What does the process of performing analytical procedures consist of?

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1. Developing an expectation.
A variety of types of information are available to the auditor to develop an expectation for analytical
procedures including;
•• Financial information for comparable priority periods.
•• Anticipated results such as budgets and forecasts.
•• Relationships among elements of financial information within a period e.g. level of debtors and credit sales.
•• Information derived from similar firms in the same industry e.g. industry wage average.
•• Relationships between financial and non financial data e.g. wage expenses and a number of employees. In establishing these relationships, the auditor may use shillings amount, physical quantities ratios or percentages.

2. The amount of acceptable difference.
The amount of acceptable difference between the expectation and the financial statements balance that can be accepted without investigation is determined primarily by the amount that is considered to be a material misstatement However; this amount must be consistent with the degree of assurance from the procedure. When trend or ratio analysis is used, the auditor typically uses professional judgment to specify an absolute amount of difference or percentage difference that will result into investigation.

3. Comparison of the account balance or ratio with the expected balance or ratio.
Once the auditor has determined the expectation and amount of acceptable difference, he makes the actual comparison to determine where significant difference lies.

4. Investigation and evaluation of significant differences.
The auditor must investigate any significant differences and his expectation and the client’s financial statements balance or ratio to determine whether they represent misstatements. This involves reconsidering the methods and factors used in developing the expectation. Inquiry to management can be useful in this regard. Management explanations however must be ordinary be supported with other audit evidence. If the explanations are not tallying with other audit evidence, the editor will often be required to expand his tests of related financial amounts to determine whether or not they are materially misstated.

Wilfykil answered the question on April 11, 2019 at 13:31

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What does the process of performing analytical procedures consist of?

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