Table of Contents

7.1 Analytical Review Techniques

CIA REVIEW: PART 1 7.2 Benchmarking
7.3 Performing Audit Procedures
Study Unit 7 7.4 Drawing Conclusions
Procedures, Analysis, 7.5 Working Papers Purpose and Characteristics
Conclusions, and 7.6 Working Papers -- Control and Retention
Documentation 7.7 Computerized Audit Tools

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Analytical Procedures
Specific guidance is in Implementation Guide 2320, Analysis
and Evaluation.
Use of analytical procedures as a planning tool or to
perform the engagement requires developing expectations
Analytical Review against which specified information can be compared.
Examples of analytical procedures include
Techniques o Ratio, trend, and regression analysis
o Reasonableness tests
o Period-to-period comparisons
7.1 o Forecasts
o Benchmarking information against similar industries or
organizational units

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 Ratio Analysis Ratio Comparisons
One of the most common analytical procedures is ratio analysis, Ratios by themselves reveal little about the organization.
the comparison of one financial statement element with another.
o Trend analysis tracks the changes in a ratio over time.
Liquidity is the ability to meet current obligations as they come
due and continue operating in the short run. Measures of relative o Period-to-period analysis compares performance for
liquidity are similar time periods.
o Current ratio o Industry
o Accounts receivable turnover ratio those of competitors or with the published averages for
o Inventory turnover ratio the entire industry.
Profitability is measured by three common percentages based on
income statement amounts:
o Gross profit margin
o Operating profit margin
o Net profit margin

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Other Analytical Procedures Multiple-Choice Question

Regression analysis determines the degree of relationship, Analytical procedures in which current financial statements are compared with
budgets or previous statements are primarily intended to determine the
if any, between two variables, such as that between sales
and cost of goods sold.
A. Adequacy of financial statement disclosure.
Variance analysis studies the difference (favorable or
B. Existence of specific errors or omissions.
unfavorable) between an amount based on an actual result
and the corresponding budgeted amount. C. Overall reasonableness of statement contents.
D. Use of an erroneous cutoff date.

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 Multiple-Choice Answer
Analytical procedures in which current financial statements are compared with
budgets or previous statements are primarily intended to determine the

A. Adequacy of financial statement disclosure.

B. Existence of specific errors or omissions.
C. Overall reasonableness of statement contents.
D. Use of an erroneous cutoff date.
Benchmarking
An analytical procedure in the form of a period-to-period
comparison is primarily intended to assess the reasonableness
7.2
of current content in relation to previous content.

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Benchmarking Benchmarking
The first phase in the benchmarking process is to select and
performance with best-in-class performance. prioritize benchmarking projects.
Benchmarking involves analyzing and measuring key The next phase is to organize benchmarking teams. A team
outputs against those of the best organizations and organization is appropriate because it permits
identifying the underlying key actions and causes that o A fair division of labor,
contribute to the performance difference. o Participation by those responsible for implementing
Benchmarking may be either internal or external. changes, and
o Inclusion of a variety of functional expertise and work
experience.
Researching and identifying best-in-class performance is
often the most difficult phase.

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 Benchmarking Multiple-Choice Question
Data analysis involves A company with many branch stores has decided to benchmark one of its stores
for the purpose of analyzing the accuracy and reliability of branch store financial
o Identifying performance gaps, reporting. Which one of the following is the most likely measure to be included in
o Understanding the reasons, and
a financial benchmark?

o Prioritizing the key activities that will facilitate the

behavioral and process changes needed to implement A. High turnover of employees.
recommendations. B. High level of employee participation in setting budgets.
C. High amount of bad debt write-offs.
Leadership is most important in the implementation phase
because the team must justify its recommendations. D. High number of suppliers.

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Multiple-Choice Answer
A company with many branch stores has decided to benchmark one of its stores
for the purpose of analyzing the accuracy and reliability of branch store financial
reporting. Which one of the following is the most likely measure to be included in
a financial benchmark?

A. High turnover of employees. Performing Audit

Procedures
B. High level of employee participation in setting budgets.
C. High amount of bad debt write-offs.
D. High number of suppliers.

The level of bad debts written off as uncollectible is a benchmark stated 7.3
in financial terms. A level exceeding the benchmark could indicate fraud,
which compromises the accuracy and reliability of financial reports. Bad
debt write-offs may result from recording fictitious sales.

