When applying analytical procedures, an auditor could develop independent estimate of an account balance to compare it to-
Options:
| a) client’s unedited account balance b) client’s unedited account balance adjusted for trends in the industry c) Prior year audited balance d) Prior year audited balance adjusted for trends in the industry |
The Correct Answer Is:
d) Prior year audited balance adjusted for trends in the industry
Correct Answer Explanation: d) Prior year audited balance adjusted for trends in the industry
Analytical procedures play a crucial role in an auditor’s assessment of financial statements. These procedures involve the analysis of financial information through study, comparison, and evaluation of relationships among financial and non-financial data.
When developing an independent estimate of an account balance for comparison, the auditor aims to gather evidence that supports the reasonableness of the client’s reported figures. Among the options provided, the correct choice is d) Prior year audited balance adjusted for trends in the industry.
The reason why the correct answer is d) lies in the process of using the prior year audited balance as a starting point. This figure is reliable as it has undergone scrutiny and verification during the previous audit cycle.
By adjusting this balance for trends in the industry, the auditor can factor in changes or shifts that might have occurred since the previous year. This adjustment allows for a more accurate estimation that reflects the current economic environment, market conditions, or industry-specific influences.
Now, let’s delve into why the other options are not the most suitable choices for developing an independent estimate:
a) Client’s unedited account balance:
The client’s unedited balance, while being the most current representation of their financial status, lacks the verification and scrutiny that an auditor typically performs. Relying solely on this figure could potentially overlook errors, misstatements, or inconsistencies within the financial data.
Auditors need to ensure the accuracy and reliability of financial information, and using an unedited balance without independent verification doesn’t provide the necessary level of assurance.
b) Client’s unedited account balance adjusted for trends in the industry:
This option attempts to incorporate industry trends into the client’s unedited balance. However, the fundamental issue remains: the unedited balance itself hasn’t undergone audit scrutiny.
While considering industry trends is valuable for contextualizing financial figures, starting with an unverified balance could introduce inaccuracies or misstatements.
Using this unedited balance as the foundation for the estimate could propagate any errors or misrepresentations into the analysis.
c) Prior year audited balance:
Utilizing the prior year’s audited balance is a step closer to a reliable starting point compared to the client’s unedited balance.
However, by solely relying on the prior year’s figure without adjusting it for any changes or trends in the industry, there’s a risk of overlooking significant developments or shifts that have occurred since the previous audit.
The financial landscape, economic conditions, or industry-specific influences might have evolved, and not considering these changes could result in an estimate that doesn’t accurately reflect the current financial scenario.
In summary, while each of the options tries to incorporate elements of financial analysis or industry trends, their limitations lie in either the lack of audit scrutiny (client’s unedited balance), the absence of adjustment for current trends (prior year audited balance without adjustments), or the combination of both issues (client’s unedited balance adjusted for trends without audit verification).
The optimal approach involves starting with a reliable audited figure (prior year audited balance) and then adjusting it for current industry trends to arrive at a more accurate and relevant independent estimate for comparison.
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