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    ASA 520 - AmandaLovesToAudit PDF

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    Analytical procedures are substantive audit procedures used to gather audit evidence on assertions. The objectives are to obtain relevant and reliable audit evidence in sufficient quantities. Analytical procedures examine plausible relationships between financial statement accounts based on the entity's experience. Near the end of the audit, analytical procedures can help form an overall conclusion by identifying any remaining unusual fluctuations. The going concern basis of accounting assumes the entity will continue for the foreseeable future. Management is responsible for assessing the entity's ability to continue as a going concern. As part of risk assessment, the auditor must evaluate risks to the going concern assumption and discuss any events or conditions with management that could affect going concern. Throughout the audit, the auditor remains alert for evidence

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    ASA 520 - AmandaLovesToAudit PDF

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    Analytical procedures are substantive audit procedures used to gather audit evidence on assertions. The objectives are to obtain relevant and reliable audit evidence in sufficient quantities. Analytical procedures examine plausible relationships between financial statement accounts based on the entity's experience. Near the end of the audit, analytical procedures can help form an overall conclusion by identifying any remaining unusual fluctuations. The going concern basis of accounting assumes the entity will continue for the foreseeable future. Management is responsible for assessing the entity's ability to continue as a going concern. As part of risk assessment, the auditor must evaluate risks to the going concern assumption and discuss any events or conditions with management that could affect going concern. Throughout the audit, the auditor remains alert for evidence

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    Analytical procedures are substantive audit procedures used to gather audit evidence on assertions. The objectives are to obtain relevant and reliable audit evidence in sufficient quantities. Analytical procedures examine plausible relationships between financial statement accounts based on the entity's experience. Near the end of the audit, analytical procedures can help form an overall conclusion by identifying any remaining unusual fluctuations. The going concern basis of accounting assumes the entity will continue for the foreseeable future. Management is responsible for assessing the entity's ability to continue as a going concern. As part of risk assessment, the auditor must evaluate risks to the going concern assumption and discuss any events or conditions with management that could affect going concern. Throughout the audit, the auditor remains alert for evidence

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    © All Rights Reserved
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    61 views6 pages

    ASA 520 - AmandaLovesToAudit PDF

    Uploaded by

    Red
    Analytical procedures are substantive audit procedures used to gather audit evidence on assertions. The objectives are to obtain relevant and reliable audit evidence in sufficient quantities. Analytical procedures examine plausible relationships between financial statement accounts based on the entity's experience. Near the end of the audit, analytical procedures can help form an overall conclusion by identifying any remaining unusual fluctuations. The going concern basis of accounting assumes the entity will continue for the foreseeable future. Management is responsible for assessing the entity's ability to continue as a going concern. As part of risk assessment, the auditor must evaluate risks to the going concern assumption and discuss any events or conditions with management that could affect going concern. Throughout the audit, the auditor remains alert for evidence

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    PSA 520 - ANALYTICAL PROCEDURES

    Substantive procedures
    - To help us gather evidence on our different assertions (Assertions from ISA 315,
    Paragraph A128)

    Objectives
    - Relevant and reliable audit evidence (ISA 500; Must be relevant and reliable)
    - Needs to be sufficient & appropriate amount of evidence
    - Analytical procedures near ​end of the audit

    Plausible relationships
    - Comes from ​double entry accounting
    - When one goes up, one goes down etc.

    Definition
    - Mental model approach for collecting
    - Looking for things that don’t make sense (inconsistencies)
    - ISA 315 - understand client (if we don’t we can’t determine if something is a fluctuation
    or not)

    Application and Other Explanatory Material


    Definition of Analytical Procedures
    Analytical procedures include ​consideration of comparisons of entity’s financial
    informatio​n with for example:
    - Comparable information for prior periods (common)
    - Anticipated results such as budgets (?) (Budgets can be manipulated), forecasts,
    expectations (Probably not as useful)
    - Industry information such as industry averages
    - How well client is similar to other companies that make up the average otherwise
    it might not be the best use of comparison (or small sample of firms closer to
    client)

