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Analytical Procedures
Chapter 8
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Learning Objective 1
Discuss why adequate audit
planning is essential.
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Risk Terms
Acceptable audit risk
Inherent risk
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Learning Objective 2
Make client acceptance decisions
and perform initial audit planning.
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Learning Objective 3
Gain an understanding of the
clients business and industry.
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Business Operations
and Processes
Factors the auditor should understand:
Major sources of revenue
Key customers and suppliers
Sources of financing
Information about related parties
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Code of Ethics
In response to the Sarbanes-Oxley Act, the SEC
now requires each public company to disclose
whether is has adopted a code of ethics that
applies to senior management.
The SEC also requires companies to disclose
amendments and waivers to the code of ethics.
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Measurement and
Performance
The clients performance measurement system
includes key performance indicators. Examples:
market share
sales per employee
unit sales growth
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Learning Objective 4
Assess client business risk.
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Learning Objective 5
Perform preliminary analytical
procedures.
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Preliminary Analytical
Procedures
Comparison of client ratios to industry
or competitor benchmarks provides an
indication of the companys performance.
Preliminary tests can reveal unusual
changes in ratios.
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Examples of Planning
Analytical Procedures
Selected Ratios
Short-term debt-paying ability:
Current ratio
Client Industry
3.86
5.20
3.36
5.20
2.51
Profitability ratio:
Profit margin
0.07
0.05
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Learning Objective 6
State the purposes of analytical
procedures and the timing
of each purpose.
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Analytical Procedures
SAS 56 emphasizes the expectations
developed by the auditor.
1. Required in the planning phase
2. Often done during the testing phase
3. Required during the completion phase
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(Required)
Planning
Phase
Understand clients
industry and business
Primary
purpose
Secondary
purpose
Indicate possible
misstatements
(attention directing)
Reduce detailed tests
Primary
purpose
Testing
Phase
(Required)
Completion
Phase
Secondary
purpose
Secondary Primary
purpose
purpose
Secondary Primary
purpose
purpose
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Learning Objective 7
Select the most appropriate
analytical procedure from
among the five major types.
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3.4
26.3%
3.5
26.4%
Industry
2007
2006
3.9
27.3%
3.4
26.2%
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$143,086
103,241
$ 39,845
14,810
17,665
1,689
$ 5,681
1,747
$ 3,934
100.0
72.1
27.9
10.3
12.4
1.2
4.0
1.2
2.8
2006
(000)
% of
Prelim. Net sales
$131,226
94,876
$ 36,350
12,899
16,757
2,035
$ 4,659
1,465
$ 3,194
100.0
72.3
27.7
9.8
12.8
1.6
3.5
1.1
2.4
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Learning Objective 8
Compute common financial ratios.
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Quick ratio
Current assets
Current ratio =
Current liabilities
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
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365 days
=
Accounts receivable turnover
Inventory
turnover
Days to sell
inventory
365 days
=
Inventory turnover
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Total liabilities
Total equity
Times interest
=
earned
Operating income
Interest expense
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Profitability Ratios
Earnings
per share
Gross profit
percent
Net income
Average common shares outstanding
Profit margin =
Operating income
Net sales
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Profitability Ratios
Return on
=
assets
Return on
common
=
equity
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Summary of Analytical
Procedures
They involve the computation of ratios
and other comparisons of recorded
amounts to auditor expectations.
They are used in planning to understand
the clients business and industry.
They are used throughout the audit to identify
possible misstatements, reduce detailed tests,
and to assess going-concern issues.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
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End of Chapter 8
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