Advanced Audit

Fourth YEAR

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 Chapter One
Analytical Procedures of Auditing
➢ Definition of Auditing:
Auditing: the accumulation and evaluation of evidence about information to determine and report on
the degree of correspondence between the information and established criteria
Auditing: “A systematic process of objectively obtaining and evaluating evidence regarding assertions
about economic actions and events to ascertain the degree of correspondence between those
assertions and established criteria and communicating the results to interested”
‫ وممكن نقول عليها هي عمليه الحصول‬.‫ هي عمليه تجميع االدله وتقييم المعلومات وتحديد درجه التطابق بين المعلومات والمعايير‬:‫المراجعة‬
‫على ادله وتقييمها فيها يتعلق بالتأكيدات حول مواضيع معينه وقياس مدى التطابق بينها وابالغ النتائج الى المهتمين لمعرفه مدي تطابق تلك‬
.‫ ولمعلوماتك مش اكتر كلمه مراجعه نشأتها هي مشتقه من كلمه التينيه وتعني بمفوهمنا اسمع‬.‫المعلومات‬
➢ From The Definition What’s The Steps of Making Auditing:
1- Accumulate (Collecting evidence)
2- Evaluating evidence
3- Determine whether this information is prepared according to certain criteria
4- Reporting, the auditor should write a report

➢ Definition of Analytical procedures:

▪ Analytical procedures: Consist of evaluations of financial information through analysis of
plausible relationships among financial and nonfinancial data.
▪ For example:
To provide some assurance for the accuracy objective for both sales transactions and account
receivables.
▪ Analytical procedures: allow the auditor to overview the data to answer the question: Do the
numbers make sense?
▪ Analytical procedures: are based on the basic assumption that there are logical relationships
between the data, and it is reasonably expected that those relationships will continue.
▪ Analytical procedures: Analytical procedures include the consideration of comparisons of the
entity’s financial information with, for example:
o Comparable information for prior periods.
o Anticipated results of the entity, such as budgets or forecasts, or expectations of the
auditor, such as an estimation of depreciation.
o Similar industry information, such as a comparison of the entity’s ratio of sales to
accounts receivable with industry averages or with other entities of comparable size in
the same industry
▪ Analytical procedures: Examine unusual large Amounts (Fluctuations)

.‫ تتكون من تقييمات للمعلومات المالية من خالل تحليل العالقات المعقولة بين البيانات المالية وغير المالية‬:‫ اإلجراءات التحليلية‬
:‫ على سبيل المثال‬
.‫لتوفير بعض التأكيد على هدف الدقة لكل من معامالت المبيعات والذمم المدينة‬
‫ هل األرقام منطقية؟‬:‫ تسمح للمراجع بإلقاء نظرة عامة على البيانات لإلجابة على السؤال‬:‫ اإلجراءات التحليلية‬
.‫ ومن المتوقع بشكل معقول أن تستمر هذه العالقات‬، ‫ تستند إلى االفتراض األساسي بوجود عالقات منطقية بين البيانات‬:‫اإلجراءات التحليلية‬
:‫ على سبيل المثال‬، ‫ تشمل اإلجراءات التحليلية النظر في مقارنات المعلومات المالية للمنشأة مع‬:‫ اإلجراءات التحليلية‬
.‫ معلومات قابلة للمقارنة لفترات سابقة‬o
.‫ مثل تقدير االستهالك‬، ‫ أو توقعات المدقق‬، ‫ مثل الميزانيات أو التوقعات‬، ‫ النتائج المتوقعة للمنشأة‬o
‫ مثل مقارنة نسبة مبيعات الكيان إلى حسابات القبض مع متوسطات الصناعة أو مع كيانات أخرى ذات حجم مماثل في‬، ‫ معلومات صناعية مماثلة‬o
‫نفس الصناعة‬
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➢ Fluctuations occurs when:
1. Accounting system changes Like as change from FIFO to LIFO which lead to changes in
result of Financial statement.
2. Economic Events Like as (Covid-19 and Russian war).
3. Material Misstatement.
o Error
o Fraud

