Which of the following illustrates a trend substantive analytical procedure

Analytical procedures have increasingly become important when conducting audit on financial statements. This has been shown by the Auditing Standards Board, which made it compulsory to perform analytical procedures on all audits of financial statements. Analytical procedures refer to the evaluation of financial information in terms of identifying relationships among financial and nonfinancial data. These relationships are in terms of comparing expected and actual balances. Material differences between the two call for further investigations.

Ratio Analysis

1. Ratios are expressed as one financial statement data in relation to another. For example, current ratio is calculated by dividing current assets with current liabilities. Auditors use ratio analysis in their audit to compare ratios for the current year with ratios for a prior year, budget or an industrial average. Any material differences in the ratios must be explained by the auditors.

Trend Analysis

1. Trend analysis refers to the comparison of a current balance with a previous year's balance. An auditor may choose to use either the diagnostic or casual approach. The diagnostic approach is used to evaluate if a balance of a current account deviates significantly from the trend established in the previous year's balances for that account. In the casual approach, the auditor calculates a balance expected for the account then compared to the actual amount.

Reasonable Tests

1. Nonfinancial data for the current period is used to calculate an expected amount for the account balance. This procedure does not use previous period events; rather, it uses operating data for the period under consideration for the audit. These procedures are therefore more applicable to income statements because data for current period may be easier to attain than previous years' data. The calculated amount is then used to check for reasonableness in the account balances under audit.

Model-Based Procedures

1. Model-based procedures use client-operating data and external data, such as industry and economic information, to predict account balances for items under audit. These models also use financial and nonfinancial data as well. The most commonly used procedure is regression analysis, which is used for income statements using monthly data for the past three years. The 36 monthly observations are used to establish a relationship that is used to predict current account balances.

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A conceptually logical approach to the auditor's evaluation of internal control consists of the following four steps:

I. Determining the internal controls that should prevent or detect errors and fraud.

II. Identifying control deficiencies to determine their effect on the nature, timing, or extent of auditing procedures to be applied and suggestions to be made to the client.

III. Determining whether the necessary internal control procedures are prescribed and are being followed satisfactorily.

IV. Considering the types of errors and fraud that can occur.

What should be the order in which these four steps are performed?

(1) I, II, III, and IV

(2) I, III, IV, and II

(3) III, IV, I, and II

(4) IV, I, III, and II

Video Transcript

Okay, so let's understand the accounting cycle first. Then we will understand which process of the company's second request more analytical thought. Okay, so the abounding Zaken So we'll go with the diagram because it will give you a more elaborated idea. Okay, so first up on first of all, we have a transaction. We have a dog, then we will have a journal entry. It's it is mostly concerned with recording Oh, transaction, because before recording the tradition, they need to be a transaction. So therefore first step than recording off the transaction, then ledger after the cities of conviction. After making a general increase or recording the competition, people create ledgers. The knock of that the evil act Trial bellies. It's like a symbolized summarize position of all the letters Advil Place. We will understand these terms in detail or be bill, draw these Georgie's formers, along with the new medical problems, get an idea that how how old this process works. So this is third. This is for this is the more traditionally I'm going, I'm beating right now. Then comes the occupation of financial statements. This is a more straightforward I have a meeting some of the terms like closing it. Losing, adjusting entries, closing, closing campgrounds hosting and all that toe make it most clear. So within this accounting cycle, within this accounting cycle, which process requires the most analytical thought it will discuss it right now. Okay, So the most analytical tart will be required in case off accordingly. Conviction in this process content the guards, the traveler chip. Bye. Giving effect by giving effect. So the multiple accounts I was in the entity. After executing the financial transaction, the content will be able to regard such tradition in the general off the company. Now what is you know, how will he regarded on what basis he will reportedly be? Lex People explain this further. Benji will face such type of puppets. But before that, it requires the recording of the damage and requires more political talk because it involves four basic terms as off now. I wouldn't say Violet According to election regard, introduction choirs, More knowledge across married people. Idiots. Okay, suggests calculation. Expects knowledge off financial reporting, financial reporting standards. It's a knowledge of applicability. At least give Nitti off. Well, here's to company. The list is not at all exhaustive because because it requires experience. Foreign account. It requires experience for in the caldron record different type of different types of religion which an accountant or an entity face during the life or something. Business. So, for the current problem, Dean, we have the correct choice. It is. Hey, that's all for the solution. Thank you.

What is a trend substantive analytical procedure?

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