CHAPTER 9

AUDIT DATA ANALYTICS

CHAPTER LEARNING OBJECTIVES

1. Describe audit data analytics, when they can be used during an audit, and some of the approaches available to perform these procedures.

Audit data analytics (ADAs) involve examining large datasets, usually using computer software, to look for trends, exceptions, and outliers. Often the test results are presented as visualizations. ADAs can be used at any stage of an audit. They can be used at the beginning of the audit during the risk assessment stage when the focus is on audit planning. They can be used during the risk response stage of the audit, as they can be used to conduct tests of controls, substantive analytical procedures, and tests of details. Lastly, ADAs can be used at the end of the audit as the auditor looks to complete the audit and performs analytical procedures to support the overall audit conclusion. Common techniques for ADAs include visualizations, matching, clustering, and statistical techniques.

2. Explain the key considerations related to data when performing audit data analytics.

Most ADAs involve structured data, which are in a fixed field or cell such as general ledger data. For an auditor to gain efficiencies, it is important that an ADA is well planned. This includes obtaining a read-only copy of the data from the client, understanding what data are available, and understanding the size of the data set. Data quality must be considered before performing an ADA. It is important that the data are in a consistent format, complete, and accurate, otherwise the data need to be cleaned before they can be used. The auditor should also consider the relevance and reliability of the data.

As with all audit work, documentation should be in sufficient detail to allow an experienced auditor to reperform the test and come up with the same results. As the auditor obtains, prepares, uses, maintains, and destroys the data, the data move through the data life cycle.

3. Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

It is important the auditor spend adequate time planning an ADA. A five-step process, including planning the test, preparing the data, assessing the relevance and reliability of the data, performing the test, and evaluating the test results, ensures an ADA is planned well. When performing an ADA, the auditor likely identifies notable items. When there are too many notable items to examine each one individually, the auditor should assess if there was an issue with the test design resulting in false positives. Once the auditor determines the notable items are not false positives, the auditor can then cluster and group the exceptions to identify those with similar characteristics and then perform more audit work on the clusters.

4. Illustrate how audit data analytics can be used as a substantive analytical procedure.

ADAs can be used to perform substantive analytical procedures. Regression analysis is an example. This is a predictive analytic technique that allows the auditor to use a mathematical formula to determine an expected amount to compare with the actual amount or account balance for reasonableness. When using regression analysis, the auditor needs to identify the dependent and independent variables. The dependent variable is the item to be predicted or the account being audited, and the independent variable is the predictor. The auditor needs to determine an acceptable difference, which is usually an amount less than performance materiality.

5. Illustrate how audit data analytics can be used as a substantive test.

ADAs can be used as a substantive test to corroborate transactions and balances in the accounting records. An advantage of using an ADA as a test of details is that it may allow the auditor to test 100 percent of a population quickly. This provides the auditor a higher level of assurance regarding the risk of material misstatement while reducing the time needed to perform the test. Substantive testing includes matching cash receipts to invoiced amounts and matching payroll transactions and balances.

6. Describe the features of a good data visualization.

Visualizations are often used to communicate the results of an ADA. In deciding the best visualization, the auditor needs to understand what the visualization is trying to communicate. A good visualization stands alone and conveys its message without any additional information. Preparing an effective visual also involves including the appropriate level of detail, colour, and axis scaling.

TRUE-FALSE STATEMENTS

1. Audit data analytics are the examination of large datasets, usually using computer software, to identify patterns, trends, and outliers as a means of gathering sufficient appropriate audit evidence.

Difficulty: Easy

Learning Objective: Describe audit data analytics, when they can be used during an audit, and some of the approaches available to perform these procedures.

Section Reference: 9.1.1 How Audit Data Analytics are Used

CPA Competency: Audit and Assurance

AACSB: Analytic

2. Audit data analytics can only be used in the risk response phase of the audit.

Difficulty: Easy

Learning Objective: Describe audit data analytics, when they can be used during an audit, and some of the approaches available to perform these procedures.

Section Reference: 9.1.2 When Audit Data Analytics are Used

CPA Competency: Audit and Assurance

AACSB: Analytic

3. Data visualizations search for items that should or should not match and help prevent fraud.

Difficulty: Easy

Learning Objective: Describe audit data analytics, when they can be used during an audit, and some of the approaches available to perform these procedures.

Section Reference: 9.1.3 Techniques Used for Audit Data Analytics

CPA Competency: Audit and Assurance

AACSB: Analytic

4. Data quality includes data consistency, data completeness, and data cleansing.

Difficulty: Easy

Learning Objective: Explain the key considerations related to data when performing audit data analytics.

Section Reference: 9.2 Data Considerations

CPA Competency: Audit and Assurance

AACSB: Analytic

5. Unstructured data are most commonly used in audit data analytics.

Difficulty: Easy

Learning Objective: Explain the key considerations related to data when performing audit data analytics.

