Paper Example on Audit Preliminary Analytical Procedures

Published: 2021-07-19
1556 words
6 pages
13 min to read
University of Richmond
Type of paper: 
Case study
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Preliminary analytical procedures of auditing are the audit techniques which capitalizes on assisting the auditors understanding of the business knowledge as allowing the auditor to effectively plan for the ideal nature of the audit, timing, and the appropriate audit procedures (Aobdia, 2016). The International Accounting Standards of Auditing defines the preliminary analytical procedures as the step-by-step guidelines use to evaluate both financial and nonfinancial accounting information (Wright, 2017). The Standards describes the auditors responsibility in priorly conducting the preliminary analytical procedures of auditing in accordance with the general audit guidelines to enable the auditor to intensively comprehend the client's business and understand the flow of the business transactions enhance the auditor to effect appropriate type of audit required as well as reducing the chance of material misstatement in the business financial statements reported.

The preliminary audit procedures describe the auditors planning schedules of the auditing process in accordance with (ISAs) requirements to enhance accurate information through auditing techniques and to reduce the chances of material misstatement. The effective analytical audit procedure traverses through the audit test and work-through test, cut-off test and other procedures used in determining the accuracy of the final audit opinion given on the companys financial information obtained in the annual report (Barth, 2013). The auditors responsibility is extended to determining the companys risk and guarantying that the financial statement represent true and fair view of the companys financial condition (Knechel, 2016). The preliminary analytical procedures emphasizes on hardheaded assessment of the business financial information through the use of preferred method to determines their success and progress in regard to the set industries ratios and the competitive market trend.

The preliminary audit procedures s assessed based on the standardized methods which evaluates the analytical techniques used to achieve the true fact of the companys financial information. The standardized method used to achieve the substantial accounting information entails simple comparison method and ratio analysis (Aobdia, 2016). The simple comparison method is vested on determining on the companys material facts using the projected performances such as the behavior of earnings in respecting years as compared to detailed analysis which is incepted in ration analysis method.

The auditor's audit planning constitutes a standardized analysis of business financial information with auditor's expected results that forms the base of auditors opinion in the business financial report (Barth, 2013). The evaluating of the business financial information based on the financial ratios as well as simple comparison techniques preempt the auditors preliminary analytical procedures applied in the financial report to achieve fair reporting.

Simple comparison

The simple comparative analysis describes the significant indication attached to the annual projection in the company's financial reports without reflective analysis (Knechel, 2016). The financial information reflected in the annual reports may fall short of concise financial information used to form a base of the decision on the assurance of fair view of the company's information. The simple comparison method stimulates the projection of relevant business financial information regarding the its fair view as per quarterly and annual reporting (Barth, 2013). DIPLs simple comparison of financial situation expresses a procedural evaluation of the financial performances regarding the flow of the relevant financial information such as the earnings, assets as well other financial statement items in the three financial years ending 2015.

2013 2014 2015

Cash 647250 517788 347120

Total assets 12930000 15903900 26147991

Gross profits 6004500 6079500 6604500

Net income 2359190 2291362 2972183


The DPIL simple comparison of the profitability trend within the three years ending 2015 provides significant financial analysis where cash available, assets, gross profit and net income unveils different performances as portrayed in three respective years ending 2015.

Simple comparison of DPILs Total assets and its influence on audit planning


The simple comparison of DPIL total assets accentuates that the business assets increases 12,930,000 in 2013 to 15,903,000 in 2014 and 26,147,991 in 2015 denoting that the business investment in assets increases (Barth, 2013). The increasing trend of the DPILs assets unveils that the business can meet the current obligation when they fall due for payment and that it guarantees the business future operations and existence. This influences the auditors audit planning using the preliminary audit procedures to effectively audit the companys assets (Knechel, 2016). Increases assets growth does not raise eyebrows to the company assets performances and riskiness of misappropriation thus reducing the auditing time planned for assets evaluating and use sampling rather than other detail audit techniques.

