Final answer:
The factors impacting the effectiveness and efficiency of using a substantive analytical procedure include the nature of the assertion, assessed risk of material misstatement, control over the data, and persuasiveness of the evidence. These factors determine how suitable the analytical procedures are when responding to risk in financial statement assertion analysis.
Step-by-step explanation:
The effectiveness and efficiency of using a substantive analytical procedure to respond to risk can be impacted by various factors. In auditing, these procedures are used to evaluate financial statement assertions by examining trends and ratios that may indicate instances of material misstatement.
Factors impacting the use of substantive analytical procedures:
- Nature of the assertion: This relates to what the financial statement elements are supposed to represent and includes considerations like the existence, rights and obligations, completeness, valuation, and allocation. Each assertion may require a different approach in analytic procedures.
- Assessed risk of material misstatement: The level of risk identified dictates the extent of substantive analysis required. Higher risks often necessitate more in-depth and rigorous procedures.
- Control over the data: The quality and reliability of the data used in the analytics are critical. Strong internal controls over data increase confidence in the analysis performed.
- Persuasiveness of the evidence: Ultimately, the analytical procedures must yield evidence that is persuasive enough to support the auditor's conclusion. The better the quality of evidence, the more effective the procedure.
Each of these factors plays a role in deciding the sufficiency and appropriateness of the analytical procedures applied during an audit.