One type of Analytical Review involves comparing unaudited numbers and ratios based on numbers for the year under audit, with similar information for past years.

1. What is the purpose of Analytical Review in the Preliminary Phase of an audit?

2. In class we talked about two situations, related to auditor expectations, which the auditor would possibly investigate. Briefly present each situation.

3. Consider the following case.

Assume that sales are made evenly through the year; accounts receivable are collected one month after sale. Gross profit to sales has been .40. Sales in year 1 are $1,200,000; actual sales increase 10% from year 1 to year 2. Accounts receivable turnover for year 1 was 12.0.

Year 1

Year 2 (unaudited)

Sales

$ 1,200,000

Can be determined

Cost of Goods Sold

720,000

792,000 (amount seems all right)

Accounts Receivable (end of year)

100,000

Can be determined

Relationships between accounts for year 2 are expected to be similar to those of year 1. A comparison between year 1 and unaudited year 2 data is as follows:

Note: At the beginning of year 1, accounts receivable were $100,000.

Unaudited data for year 2 indicate the following:

Gross profit to sales is .4612244; Accounts receivable turnover is 8.166666 Determine if there seems to be a discrepancy for unaudited Sales for year 2 and Accounts Receivable

at the end of year 2. If so, indicate whether it seems a possible overstatement or understatement, and estimate an amount. BRIEFLY DISCUSS AND SHOW CALCULATIONS.

Estimate of Year 2 Recorded Sales, [unaudited] (Discuss briefly)

Estimate of year 2 Actual Sales [Based on your "audit"] Expected discrepancy

{Discuss briefly} Recorded sales - Actual sales

Estimate Unaudited Accounts Receivable end year 2 (discuss briefly)

Estimate actual accounts Receivable end year 2 (discuss briefly)

Expected discrepancy in Accounts Receivable Unaudited Accounts Receivable - Estimated Actual Accounts Receivable