Auditing

8e

Gramling
Rittenberg
Johnstone

Chapter8
ToolsUsedin
GatheringAudit
Evidence

Copyright 2012 South-Western/Cengage Learning

AuditOpinionFormulationProcess

LO1:OverviewofToolstoGather

AuditEvidence

Allauditsinvolvesamplingbecausetheauditorcannot
examine100%ofthetransactionsduringaperiod
Whysample?
Theansweristhatanauditorneedsanefficientandeffectivewayto
reachajudgmentaboutapopulationthatistoolargetoexamine
completely

Objectiveofsamplingwhentestingaccountbalancesisto
estimatetheamountofmisstatementinanunderlying
populationdeterminewhetherthecontrolsareworking
effectively
Itisdifficulttodesignajudgmentalsamplethatcouldbe
consideredmoreeffectiveormoreefficientthanawell
designedstatisticalsample

OtherApproaches
Otherapproachesare:

Computerizedfootingoftheaccountbalance
Samplingtotestvaluation
Analyticalreviewtodeterminepotentialobsolescence
Testsofablockoftransactionsreviewforcutofftests

FinancialStatementAssertionare:

Existence
Completeness
Rights
ValuationorAllocation
PresentationandDisclosure

LO2:OverviewofSampling
Auditsamplingisdefinedasapplyingauditprocedurestoless
than100percentofapopulationinordertoestimatesome
characteristicaboutthatpopulation
Auditorsusesamplingtogatherevidenceto:
Testcontrolsforthepurposeofexpressinganopiniononthe
clientsinternalcontrols
Testcontrolsforthepurposeofassessingcontrolrisk
Testforcompliancewithcompanypolicies,governmental
regulations,orothercriteria
Testindividualitemsinaccountbalancesasabasisfor
determiningwhethermaterialmisstatementsexistintheaccount
balance

Overview(continued)
Insomecases,samplingmaynotbethebest
approach
Someauditproceduresdonotprovide
sufficientevidencewhenappliedonasample
basis
Example:auditorsreadminutesofallBOD
meetingstoidentifyrelatedpartytransactions
ReadingtheminutesofasampleofBODmeetings
wouldnotbesufficient

Overview(continued)
Auditproceduresthatprovidehighqualityevidenceatlow
costmaybeappliedmoreextensivelysimplybecauseits
cheapertotestallitemsratherthansampling
Example:auditorstypicallyconfirmallbankaccountbalances

Accountbalancesthatareimmaterial(orwherethepotential
misstatementisimmaterial)maynotbeworthsampling
Suchaccountsmaybeauditedmoreefficientlywithanalytics
Fromtheresultsofsampling,theauditormakesaninference
abouttheunderlyingpopulation

Overview(continued)
Forthisinferencetobevalid,thesamplingunits
testedmustberepresentativeoftheunderlying
population
Theauditorneedstomakefourimportantdecisionsto
ensurethesampleisrepresentativeandtocontrol
againstmakinganincorrectinference:
Whichpopulationshouldbetestedandforwhat
characteristics?(population)
Howmanyitemsshouldbeselectedforaudittesting?
(Samplesize)
Whichitemsshouldbeincludedinthesample?(selection)
Whatinferencescanbemadefromthesample?(evaluation)

Whatisnonsamplingandsampling
risk?
Whenauditorsdrawanerroneousinferencefrom
sampling,thecauseiseithernonsamplingor
samplingrisk
NonsamplingRisk
Occurswhenauditordoesnotappropriatelycarryoutaudit
proceduresormisinterpretsresults
Resultsfromhumanerror
Cannotbequantified
CPAfirmstrytominimizethroughqualitycontrol
practices

Whatisnonsamplingandsampling
risk?(continued)
SamplingRisk
Occurswhensampleisnotrepresentativeoftheunderlying
population
Canbecontrolledthroughsamplesizeassamplesize
increases,samplingriskdecreases
Ifthesampleis100%ofthepopulation,samplingriskis
zero;however,thisisoftennotpractical