    Also include ​consideration of relationships


    - Among elements of financial information that would be expected to conform to a
    predictable pattern based on entity’s experience
    - Ex. Dr Cash and Cr Sales revenue like if we know that sales revenue is going to
    increase by a certain percentage then so should our COGS by the same
    percentage
    - Between financial information and relevant non-financial information
    - Data analytics

    Requirements ​(Legally enforceable components)


    Substantive Analytical Procedures
    When ​designing and performing substantive analytical procedures,​ the auditor has to do
    four (4) things:
    - First, determine the ​suitability​ of particular substantive analytical procedures for given
    assertions (auditor has to determine whether the particular substantive analytical
    procedure matches the assertion)
    - Second, is to evaluate the ​reliability​ of data which the auditor developed their
    expectation of recorded amounts or ratios from
    - The auditor needs to evaluate the client’s internal controls
    - (If it’s poor, auditor probably couldn’t rely on substantive analytical procedures to
    the same extent)
    - Third, is to develop an ​expectation​ of recorded amounts or ratios and evaluate whether
    the expectation is sufficiently precise to identify a misstatement
    - If auditor expects an increase of 5% in an industry but there’s an increase of say
    10% or 15% in the client, then there may be cause for concern.
    - Fourth, is to determine the amount of any ​difference ​of recorded amounts from
    expected values
    - Then for that difference or for any difference, there should be further investigation
    meaning more audit testing or substantive work

    In the AmandaLovestoAudit video, she further emphasizes that


    Throughout all these, it’s important to keep in mind that an analytical procedure won’t pinpoint
    the exact source or the location of a material misstatement.
    - It can point to a general area but not the very specific transaction

    Analytical Procedures that Assist When Forming an Overall Conclusion


    - Happens near the ​end

    What happens in the risk assessment stage of audit


    - For risk assessment in the beginning
    - Auditor develops a list of Analytical Procedures
    - Ratio analysis
    - Common size
    - Trends
    - APs are used to identify certain areas of risk
    - Use areas of risk to gather substantive evidence about those risks
    - If errors are found then that would result in a certain adjustment
    - Ask management to make adjustments
    - Which would result in an adjusted Income statement and Balance Sheet
    - Rerun Analytical procedures on the adjusted Income Statement and
    Balance sheet to look for errors that d
    ​ isappear
    - At the end of the audit, what should happen is that any unusual
    fluctuations found at the beginning of the audit ​should disappear​ if the
    auditor detected all of the material misstatements
    - If there still are unusual fluctuations, then there should still be
    further investigation because this could signal that there still are
    undetected misstatements.

    Investigating Results of Analytical Procedures


    - If there are still fluctuations, inconsistencies, auditor has to again ​further​ ​investigate
    which would involve:
    - Talking to management (and obtaining appropriate audit evidence relevant to
    management’s responses) and
    - Performing other audit procedures (like tracing and inspecting documents)

    PSA 570 - GOING CONCERN

    Introduction
    Going Concern Basis of Accounting
    - Assumption that they will continue its operations for foreseeable future
    - Sometimes company knows it’s going to close or when their FS indicates that it’s likely
    that they are going to close in the future
    - In this case, they need to use the special purpose financial reports (Ex. use
    liquidation values)
    Responsibility for Assessment of Entity’s Ability to Continue as a Going Concern
    - Explicit requirement for management to make a specific assessment of the entity
    - Not recorded anywhere in the annual report
    - Section where management usually say that if they use historical cost, make
    assumption that they are going as a going concern
    - Management’s assessment of entity’s ability to continue as a going concern involves
    making a judgement, at a particular point, about inherently uncertain future outcomes of
    events or conditions
    - needs to make judgement based on information available

