Determining the nature, extent and timing of analytical and tests of balances procedures is based on the results of the auditor’s risk assessment procedures.  More substantive evidence obtained from the auditor’s risk assessment procedures and analytical procedures can result in less evidence required from the detailed tests of balances.  Today’s focus is on maximizing evidence that can be gathered from analytical procedures.

Where will you find one sentence that is nearly twice as long as the entire Gettysburg Address? The Internal Revenue Code, of course. The Gettysburg Address is 278 words, while one whopper of a sentence in the IRC exceeds 450 words. And this isn’t the only instance of a long and confusing sentence! The IRC, with its 4 million words, is full of mind-bending sentences about limitations that hinge on combinations of multiple variables. Think algebra!

In my previous blog, I briefly discussed the impact of risk on the nature of the tests of balances procedures for accounts receivable. The assessed levels of risk of material misstatement at the assertion level also will determine the number (extent) of necessary accounts receivable confirmations from both sampling and non-sampling plans.  Risk determines tolerable misstatement at both the financial statement and assertion levels; tolerable misstatement is the basis for the lower limit of individually significant items.  Following is an example of the calculation process.

Similar to my discussion in a previous blog on cash auditing procedures, learning “how” to audit accounts receivable is mainly learning to “what extent” auditing procedures should be applied.  The amount of audit work necessary depends on risk of material misstatement (RMM) evaluations at both the financial statement and classification (assertion) levels.

Learning “how” to audit cash is mainly learning “when” to audit cash and to “what extent” cash auditing procedures should be applied.  The cause of much over-auditing on many engagements, the amount of audit work necessary depends on risk of material misstatement (RMM) evaluations at both the financial statement and classification (assertion) levels.