SamplingRisksRelatedtoTestsof
ControlsProcedures
Ifthesampleisnotrepresentativeofthepopulation,
theauditormaydrawanincorrectconclusionabout
theeffectivenessofacontrol:
Auditorassessescontrolrisktoohigh:
Sampleindicatescontrolisworsethanitreallyis
Asaresult,theauditordoesnotrelyonthecontroland
doesmoresubstantivetestingthannecessary
Assessingcontrolrisktoohighdoesnotdirectlyaffect
auditquality,butdoesleadtoauditinefficiencies

SamplingRisksRelatedtoTestsof
ControlsProcedures
Auditorassessescontrolrisktoolow:
Sampleindicatescontrolisbetterthanitreallyis
Asaresult,theauditorreliesonanineffectivecontrol
(withoutrealizingitsunreliable)andsubstantivetestingis
notrigorousasitshouldbe
Thisincreasestheriskthatmaterialmisstatementsarenot
foundandanincorrectauditopinionissued

SamplingRisksRelatedto
SubstantiveTesting
Ifthesampleisnotrepresentativeofthepopulation,
theauditormaydrawanincorrectconclusionabout
whetheranaccountbalanceispresentedfairly
Incorrectacceptance
Sampleindicatesaccountbalanceisnotmaterially
misstatedwhenitis
Auditormayissueunqualifiedopiniononmaterially
misstatedstatements
Becauseofthepotentialcostsassociatedwithincorrect
acceptance,auditorscontrolforthisrisk

SamplingRisksRelatedto
SubstantiveTesting(continued)
Incorrectrejection
Sampleindicatesaccountbalanceismateriallymisstated
whenitisnt
Therearethingsthatreducethisrisk
Beforetellingclienttoadjustitsbooks,auditorusuallyperforms
additionaltests
Ifclientbelievesaccountbalanceiscorrect,clientwillaskauditor
toperformmoretests
Theseincreaseprobabilitythatincorrectrejectionwillbe
discovered

Incorrectrejectionaffectstheefficiencyoftheaudit,but
doesnotaffectthefairnessoftheauditedfinancial
statements

LO3:SelectingaSampling
Approach
Auditorsusebothstatisticalandnonstatisticalsampling
techniques

SelectingaSamplingApproach(continued)
Whethertousestatisticalornonstatisticalsamplingisa
cost/benefitdecision

LO4:GatheringSampleEvidenceabout
ControlEffectiveness
Ifanauditorbelievesacontroliseffectiveandplans
torelyonthatcontrol,she/hemusttestthecontrolto
seeifitisoperatingeffectively.Theassessmentof
controleffectivenessmaybebasedon:
Asampletotesttheeffectivenessofcontrolsinoperation
Theauditorsobservationofthesignificantbusiness
processes
Testsofcontrolsbuiltintotheclientscomputersystem
Inquiryandareviewofmonitoringreports

AS5requirestheexternalauditorstotestthe
effectivenessofinternalcontrols

AttributeEstimationSampling
Anattributeisacharacteristicofthepopulationof
interesttotheauditor
theattributetheauditorwishestoexamineisthe
effectiveoperationofacontrol
Theappropriatesamplesizedependsonanumberof
factorsincluding:
SamplingRisk(Riskofassessingcontrolrisktoolow)
Riskofconcludingcontrolsareeffectivewhen,infact,theyarenot
Samplingriskisoftensetthesameasauditriskbecausethe
auditorsassessmentofinternalcontrolsdeterminesthenatureand
extentofothertesting
Auditortestsonlysignificantcontrols

AttributeEstimationSampling
(continued)

Tolerablefailurerate
Failurerateatwhichauditorwilldeterminethecontrolis
notoperatingeffectively
Levelatwhichthecontrolsfailuretooperatewould
changetheauditorsplannedassessmentofcontrolriskin
performingtestsofaccountbalances
Mustbesetinadvanceinordertodeterminesamplesize
Expectedfailurerate
Basedonauditorsexperiencewiththeclient
Thehighertheexpectedfailurerate,thelargerthesample
size

