Audit - Case - 8.3 - Burlingham - Bees 1

Case 8.
3 Burlingham Bees: Using
Analytical Procedures as Substantive Tests
Due: October 30, 2018
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Requirement 1)
Auditing Standard 2305: Substantive Analytical Procedures
provides information and requirements regarding the use of
substantive analytical procedures in an audit.
Paragraph 2 discusses how an auditor develops an expectation
to be used in analytical procedures. “Analytical procedures
involve comparisons of recorded amounts, or ratios developed from
recorded amounts, to expectations developed by the auditor. The
auditor develops such expectations by identifying and using
plausible relationships that are reasonably expected to exist
based on the auditor's understanding of the client and of the
industry in which the client operates.” Paragraph 17 states “the
expectation should be precise enough to provide the desired level
of assurance that differences that may be potential material
misstatements, individually or when aggregated with other
misstatements, would be identified for the auditor to
investigate.” Such precision depends on “the auditor's
identification and consideration of factors that significantly
affect the amount being audited and the level of detail of data
used to develop the expectation.” The more detail an expectation
is developed with (which is influenced by the nature of the
client, its size and its complexity), the greater the chance of
detecting a misstatement (paragraph 19).
Paragraph 9 examines an auditor’s reliance on substantive
tests to achieve an audit objective related to an assertion,
which may come from tests of details, analytical procedures, or
both. Deciding which procedure(s) to use is based on the
auditor's judgment on the expected effectiveness and efficiency
of the available procedures.
When conducting analytical procedures intended to provide
substantive testing, the auditor considers the level of assurance
he or she wants from substantive testing for an audit objective
and decides which procedure(s) can provide such (paragraph 10).
The auditor also evaluates the risk of management override of
controls as “substantive analytical procedures alone are not well
suited to detecting fraud” (paragraph 10).
According to paragraph 11, “the efficiency and effectiveness
of an analytical procedure to identify potential misstatements
depends on:
a) the nature of the assertion,

b) the plausibility and predictability of the relationship,
c) the availability and reliability of the data used to develop
the expectation, and

d) the precision of the expectation.”
Paragraph 16 focuses on the reliability of data. “Before
using the results obtained from substantive analytical
procedures, the auditor should either test the design and
operating effectiveness of controls over financial information
used in the substantive analytical procedures or perform other
procedures to support the completeness and accuracy of the
underlying information. The following factors influence the
auditor's consideration of the reliability of data for purposes
of achieving audit objectives:
 Whether the data was obtained from independent sources
outside the entity or from sources within the entity

 Whether sources within the entity were independent of those
who are responsible for the amount being audited

 Whether the data was developed under a reliable system with
adequate controls
 Whether the data was subjected to audit testing in the
current or prior year

 Whether the expectations were developed using data from a
variety of sources”
There are several advantages of developing an expectation at
a detailed level rather than an overall or aggregated level.
Developing expectations at a detailed level enhances the
effectiveness and efficiency of an analytical procedure, as it
increases the chance of detecting a misstatement of any given
amount opposed to an aggregated expectation. The level of
diversity and complexity of information varies greatly depending
on the company. In order to minimize risk and failure to detect
to misstatements, developing expectations at a more detailed
level allows the auditor to gain a better understanding of the
client’s business operations and disaggregate complexity.
Requirement 2)
The precise expectation for ticket revenue based on our
calculations is $4,277,630.86. To establish the 2014 precise
expectation of ticket revenues, the average game attendance,
ticket price, game revenue, and number of games must first be
calculated for typical weekdays and weekends and promotional
weekdays and weekends. With “x” being the average attendance on a
typical weekday, the equation we used to compute it is:
(Non-promotional weekday games x average attendance) + (Non-
promotional weekend
games x 20% weekend game increase x average attendance) +
(Promotional weekday
games x 15% promotional increase x average attendance) +
(Weekend promotional
games x 20% weekend game increase x 15% promotional
increase) = Total attendance
or
(44-8)x + (28-9)(1.20)x + 8(1.15)x + 9(1.20)(1.15)x = 516,783
The average attendance on a typical weekday is 6,426 attendees
per game. The ticket price is computed by multiplying the price
of each seat by the relative proportion of the sales mix and
adding them together.
The average ticket price for a weekday game is:
$12(25%) + $10(30%) + $6(23%) + $4(22%) = $8.26
The average ticket price for a weekend game is:
$12(26%) + $10(29%) + $6(24%) + $4(21%) = $8.30
The average game revenue is calculated by multiplying the game
attendance by the ticket price.
Below is a sample excel sheet to illustrate the computations for
the precise expectation of ticket revenues in 2014.
Requirement 4)
(a) For this calculation, when dealing with substantive
analytical procedures, the tolerable difference cannot exceed the
overall materiality of the audit. In this situation, considering
that pre-tax net income of $731,845 has been reported to us, we
can use the generally accepted level of 5% to determine our
materiality range for the actual revenue figure. In this
circumstance this equates to $36,592.25. Thus, our reasonable
range for total revenue is between $4,241,038.61 and
$4,314,223.11. With this information in hand, we can see that our
actual reported revenue of $4,292,970 falls favorably in this
range.
(b) If the reported ticket revenues were outside the
“reasonableness range,” it could be due to:
 A misstatement in revenues, either from an error or fraud.