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 Preliminary Conclusions
about Controls Audit Procedures
Internal auditors obtain an understanding of the design of Risk assessment procedures are performed to obtain an
understanding of the entity and its environment, including
internal control.
The auditors then draw conclusions about whether internal Further audit procedures include tests of controls and
substantive procedures.
o Tests of controls test the operating effectiveness of controls
control objectives. in preventing, or detecting and correcting, instances of
noncompliance, whether they take the form of a material
misstatement in the financial statements, failure to comply
with a law or regulation, or some other undesired outcome.
o Substantive procedures are used to detect material
misstatements at the relevant assertion level. They include
(1) tests of details and (2) substantive analytical procedures.
A is an individual or organization having
expertise in a field other than accounting or auditing that assists
in preparing the financial statements.

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Types of Audit Procedures Types of Audit Procedures

Vouching tracks a result backward to the originating event, Inquiry seeks financial or nonfinancial information from
ensuring that a recorded amount is properly supported. knowledgeable persons within the entity or outside the entity.
Tracing follows a transaction forward from the triggering event to External confirmation obtains audit evidence as a direct, written
a resulting event, ensuring that the transaction was accounted for response to the auditor from a third party, e.g., confirmation of
properly. account balances or the terms of agreements.
Inspection of records or documents is the examination of records Recalculation is checking mathematical accuracy.
or documents, whether internal or external, in paper, electronic, Reperformance is the independent execution of procedures or
or other media. controls.
Inspection of tangible assets is the physical examination of assets Analytical procedures are evaluations of data made by a study of
to test existence. For example, it is combined with observation of plausible relationships among both financial and nonfinancial
inventory counts. data.
Observation is looking at a process or procedures being o Scanning is used to review accounting data to identify
performed. significant or unusual items for testing.

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 Multiple-Choice Question Multiple-Choice Answer
An inexperienced internal auditor notified the senior auditor of a significant variance from the An inexperienced internal auditor notified the senior auditor of a significant variance from the

senior had heard that there had been an unauthorized work stoppage that probably accounted for senior had heard that there had been an unauthorized work stoppage that probably accounted for
the difference. Which of the following statements is most appropriate? the difference. Which of the following statements is most appropriate?

A. The new internal auditor should have investigated the matter fully and not bothered the senior. A. The new internal auditor should have investigated the matter fully and not bothered the senior.
B. The senior used proper judgment in curtailing what could have been a wasteful investigation. B. The senior used proper judgment in curtailing what could have been a wasteful investigation.
C. The senior should have halted the engagement until the variance was fully explained. C. The senior should have halted the engagement until the variance was fully explained.
D. The senior should have aided the new internal auditor in formulating a plan for accumulating D. The senior should have aided the new internal auditor in formulating a plan for accumulating
appropriate information. appropriate information.
When analytical audit procedures identify unexpected results or relationships, the
internal auditor evaluates such results or relationships instead of obtaining information
to explain the variance. The senior allowed the identified variance to go unevaluated.

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Multiple-Choice Question Multiple-Choice Answer

A medium-sized municipality provides 8.5 billion gallons of water per year for 31,000 customers. The water A medium-sized municipality provides 8.5 billion gallons of water per year for 31,000 customers. The water
meters are replaced at least every 5 years to ensure accurate billing. The water department tracks unmetered meters are replaced at least every 5 years to ensure accurate billing. The water department tracks unmetered
water to identify water consumption that is not being billed. The department recently issued the following water to identify water consumption that is not being billed. The department recently issued the following
water activity report: water activity report:

Based on the activity Based on the activity

reported for the reported for the
unmetered water, an unmetered water, an
internal auditor would internal auditor would
conclude that conclude that
A. Established operating standards are understood and are being met. A. Established operating standards are understood and are being met.
B. Further audit investigation of unmetered water is not warranted. B. Further audit investigation of unmetered water is not warranted.
C. The deviation in Month 2 was probably not corrected. C. The deviation in Month 2 was probably not corrected.
D. The operating standard should be changed. D. The operating standard should be changed.

Analytical auditing procedures assist internal auditors in identifying conditions, which may
require subsequent engagement procedures. Month 3 performance met the standard, so
the deviation in Month 2 was probably corrected, and further audit work is not warranted.

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 Root Cause Analysis
When audit procedures detect an unfavorable condition, internal auditors are
encouraged to identify the root cause.
IG 2320, Analysis and Evaluation, provides the following guidance:
o Purpose. A root cause analysis identifies the underlying reason for the
unfavorable condition.
o Cost-benefit. Due professional care should be exercised by weighing effort
against possible benefits.