AttributeEstimationSamplingasan
AuditObjective
Thestepstoimplementanattributeestimationsamplingplan
are:
Definetheattributesofinterestandwhatconstitutesfailures
Definethepopulationintermsoftheperiodtobecoveredbythe
test,thesamplingunit,andtheprocessofassuringthe
completenessofthepopulation
Determinethesamplesize,consideringtolerableandexpected
failureratesalongwithanacceptablesamplingrisk
Determineeffectiveandefficientmethodofselectingthesample
Selectandauditsampleitems
Decidehowtohandleinapplicable,voided,orunuseddocuments

Evaluatesampleresultsandreachconclusiononauditobjectives
Documentallphasesofthesamplingplan

AttributeEstimationSampling:Define
thePopulation
Periodtobecoveredbythetest
Forexample,theyearwhenevaluatingcontrols

Samplingunit
Forexample,anitemthatwouldindicatetheoperationofa
control

Completenessofthepopulation
Footingthefile
Reconcilingthebalancetothegeneralledger
Reviewingthecompletenessofprenumbereddocuments

AttributeEstimationSampling:
SampleSize
Theappropriatesamplesizedependsonanumberof
factorsincludingsamplingrisk,tolerablefailurerates
andexpectedfailurerates
Otherissues:
MultipleAttributes

Auditorsfrequentlytestseveralattributesusingthesameset
ofsourcedocuments
Whilethesamplingriskshouldbethesame,thetolerableand
expectedfailureratesmaydifferbetweencontrols
Theresultisadifferentsamplesizeforeachcontrol
Thereareseveralapproachestoselectitemsforthesample

AttributeEstimationSampling:
SampleSize(continued)
SmallPopulation

Ifthesampleisalargeportionofthepopulation,auditormay
beabletoreducethesamplesize
Useafiniteadjustmentfactor

Samplesizeusingthetables
Selectstheallowablesamplingrisk(5%or10%)basedon
factorssuchasauditrisk,andwhethertheauditorwillbe
issuingaseparatereportoninternalcontrol
Determinesthetolerablerateoferrorbylookingatthe
relationshipbetweencontrolfailurerateandmaterial
misstatement

Usespastknowledgetoentertheexpectedcontrolfailurerate
Thisisimportantbecauseitcontrolsagainstrejectingcontrols
whenonlyoneerrorisfound

Determinessamplesizebylookingattheintersectionofthe
expectedrateoffailureandthetolerablerateoffailureinthe
appropriatetable

AttributeEstimationSampling:Sample
Selection
Oncetheappropriatesamplesizehasbeen
determined,theauditormustdecidehowtoselect
sample
Randombasedmethodseliminatethepossibilityof
unintentionalbiasintheselectionprocessandhelp
ensurethesampleisrepresentative
Randomnumberefficientselectionmethodifthereisan
easywaytorelaterandomnumberstothepopulation
Examples:salesinvoicenumber,purchaseordernumber
Computerprogramstypicallyusedtogeneraterandomnumbers

AttributeEstimationSampling:
SampleSelection(continued)
Systematicselectionselectseverynthiteminthepopulation
fromarandomlyselectedstartingpoint
Samplinginterval(n)isdeterminedbydividingpopulationsizeby
desiredsamplesize
Tousethismethod,auditormustbesurethereisnotasystematic
patternoffailuresinthepopulation

Haphazardselection(nonstatisticalmethod)
Arbitraryselection
Notrandombased

Judgmentalsampling(nonstatisticalmethod)
Auditormayusejudgmenttoselectsample
Notrandombased

AttributeEstimationSampling:
SampleSelection(continued)

