Which of the following is a 'substantive analytical procedure'?

Answer options:

Comparing the current year's gross margin to the prior year's gross margin during the planning phase.

Estimating interest expense by multiplying average debt by the average interest rate and comparing it to recorded interest expense.

Scanning the general ledger for large, unusual transactions.

Comparing the final financial statement amounts to the budget in the final review stage.

How to approach this question

Substantive Analytics = Creating an Expectation to verify a number. Planning/Final Analytics = Looking for trends/anomalies.

Full Answer

B.Estimating interest expense by multiplying average debt by the average interest rate and comparing it to recorded interest expense.✓ Correct

Estimating interest expense by multiplying average debt by the average interest rate and comparing it to recorded interest expense.

Substantive analytical procedures are used to obtain audit evidence to support an assertion. Developing a precise expectation (Interest = Rate * Debt) and comparing it to the recorded amount is a classic substantive analytic.

Common mistakes

Confusing Planning Analytics (Trend Analysis) with Substantive Analytics (Ratio/Regression/Reasonableness tests).

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