Discuss about the Analytical Procedures As Risk Assessment.
Analytical processes refer to the procedure in auditing that helps auditors get information concerning changes in the business and thus point out potential risks in other audit processes by comparing financial and non- financial data. The analytical procedures are used in carrying out risks assessments and as substantive methods during the audit.
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Analytical procedure
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Explanation
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Understanding the nature of the organization.
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In this, several questions are asked. One is on the market overview of the company, where the main clients of the company are identified. The other aspect is on who regulates the stated clients, where the Securities and Exchange Commission is the common regulatory agency used. The business strategy of the company is required in this step. Coca-Cola Company is the organization in this case, where the clients are the non -alcoholic drinks consumers. The strategy used by the company is ensuring that the goods demanded by the buyers are supplied satisfactorily. Where the market served by the company and the strategy used are compatible, like the case with Coca-Cola, it is said that the company is safe from risks.
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Evaluating the quality of the organization’s management.
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The type of management used in an organization determines the success to be attained (Chan & Vasarhelyi 2018). For example, a company where employees have been retained for many years could be said to have a stable type of management. Also, where financial restatements are not common, it is a sign that the management is working efficiently. Coca-Cola Company has retained most of its workers, indicating that the company’s management is suitable.
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Analytical procedure
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Explanation
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Developing an independent expectation
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The development of a precise and objective expectation is vital in substantive procedures (Vasarhelyi et al., 2018). An expectation refers to foresee of a known amount, which could be a specific number, percentage or approximation. The single expectation is developed by pointing out the plausible relationships, for example, market trends and the clients' revenues. Notably, the expectation should be based on logical reasoning, which is met by having significant knowledge about the business, trends in the industry and its nature.
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Defining a significant difference
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In this way, the auditor determines the difference between the expectations that could be accepted without further research (ISA 520). The difference that is significantly accepted is known as the threshold. Notably, the threshold could be based on figures for percentages of the items being evaluated. Developing a suitable threshold is important in substantive analysis, which should be developed at the planning stage, to avoid biases in judgment. On the other hand, the threshold expected is the accepted amount of possible misstatement which indicates that it should not get over the planning materiality. In addition, it has to be small, so as the auditing team could point out misstatements which could be material either as one or when aggregated with other portions. Therefore, this is an important way of carrying out substantive analysis in the organization.
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References
Chan, D. Y., & Vasarhelyi, M. A. (2018). Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.
Vasarhelyi, M. A., Alles, M. G., & Kogan, A. (2018). Principles of analytic monitoring for continuous assurance. In Continuous Auditing: Theory and Application (pp. 191-217). Emerald Publishing Limited.