Section Reference: 9.2.1 Types of Data

CPA Competency: Audit and Assurance

AACSB: Analytic

6. Audit efficiencies are always realized when using ADA techniques and tools.

Difficulty: Easy

Learning Objective: Explain the key considerations related to data when performing audit data analytics.

Section Reference: 9.2.2 Data Access

CPA Competency: Audit and Assurance

AACSB: Analytic

7. The five-step process from the CPA Canada Guide to Audit Data Analytics is required by auditing standards.

Difficulty: Easy

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3 The Audit Data Analytic (ADA) Five-Step Process

CPA Competency: Audit and Assurance

AACSB: Analytic

8. When performing an ADA, notable items are considered unexpected trends, outliers, and exceptions that do not require follow-up.

Difficulty: Easy

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3.4 Perform the ADA

CPA Competency: Audit and Assurance

AACSB: Analytic

9. If a large number of notable items is found, it may indicate there is an issue with the test, and the test may need to be revised and reperformed.

Difficulty: Easy

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3.5 Evaluate the Results

CPA Competency: Audit and Assurance

AACSB: Analytic

10. Reviewing both the correlation coefficient and the standard error of the model will help the auditor assess the quality of the regression.

Difficulty: Easy

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.4.1: Regression Analysis

CPA Competency: Audit and Assurance

AACSB: Analytic

11. A regression analysis is more helpful when auditing clients with a low volume of repetitive transactions.

Difficulty: Easy

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.4.1: Regression Analysis

CPA Competency: Audit and Assurance

AACSB: Analytic

12. A regression analysis is a predictive analytic technique that allows the auditor to use a mathematical formula to determine the actual amount of an account.

Difficulty: Easy

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.4: Data Analytics as a Substantive Analytical Procedure

CPA Competency: Audit and Assurance

AACSB: Analytic

13. Using an ADA as a test of details may allow the auditor to test 100 percent of a population.

Difficulty: Easy

Learning Objective: Illustrate how audit data analytics can be used as a substantive test.

Section Reference: 9.5.1: Substantive Testing

CPA Competency: Audit and Assurance

AACSB: Analytic

14. ADAs can be used as risk assessment procedures, substantive analytical procedures, or as substantive tests.

Difficulty: Easy

Learning Objective: Illustrate how audit data analytics can be used as a substantive test.

Section Reference: 9.5.1: Substantive Testing

CPA Competency: Audit and Assurance

AACSB: Analytic

15. Even a good visualization requires some additional information in order for the user to completely understand the data.

Difficulty: Easy

Learning Objective: Describe the features of a good data visualization.

Section Reference: 9.6 Features of a Good Visualization

CPA Competency: Audit and Assurance

AACSB: Analytic

16. A visualization of data can be interpreted more quickly than a data table.

Difficulty: Easy

Learning Objective: Describe the features of a good data visualization.

Section Reference: 9.6 Features of a Good Visualization

CPA Competency: Audit and Assurance

AACSB: Analytic

17. In visualizations, it is always best to include as many details and as much information as possible.

Difficulty: Easy

Learning Objective: Describe the features of a good data visualization.

Section Reference: 9.6 Features of a Good Visualization

CPA Competency: Audit and Assurance

AACSB: Analytic

18. An effective visual minimizes the use of colour.

Difficulty: Easy

Learning Objective: Describe the features of a good data visualization.

Section Reference: 9.6 Features of a Good Visualization

CPA Competency: Audit and Assurance

AACSB: Analytic

MULTIPLE CHOICE QUESTIONS

19. A data analytic performed to understand past data is called a

a) descriptive analytic.

b) diagnostic analytic.

c) predictive analytic.

d) prescriptive analytic.

Difficulty: Easy

Learning Objective: Describe audit data analytics, when they can be used during an audit, and some of the approaches available to perform these procedures.

Section Reference: 9.1 What Are Data Analytics

CPA Competency: Audit and Assurance

AACSB: Analytic

20. A data analytic performed to examine a variety of solutions to determine the best outcome is called a

a) descriptive analytic.

b) diagnostic analytic.

c) predictive analytic.

d) prescriptive analytic.

Difficulty: Easy

Learning Objective: Describe audit data analytics, when they can be used during an audit, and some of the approaches available to perform these procedures.

Section Reference: 9.1 What Are Data Analytics

CPA Competency: Audit and Assurance

AACSB: Analytic

21. Which of the following accurately describes audit data analytics?

a) examination of small datasets to identify patterns, trends, and outliers

b) use of manual techniques to examine large datasets to gather audit evidence

c) method of expanding audit testing to guarantee financial statements are properly presented

d) examination of large datasets to identify patterns, trends, and outliers

Difficulty: Easy

Learning Objective: Describe audit data analytics, when they can be used during an audit, and some of the approaches available to perform these procedures.

