Auditing Burlingham Bees

Topics: Revenue, Income statement, Net income Pages: 5 (1598 words) Published: October 23, 2011
Burlingham Bees
1. AU 329
a. Based on the standards, describe the guidelines for developing an expectation and conducting analytical procedures when those procedures are intended to provide substantive evidence (para. 9-22). i. .09 Reliance on substantive tests: may be derived from tests of detail, from analytical procedures, or from a combination of both. The decision about which procedure to use is based on the auditor’s judgment. ii. .10 Level of assurance: analytical procedure may provide effective level of assurance for some assertions, but some of the assertions may be more effective to reach desired level of assurance by using test of details. iii. .11 Identifying potential misstatement: identifying potential misstatement depends on: 1. The nature of assertion

.12 Analytical procedures may test for assertions in which potential misstatements would not be apparent from an examination of the detail evidence or in which detailed evidence is not readily available. 2. The plausibility and predictability of the relationship .13 Reasons of making relationship plausible are that data sometimes appear to be related when they are not and sometimes an unexpected relationship can provide important evidence when appropriately scrutinized. .14 More predictable relationships are required to develop the expectation as higher levels of assurances are desired from analytical procedure. i. Relationships in a stable environment are more predictable. ii. Relationships involving income statement accounts are more predictable than relationships involving only balance sheet. iii. Relationships involving transactions subject to management discretion are sometimes less predictable. 3. The availability and reliability of the data used to develop the expectation .15 To test completeness assertion, expected sales for some entities might be developed from production statistics or square feet of selling space. .16 The consideration of reliability of data is based on:

i. Whether the data was obtained from independent sources ii. Whether sources within the entity were independent of those who are responsible for the amount being audited. iii. Whether the data was developed under a reliable system with adequate controls. iv. Whether the data was subjected to audit testing in the current or prior year. v. Whether the expectations were developed using data from a variety of sources. 4. The precision of the expectation

.17 The expectation should be precise enough to provide the desired level of assurance .18 Many factors can influence financial relationships. More effective identification of factors that significantly affect the relationship is generally needed as the desired level of assurance from analytical procedures increases. iv. .20 In planning the analytical procedures as a substantive test, the auditor should consider the amount of difference from the expectation that can be accepted without further investigation. v. .21 The auditor should evaluate significant unexpected differences. vi. .22 When an analytical procedure is used as the principal substantive test of a significant financial statement assertion, the auditor should document all of the following: a. The expectation, where that expectation is not otherwise readily determinable from the documentation of the work performed, and factors considered in its development. b. Results of the comparison of the expectation to the recorded amounts or ratios developed from recorded amounts c. Any additional auditing procedures performed in response to significant unexpected differences arising from the analytical procedure and the results of such additional procedures.

b. What are the advantages of developing an expectation at a detailed level (i.e., using disaggregated data) rather than at an overall or aggregated level? .19 Expectations developed at a...
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