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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  • 5 Marks

AA – April 2022 – L2 – Q1b – Audit and Assurance Evidence

Explain five factors that determine reliance on analytical procedures.

ISA 520: “Analytical Procedures” provides guidance to auditors on the use of analytical procedures during the course of an external audit.

Required:
Explain FIVE (5) 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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  • 10 Marks

AAA – Nov 2020 – L3 – Q5b – The Audit Approach

Identify and comment on the implications of findings related to quality control policies and procedures during an audit engagement.

You are a Partner in Green & Co., a firm of Chartered Accountants, with specific responsibility for the quality of audits. Green & Co. was appointed auditor of Cleanup Co, a provider of waste management services, in July 2019. You have just visited the audit team at the head office of Cleanup Co. The audit team comprises an audit manager, an audit senior, and two audit trainees.

During your visit, a review of the audit working papers revealed the following:

i) On the audit planning checklist, the audit senior has crossed through the analytical procedures section and written ‘not applicable – new client’. The audit planning checklist has not been signed off as having been reviewed.

ii) The audit manager last visited Cleanup Co.’s office when the final audit commenced two weeks ago on 1 August. The audit senior has since completed the audit of tangible non-current assets (including property and service equipment) which amount to GH¢ 600,000 as at 30 June 2019 (2018 – GH¢ 600,000). The audit manager spends most of his time working from Green & Co’s office and is currently allocated to three other assignments as well as Cleanup Co.’s audit.

iii) At 30 June 2019, trade receivables amounted to GH¢ 2.1 million (2018 – GH¢ 900,000). One of the trainees has just finished sending out requests for direct confirmation of customers’ balances as at the end of the reporting period.

iv) The other trainee has been assigned the audit of the consumable supplies, which includes inventory amounting to GH¢ 88,000 (2018 – GH¢ 53,000). The trainee has carried out tests of controls over the perpetual inventory records and confirmed the ‘roll-back’ of a sample of current quantities to book quantities as at the year end.

v) The audit manager has noted the following matter for your attention. The financial statements as at 30 June 2018 disclosed, as unquantifiable, a contingent liability for pending litigation. However, the audit manager has seen a letter confirming that the matter was settled out of court for GH¢ 450,000 on 14 September 2018. The auditor’s report on the financial statements for the year ended 30 June 2018 was unmodified and signed on 19 September 2018. The audit manager believes that management of Cleanup Co. is not aware of the error and has not brought it to their attention.

Required:
Identify and comment on the implications of these findings for Green & Co’s quality control policies and procedures. (10 marks)

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  • 10 Marks

AAA – May 2016 – L3 – Q3a – Planning | Audit evidence

Use analytical procedures to assess the financial statement extracts and their impact on the audit of accounts receivable.

Your audit and assurance firm has just accepted a financial statement audit engagement from Lunch Special Ltd., a restaurant that prepares lunch for the general public and on special orders. The company operates at a number of sales points in the city.

The company uses a computerised system that has networked all the Sales Points to its Head Office. Your firm is planning the new audit and has received the draft financial statements for the year. As the audit senior to lead the engagement team, you are examining the financial statements, an extract of which is shown below:

Required:
i) Using analytical procedures at the planning stage, state your observations drawn from the extracts from the draft financial statements and how they may impact your audit of the Accounts Receivables. (10 marks)

 

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  • 20 Marks

AAA – May 2018 – L3 – Q1 -Planning, Audit Evidence, Evaluation and Review

This set of questions requires a comprehensive approach to investigating the losses incurred by PQR Ltd., focusing on key areas such as planning the investigation, evaluating potential undervaluation of inventory, performing tests to quantify any undervaluation, identifying reasons for high material consumption, and verifying the accuracy of material consumption in the management accounts. The investigation involves considerations like resource allocation, scope definition, inventory count accuracy, valuation methods, wastage, theft, and cut-off procedures.

As the Senior Audit Manager in MNO & Co, a firm of Chartered Accountants, you have
just had a meeting with a Senior Partner at the firm, in which he informed you that you
have to carry out an investigation requested by the Management of ECO Ltd.

i) One of ECO Ltd’s subsidiaries, PQR Ltd, has been making losses for the past year. ECO Ltd’s management is concerned about the accuracy of PQR’s most recent quarter’s management accounts. The summarised statements of profit or loss for the last three quarters are as follows:

Quarter to 31-Mar 2018

GH¢’000

 Quarter to 31-Dec 2017

GH¢’000

 Quarter to 30-Sep 2017

GH¢’000
Revenue 429  334  343
Opening inventory 180 163 203
Materials 318 251 200
Direct wages 62 54 74
560 468 477
Less closing inventory (162) (180) (163)
Cost of goods sold 398 288 314
Gross profit 31 46 29
Less overheads (63) (75) (82)
Net loss (32) (29) (53)
Gross profit (%) 7.2% 13.8% 8.5%
Materials (% of revenue) 78.3% 70.1% 70.0%
Labour (% of revenue) 14.5% 16.2% 21.6%

ii) ECO Ltd’s management board believes that the high material consumption as a percentage of revenue for the quarter to 31 March 2018 is due to one or more of the following factors:

  • Under-counting or under-valuation of closing inventory
  • Excessive consumption or wastage of materials
  • Material being stolen by employees or other individuals

iii) PQR Ltd has a small number of large customers and manufactures its products to each customer’s specification. The selling price of the product is determined by:

  • Estimating the cost of materials;
  • Estimating the labour cost; and
  • Adding a mark-up to cover overheads and provide a normal profit.

iv) The estimated costs are not compared with actual costs. Although it is possible to analyse purchase invoices for materials between customers’ orders, this analysis has not been done.

v) A physical inventory count is carried out at the end of each quarter. Items of inventory are entered on inventory sheets and valued manually. The company does not maintain perpetual inventory records and a full physical count is to be carried out at the financial year end, 30 June 2018.

vi) The direct labour cost included in the inventory valuation is small and should be assumed to be constant at the end of each quarter.

vii) Historically, the cost of materials consumed has been about 70% of revenue. The management accounts to 31 March 2018 are to be assumed to be correct.

Required:

a) Identify and describe the matters that you should consider and the procedures you should carry out in order to plan an investigation of PQR Ltd.’s losses. (10 marks)

b) Explain the matters you should consider to determine whether closing inventory at 31 March 2018 is undervalued. (3 marks)

c) Describe the tests you should plan to perform to quantify the amount of any undervaluation. (3 marks)

d) Identify and explain the possible reasons for the apparent high materials consumption in the quarter ended 31 March 2018. (2 marks)

e) Describe the tests you should plan to perform to determine whether materials consumption, as shown in the management accounts, is correct. (2 marks)

(Total: 20 marks)

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