Section Reference: 9.1.1 How Audit Data Analytics Are Used

CPA Competency: Audit and Assurance

AACSB: Analytic

22. Yulia Sanchez conducted a test on purchases and used audit data analytics to compare purchase orders with supplier invoices. Any exceptions were noted and Yulia examined each exception to determine if there was a misstatement. The audit data analytic technique she used is called

a) visualization.

b) matching.

c) clustering.

d) statistical technique.

Difficulty: Medium

Learning Objective: Describe audit data analytics, when they can be used during an audit, and some of the approaches available to perform these procedures.

Section Reference: 9.1.3 Techniques Used for Audit Data Analytics

CPA Competency: Audit and Assurance

AACSB: Analytic

23. Ivan Goldberg used audit data analytics to identify specific accounts causing a significant increase in accounts payable. This ADA was performed during the

a) risk assessment phase.

b) reporting phase.

c) risk response phase.

d) client acceptance phase.

Difficulty: Medium

Learning Objective: Describe audit data analytics, when they can be used during an audit, and some of the approaches available to perform these procedures.

Section Reference: 9.1.2 When Audit Data Analytics Are Used

CPA Competency: Audit and Assurance

AACSB: Analytic

24. Kelton Kittle is planning on preparing a bar chart showing the aging of the accounts receivable balance. This bar chart will

a) be prepared using the data analytic technique called matching.

b) identify any fraud.

c) be helpful during the audit completion phase.

d) identify trends in the aging of accounts.

Difficulty: Easy

Learning Objective: Describe audit data analytics, when they can be used during an audit, and some of the approaches available to perform these procedures.

Section Reference: 9.1.2 When Audit Data Analytics Are Used, 9.1.3 Techniques Used for Data Analytics

CPA Competency: Audit and Assurance

AACSB: Analytic

25. During the audit of a manufacturing company, the auditor performed audit data analytics. Which of the following ADAs were used as a substantive test?

a) identifying payments made after year end

b) creating a visualization of ratio analysis

c) performing a quantity and price analysis for inventory

d) analyzing the general ledger for large unusual transactions

Difficulty: Easy

Learning Objective: Describe audit data analytics, when they can be used during an audit, and some of the approaches available to perform these procedures.

Section Reference: 9.1.2 When Audit Data Analytics Are Used

CPA Competency: Audit and Assurance

AACSB: Analytic

26. During the audit of a retail clothing store company, the auditor performed audit data analytics. Which of the following ADAs were used to assess risk?

a) identifying payments made after year end

b) identifying credit entries in accounts receivable

c) testing the net realizable value of inventory

d) analyzing the general ledger for large unusual transactions

Difficulty: Easy

Learning Objective: Describe audit data analytics, when they can be used during an audit, and some of the approaches available to perform these procedures.

Section Reference: 9.1.2 When Audit Data Analytics Are Used

CPA Competency: Audit and Assurance

AACSB: Analytic

27. Kim Wilson is planning on performing audit data analytics using structured data. Which of the following would be considered structured data?

a) emails

b) accounts receivable sub-ledger

c) texts

d) statistics posted on various websites

Difficulty: Easy

Learning Objective: Explain the key considerations related to data when performing audit data analytics.

Section Reference: 9.2.1 Types of Data

CPA Competency: Audit and Assurance

AACSB: Analytic

28. Jaques is using ADAs in the audit of JKJ Company, a company with 20 different stores. When considering the data quality, he discovers that each store uses different software and captures the data differently. Data will need to be manipulated to ensure the data are

a) consistent.

b) complete.

c) clean.

d) clustered.

Difficulty: Easy

Learning Objective: Explain the key considerations related to data when performing audit data analytics.

Section Reference: 9.2.3 Data Quality

CPA Competency: Audit and Assurance

AACSB: Analytic

29. Sue Young is using ADAs to verify the amount of purchases recorded in the financial statements. Which of the following steps would help ensure the data is clean?

a) agreeing the total purchases figure from the dataset to the total in the general ledger

b) ensuring the dates entered from two different systems are formatted in the same manner

c) verifying that the purchase orders are in sequential number

d) removing duplicate purchase invoices from the dataset

Difficulty: Medium

Learning Objective: Explain the key considerations related to data when performing audit data analytics.

Section Reference: 9.2.3 Data Quality

CPA Competency: Audit and Assurance

AACSB: Analytic

30. Auditors should always consider the relevance and reliability of the information to be used as audit evidence. Which of the following characteristics would decrease the reliability of data?

a) strong internal controls

b) data available from multiple sources

c) numerical data

d) unstructured data

Difficulty: Easy

Learning Objective: Explain the key considerations related to data when performing audit data analytics.

Section Reference: 9.2.4 Data Relevance and Reliability

CPA Competency: Audit and Assurance

AACSB: Analytic

31. Jennifer is creating a visualization comparing key profit ratios of JKJ Ltd. both to profit ratios from previous years as well as to its industry. The company has strong internal controls and information can be obtained from a variety of sources and in a variety of formats. Which of the following characteristics would most increase the relevance or reliability of the data being used to create the visualization?

a) internal data on the valuation of inventory

b) financial data created under a strong internal control system

c) publicly available audited financial data

d) email from the CFO giving the ratios that are common in the industry

Difficulty: Medium

Learning Objective: Explain the key considerations related to data when performing audit data analytics.

