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Analytical procedures are used by auditors to evaluate their clients' financial information by studying plausible relationships among both financial and non-financial data. Explain how analytical procedures are used at the different stages of an audit.
4 – 18Test Bank for Auditing: a practical approach, Canadian EditionCASECa 59John Primo, the senior auditor at Delahanty, Forbes, CA’s was planning for the audit of Canadian Light Source (CLS) and decided to use benchmarking as an analytical procedure. His manager agreed with John’s approach and suggested information sources that would ensure the reliability of the data for his benchmarking exercise.As John walked out of the office he ran into Gina Stevenson, a newly hired auditor. He congratulated her on her decision to use a substantive approach to her accounts receivable section of the audit program.Gina was also going to be reviewing certain internal controls in the CLS audit program. She asked him to whom she should report weaknesses in the client’s internal controls. Required:a)Which information sources are generally considered to be reliable when conducting benchmarking exercises?b)What circumstances would have made Gina use a substantive approach?c)To whom will Gina report weaknesses in a client's system of internal controls?Solution:a)In conducting analytical procedures, the following information sources are generally considered to be reliable:• information generated by an accounting system that has effective internal controls• information generated by an independent reputable external source• audited information• information generated using consistent accounting methods• information from a source internal to the client that has proven to be accurate in the past (for example, when preparing budgets).b)By assessing control risk as high, Gina will adopt a predominantly substantiveaudit approach.When this audit strategy is adopted, it is implied that Gina has gained the minimum necessary knowledge of the client's system of internal controls as required by the auditing standards, but generally she will not have conducted tests of those controls.If CLS's system of internal controls is non-existent, very poor or unlikely to be effective in mitigating an identified inherent risk, there is generally no point testing the internal controls as Gina will not be planning on relying on them. Instead, Gina will increase her level of reliance on detailed substantive procedures, which involves intensive testing of year-end account balances and transactions from throughout the year.c)If the auditor tests the controls and believes them to be ineffective, the auditor cannot rely on the controls. In this case, the auditor reports the weaknesses identified to those charged with governance, makes recommendations on improving the controls and increases the reliance placed on detailed substantive procedures.