors to consider when relying on the results of analytical procedures as substantive audit procedures.

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. (6 marks

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  • 15 Marks

AA – May 2019 – L2 – Q4 – Audit and Assurance Evidence

Defines analytical procedures and outlines substantive procedures for revenue, profit, inventory, payables, and bank loan verification.

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:
a) Define the term analytical procedures.
(2 marks)

b) In relation to the work of an external auditor:
i) Describe THREE (3) analytical procedures that should be performed to confirm PW’s revenue and profit.
(3 marks)
ii) Outline THREE (3) substantive procedures that should be adopted to verify each of the following assertions:

  • The valuation of inventory.
    (3 marks)
  • The completeness of payables.
    (3 marks)

c) Recommend FOUR (4) appropriate substantive procedures that should be performed to confirm PW’s bank loan.
(4 marks)

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