Section Reference: 9.2.4 Data Relevance and Reliability

CPA Competency: Audit and Assurance

AACSB: Analytic

32. At what stage of the data life cycle does the auditor consider the accuracy, completeness, and timeliness of the data and clean the data errors?

a) Data collection

b) Data processing

c) Data usage

d) Data maintenance

Difficulty: Easy

Learning Objective: Explain the key considerations related to data when performing audit data analytics.

Section Reference: 9.2.6 The Data Life Cycle

CPA Competency: Audit and Assurance

AACSB: Analytic

33. Olaf has taken prepared data and is now using the data to perform the test. What stage of the data life cycle is he working on?

a) Data collection

b) Data processing

c) Data usage

d) Data maintenance

Difficulty: Easy

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3 The Data Life Cycle

CPA Competency: Audit and Assurance

AACSB: Analytic

34. Which of the following would be considered by an auditor during the planning of an ADA?

a) availability of data

b) complexity of the client's data capturing systems

c) format of the data

d) consistency of the data

Difficulty: Easy

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3.1 Plan the ADA

CPA Competency: Audit and Assurance

AACSB: Analytic

35. Which of the following would be considered by an auditor during the accessing and preparing of data for an ADA?

a) availability of data

b) software to be used to conduct test

c) account and assertion to be tested

d) consistency of the data

Difficulty: Easy

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3.2 Access and Prepare the Data

CPA Competency: Audit and Assurance

AACSB: Analytic

36. Jason is auditing a company’s professional expenses over a three-year period. Which of the following characteristics would make the data less reliable?

a) Data are produced under a system of effective internal controls

b) Data are unstructured

c) Data are in general ledger format

d) Data are controlled by the accounting department

Difficulty: Easy

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3.3 Consider the Data’s Relevance and Reliability

CPA Competency: Audit and Assurance

AACSB: Analytic

37. Jason is auditing a company’s professional expenses over a three-year period. He decides to perform an ADA to determine if there is a higher risk of misstatement in this area. Which of the following questions would be considered when determining the relevance of the data to be used?

a) Are the data structured?

b) Will the data provide information regarding the trend of professional expenses?

c) Can the data that will be used be easily overridden by management?

d) Will the data be provided by management or gathered directly by Jason?

Difficulty: Medium

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3.3 Consider the Data’s Relevance and Reliability

CPA Competency: Audit and Assurance

AACSB: Analytic

38. Which of the following statements is accurate regarding notable items?

a) if a large number of notable items are found, the original risk assessment is determined to be accurate

b) notable items are exceptions that do not require follow-up

c) unexpected trends requiring follow-up would be notable items

d) all data points are considered notable items

Difficulty: Easy

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3.4 Perform the ADA

CPA Competency: Audit and Assurance

AACSB: Analytic

39. Jason is auditing a company’s accounts receivable balance and has used an ADA test to provide evidence regarding valuation. Which of the following steps occurred during the performing of the ADA?

a) Jason determined controls over receivables were strong and data could be relied on

b) All duplicate data receivable entries were removed

c) A visualization was created to show aging of receivables

d) Jason concluded the test provided evidence regarding valuation

Difficulty: Medium

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3 The Audit Data Analytic (ADA) Five-Step Process

CPA Competency: Audit and Assurance

AACSB: Analytic

40. Which of the following is not a consideration when the auditor evaluates the results of an ADA?

a) How many notable items were found?

b) Do test results indicate more testing is required?

c) How will the exceptions be documented in the audit file?

d) Whether to use the data analytic technique of matching or visualization

Difficulty: Easy

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3.5 Evaluate the Results

CPA Competency: Audit and Assurance

AACSB: Analytic

41. Why would an auditor use an ADA to analyze and test the journal entries in the general ledger?

a) to ensure no fraud occurred during the period

b) to determine the financial statements are properly presented

c) to identify entries that may indicate a higher risk of misstatement

d) to identify false positives

Difficulty: Easy

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3.6 Additional Issues to Consider when Performing an ADA as a Risk Assessment Procedure

CPA Competency: Audit and Assurance

AACSB: Analytic

42. Sherry Galo has performed an ADA and has documented the notable items. Which of the following statements accurately describes how the CPA guidelines suggest addressing notable items?

a) When few exceptions are identified, the auditor may be able to examine each one to determine the impact on the original risk assessment.

b) When a great number of notable items are identified, the auditor must conclude the test was ineffective.

c) When no exceptions are identified, the auditor should assume the test has not been performed correctly and should reperform the test.

d) When few exceptions are identified, reduce the exceptions by using clustering.