Drawing Conclusions o Application. A root cause analysis may be difficult and subjective or as

o Professional judgment. Root causes generally result from decisions, acts, or

7.4 o
failures to act by a person or group.
Multiple root causes
objective and independent analysis may identify multiple root causes for

o Management assistance. The resources of the internal audit activity may

be inadequate to complete a root cause analysis.
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Example, Part 1 Example, Part 2

Example of the process of moving from a finding to a From the finding, the internal auditor can draw a conclusion
conclusion for a specific engagement objective: that informs the reader of the implications of the finding for
o The engagement work program called for the auditor to one or more engagement objectives:
examine all purchase orders exceeding $100,000 to o The system of internal controls over purchases of
determine whether they were approved by the
appropriate division vice president. The results of the material dollar amounts in the Eastern Division is not
procedure are stated as a finding: functioning as designed.
Of 38 purchase orders over $100,000 examined,
3 lacked required vice presidential approval, an
exception rate of 7.9%.
The finding is an objective statement of fact about
the results of audit work without interpretation or
commentary.

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 Example, Part 3 Multiple-Choice Question
The relationship of a finding and a conclusion need not be
amount of funds or sufficient documentation in lieu of funds, a 50%
one-to-one. If the auditor finds it useful, multiple findings
can be used to support a single conclusion: The above statement is an example of a(n)
o Of 38 purchase orders over $100,000 examined, 3 lacked
required vice presidential approval, an exception rate of
A. Observation.
7.9%. Of 115 purchase orders less than $100,000
randomly selected and examined, 12 lacked required B. Opinion.
approvals, an exception rate of 10.4%. Given these C. Conclusion.
findings, the system of internal controls over all D. Recommendation.
purchases in the Eastern Division is not functioning as
designed.

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Multiple-Choice Answer
amount of funds or sufficient documentation in lieu of funds, a 50%

The above statement is an example of a(n)

A. Observation. Working Papers -- Purpose

B. Opinion.
C. Conclusion. and Characteristics
D. Recommendation.
7.5
A finding or observation is an objective statement of fact about the
results of an internal audit without interpretation or commentary.

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 Standard 2330 General Guidelines
Performance Standard 2330: Documenting Information Engagement working papers
o Internal auditors must document relevant information to o Aid in planning, performance, and review of
support the conclusions and engagement results. engagements
o Provide the principal support for engagement results
o Document whether engagement objectives were
achieved
o Support the accuracy and completeness of the work
performed
o
assurance and improvement program
o Facilitate third-party review

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Best Practices
Working Papers for Working Papers
The content of working papers is prescribed in IG 2330, Documenting Each working paper must, at a minimum, identify the
Information:
o Purpose. Working papers document the engagement process from engagement and describe the contents or purpose of the
planning to drawing conclusions. working paper, for example, in the heading.
o Uniformity. The content, organization, and format of working
papers depend on the organization and the engagement. Working papers should be consistently and efficiently
o Responsibility. In accordance with Standards 2040 and 2050, the prepared to facilitate review.
CAE should establish policies and procedures for working papers for
different engagements. While clarity, concision, and accuracy are desirable qualities
o Characteristics. Standard 2310 requires internal auditors to identify
sufficient, reliable, relevant, and useful information. of working papers, completeness and support for
o Content. Working papers may include indexing; titles indicating the conclusions are the most important considerations.
subject matter of engagement; time of engagement; scope of work;
purpose; sources of information; population, sample size, and
means of selection; analytical methods; results of tests and
analyses; conclusions cross-referenced to observations;
recommended follow-up; names of internal auditor(s); review
notation and name of reviewer(s).
o Review. Review of working papers is a means of staff development.

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 Indexing and Summaries Permanent Files
Indexing permits cross-referencing. Typical items contained in the permanent or carry-forward
o The practice simplifies supervisory review either during
files:
the engagement or subsequently by creating a trail of o Previous engagement communications, responses, and

related items through the working papers. results of follow-up

o Reviews of the long-term engagement work schedule by
Internal auditors summarize information in working papers. senior management
o Summaries help to coordinate working papers related to o Auditor observations during past engagements that may
a subject by providing concise statements of the most have future relevance
important information. o
o Long-term contracts
o Historical financial information
o Correspondence about the engagement project

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Computerized Working Papers Multiple-Choice Question

Electronic working papers have the following advantages: Which of the following is the most important if working papers are to have the
characteristics that will ensure that they achieve their primary purposes?
o Uniformity of format
o Ease of storage
A. Working papers must be of standard format and standard content.
o Searchability and automated cross-indexing
B. Working papers must be properly indexed and cross-referenced to the draft
o Backup and recovery functions final engagement communication.
o Built-in audit methodologies, such as sampling routines C. Working papers must provide sufficient, reliable, and useful information to
support the engagement results.
D. Working papers must be arranged in logical order following the engagement
work program sequence.

