Question

one purpose of performing analytical procedure in the planning phase of an audit is to assess the client's financial condition. Explain how the assessment of a client's financial condition can affect the auditor's decisions concerning evidence accumulation in later phases of the audit

Answer 1

Auditors must obtain knowledge about a client's industry and business as a part of planning an audit. By conducting analytical procedures in which the current year's unaudited information is compared with prior years' audited information or industry data, changes are highlighted. These changes can represent important trends or specific events, all of which will influence audit planning.

The use of analytical procedures is often a useful indicator for determining whether the client company has financial problems and if substantial doubt exists about the entity's ability to continue as a going concern. Certain analytical procedures can help the auditor assess the likelihood of failure.

The analytical procedures could also indicate the presence of possible misstatements in the financial statements if significant unexpected fluctuations occur. These items may warrant increased audit procedures, whereas when the analytical procedures reveal no unusual fluctuations, the possibility of material misstatement is minimized and it is possible to perform fewer detailed tests on related accounts or to eliminate certain audit procedures, reduce sample sizes, or to move the procedures farther away from the balance sheet date.