Difficulty: Easy

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3.6 Additional Issues to Consider when Performing an ADA as a Risk Assessment Procedure

CPA Competency: Audit and Assurance

AACSB: Analytic

43. Daniel Morency has decided to test the journal entries posted in the miscellaneous expense account for the year under audit. Daniel is looking for large credit entries in order to identify possible areas of misstatement. Which of the following steps will help ensure the completeness of the dataset?

a) Daniel compares total activity from this year to last year.

b) Daniel totals the debits in the miscellaneous expense account and compares them to the level of materiality.

c) Daniel reviews the sequential ordering of the entries posted in the miscellaneous expense account.

d) Daniel removes any duplicate entries from the dataset.

Difficulty: Medium

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3.6 Additional Issues to Consider when Performing an ADA as a Risk Assessment Procedure

CPA Competency: Audit and Assurance

AACSB: Analytic

44. When auditing the general ledger to identify inappropriate entries, the review of entries posted by unauthorized users would test the assertions of

a) completeness and occurrence.

b) existence and occurrence.

c) accuracy and valuation.

d) classification and cut-off.

Difficulty: Easy

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3.6 Additional Issues to Consider when Performing an ADA as a Risk Assessment Procedure

CPA Competency: Audit and Assurance

AACSB: Analytic

45. When auditing the general ledger to identify inappropriate entries, the review of significant value journal entries would test the assertion of

a) completeness.

b) existence.

c) accuracy.

d) classification.

Difficulty: Easy

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3.6 Additional Issues to Consider when Performing an ADA as a Risk Assessment Procedure

CPA Competency: Audit and Assurance

AACSB: Analytic

46. What is a false positive as it relates to an ADA?

a) items identified as an exception

b) unexpected trending of items

c) items erroneously identified as an exception

d) items correctly excluded from the test population

Difficulty: Easy

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3.6 Additional Issues to Consider when Performing an ADA as a Risk Assessment Procedure

CPA Competency: Audit and Assurance

AACSB: Analytic

47. A predictive analytic technique that would allow the auditor to calculate the expected amount of payroll expense by using the average rate of pay and the number of employees would be a

a) visualization analysis.

b) matching analysis.

c) regression analysis.

d) cluster analysis.

Difficulty: Easy

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.4 Data Analytics as a Substantive Analytical Procedure

CPA Competency: Audit and Assurance

AACSB: Analytic

48. In a regression analysis, the dependent variable is

a) information gathered internally.

b) the predictor.

c) the item or account being predicted.

d) determined after the test is performed.

Difficulty: Easy

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.4.1 Regression Analysis

CPA Competency: Audit and Assurance

AACSB: Analytic

49. Sue is conducting a regression analysis to predict the amount of salaries expense using the number of employees and the average rate of pay. Which of the following would be considered the dependent variable?

a) number of employees

b) amount of salaries expense

c) average rate of pay

d) age of employees

Difficulty: Medium

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.4.1 Regression Analysis

CPA Competency: Audit and Assurance

AACSB: Analytic

50. Sue is conducting a regression analysis to predict the amount of salaries expense using the number of employees and the average rate of pay. The average rate of pay would be considered to be an

a) internal financial predictor.

b) internal non-financial predictor.

c) external financial predictor.

d) external non-financial predictor.

Difficulty: Medium

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.4.1 Regression Analysis

CPA Competency: Audit and Assurance

AACSB: Analytic

51. Sue is conducting a regression analysis to predict the amount of salaries expense using the number of employees and the average rate of pay. This type of regression analysis is called a(n)

a) linear regression.

b) dependent regression.

c) multiple regression.

d) independent regression,

Difficulty: Easy

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.4.1 Regression Analysis

CPA Competency: Audit and Assurance

AACSB: Analytic

52. Paul has decided to perform a regression analysis as a substantive analytical procedure to forecast the amount of rental revenue based on the average number of apartments rented per year and the average amount of rent charged. What are the related assertions?

a) occurrence, completeness, and accuracy

b) existence and completeness

c) completeness, presentation, and accuracy

d) classification, existence, and accuracy

Difficulty: Medium

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.4.1 Regression Analysis

CPA Competency: Audit and Assurance

AACSB: Analytic

53. Paul has decided to perform a regression analysis as a substantive analytical procedure to forecast the amount of rental revenue based on the average number of apartments rented per year and the average amount of rent charged. Which of the following should be determined during the planning of the ADA?

a) difference between the predicted amount of revenue and the actual amount of revenue

b) the amount of acceptable audit risk

c) the number of apartments rented for the year

d) whether the average amount of rent received from the client is reliable

Difficulty: Easy

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.4.1 Regression Analysis

CPA Competency: Audit and Assurance

AACSB: Analytic

54. Paul has decided to perform a regression analysis as a substantive analytical procedure to forecast the amount of rental revenue based on the average number of apartments rented per year and the average amount of rent charged. What type of procedure would this be?

a) risk assessment

b) substantive analytical

c) test of control

d) test of detail

Difficulty: Medium

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.4 Audit Data Analytics as a Substantive Analytical Procedure

