The auditor uses a plausible relationship to develop an expected figure, compares it with the recorded figure and investigates significant differences. During audit planning, this can identify an area of risk. When used as a substantive procedure, the auditor needs reliable data, a sufficiently precise expectation and a basis for deciding which differences require investigation. standards.xrb.govt.nz
Worked example. Jengka Furniture rents out a warehouse for RM5,000 per month. The auditor inspects the signed tenancy agreement and verifies that the tenant occupied the premises for all 12 months at the same rate. Expected rental income is RM60,000, but the ledger shows RM50,000. The RM10,000 difference warrants investigation. The auditor examines invoices, correspondence and any rent concession agreement to determine whether the company omitted two months’ income or had a valid reason to record a lower amount.
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