Question

Auditing course:

a- Describe in detail the substantive analytical procedures that can be used in auditing the revenue?

b-The testing of the hierarchy is considered to be more effective and more efficient. Why?

Answer 1

a)

Substantive Analytical Procedures

Substantive procedures are intended to create evidence that an auditor assembles to support the assertion that there are no material misstatements in regard to the completeness, validity, and accuracy of the financial records of an entity.

Revenue typically is a significant account often involving significant risk that warrant special audit consideration.

Audit procedures for deferred revenue, revenue analytics examples and analytical procedures in audit planning all fall under the umbrella of how to audit revenue.

Auditing revenue essentially includes,

1.Obtain an understanding of firms products and services

2.obtain an understanding of it's revenue recognition policies and related internal controls

3.Apply substantive procedures such as analytical or test of details or a combination of both.

4.Ensuring persuasive evidence of arrangements exists.

Some of the examples of analytical procedures;

•Comparison of revenues with units shipped or production levels.

•Analysis of daily or weekly revenues around year end

•Comparison with previous year's and/or industry:

Consideration of predictable relationships such as revenue and gross profit percentage by product

Receivable turnover and days outstanding

Allowance for uncollectible accounts as a percentage of Accounts receivable.

Bad debts expense as a percentage of credit sale

Sales return as a percentage of revenue.

•Substantive analytical procedures for revenue also includes comparison of revenue items with budgets, forecasts,prior periods similar industries and so on.

b)

Testing of hierarchy

Applying the audit testing hierarchy is more effective;

Testing of control will influence the nature, timing, and extent of substantive testing and will enhance the auditor’s ability to hone in on areas where misstatements are more likely to be found. If controls are highly effective, less extensive substantive procedures will need to be performed.

Applying the audit testing hierarchy is more efficient;

Substantiveanalytical procedures are less costly to perform because tests of controls and substantive analytical procedures provide assurance on multiple transactions