CPA Competency: Audit and Assurance

AACSB: Analytic

55. Stacey Vino was told by her audit senior to ensure that the data she was using for the regression analysis was clean and complete. In which phase of the ADA would this step be performed?

a) planning the ADA

b) accessing and preparing the data

c) assessing the data’s relevance and reliability

d) performing the ADA

Difficulty: Easy

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.4.1 Regression Analysis

CPA Competency: Audit and Assurance

AACSB: Analytic

56. When performing a regression analysis, the auditor will assess the quality of the model. Which of the following would indicate a higher level of confidence in the regression?

a) correlation coefficient of .2

b) standard error is greater than performance materiality

c) expected results are less than actual results

d) correlation coefficient of .85

Difficulty: Easy

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.4.1 Regression Analysis

CPA Competency: Audit and Assurance

AACSB: Analytic

57. Paul performs a regression analysis as a substantive analytical test on total rental revenue. He uses the average number of apartments rented for the month and the average monthly rent to determine an expected monthly revenue amount. He calculates the difference between the expected and actual for each month. Which months will require further examination?

a) months with a difference between expected and actual results over $0

b) months where expected and actual results are exactly the same

c) the months with the highest and the lowest difference

d) months with a difference between expected and actual results over performance materiality

Difficulty: Easy

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.4.1 Regression Analysis

CPA Competency: Audit and Assurance

AACSB: Analytic

58. Paul decides to perform an ADA and test accounts payable and compare purchase orders with invoices received and booked. This comparison will provide evidence as to the existence of accounts payable at year end. What type of procedure is this?

a) risk assessment

b) substantive analytical

c) test of control

d) test of details

Difficulty: Medium

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.5.1 Substantive Testing

CPA Competency: Audit and Assurance

AACSB: Analytic

59. Peter is going to use an ADA to compare the invoices issued by a company to the cash they have received during the year. The purpose of this is to substantiate both the accounts receivable at year end and the amount of revenue during the year. For accounts receivable, what assertion will this test provide evidence for?

a) completeness

b) rights and obligations

c) existence

d) cut-off

Difficulty: Medium

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.5.2 ADA Example of Accounts Receivable and Revenue

CPA Competency: Audit and Assurance

AACSB: Analytic

60. Which of the following would be considered an advantage of using an ADA as a substantive procedure?

a) ability to test 100 percent of a population

b) time needed to perform the test

c) level of assurance that can be provided from the test

d) all of the answers are correct

Difficulty: Easy

Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.5.1 Substantive Testing

CPA Competency: Audit and Assurance

AACSB: Analytic

61. Peter is going to use an ADA to compare the invoices issued by a company to the cash they have received during the year. The purpose of this is to substantiate both the accounts receivable at year end and the amount of revenue during the year. For the sales account, what assertion will this test provide evidence for?

a) completeness

b) rights and obligations

c) occurrence

d) cut-off

Difficulty: Medium

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.5.2 ADA Example of Accounts Receivable and Revenue

CPA Competency: Audit and Assurance

AACSB: Analytic

62. Peter is going to use an ADA to match the hours worked according to time sheets to the hours paid according to the payroll register files. What type of procedure is this?

a) risk assessment

b) substantive analytical

c) test of control

d) test of details

Difficulty: Medium

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.5.3 ADA Example of Payroll

CPA Competency: Audit and Assurance

AACSB: Analytic

63. Determining which type of visualization will best summarize the results of an ADA would be part of

a) planning of an ADA.

b) preparing the data.

c) assessing the data’s relevance and reliability.

d) performing the ADA.

Difficulty: Easy

Learning Objective: Describe the features of a good data visualization.

Section Reference: 9.6 Features of a Good Visualization

CPA Competency: Audit and Assurance

AACSB: Analytic

64. The best visualization for a regression analysis would be a

a) bar chart.

b) scatterchart.

c) line chart.

d) pie chart.

Difficulty: Easy

Learning Objective: Describe the features of a good data visualization.

Section Reference: 9.6 Features of a Good Visualization

CPA Competency: Audit and Assurance

AACSB: Analytic

65. The best visualization for showing part of a miscellaneous expense account would be a

a) bar chart.

b) scatterchart.

c) line chart.

d) pie chart.

Difficulty: Easy

Learning Objective: Describe the features of a good data visualization.

Section Reference: 9.6 Features of a Good Visualization

CPA Competency: Audit and Assurance

AACSB: Analytic

66. How much detail should be provided in a good visualization?

a) as much detail as possible

b) only a title and labelling of both axes

c) enough detail for the user to understand the data presented

d) no words should be included on visualizations

Difficulty: Easy

Learning Objective: Describe the features of a good data visualization.

Section Reference: 9.6 Features of a Good Visualization

CPA Competency: Audit and Assurance

AACSB: Analytic

67. In a bar chart visualization, if axis scaling is too large,

a) small fluctuations will appear significant

b) large fluctuations will appear insignificant

c) small fluctuations will not be noticeable

d) neither small or large fluctuations will be noticeable

Difficulty: Easy

Learning Objective: Describe the features of a good data visualization.