AttributeEstimationSampling:Evaluate
SampleResults
Theauditorprojectstheresultsofsamplingtothe
populationbeforedrawingaconclusion
Ifthesamplefailurerateisnogreaterthanthe
expectedfailurerate,theauditorcanconcludethe
controlisaseffectiveasexpected
QuantitativeEvaluation:Ifthesamplefailurerate
exceedstheexpectedfailurerate,theauditormust
determinewhethertheprojectedmaximumfailure
rateislikelytoexceedthetolerablefailurerate

AttributeEstimationSampling:Evaluate
SampleResults(continued)
Todothis,theauditormustdeterminetheupperlimitof
thepotentialfailurerateinthepopulation
Theupperlimitisbasedonthesamplefailurerateand
samplesizeandisadjustedupwardforsamplingerror

Iftheupperlimitexceedsthetolerablefailurerate,
theinternalcontrolprocesshasdeficiencies
Theauditorshouldeither
Testacompensatingcontrol(ifavailable)
Increasetherigorofthesubsequentsubstantivetesting

AttributeEstimationSampling:Evaluate
SampleResults(continued)
Theauditorshouldalsoevaluate
Thenatureofthecontrolprocedurefailures(patternof
error)
Theeffectofsuchfailuresonpotentialfinancialstatement
misstatement

QualitativeEvaluation:Whencontrolfailuresare
found,theyshouldbeanalyzedqualitativelyaswell
asquantitatively
Auditorshouldtrytodeterminewhetherthefailures

AttributeEstimationSampling:Evaluate
SampleResults(continued)
Wereintentionalorunintentional
Wererandomorsystematic
Hadadirectdollareffect
Wereofsuchmagnitudethatamaterialdollaramountof
errorscouldoccurandnotbedetected

SamplingtoTestforAccountBalance
Misstatements(SubstantiveSampling)
Basicsteps

Specifyauditobjectiveofthetest
Defineamisstatement
Definethepopulationfromwhichthesampleistobetaken
Choosesamplingmethod
Determinesamplesize
Selectsample
Auditselecteditems
Evaluatesampleresults
Documentsamplingprocedureandresults

SpecifyingtheAuditObjective
Specifyingtheauditobjectivedeterminesthe
populationtotest
Forexample:
Ifobjectiveistodetermineexistence,thesampleshouldbe
selectedfromrecordedinformation
Ontheotherhand,iftheobjectiveistodetermine
completeness,thesampleshouldbeselectedfroma
complementarypopulationsuchassourcedocuments

SpecifyingtheAuditObjective(continued)
Samplingisusedtoauditaccountbalancesintwo
primaryways
todeterminethereasonablenessofanaccountbalance
toestimatesomeamount,suchastheLIFOindex,to
estimatetheLIFOvalueofinventory

DefineMisstatements
Misstatementsshouldbedefinedbeforesamplingto
Precludetheclientorauditorfromrationalizingaway
misstatementsasisolatedevents
Provideguidancetotheauditteam

Misstatementisusuallydefinedasadifferencethat
affectsthecorrectnessoftheoverallaccountbalance

DefinethePopulation
Groupofitemsinanaccountbalancethattheauditor
wantstotestdoesnotinclude:
Itemstheauditorhasdecidedtoexamine100%
Itemsthatwillbetestedseparately

Importanttoproperlydefinethepopulation:
Sampleresultscanbeprojectedonlytothegroupfrom
whichthesampleisselected
Thepopulationmustbedirectlyrelatedtotheaudit
objective

DefinetheSamplingUnit
Samplingunitsaretheindividualauditable
elementsthatmakeupthepopulation
Example:samplingunitsforconfirming
accountsreceivablecouldbetheindividual
customersbalanceorindividualunpaid
invoices,oracombinationofthesetwo.