    Requirements
    Risk Assessment Procedures and Related Activities
    - Perform risk assessment procedures at the ​planning stage​ (needs to consider if the
    company is a going concern)
    - The reason why this is done at the planning stage is because if the company has
    that risk of not being a going concern, then the auditor ​needs t​o take that risk into
    account​ throughout​the process of them doing the audit and the planning
    - When performing risk assessment procedures as required in PSA 315, the auditor needs
    to find out if there are any certain events or conditions that would affect the entity’s ability
    to continue as a going concern. First, the auditor needs to see whether management
    was already able to perform their own preliminary assessment of the entity’s ability to
    continue as a going concern.
    - So if an assessment ​has been performed​, then the auditor should discuss the
    assessment with management. Auditor should ask “Okay so based on your assessment,
    are there any events or conditions that would cause significant doubt on your ability to
    continue as a going concern.”
    - And if there are, then the auditor should ask “Okay then what do you plan to do
    about it? What are your plans to address them”
    - AmandaLovestoAudit gives this example:
    - Say a company has a loan that is going to expire and entity needs a new
    loan then the auditor needs to talk about management’s plan to obtain
    this new loan. Management’s plan may be to decide to talk to more banks
    or to raise new capital and after hearing the plan of management, the
    auditor needs to consider the likelihood of this plan being successful
    - To continue this scenario, say management discusses a plan to raise new
    capital by making mobile phones by taking 40% of the market share then
    this plan doesn’t seem likely considering that they would have to face
    large competitors such as Apple and Samsung
    - BUT If an assessment​ hasn’t been performed​, then auditor needs to discuss with
    management about going concern and do their work and again ask if they are aware of
    any certain conditions or events that could threaten the entity’s ability to continue as a
    going concern.
    - Auditor needs to remain ​alert ​throughout the audit for evidence of events or conditions
    about going concern​ (every member needs to consider the possibility of a risk of going
    concern)
    - Regular communication is extremely important (Combining information to
    determine any issues concerning going concern)
    Evaluating Management’s Assessment
    - Evaluating management’s assessment of the entity’s ability to continue with the going
    concern
    - Again, if management was able to make a preliminary assessment of their own,
    then the auditor needs to check if they are using all the ​right or relevant
    information
    - If they are making their own assumptions about changes in the market/growth or
    projections of performance, are these assumptions and projections valid,
    reasonable, or achievable?

    Period beyond Management’s Assessment


    - Self-explanatory
    - Need to ask management if they are aware of any certain events or conditions beyond
    the period of management's assessment that could pose an issue to the entity’s ability to
    continue as a going concern
    Additional Audit Procedures When Events or Conditions are Identified
    - When auditor has identified something, then they must also:
    - Obtain sufficient appropriate audit evidence
    - to determine whether or not a material uncertainty exists
    - This material uncertainty could cast significant doubt on the entity’s ability
    to remain a going concern
    - (Ex. Something being produced becomes illegal; Receipt of government
    subsidy disappears)
    - So, if there are, then auditor needs to consider if this would affect going
    concern and is there anything that could help minimize the impact of that
    concern?

    Additional Audit Procedures include:


    1. Asking management to make an assessment of entity’s ability to continue as a going
    concern. This is if management wasn’t able to perform their own preliminary assessment
    yet.
    2. Evaluate management’s plans for the future
    a. Again, is management’s plans: reasonable, achievable, is it going to help
    improve the situation and the client?
    3. If there is a​ cash flow issue​ and in response, the entity prepared a cash flow forecast
    where they make certain assumptions or projections, the auditor needs to consider
    whether the underlying data is reliable or if the assumptions are reasonable. And is there
    enough support for management’s assumptions?
    4. Consider any additional facts or information
    a. The auditor needs to evaluate if there are subsequent events or subsequent
    information that would help the auditor understand the client’s plan and evaluate
    its likelihood
    5. Need to get a written representation from management
    a. Ask them to write down the plan and the model
    i. So we can audit it
    b. Get management to confirm that they’ve given out all information about the
    situation

    Audit Conclusions and Reporting


    - The auditor needs to consider this question, will client be a going concern for 12 months
    past date of signing the audit report
    - If there’s a material uncertainty, then the auditor should have looked at the
    magnitude of its impact, the likelihood of it happening, and lastly it needs to be
    properly disclosed.
    - Lastly, the auditor needs to judge:
    - Did the entity fairly present the information?
    - The Auditor also needs to ensure that the information is not ​misleading

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