Page 130 - CA Inter Audit PARAM

CA Ravi Taori
• Develop an expectation of recorded amounts or ratios and evaluate whether the expectation is
sufficiently precise to identify a misstatement that, individually or when aggregated with other
misstatements, may cause the financial statements to be materially misstated; and
• Determine the amount of any difference of recorded amounts from expected values that is
acceptable without further investigation.

QNO-- Suitability of Analytical Procedures -- Case Study New Course – (S24M)
520.04.30 Bhaskar CNO – SA520.100

CA M, auditor of a company, has planned to use substantive analytical procedures during course of audit.
In this regard, he has decided to use such procedures in the following areas: -
(i) For testing the relationship between sales and cost of sales
(ii) For testing rights over certain assets forming part of account balances
Comment upon his approach along with reasons
Answer (i) Substantive analytical procedures are more appropriate when an account balance or relationships
between items of data are predictable. A predictable relationship is one that may reasonably be
expected to exist and continue over time.

In the given case CA M, auditor of a company, has planned to use substantive analytical procedures
for testing relationship between sales and cost of sales. Hence, auditor’s approach is appropriate in
this case.

(ii) Using substantive analytical procedures is also affected by nature of assertion. Substantive analytical
procedures may be more effective in providing evidence for some assertions (e.g., completeness or
valuation) than for others (e.g., rights and obligations).

In the given case, CA M has planned to use substantive analytical procedures for testing rights over
certain assets forming part of account balances. Such procedures are likely to be less effective in this
case.

QNO Matters to be consider to decide combination of Old Course – (N20R)
520.04.50 analytical procedures and test of details #Unique
The decision about which audit procedures to perform, including whether to use substantive analytical

procedures, is based on the auditor’s judgment. Explain
Answer ➢ The auditor’s substantive procedures at the assertion level may be tests of details, substantive
analytical procedures, or a combination of both. The decision about which audit procedures to
perform, including whether to use substantive analytical procedures, is based on the auditor’s
judgment about the expected effectiveness and efficiency of the available audit procedures to
reduce audit risk at the assertion level to an acceptably low level.
➢ The auditor may inquire of management as to the availability and reliability of information needed
to apply substantive analytical procedures, and the results of any such analytical procedures
performed by the entity. It may be effective to use analytical data prepared by management,
provided the auditor is satisfied that such data is properly prepared.
Author’s Note : This question and answer is emphasizing that it is matter of auditor’s judgement to decide
whether to apply test of details or analytical procedures. But if question is emphasizing on factors to be
considered regarding suitability of analytical procedures then students are supposed to write “ V-RAT”
points as discussed in Notes.

QNO Analytical Procedures- Factor affecting Suitability- Volume Old Course -- (M19M/M22M)
520.05 Bhaskar CNO - SA520.120
Substantive analytical procedures are generally more applicable to large volumes of transactions that tend

to be predictable over time. Explain.
Answer Substantive Analytical Procedure:
➢ Substantive analytical procedures are generally more applicable to large volumes of transactions that

tend to be predictable over time. The application of planned analytical procedures is based on the
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