IdentifyIndividuallySignificant
Items
Manyaccountbalancesarecomprisedofafewlarge
dollaritemsandmanysmalleritems
Dividingapopulationintotwoormoresubgroups
basedondollaramountcanincreaseauditefficiency

Itemsinexcessofaspecifieddollaramount(topstratum
items)areexamined100%
Itemslessthanthespecifiedamount(lowerstratumitems)
aresampled

Thisprocess(stratification)allowstheauditorto
examineasignificantportionofanaccountbalance
eventhoughs/heexaminesarelativelyfewitems

ChoosingaSamplingMethod
Thereareanumberofsamplingmethodsan
auditormayuse
Nonstatistical
Probabilityproportionaltosize(PPS)
Classicalsamplingmethods
Meanperunit
Ratioestimation
Differenceestimation

ChoosingaSamplingMethod(continued)
Thesamplingmethodsdifferinanumberof
ways:
Measureofsamplingrisk
Statisticalmethodsprovideanobjectivemeasureof
samplingrisk
Nonstatisticalmethodsdonotprovidesuchameasure

Testsforaccountbalance
PPSisdesignedtotestforoverstatementofanaccount
balance
Classicalmethodstestforbothoverstatementand
understatement

ChoosingaSamplingMethod(continued)
Statisticalestimates
PPSprovidesanestimateoftheamountofmisstatement
intheaccount
Classicalmethodsprovideanestimatedrangeofthe
accountbalance

Sampleselection
PPSisadollarbasedapproach;eachdollarisa
samplingunit
Classicalsamplesareselectedusingavarietyof
samplingunits

DeterminingSampleSize,Selecting
Sample,EvaluatingResults
Samplesize,methodofselectingthesample,andthe
approachtoevaluatingsampleresultsalldependon
thesamplingmethodused
Whicheversamplingmethodisused,consideration
mustbegiventotheriskofmisstatement,sampling
risk,andtheauditorsassessmentoftolerableand
expectedmisstatement
Tolerablemisstatement

Maximummisstatementanauditorwillacceptbefore
decidingtherecordedaccountbalanceismateriallymisstated

DeterminingSampleSize,Selecting
Sample,EvaluatingResults(continued)
Expectedmisstatement

Basedonresultsofothersubstantivetestsandauditorsprior

Experiencewiththeclient

Expectedmisstatementshouldbelessthantolerable
misstatement

Whatisnonstatisticalsampling?
Determinesamplesize

Allsignificantitemsshouldbetested
Nowaytomathematicallycontrolsamplingrisk

Selectthesample

Samplemustberepresentativeofpopulation
Coulduserandombasedmethodorhaphazardselection

Evaluatesampleresults

Projectmisstatementstothepopulation
Considersamplingerror
Makejudgmentastowhetheraccountislikelytobe
materiallymisstated

LO5:StatisticalApproachtoTestAccountBalances
andAssertions:MonetaryUnitSampling(MUS)
Dollarbasedsamplingapproachwherethe
populationisthenumberofdollarsintheaccount
balanceexamined
Usingdollarsassamplingunitsmeanslargerdollar
itemsintheaccountbalancearemorelikelytobe
selectedinthesample
MUSisaneffectivesamplingapproachwhenthe
auditoristestingforoverstatements
Appropriatewhenfewmisstatementsareexpected
andindividualbookvaluesareavailable

StrengthsandweaknessesofMUS
Sampling
Strengths
Easiertoapplythanotherstatisticalsamplingapproaches
Automaticallyselectsasampleinproportiontoanitems
dollaramount;thus,stratificationthatisrequiredinother
statisticalapproachesisunnecessary
Resultsinahighlyefficientsamplesize

Weaknesses
Notdesignedtotestfortheunderstatementofapopulation
Evaluationofthesamplerequiresspecialconsiderations
Selectionofzeroornegativebalancesrequiresspecial
designconsiderations

ProbabilityProportionaltoSize
Sampling:SampleSize
PPSsamplesareusuallyselectedusingafixed
intervalsamplingapproach
Thesamplinginterval(I)iscalculatedas

TM EM EEF
I
RF
TM=Tolerablemisstatement
EM=Expectedmisstatement
EEF=Errorexpansionfactor
RF=Reliabilityfactor