Section Reference: 9.6 Features of a Good Visualization

CPA Competency: Audit and Assurance

AACSB: Analytic

68. In a bar chart visualization, which of the following will happen if axis scaling is inappropriate?

a) if axis scaling is too small, small fluctuations will appear significant

b) if axis scaling is too large, small fluctuations will appear significant

c) axis scaling is not important in a visualization

d) if axis scaling is too large, significant fluctuations may remain hidden

Difficulty: Easy

Learning Objective: Describe the features of a good data visualization.

Section Reference: 9.6 Features of a Good Visualization

CPA Competency: Audit and Assurance

AACSB: Analytic

69. In a visualization, what is the best use of colour?

a) Use only red colour

b) No colour should be used

c) Use as many colours as possible

d) Use one or two colours

Difficulty: Easy

Learning Objective: Describe the features of a good data visualization.

Section Reference: 9.6 Features of a Good Visualization

CPA Competency: Audit and Assurance

AACSB: Analytic

70. Overall, when deciding on a good visualization, the auditor should

a) understand the goal of the visualization.

b) use five or six colours.

c) use as much detail as possible.

d) always use bar charts.

Difficulty: Easy

Learning Objective: Describe the features of a good data visualization.

Section Reference: 9.6 Features of a Good Visualization

CPA Competency: Audit and Assurance

AACSB: Analytic

SHORT ANSWER QUESTIONS

71. Indicate whether you agree or disagree with the following statements and explain your reasoning.

a) Svetlana Petrova was reviewing the risk profile of Gaz Prom Industries in order to identify areas where there was a risk of material misstatement. She concluded: “In order to determine where there is an increased risk of material misstatement, I will use a prescriptive analysis.”

b) Boris and Jana were performing an assessment of the accounts payable system at Magnitogirsk Iron and Steel Works Operations. Their focus was on the completeness assertion for accounts payable balances. Boris stated “In order to gather evidence on the completeness of accounts payable, we should analyze the general ledger for unusual transactions and create a visualization of the Days in Accounts Payable and the Accounts Payable Turnover ratios.”

c) Jana Novotna, the auditor in charge of the Mosenergo petroleum giant, was explaining to Valentin Titov the importance of visualizations. “This data analytic technique allows us to present our information visually and can assist us in identifying risk and trends; however, it is important that we ensure data are consistent, complete, and clean.”

d) Susan Martin, the audit senior at Canadian National Railways, was explaining to the junior auditor the difference between structured and unstructured data: “Structured data are more reliable and include emails and texts or information that is posted on social media. Unstructured data includes data captured, processed, and maintained in an accounting system.”

e) Larisa McCarthy, the auditor in charge of the Loblaw audit, feels that the use of ADAs will significantly reduce the time required in auditing large population of sales transactions. After performing the ADA, there were two large notable items. Larisa mentions to her staff “The ADA is not useful as we have discovered some notable items. The fact that there were any notable items means that the ADA was not appropriately planned and performed.”

Difficulty: Hard

Learning Objective: Describe audit data analytics, when they can be used during an audit, and some of the approaches available to perform these procedures.

Learning Objective: Explain the key considerations related to data when performing audit data analytics.

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.1.1 How Audit Data Analytics are Used

Section Reference: 9.1.2 When Audit Data Analytics are Used

Section Reference: 9.1.3 Techniques Used for Audit Data Analytics

Section Reference: 9.2.1 Types of Data

Section Reference: 9.3.6 Additional Issues to Consider when Performing an ADA as a Risk Assessment Procedure

CPA Competency: Audit and Assurance

AACSB: Analytic

72. The following is a list of different audit data analytics performed by an auditor. Indicate whether the ADA is a risk assessment procedure, a test of control, a substantive analytical procedure, or a substantive test.

Scenario 1: Analyzing the miscellaneous expense account for large unusual transactions

Scenario 2: Testing purchase order authorization limits by comparing purchase orders to the pre-authorized limits for various suppliers

Scenario 3: Calculating expected rental revenue by using average rent and number of units rented to actual rental revenue

Scenario 4: Testing outstanding cheques on the bank reconciliation to determine if cheques were cashed after the end of the period

Scenario 5: Testing the balance in accounts receivable by matching invoices to cash received

Difficulty: Medium

Learning Objective: Describe audit data analytics, when they can be used during an audit, and some of the approaches available to perform these procedures.

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Learning Objective: Illustrate how audit data analytics can be used as a substantive test.

Section Reference: 9.1.2 When Audit Data Analytics are Used

Section Reference: 9.4 Audit Data Analytics as a Substantive Analytical Procedure

Section Reference: 9.5.1 Substantive Testing

CPA Competency: Audit and Assurance

AACSB: Analytic

73. Discuss the factors that influence the quality of data when an auditor is planning an ADA. Why is the quality of data important?

