CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceHard
An auditor is evaluating the overall reasonableness of the client's financial statements using analytical procedures. The client operates in a highly seasonal industry. Which of the following analytical procedures would be most effective in this context?
- APerforming regression analysis on total annual sales volume against economic indicators.
- BComparing current year's monthly revenue and expense trends to prior year's monthly trends.
- CCalculating key financial ratios and comparing them to industry averages.
- DComparing current year-end balances to prior year-end balances for all major accounts.
Show answer & explanationAnswer & explanation
Correct answer: B. Comparing current year's monthly revenue and expense trends to prior year's monthly trends.
In a highly seasonal industry, comparing year-end balances or total annual figures can obscure significant fluctuations. Comparing monthly trends to prior monthly trends allows the auditor to identify unusual deviations within the seasonal patterns, providing more effective insights into reasonableness.
Why the other options are wrong
- A. Regression analysis can be powerful but might be overly complex or less practical for identifying specific operational anomalies linked to monthly seasonality compared to a direct monthly trend comparison.
- C. While useful, industry averages may not perfectly align with the client's specific seasonal patterns or internal changes, and may still be based on annual data.
- D. Comparing year-end balances might mask significant intra-year fluctuations due to seasonality, making it less effective for reasonableness in this context.
Analytical Procedures for Seasonal Industries
For highly seasonal industries, analytical procedures comparing current period monthly or quarterly trends to prior period trends are most effective in identifying unusual fluctuations.
- Seasonality can obscure annual comparisons.
- Monthly/quarterly data provides granular insights.
- Focuses on consistency of patterns within seasons.
Memory trick: Monthly Peaks and Valleys Reveal the Real Story.