Burlingham Bees- Using Analytical Procedures as Substantive Tests Question 1

BurlinghamBees-Using Analytical Procedures as Substantive Tests

Question1

Professionalstandards (AU 329)

Paragraph2 provides that a premise considering the application of analyticalprocedures should have a credible trend of the financial data that isexpected to hold even under uncertain conditions. The processinvolves comparison financial data and ratios development with thosedeveloped base on the expectations of the auditor.

Paragraph2 emphasises that the auditor should develop his/her expectations.The expected effectiveness of these analytical procedures are meantto identify any misstatement in the financial reporting. That is, ifthere are much deviation from the expectations of the auditorcompared to the reported figures, then it forms basis forinvestigation.

Advantagesof developing expectations

Paragraph19 continues and adds that the expectations developed whileanalytical review helps the auditor to have a greater chance ofdetecting frauds and misstatements in the financial statements. It isalso provided that, the narrow the scope, the more effective theexpectations are. That is, monthly expectations are more effectivethan annual expectation, and local line business are more effectivethan company – wide comparison. Therefore, the risk of materialstatement increases as the operations of the firm becomes complex andmore diversified. Thus, this calls for the need of Disaggregation soas to minimize the risk.

Question2

Developinga precious expectations for the year 2005 for the data given

Step1 – Average attendance

Letthe weekends increase in attendance and promotions be 25% and 10%respectively. Since there are 43 weekdays and 29 weekends it impliesthat promotions are held 10 weekends and 7 weekdays.

Thereforeaverage attendance can be calculated as follows

434,348= (43 – 7)X + 7(1.1X) + (29 – 10)(1.25X) + 10(1.25(1.1X))

434,348= 36X + 7.7X + 23.75X + 13.75X

434,348= 81.2X

X= 5,349.1

Step2 – Computing average attendance for other categories

Typicalweekend game 5,349.1 × 1.25× = 6,686.4

Promotionalweekday game 1.1 × 5,349.1 = 5,884

Promotionalweekend game 1.1 × 6,686.4 = 7,355

Step3 – Average ticket prices

Weekdaygames

(10× 30%) + (6 × 35%) + (4 × 20%) + (2 × 15%) = $6.20

Weekendgames

$5.70= $10(25%) + $6(30%) + $4(25%) + $2(20%)

Step4 – Expected 2005 ticket revenue

Game category

Average Attendance

Ticket price

Game revenue

Number of games

Total revenue

Promotional weekday

5,884.00

6.20

36,480.80

7.00

255,365.60

Promotional weekend

7,355.00

5.70

41,923.50

10.00

419,235.00

Typical weekday

5,349.10

6.20

33,164.42

36.00

1,193,919.12

Typical weekends

6,686.40

5.70

38,112.48

19.00

724,137.12

Expected ticket revenue

2,592,657

Observed difference

-12,237

Reported 2005 Ticket Revenue

2,580,420

Question3

Judgmenton whether the tickets revenue for the financial year 2005 werereasonably or fairly reported.

Inassessing whether the ticket revenue was reasonably stated or fairlystated I would consider the materiality of the difference between mydeveloped expectations and the reported revenue. For instance, inthis case, I have found the materiality level was obtained at $24,000with the application of rule of thumb of five percent pre-tax income.It is also recommended that materiality level should be maintainedbelow 1% of the total revenue. The analytical review developed abovefor the tickets revenue showed a difference of $12,237. Since thisvariation is below the materiality level, it can be concluded thatthe revenue for the year 2005 was fairly stated. Also, this deviationis below 1% which means that the amount reported is reasonable.

However,even if the deviation is below the materiality, the auditor is stillrequired to take little comfort in the investigation of the evidenceto increase the quality of the expectations.

Ifthe reported revenue is found to be outside the reasonable range, thedifference can be explained with various reasons that could implyeither there was poor expectations development by the auditor orthere was revenue misstatements. In this case, for example, if thedifference were due to poor expectations development, then therecould have been error or the model used to develop the expectationshad not included all the important factors. This could have led tothe expected attendance figure to be wrong.

Question4

Advantagesof using analytical procedures as substantive test

Usinganalytical procedures as substantive test allows the auditor toassess the effectiveness and the efficiency of the audit. This isbecause analytical procedures are more efficient than the substantivetest that involve a test of details. For example, AU 329.12 providesthat, comparison of the aggregate salaries paid with the total numberof the employees is intended to detect the existence of unauthorizedpayments. Therefore, we can conclude that in most tests, theanalytical procedure is more effective and efficient that substantivetest during the audit process.

Ifthe auditors decide to use analytical procedures as substantivetests, nature and timing would also change. And furthermore, theaudit plan is more likely to contain fewer details of the test.Therefore, I still believe that analytical procedures should be usedas a substantive test for Bees audit since it is more effective andefficient.

Workcited

BeasleyS., Buckless A. &amp Glover M. Auditingcases 6thedition.New York: PearsonEducation. 2014.Print.