Question

Why is it important that an auditor develop an expectation of the account balance when performing substantive analytical procedures about the reasonableness of an account balance?  What are the audit documentation requirements when performing a substantive and the analytical procedure?

Answer 1

Development of an appropriately precise expectation is the most important step when performing substantive analytical procedures about the reasonableness of an account balance. The prediction can be a percentage, direction, approximation depending on the required precision. Auditor should have an independent expectation whenever they use substantive analytical procedures. The auditor develops expectation by determining plausible relationships that are expected to exist by using knowledge of business.

The audit documentation requirements when performing a substantive and the analytical procedure are:

a. The expectation, where the expectation is not determinable from the documentation of the performed work and the factors considering the development.

b. Results of the comparison of expectations to the recorded amounts.

c. Additional audit procedures performed in response to significant unexpected differences resulting from analytical procedures and the effects from such additional procedures.