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 Multiple-Choice Answer Multiple-Choice Question
Which of the following represents appropriate evidence of supervisory review of
Which of the following is the most important if working papers are to have the engagement workpapers?
characteristics that will ensure that they achieve their primary purposes?
1. workpaper.
2. An engagement workpaper review checklist.

A. Working papers must be of standard format and standard content. 3. A memorandum specifying the nature, extent, and results of the supervisory review of
workpapers.
B. Working papers must be properly indexed and cross-referenced to the draft final 4. Performance appraisals that assess the quality of workpapers prepared by auditors.
engagement communication.
C. Working papers must provide sufficient, reliable, and useful information to
support the engagement results. A. 2 and 4 only.
B. 1, 2, and 3 only.
D. Working papers must be arranged in logical order following the engagement work
program sequence. C. 1, 3, and 4 only.

Effective working papers contain information that is sufficient and relevant to the D. 1, 2, 3, and 4.
engagement objectives, observations, conclusions, and recommendations. Thus, to
ensure working papers achieve their primary purposes, they must provide sufficient,
reliable, relevant, and useful information to support the engagement results.
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Multiple-Choice Answer
Which of the following represents appropriate evidence of supervisory review of
engagement workpapers?
1. workpaper.
2. An engagement workpaper review checklist.
3. A memorandum specifying the nature, extent, and results of the supervisory review of
workpapers.
4. Performance appraisals that assess the quality of workpapers prepared by auditors. Working Papers --
A. 2 and 4 only.
B. 1, 2, and 3 only.
Control and Retention
and a memorandum describing the review are appropriate. Also,
C. 1, 3, and 4 only. performance appraisals that mention workpaper quality are
appropriate in the evaluation of individual auditors, but they do not 7.6
D. 1, 2, 3, and 4. represent sufficient evidence of review for engagement workpapers.

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 Access to
Engagement Records Control of Working Papers
Implementation Standard 2330.A1 The primary objective of maintaining security over working
o The chief audit executive must control access to
papers is to prevent unauthorized changes or removal of
information.
engagement records. The chief audit executive must
obtain the approval of senior management and/or legal Working papers contain sensitive information, but they
counsel prior to releasing such records to external generally are not protected from disclosure in civil and
parties, as appropriate. criminal legal matters. Thus, auditors do not have the
equivalent of the attorney-client privilege.
Engagement records include reports, supporting
documents, review notes, and correspondence, regardless
of media storage. These records or working papers are the
property of the organization. The internal audit activity
controls working papers and provides access to authorized
personnel only.

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Access to Working Papers Retention Requirements

When engagement objectives will not be compromised, the Implementation Standard 2330.A2
internal auditor may show all or part of the working papers o The chief audit executive must develop retention
to the client. requirements for engagement records, regardless of the
One potential use of engagement working papers is to medium in which each record is stored. These retention

claims, fraud cases, or lawsuits. guidelines and any pertinent regulatory or other
requirements.
Internal auditors are encouraged to consult legal counsel in
matters involving legal issues. Requirements may vary
significantly in different jurisdictions.

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 Retention of Working Papers Multiple-Choice Question
Record retention requirements vary among jurisdictions and
legal environments.
The CAE should develop a written retention policy that A. May not use the working papers in preparing the claim.
meets organizational needs and legal requirements of the B. May use the working papers in preparing the claim, but such use should be approved by the
jurisdictions where the organization operates. chief audit executive.
The policy should include appropriate arrangements for the C. Should be precluded from preparing the claim, and this function should be performed by the
internal audit activity.
retention of records related to engagements performed by
external service providers. D. May use the working papers in preparing the claim, but such use should be approved by the

Working papers should be destroyed after they have served

their purpose. Any parts having continuing value should be
brought forward to current working papers or to the
permanent file.

