Question

The auditor should perform analytical procedures relating to revenue with the objective of identifying unusual or unexpected relationships involving revenue accounts that may indicate a material misstatement due to fraudulent financial reporting. Which of the following is not an example of an analytical procedure?

a. Comparing current-year revenue to budgeted revenue
b. Analyzing the trend of gross profit percentages over several years
c. Confirming accounts receivable balances with customers
d. Investigating significant fluctuations in revenue accounts

Answer 1

Confirming accounts receivable balances with customers is not an analytical procedure but an audit confirmation process. Analytical procedures involve comparing financial data to identify unusual patterns indicative of potential misstatements.

Step-by-step explanation:

The question refers to analytical procedures an auditor should perform to detect unusual relationships or transactions that might indicate material misstatements due to fraud in revenue accounts. Analytical procedures often involve evaluating financial information by studying plausible relationships among both financial and non-financial data.

Option c, confirming accounts receivable balances with customers, is not an example of an analytical procedure. This process is an audit procedure known as confirmation or substantiation, where the auditor seeks direct verification of information with third parties (in this case, the customers).

In contrast, option a, comparing current-year revenue to budgeted revenue, option b, analyzing the trend of gross profit percentages over several years, and option d, investigating significant fluctuations in revenue accounts, are all genuine examples of analytical procedures, focusing on the comparison and analysis of financial data trends and ratios.