➢ Material Misstatement:
A material misstatement is information in the financial statements that is sufficiently incorrect that
it may impact the economic decisions of someone relying on those statements. For example, a
material misstatement of revenue could trigger a decision to buy a company's stock, causing losses
for the investor when the misstatement is later corrected and the price of the stock declines.
‫التحريف الجوهري هو معلومات واردة في البيانات المالية غير صحيحة بما يكفي لدرجة أنها قد تؤثر على القرارات االقتصادية لشخص يعتمد على تلك‬
‫ مما يتسبب في خسائر للمستثمر عندما يتم‬، ‫ يمكن أن يؤدي التحريف الجوهري لإليرادات إلى اتخاذ قرار بشراء أسهم الشركة‬، ‫ على سبيل المثال‬.‫البيانات‬
.‫تصحيح الخطأ في وقت الحق وينخفض سعر السهم‬
➢ Purpose of Analytical procedures:
• Preliminary analytical procedures (Planning): are used to assist the auditor to better
understand the business and to plan the nature, timing, and extent of audit procedures.
• Substantive analytical procedures (Testing): are used as a substantive procedure to obtain
evidential matter about particular assertions related to account balances or classes of
transactions.
• Final analytical procedures (Final Examination) are used as an overall review of the financial
information in the final review stage of the audit.
.‫• يتم استخدام اإلجراءات التحليلية األولية لمساعدة المراجع على فهم األعمال بشكل أفضل وتخطيط طبيعة وتوقيت ومدى إجراءات المراجعة‬
.‫• تُستخدم اإلجراءات التحليلية الموضوعية كإجراء موضوعي للحصول على مسألة إثباتية حول تأكيدات معينة تتعلق بأرصدة الحسابات أو فئات المعامالت‬
‫• يتم استخدام اإلجراءات التحليلية النهائية كمراجعة شاملة للمعلومات المالية في مرحلة المراجعة النهائية للتدقيق‬

Uses of Analytical procedures

Phases of audit Planning Stage of basic test Stage of final Examination

- To obtain reasonable
assurance that the
- To ensure before the
- Identify unusual changes account balances are free
end of audit that all
in Financial statement from material
unusual fluctuations have
Misstatement. and focus
- Focus on account balances been explained.
on disaggregate level for
more details.

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‫‪➢ Analytical procedures Comparisons:‬‬
‫‪1. Aggregate Level (Annual Comparison): Which compare between the years, For example: when the‬‬
‫‪Net income of 2019 was $100,000 and 2020 was $150,000 and 2021 was $120,000, then we will‬‬
‫‪compare between them.‬‬
‫‪2. Disaggregated level (Monthly or Quarterly or Semi-annually): Disaggregated is more useful‬‬
‫‪about aggregated. And compare the segment or product monthly or Quarterly or Semi-annually.‬‬
‫‪3. Ratio Analysis‬‬