ProbabilityProportionaltoSize
Sampling:SampleSize(continued)
Errorexpansionandreliabilityfactorsarebasedon
TDrisk
Samplesize(n)iscomputedbydividingtheaccount
bookvaluebythesamplinginterval
Population Book Value
n
Sampling Interval

ProbabilityProportionaltoSize
Sampling:SampleSelection
Sampleitemsareoftenselectedusingafixedinterval
approach
EveryIthdollarafterarandomstart
Arandomstartisrequiredtogiveeverydollarinthe
populationanequalchancetobeincludedinthesample

Thefirstsampleitemistheonethatfirstcausesthe
cumulativetotal(cumulativebookvalue+random
start)toequalorexceedthesamplinginterval

ProbabilityProportionaltoSize
Sampling:SampleSelection(continued)
Successivesampleitemsarethosefirstcausingthe
cumulativetotaltoequalorexceedmultiplesofthe
interval
Samplecomposition:
Alltopstratumitemswillbeincludedinthesample
Lowerstratumitemswillbesampled

ProbabilityProportionaltoSize:Zeroor
NegativeBalances
Itemswithzerobalanceshavenochanceofbeing
selectedusingPPS
Ifevaluationisnecessary,zerobalanceitemsshouldbe
auditedasadifferentpopulation

Twoapproachestodealwithpopulationitemswith
negativebalances:
Excludethemfromtheselectionprocessandtestthemasa
separatepopulation
Includethemintheselectionprocessandignorethe
negativesign

ProbabilityProportionaltoSize:
SampleEvaluation
Basedonsampleresults,theauditorcomputesthe
uppermisstatementlimit
Uppermisstatementlimit(UML)
Maximumdollaroverstatementthatmightexistinthe
population
Giventhemisstatementsdetectedinthesample
AtthespecifiedTDrisklevel
UMListhesumofthreecomponents:
Basicprecision
Mostlikelymisstatement
Incrementalallowanceforsamplingerror

LO6:NoMisstatementsinthe
Sample
Ifnomisstatementsarefoundinthesample,the
auditorcanconcludethatthepopulationisnot
overstatedbymorethanthetolerablemisstatement
Whennomisstatementsarefoundinthesample,the
UMListhesameasthebasicprecision
Basicprecisionisanincrementalallowancefor
samplingerror,ameasureofthemaximumpotential
misstatementintheunauditedpartofthepopulation

MisstatementsintheSample
Auditorstaskistodeterminewhetherthereisanunacceptable
riskthattheaccountbalanceismisstatedinexcessofthe
tolerablemisstatement
Theevaluationisseparatedintotwoparts:
identifiedmisstatementsinthetopstratum
projectedmisstatementsfoundinthelowerstratum

Taintingpercentage

Misstatementanalysisoflowerstratumitemsconsistsofidentifyingthe
percentagethatthebookvalueofeachmisstatedsampleitemis
overstatedorunderstated

Understatements
Whenanunderstatementisencountered,theauditor
hastwopossiblecoursesofaction
understatementcanbeignoredforpurposesofthis
sampleevaluationandifthereareotheraudittestsfor
understatements,thisunderstatementcanbeincluded
intheothertest
auditorcanperformaseparateanalysisspecifically
forunderstatements

UnacceptableSampleResults
Optionsavailablewhenmisstatementare
found
CorrecttheKnownMisstatement
AnalyzethePatternofMisstatementsandDesign
anAlternativeAuditStrategy
IncreasetheSampleSize
ChangeObjectivetoEstimatingtheCorrectValue

LO7:UsingGeneralizedAuditSoftware
toObtainEvidence
Foottheindividualaccountsmakingupthe
totalofaccountsreceivables
Agetheaccounts
Selectindividualitemsforfurtheraudittests
Printconfirmations
Statisticallyevaluatetheresults
Makeajudgmentontheneedforanaudit
adjustment

SelectedAuditProceduresPerformedon
DetailedAccountsReceivableRecords

TasksPerformedbyGAS(ACL)

