Question 1
In carrying out an audit, there are several requirements related to developing an expectation and conducting analytical procedures when the procedures are intended to provide substantive evidence. The first requirement is determining the suitability of the procedure. In determining the suitability, the auditor should consider the risk of material misstatement. The auditor should use procedures that help to identify material misstatements.
The second requirement is an evaluation of the information and data that auditor uses to develop his expectations, trends and ratios. The reliability of the information and data depends on the strength of internal controls, the source of data and comparability of the data. Auditors emphases’ on internal controls because they determine the validity, completeness and accuracy of client’s financial data The third requirement is determining whether the analytical procedure should be performed separately or together with other procedures. The analytical procedures should be used alone or in combination with other procedures in a way that helps identify any material misstatement. The last requirement requires the auditor to determine any misstatement difference that can be accepted without further probing of the client’s financial data. This acceptance level should be based only on two issues i.e. the possibility of material misstatement and the level of assurance (AICP, 484).
Question 2
There are several advantages gained when an auditor uses the analytical procedure as substantive procedures. The first advantage is that the analytical procedures are developed during audit planning. Thus, the auditor acquires an extensive understanding of client’s business. Second, the procedures give the auditor adequate time to focus on few and important factors that affect account balance. Lastly, analytical procedures are quite effective in performing understatement tests (Anderson, Urton, and Koonce, 4).
References
AICP. "AU-C Section 520." Analytical Procedures. 2015. Web. 29 Feb. 2016.
Anderson, Urton, and Koonce, Lisa. "Evaluating the Sufficiency of Causes in Audit Analytical
Procedures." Ajournal of Practice and Theory 17 (1998). Web.
