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Chapter 12
Answers to case studies are indicative not comprehensive and should
be used as a basis for discussion
Case Study 2
Hoopoe has excellent internal controls. Receivables amount to £3m so
the tolerable error rate can be set at quite a high level. There are only
four accounts over £100,000 and these would have to be checked in
full as they are the most material. Other balances are relatively small .
A tolerable misstatement level of around £100,000 would seem
conservative and if the overall risk level was seen to be low it could be
set higher.
Audit risk factors include:
Case Study 3
It is not practicable or economic to visit every branch.
Sampling approaches should be adopted to identify which branches to
visit. Those with the largest inventory should be visited most often –
perhaps every year – others sampled on a random basis.
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Case Study 4
To what extent can Tickitt & Run engage in analytical techniques?
Devise analytical techniques using financial and non financial data
for verifying the expense ‘motor van expenses’
Devise analytical techniques for verifying sales figures. The auditors
are particularly worried that they have no systems assurance that all
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sales have been invoiced
Examination questions
1(a) Advantages and disadvantages
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1. Analytical procedures often have to be performed on management
accounts, or draft or incomplete accounts before the final financial
2. Without a prior and proper understanding of the business, the auditor may
be tempted to accept the results of analytical procedures that show no
unusual variations as evidence that there is nothing wrong, which may not be
3. Auditors may also be tempted to accept ‘plausible’ explanations for
changes and variations without much further substantiation, where further
investigation may actually be warranted.
(ii) Audit sampling
Advantages
(iii) Tests of controls
Advantages
ANSWERS TO CASE STUDIES AND EXAMINATION QUESTIONS
Millichamp and Taylor, Auditing, 10th edition
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(iv) Detailed testing of transactions and balances
Advantages
(b) Relationship between the methods of evidence gathering
(i) Analytical procedures are often first used during the planning stage of the
audit. Materiality levels and levels of tolerable error are often derived (at
least in part) from analytical procedures. These are in turn used in audit
sampling procedures.
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(ACCA)
2. (a) analytical procedures are used
xAt the planning stage to indicate preliminary areas of interest for the
auditor e.g. significant variations in ratios from previous periods might
indicate a problem area where audit resources can be focused. They
also give a preliminary indication of the ‘story’ the account for the
current period will tell. These procedures also form part of the risk
assessment carried out by the planners
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