CAF-8 · Chapter 7 · Question 10 of 10
To perform a substantive analytical procedure on interest expense, an auditor multiplies the average outstanding bank loan balance by the contractual interest rate. What makes this a highly effective procedure?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) The expectation developed (the calculated interest) is highly precise and based on reliable external data (contractual rates).
Explanation
Interest expense is highly predictable when loan balances and rates are known. Because the expectation is precise, any significant deviation from the client's recorded expense immediately flags a likely misstatement.
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