 Failure in incorporating significant factors that affect
games’ revenues - such as poor weather, changes in sales
mix, sales promotions, price changes, or free ticket prizes.

 Incorrect data used to estimate ticket revenues - such as
the sales mix or game attendance.

 Auditor’s error in calculating the estimated ticket
revenues. It could be due to incorrect model usage to
develop expectations or significant mathematical errors in
the application of the model.
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Case 8.

3 Burlingham Bees: Using

Analytical Procedures as Substantive Tests

Due: October 30, 2018

Auditing Standard 2305: Substantive Analytical Procedures

provides information and requirements regarding the use of

substantive analytical procedures in an audit.

Paragraph 2 discusses how an auditor develops an expectation

to be used in analytical procedures. “Analytical procedures

involve comparisons of recorded amounts, or ratios developed from

recorded amounts, to expectations developed by the auditor. The

auditor develops such expectations by identifying and using

plausible relationships that are reasonably expected to exist

based on the auditor's understanding of the client and of the

industry in which the client operates.” Paragraph 17 states “the

expectation should be precise enough to provide the desired level

of assurance that differences that may be potential material

misstatements, individually or when aggregated with other

misstatements, would be identified for the auditor to

investigate.” Such precision depends on “the auditor's

identification and consideration of factors that significantly

used to develop the expectation.” The more detail an expectation

is developed with (which is influenced by the nature of the

detecting a misstatement (paragraph 19).

tests to achieve an audit objective related to an assertion,

which may come from tests of details, analytical procedures, or

both. Deciding which procedure(s) to use is based on the

auditor's judgment on the expected effectiveness and efficiency

of the available procedures.

When conducting analytical procedures intended to provide

substantive testing, the auditor considers the level of assurance

he or she wants from substantive testing for an audit objective

and decides which procedure(s) can provide such (paragraph 10).

The auditor also evaluates the risk of management override of

controls as “substantive analytical procedures alone are not well

suited to detecting fraud” (paragraph 10).

According to paragraph 11, “the efficiency and effectiveness

of an analytical procedure to identify potential misstatements

a) the nature of the assertion,

the expectation, and

Paragraph 16 focuses on the reliability of data. “Before

using the results obtained from substantive analytical

operating effectiveness of controls over financial information

used in the substantive analytical procedures or perform other

procedures to support the completeness and accuracy of the

underlying information. The following factors influence the

auditor's consideration of the reliability of data for purposes

of achieving audit objectives:

 Whether the data was obtained from independent sources

outside the entity or from sources within the entity

who are responsible for the amount being audited

current or prior year

There are several advantages of developing an expectation at

a detailed level rather than an overall or aggregated level.

Developing expectations at a detailed level enhances the

effectiveness and efficiency of an analytical procedure, as it

increases the chance of detecting a misstatement of any given

amount opposed to an aggregated expectation. The level of

diversity and complexity of information varies greatly depending

on the company. In order to minimize risk and failure to detect

level allows the auditor to gain a better understanding of the

client’s business operations and disaggregate complexity.

The precise expectation for ticket revenue based on our