‫‪➢ Type of Comparisons of the Company data:‬‬

‫‪1. Past data (Prior data): Which compare the current data with the past data in the past years.‬‬
‫‪2. Future data: Which compare the current data with the future expectations or the budget.‬‬
‫‪3. Industry average: Which compare the current data of the firm with another firm in the same‬‬
‫‪industry.‬‬
‫مقارنه الحالي بالماضي‪ :‬وهي عند مقارنه البيانات الحاليه مع البيانات فى السنين الماضيه وتوضيح االختالفات بينهم‪.‬‬
‫مقارنه الحالي بالمستقبل‪ :‬اكيد مفيش سنين مستقبليه ف بالتالى احنا هنا معتمدين على التوقع والتنبؤ ممكن من اننا نعمل استبيان ونوزعه ع العمالء ونشوف‬
‫رأيهم او نشوف الموازنات التخطيطه للمستقبل ومنها نقدر نعمل عمليه مقارنه‪.‬‬
‫مقارنه الشركه بشركات اخري ولكن من نفس الصناعه‪ :‬ده بيحصل عن طريق حاجات كتير ممكن لو انت حسيت انك ايراداتك قلت طب هل انت بس اللى‬
‫حصل معاك كده وال باقى الشركات اللي ف نفس مجالك لو كله يبقي عندك معلومه ولو انت بس يبقي انت كده عندك خلل وبكده تبقى الشركه ف خطر‪.‬‬
‫‪➢ Types of Analytical Procedures:‬‬
‫‪1. Trend Analysis (Horizontal Analysis):‬‬
‫‪• Used at Planning stage when focus on account balances.‬‬
‫‪• Use aggregate level but it’s relatively imprecise, while disaggregate it’s most precise than‬‬
‫‪aggregate (Absolute figure).‬‬
‫‪• Use the Prior data which compare the last year’s account balances with the current year‬‬
‫‪account balances in many time periods.‬‬
‫‪• Trend analysis Less effectiveness at Economic events.‬‬
‫تحليل االتجاه او ما يسمي بالتحليل االفقي‪:‬‬
‫‪ -‬يتم استخدامه فى مرحله التخطيط ببساطه الن فى مرحله التخطيط بيتم التركيز على كل الحسابات وتحليل االتجاه بيعمل نفس الكالم‪.‬‬
‫‪ -‬بيستخدم طريقه مقارنه السنين ببعض بس طبعا بتبقي مش دقيقه اووي زى ما اقارن شهر ب شهر او ربع سنه مع ربع سنه‪.‬‬
‫‪ -‬بيستخدم طريقه مقارنه السنه الحاليه بالماضيه‪.‬‬
‫‪ -‬تحليل االتجاه بيكون اقل كفائه مع االحداث االقتصاديه زي الحرب الروسيه االوكرانيه اثرت على معظم الشركات ف بالتالى االيرادات قلت بشكل‬
‫كبير عن السنه اللى قبلها هل ده معناه ان الشركه هى السبب او مشكله من داخل الشركه او اخطاء جوهريه ؟ اكيد ال دي مشكله اقتصاديه ولذلك‬
‫تحليل االتجاه هنا مش هيفيدني بحاجه‪.‬‬

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 2. Ratio Analysis (Common size):
• Comparison across time or to a benchmark (Industry average).
• Ratio analysis can measure the relationship between two or more accounts, for example:
Return on Equity (ROE) = Net income ÷ Shareholder’s equity
• Ratio Analysis conversion the financial amounts to percentage.
• Ratio analysis is more effective at identify risk and misstatement rather than trend
analysis because the ratio analysis can measure the relation between two or more account
but the trend analysis focused on an individual accounts.
• Ratio analysis uses Disaggregated level (Monthly, Quarterly and Semi-annually).
• Ratio analysis and Trend analysis Less effectiveness at Economic events.
:‫تحليل النسب‬
.‫ بيقارن الحسابات عبر الزمن وبين السوق او الشركه بشركات اخري‬-
.‫ النسب التحليليه بتقيس العالقه بين حسابين مختلفين او اكثر كمان‬-
.‫ النسب التحليليه وظيفتها انها تحول الرقم المالى بتاع حضرتك الى نسبه مأويه‬-
‫ النسب التحليله دي اكثر كفائه ضد المخاطر واالخطاء عن تحليل االتجاه لقدرتها على قياس العالقه بين اكثرمن حساب عكس تحليل االتجاه بيقيس‬-
.‫حساب واحد بس‬
.‫ النسب التحليليه بتستخدم الطريقه المجزأه بمعني انها بتقسم السنه ل شهر او كل ثالث شهور او كل نص سنه‬-
3. Reasonableness analysis:
• Auditor will prepare a model designed by him, the model contains financial and Non-
financial Information.
• Involves forming an expectation using a model. In many cases, a simple model may be
sufficient. For example, ticket revenue can be modeled by taking average attendance by
average ticket price. Similarly, depreciation expense can be modeled by taking book value
divided by average useful life for a class of assets.
• Reasonableness analysis take into consider an Economic condition.
Note: Average means its reasonableness take into consider Economic conditions.
‫انا هنا كمراجع بكل بساطه بشوف هل الحسابات اللى متسجله دى ارقامها منطقيه وال ال ولذلك انا كمراجع بختبر الموضوع ده عن طريق موديل انا بعمله من‬
.‫معلومات ماليه وغير ماليه ده غير اني باخد فى اعتباري الظروف واالحداث االقتصاديه‬
We have a lot of models, but we will focus on:
Example: Suppose we want to use substantive analytical procedures to test the reasonableness of
interest expense reported by XYZ (i.e., a “reasonableness test”).
Suppose that the auditor obtained the following information about bank loan from XYZ general ledger:

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 Solution
To prepare the reasonableness test we should prepare:
1. Get a reliable source (In this example the best source is (Bank Loan Statement).
2. Get the post to ledger of its account balances (Interest Exp and Loans).
3. Calculate the average borrowing = Total of Loans / No. of months.
4. Calculate the average rates = Total rates / No. of rates
5. Calculate the expectation of Auditor = Average borrowing x Average rate
6. Get the amount of recorded account.
7. Get the difference between Expectation and recorded.
8. Get the tolerable difference = amount of account recorded x Expected rate (Given 5%)
9. In the final step we will compare the result:
o If the Difference less than the tolerable Misstatement Then we will Accept.
o If the Difference greater than the Tolerable Misstatement then we should get more
evidence about it, if we find in example change an accounting system we will accept, but if
we not find anything then it’s a Misstatement (Error or Fraud).

1. Reliable source:
Bank Loan Statement
2. Ledger accounts needed:
Loans and Interest Expense
3. Average Borrowing:
Total of Loans / No. of Months
230,900,000 / 12 = $19,240,000
4. Average rates among months:
Total rates / No. of rates
5% + 5.5% / 2 = 5.25%
5. Auditor Expectation:
Average Borrowing x Average Rate
19,240,000 x 5.25% = $1,010,000
6. Recorded amount:
Given by $983,000
7. Difference between Expectation and Recorded:
1,010,000 – 983,000 = $27,000
8. Tolerable Misstatement:
Recorded x Expected rate (Given Confidence interval = 95% then the diff= 5%)
983,000 x 5% = $49,150
9. Decision:
When the Difference less than Tolerable will accept this account

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Decision process of analytical procedures:

Multiple choices Questions

1. A systematic process of objectively obtaining and evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of correspondence between those assertions and
established criteria and communicating the results to interested it’s a definition of:
a. Auditing b. Accounting c. Analytical procedures d. None

2. Consist of evaluations of financial information through analysis of plausible relationships among

financial and nonfinancial data it’s refer to:
a. Auditing b. Accounting c. Analytical procedures d. None

3. are based on the basic assumption that there are logical relationships between the data, and it is
reasonably expected that those relationships will continue:
a. Ratio analysis b. Trend Analysis c. Analytical procedures d. None

4. Fluctuations occurs when:

a. Accounting system changes b. Economic Events
c. Material Misstatement. d. All of the above

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5. Error and fraud is
a. Accounting system changes b. Economic Events
c. Material Misstatement. d. All of the above

6. Identify unusual changes in Financial statement and Focus on account balances:

a. phases of planning b. Testing c. Compilation d. None

7. obtain reasonable assurance that the account balances are free from material Misstatement. and
focus on disaggregate level for more details.
a. phases of planning b. Testing c. Compilation d. None

8. To ensure before the end of audit that all unusual fluctuations have been explained.
a. phases of planning b. Testing c. Compilation d. None

9. level of analytical procedures comparisons which compare between the years

a. Aggregate b. Disaggregate c. testing d. None

10. level of analytical procedures comparisons which compare between quarter year and monthly year for
more focus and less mistakes.
a. Aggregate b. Disaggregate c. testing d. None

11. Used at Planning stage when focus on account balances. And Use aggregate level but it’s relatively
imprecise, while disaggregate it’s most precise than aggregate (Absolute figure).
a. Ratio analysis b. Trend Analysis c. Reasonableness d. None

12. can measure the relation between two or more account, and use disaggregate level
a. Ratio analysis b. Trend Analysis c. Reasonableness d. None

13. Based on expectation and model designed by auditor, in addition take into consider the economic
conditions
a. Ratio analysis b. Trend Analysis c. Reasonableness d. None

15. Auditor in analytical procedures should prepare

a. Financial statements b. Reports c. Model d. None

16. Which of the following consider one of types of analytical procedures:

a. Ratio analysis b. Trend Analysis c. Reasonableness d. All of these

End Of Chapter One Part One

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