Footingafile
Selectingasampleeitherstatisticallyorjudgmentally
Extracting,sorting,andsummarizingdata
Obtainingfilestatistics(totals,minimum/maximum/averagevalues)
Evaluatingstatisticalsampleresults
Performinganalyticalreviewtechniques
Findinghowmanytransactionsorpopulationitemsmeetspecified
criteria
Checkingforgapsinprocessingsequences
Checkingforduplicates
Doingarithmeticcalculations
Preparingcustomreports
Analyzingdataforfilevalidity
Analyzingdatafilesforunusualpatternsofnumbers

ImplementingGAS
Identifiestheclientscomputerizedfilestobereadby
auditsoftwareortobedownloadedtoaPCtoberead
bytheauditsoftwareanddevelopsadescriptionof
thefilecharacteristicstofacilitateauditsoftwareuse,
includingthefollowing:
Filetype(suchasdBase,ASCII,EBCDIC,Access,or
Excel)
Filedescription,includingspecificationofeachfield:
Lengthofrecordsandindividualdatafields
Typeoffield,suchasalpha,numeric,ordate.

Determinesthecomputerconfigurationandoperatingsystem
onwhichthefileiscontained

ImplementingGAS
Determineswhethertorunthesoftwareontheclients
computersystemortodownloadthedatatoapersonal
computer
Extractsthedatafromtheclientscomputersystem
Runsthesoftware

LO8:AnalyticalProceduresasa
SubstantiveTest
Examplesofanalyticaltechniques,including
relationshipsandsourcesofdata
Financialinformationforequivalentpriorperiods,
suchascomparingthetrendoffourthquartersalesfor
thepastthreeyearsandanalyzingdollarandpercent
changesfromtheprioryear
Expectedorplannedresultsdevelopedfrombudgetsor
otherforecasts,suchascomparingactualdivision
performancewithbudgetedperformance
Comparisonoflinkedaccountrelationships,suchas
interestexpenseandinterestbearingdebt

AnalyticalProceduresasa
SubstantiveTest(continued)
Ratiosoffinancialinformation,suchasexaminingthe
relationshipbetweensalesandcostofgoodssoldor
developingandanalyzingcommonsizedfinancial
statements
Companyandindustrytrends,suchascomparing
grossmarginpercentagesofproductlinesorinventory
turnoverwithindustryaverages
Analysisofrelevantnonfinancialinformation,suchas
analyzingtherelationshipbetweenthenumbersof
itemsshippedandroyaltyexpenseorthenumberof
employeesandpayrollexpense

EffectivenessofSubstantiveAnalytical
Procedures
Factorsonwhicheffectivenessofsubstantive
analyticalproceduresdepends
Natureoftheassertionbeingtested
Plausibilityandpredictabilityoftherelationships
inthedata
Availabilityandreliabilityofthedatausedto
developtheexpectation
Precisionoftheexpectationthattheauditor
develops
Rigoroftheanalyticalprocedure

RigoroftheAnalyticalProcedure
Regressionanalysis
Expected,orpredicted,valueisdeterminedusinga
statisticaltechniquewherebyoneormorefactorsisusedto
predictanaccountbalance

Reasonablenesstest
Auditorwilldevelopanexpectedvalueofanaccountby
usingdatapartlyorwhollyindependentoftheclients
accountinginformationsystem

Trendanalysis
Ratioanalysis

RigoroftheAnalyticalProcedure
Scanning
Auditorwilleyeballaccountbalances,listingsof
transactions,journals,andsooninanefforttodetectany
unusualorunexpectedbalancesortransactions

AnalyticalProcedures
Analyticalprocedurescanbeusedtoprovide
evidencethatcorroboratesanauditorsalready
existinginformationaboutthecorrectnessofan
accountbalanceandshouldbeusedwhenthe
proceduresare

reliable
morecosteffectivethanothersubstantiveprocedures

Analyticalproceduresaredesignedtoprovide
independentevidenceaboutaccountbalancesnotto
replacetheclientsunderlyingestimationprocess