Substantive Analytical Procedures: Revenue, Cash, and A/R

Substantive Analytical Procedures – the comparison of quantitative relationships among account balances and other indicators to an auditor’s expectations.

If auditor expectations are not met, additional evidence is gathered to identify possible misstatements. (Knechel)

Documentation of Substantive Analytical Procedures (PCAOB):

a.       Form expectation

b.      Results of comparison

c.       Additional procedures to be performed

Expectations:

Revenue - $222,086

Cash - $14,176.25

Accounts Receivable – $4,609

Results:

Account	2011(Unaudited)	Auditor’s Expectations	Expectation Gap
Revenue	$352,523	$222,086	$130,437
Cash	$9,347	$14,176.25	$4,829
Accts. Receivable	$10,846	$4,609	$6,237

 

Expectations were formed based on linear progression.  Information from the Balance Sheet and Income Statement balances to form expectations.

Additional Procedures to be performed:

·         Inquiry

·         Recalculation and re-performance

·         Tests of transactions – verification of details and occurrence of transactions

·         Tests of accounts – test details of year-end balance through test of existence and valuation

·         Tests of presentation and disclosure – examine footnotes and disclosure for better understandability of financial statements

·         Inspection of records and documents – helps support all assertions in financial statements

·         Analytical evidence – examination of relationships among importance account balances, percentages and ratios for unexplained variations

References:

 Linda S. McDaniel and William R. Kinney, Jr. Expectation-Formation Guidance in the Auditor's Review of Interim Financial Information. https://webvpn.ucr.edu/+CSCO+0h756767633A2F2F6A6A6A2E77666762652E626574++/stabe/-CSCO-3p--pdfplus/2491292.pdf?acceptTC=true

AU Section 329 Substantive Analytical Procedure. PCAOB. http://pcaobus.org/Standards/Auditing/Pages/AU329.aspx#ps-pcaob_88942dde-5310-4f3e-88a9-fd8f8a478f54