Difficulty: Medium

Learning Objective: Explain the key considerations related to data when performing audit data analytics.

Section Reference: 9.2.3 Data Quality

CPA Competency: Audit and Assurance

AACSB: Analytic

74. What is the data life cycle? Explain the different stages of the data life cycle.

Difficulty: Easy

Learning Objective: Explain the key considerations related to data when performing audit data analytics

Section Reference: 9.2.6 The Data Life Cycle

CPA Competency: Audit and Assurance

AACSB: Analytic

75. Describe the four different data analytic techniques and state how they are helpful to an audit.

Difficulty: Easy

Learning Objective: Describe audit data analytics, when they can be used during an audit, and some of the approaches available to perform these procedures.

Section Reference: 9.1.3 Techniques Used for Audit Data Analytics

CPA Competency: Audit and Assurance

AACSB: Analytic

76. Identify the five steps for Audit Data Analytics suggested by the CPA Canada Guide to plan, perform, and evaluate ADAs.

Difficulty: Easy

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3 The Audit Data Analytic Five-Step Process

CPA Competency: Audit and Assurance

AACSB: Analytic

77. The auditor may choose to use ADAs to perform substantive analytical procedures. Formulate a substantive analytical procedure that will assist in corroborating the balance in the Sales Revenue account for a golf course.

Difficulty: Hard

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.4 Audit Data Analytics as a Substantive Analytical Procedure

CPA Competency: Audit and Assurance

AACSB: Analytic

78. The auditor may choose to use ADAs to perform substantive tests. Formulate a substantive test that will assist in corroborating the balance in the Accounts Payable account for a manufacturing company.

Difficulty: Hard

Learning Objective: Illustrate how audit data analytics can be used as a substantive test.

Section Reference: 9.5.1 Substantive Testing

CPA Competency: Audit and Assurance

AACSB: Analytic

79. Explain the features of a good data visualization.

Difficulty: Easy

Learning Objective: Describe the features of a good data visualization.

Section Reference: 9.6 Features of a Good Visualization

CPA Competency: Audit and Assurance

AACSB: Analytic

80. Describe what must be considered by the auditor when forming a conclusion on the results of audit data analytics. How do auditors determine what results need follow-up?

Difficulty: Medium

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Learning Objective: Illustrate how audit data analytics can be used as a substantive test.

Section Reference: 9.3.5 Evaluate the Results

Section Reference: 9.3.6 Additional Issues to Consider when Performing an ADA as a Risk Section Reference: 9.4.1 Regression Analysis

Section Reference: 9.5.2 ADA Example of Accounts Receivable and Revenue

CPA Competency: Audit and Assurance

AACSB: Analytic

ESSAY QUESTIONS

81. CAS 240 requires the auditor to assess the risk of fraud. Auditors will commonly use ADAs to analyze the general ledger to identify any areas of risk. Identify specific examples of such procedures and explain how the procedures help identify potential fraud.

Difficulty: Medium

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3.6 Additional Issues to Consider when Performing an ADA as a Risk Assessment Procedure

CPA Competency: Audit and Assurance

AACSB: Analytic

82. Regression analysis allows the auditor to express a relationship between variables as a mathematical formula. This formula can then be used to develop an expected account balance that can then be compared with the actual account balance for reasonableness. Formulate a regression analysis for payroll expense. Discuss whether the regression is a linear regression or a multiple regression analysis and identify the dependent and independent variables. Be sure to include whether the independent variable is internal or external, and financial or non-financial.

Difficulty: Hard

Learning Objective: Illustrate how audit data analytics can be used as a substantive analytical procedure.

Section Reference: 9.4.1 Regression Analysis

CPA Competency: Audit and Assurance

AACSB: Analytic

83. Using the five-step process, explain how auditors perform an audit data analytic for risk assessment.

Difficulty: Easy

Learning Objective: Describe the five-step process for performing an audit data analytic and apply this process when using audit data analytics as a risk assessment procedure.

Section Reference: 9.3 The Audit Data Analytic (ADA) Five-Step Process

CPA Competency: Audit and Assurance

AACSB: Analytic

CASE QUESTION

84. Raisa Alexseev was assigned to perform the year end audit at Vulcan Spice Mills. She had already made a preliminary risk assessment analysis and determined that the potential for fraud was high due to the significant volume of employee expenses. The controls surrounding the employee expenses were weak due to the ability of management to override the controls. Raisa decided to design an ADA to perform a substantive test on the reimbursement of employee expenses.

Instructions

Using the five-step process, formulate a substantive test for employee expenses.

Be sure to include:

The main assertions related to the employee expense account.

The data Raisa will require to perform the substantive test.

The technique Raisa should use to perform this substantive test.

Difficulty: Hard

Learning Objective: Illustrate how audit data analytics can be used as a substantive test. Section Reference: 9.5.1 Substantive Testing

CPA Competency: Audit and Assurance

AACSB: Analytic

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