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Multiple-Choice Answer

A. May not use the working papers in preparing the claim.

B. May use the working papers in preparing the claim, but such use should be approved by the
chief audit executive.
C. Should be precluded from preparing the claim, and this function should be performed by the
Computerized
internal audit activity.
D. May use the working papers in preparing the claim, but such use should be approved by the Audit Tools
insurance claims, fraud cases, and lawsuits. In such cases, management and other members of the 7.7
organization may request access to engagement working papers. This access may be necessary to substantiate
or explain engagement observations and recommendations or to use engagement documentation for other

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 Generalized Audit
Overview Software and Test Data
Auditors increasingly rely on software tools to perform Using Generalized Audit Software (GAS), the auditor loads a
virtually all auditing activities.
Computer-assisted audit techniques (CAATs) may be computer to perform various analytical procedures.
systems- or transaction-based or may provide automated Test data allow the auditor to assess the controls embedded
methods for extracting and analyzing large amounts of data. in an application by observing
o Whether the good data are correctly processed and
o How well the system handles bad data.

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Parallel Simulation
and Data Mining Integrated Test Facility (ITF)
Parallel simulation allows an auditor to determine whether In this approach, the auditor creates a fictitious entity (a
the data are subjected to the processes that the client
claims the application performs. live production system.
Data Mining and Extraction Technique Use of an ITF requires great care to ensure no transactions
o The oldest form of data extraction is the manual copying associated with the dummy entity are included in
of client records. production reports and output files.
o Until the widespread use of photocopy machines, it was
the only method.

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 Application Tracing
Embedded Audit Module and System Mapping
An embedded audit module is an integral part of an Application tracing uses a feature of the programming
application system. language in which the application was written.
It is designed to identify and report actual transactions and o Tracing aids computer programmers in following the
other information that meet criteria having audit step-by-
significance. code. It can be used by auditors for the same purpose.
System mapping is similar to application tracing. But
mapping is performed by another computer program
instead of by the auditor.

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Spreadsheet Analysis Multiple-Choice Question

Internal auditors can use spreadsheets to When an auditor performs tests on a computerized inventory file containing over 20,000 line
items, that auditor can maintain independence and perform most efficiently by
o
o Create graphs A. Asking the console operator to print every item that costs more than US $100.
o Analyze variances between actual and budgeted B. Using a generalized audit software package.
amounts C. Obtaining a printout of the entire file and then selecting each nth item.
o Perform other analytical procedures D.

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 Multiple-Choice Answer Multiple-Choice Question
When an auditor performs tests on a computerized inventory file containing over 20,000 line If a financial institution overstated revenue by charging too much of each loan payment to
items, that auditor can maintain independence and perform most efficiently by interest income and too little to repayment of principal, which of the following audit
procedures would be least likely to detect the error?

A. Asking the console operator to print every item that costs more than US $100.
A. Performing an analytical review by comparing interest income this period as a percentage
B. Using a generalized audit software package. of the loan portfolio with the interest income percentage for the prior period.
C. Obtaining a printout of the entire file and then selecting each nth item. B. Using an integrated test facility (ITF) and submitting interest payments for various loans in
the ITF portfolio to determine if they are recorded correctly.
D.
C. Using test data and submitting interest payments for various loans in the test portfolio to
determine if they are recorded correctly.
Independence can be preserved when the auditor acquires general audit software (GAS) D. Using generalized audit software to select a random sample of loan payments made
from an external source rather than relying on auditee-developed audit software. Also, during the period, calculating the correct posting amounts, and tracing the postings that
efficiency is enhanced to the extent GAS can be used (as compared to manual auditing or were made to the various accounts.
writing special audit programs). The leading GAS packages are currently ACL and IDEA.

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Multiple-Choice Answer
If a financial institution overstated revenue by charging too much of each loan payment to
interest income and too little to repayment of principal, which of the following audit
procedures would be least likely to detect the error?

A. Performing an analytical review by comparing interest income this period as a

percentage of the loan portfolio with the interest income percentage for the prior
period.
B. Using an integrated test facility (ITF) and submitting interest payments for various loans in
the ITF portfolio to determine if they are recorded correctly.
C. Using test data and submitting interest payments for various loans in the test portfolio to
determine if they are recorded correctly.
D. Using generalized audit software to select a random sample of loan payments made
during the period, calculating the correct posting amounts, and tracing the postings that
were made to the various accounts.
Analytical review is the least effective procedure. It provides only a comparison
with the prior period when the same error may have been made. Moreover, it
is a global test that does not isolate the cause of a suspected misstatement.

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CIA 1 SU 7