Reliability.docx - 1.1 Reliability when the client has not been audited in the past or has changed its accounting policies or framework this can edures

Reliability.docx - 1.1 Reliability when the client has not...

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1.1 Reliability when the client has not been audited in the past or has changed its accounting policies or framework; this can edures over the client's financial information, the practitioner must question the reliability of the financial information being used. The practitioner must also consider the reliability of prior The practitioner must also take care when comparing the client's financial performance against benchmarks. The practitioner must consider whether the benchmark is reasonable — for example, if an industry average is being used as a benchmark, the practitioner must consider whether the client is comparable to the companies in its industry. Where the practitioner is comparing results against the client's events during the period that the client could not have budgeted for. If these things are not taken into consideration, the interpretation of the results of the analytical procedures will not be accurate or useful for risk assessment. 1.2 Annualizing The practitioner will often gain an understanding of the client and perform analytical procedures on the financial information meaningful interpretation of the results. To annualize, divide each account on the income statement by the number of months included in the interim income statement and then multiply each account by the number of months in a year (12). For example, if revenue for nine months ended September 30, 20X1, was $45,000, then annualizing this ant would result in project annual revenue for the 12 months ended December 31, 20X1 45,000 / 9 months × 12 months). The balance sheet represents the value of accounts at a single point in time and does not require annualizing. 2 Types of Analytical Procedures As noted above, there are three main types of analytical procedures that the practitioner should perform, at a minimum: • horizontal analysis • vertical analysis • ratio analysis Please refer to the E-book chapter on financial statement analysis for more detail. Below is a discussion of the common financial statement analysis ratios and what their results may indicate in an audit context. The table also suggests procedures that could be performed in each case. Note that this focuses on common audit risks and errors and is not exhaustive.
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Ratio Audit context Example procedures Accounts receivable turnover (and days sales) Determines how quickly the company is turning them into cash.
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