Simple comparison of DPILs cash and its influence on audit planning

The simple comparison of DPIL total assets accentuates that the business assets decreases from 647,250 in 2013 to 517,788 in 2014 and 347,120 in 2015 1 denoting that the business ability to generate cash decreases. The decreasing trend of the DPILs assets unveils that the business is not able to meet the current obligation using cash when they fall due for payment thus does not guarantees success of future operations hence more time in auditing (Nickell, 2016). The diminishing cash performances in the business is influences the auditors audit planning using the preliminary audit procedures to effectively audit the companys flow of cash and reason of dilapidating trend (Aobdia, 2016). Decreasing of the DPILs cash raises the auditors eyebrows on the companys cash performances and riskiness of misappropriation thus increasing the auditing timeframe planned for cash evaluation and use detail audit techniques in assessing cash transaction.

Financial Ratio Analysis

Auditors commonly prefer to use financial ratio analysis in the evaluation of the business performances in specific financial year examined. The financial ratios provide substantial detail flow of finances over the financial years examines thus provides a good base for determining of the business performances. The financial ratio analysis results form a comprehensive benchmark of preliminary audit procedures that influence the auditors audit planning conclusions to give a true and fair opinion on the companys condition and reduce the chanced of the riskiness of fraudulent activities.

2013 2014 2015

Current Assets 5385938 7509150 9600929

Inventories 2256188 2671362 4180500

Quick Asset Ratio 0.827976 0.944834 0.847273


The DIPL liquidity ratios describes an increasing trend which defines the business improvement of the liquidity trend which guarantees the business ability to meet the obligations when they fall due for payment. The currents assets liquidity trend shows a consistent increase from 53,835,938 in 2013 to 75,091,500 in 2014 and 96,000,290 in 2015 financial years (Barth, 2013). The increasing trend of the liquidity assets significantly influences the auditors audit planning decision since the auditor will plan for minimum time for the preliminary liquidity procedures due to credibility and increases of ability to meet the obligations (Knechel, 2016). The result influences the auditors audit planning by limiting the allocation of time in audit over the companys current assets while making use sampling audit technique in evaluating the transaction related to current assets.

The DIPL quick asset ratio analysis reveals an average performance of the companys ability to use the asset in settling the current liabilities without selling their inventories (Wright, 2017). The steady liquidity trend expressively influences the auditors audit planning approaches since the application of preliminary procedures in such sensitive financial items gives the companys probability of susceptibility to risk that call for intensive testing and increase of time to examine the auditing of the quick asset ratio items in financial statements. The result depicted in the DPILs liquidity financial progress influence the auditor in planning and allocation of average time in audit over the companys items related to quick assets ratio to guarantee the auditor fair opinion without mitigated risk of material misstatement.

Question 2

Inherent risk

Inherent risks are the risk that an auditor may fail to detect the presence of material misstatement in financial statement and still concludes that the financial statement signifies true and fair view of the companys financial conditions (Knechel, 2016). The likelihoods that the DPILs financial statement entailing the presence of material misstatement and the auditors may fail to detect the omission due to complex nature of accounting transaction is high since the transaction may be presumed by the auditor thus leading to inherent risk.

DPILs inherent risk factors

Nature of the clients business

The DIPLs accounting entries entail different comprehensive nature of normal accounting transaction such as normal sales and expenses provided in most of the financial statements (Knechel, 2016). The measure attributable to allocating different from revenues from the printing and publishing systems heightens a different mode of accounting which requires high chanced inherent risk in financial statements (Nickell, 2016). The recording of the mode of printing a revenue attributable to the publication transactions requires an intensive provision of audit controls to limit the chances of high exposures of material misstatement as a result of inherent risk.

The E-book revenues require the pragmatic significance of the work of an accounting expert to ease the complication of the accounting transaction that is highly vulnerable to inherent risk.

Non-routine transactions.

The DIPLs appointment of new CEO entices new management system aligning the new inventive IT system demanding the inception of the non-routine transaction in the business accounting transactions (Wright, 2017). The CEO implementation of the new IT system in the business defines an equipped form of accounting entries which daunts to the initial normal accounting entries which subject the auditors to high probabilities of inherent risk in the accounting information relayed.

The new management additionally accentuates on the employment of the various accounting principles in recording the inventory raw materials based on first in first out technique and resolution the obsolete stock by consequently writing down (Aobdia, 2016). The accounting dealings create high likelihood of inherent audit risk owing to non-routine transactions which can result in high risk of the material statement.

Question 3

Fraud risks are the accounting entries preset to deceive the financial statement users on the mater...

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