Analytical procedures in audit

 

What does  “Analytical procedures” mean  and when do auditors use it?

“Analytical procedures” is one of the audit procedures used to obtain audit evidence. It is applied practically at all stages of the audit.

The term “Analytical procedures” means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.

Analytical procedures could be designed using the comparisons of the entity’s financial information with:

·        Comparable financial information for prior periods.

·        Projected results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an estimation of depreciation.

·        Similar industry information, such as a comparison of the entity’s ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry.

Analytical procedures also include consideration of relationships, for example:

● Among elements of financial information that would be expected to conform to a predictable pattern based on the entity’s experience, such as gross margin percentages.

● Between financial information and relevant non-financial information, such as pension contribution costs to number of employees.

Auditors use audit analytical procedures in following situations:

(a)    When performing risk assessments procedures at the planning stage of audit

(b)   When performing substantive procedures at the assertion level for account balances and classes of transactions and related disclosures.

(с) When Forming an Overall Conclusion on financial statements at the audit finalization stage.

The results of analytical procedures are investigated by auditors to identify fluctuations or relationships that are inconsistent with other relevant information obtained by the auditors.

Usually, the identified differences are further investigated by:

·        Inquiring of management about these differences.

·        Performing other audit procedures as necessary in the circumstances

 Substantive analytical procedures

Substantive analytical procedures are the part of substantive tests which are designed to detect material misstatements at the assertion level.

Substantive analytical procedures could be used by auditor either alone or in combination with tests of details. The decision to use analytical procedures is based on the auditor’s judgment about the expected effectiveness and efficiency of the available audit procedures.

Substantive analytical procedures are used to test assertions about account balances and about classes of transactions (for example, accounts receivable, accounts payable, bad debt reserve account, payroll expense, interest expense, revenue, distribution expense, depreciation). Substantive analytical procedures are not used by auditor to test control.

When designing Substantive analytical procedures, the auditor shall:

·       Decide the suitability of particular substantive analytical procedures for given assertions.

·       Evaluate the reliability of data from which the auditor’s expectation of recorded amounts or ratios is developed (source of the information available, comparability of the information available, controls over the preparation of the information).

·        Develop an expectation of recorded amounts or ratios and evaluate whether the expectation is sufficiently precise to identify a misstatement.

·      Determine the amount of any difference of recorded amounts from expected values that is acceptable without further investigation (is influenced by materiality and the consistency with the desired level of assurance).

Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time. The application of planned analytical procedures is based on the expectation that relationships among data exist and continue.

The examples of substantive analytical procedures types are predictive model procedures (predicted results are calculated and compared to the actual client`s numbers) and analysis of amounts of reporting items (revenue, expenses, profit margin) monthly, in comparison with the average value of these items for the current year.

Analytical procedures at the planning and  the final stages of audit

Analytical procedures are performed as a risk assessment procedure at the planning stage of audit.

Analytical procedures help identify inconsistencies, unusual transactions or events, and amounts, ratios, and trends that indicate matters that may have audit implications. Unusual or unexpected relationships that are identified may assist the auditor in identifying risks of material misstatement, especially risks of material misstatement due to fraud.

Analytical procedures also are used by auditors when forming an overall conclusion on financial statements at the audit finalization stage. The results of such analytical procedures may show a previously unrecognized risk of material misstatement at the  previous stages of audit. The analytical procedures performed at the audit finalization stage may be similar to those that would be used as risk assessment procedures.

As such analytical procedures may be used  the  comparison of the amounts of items in the statement of financial position at the end of the current period with the amounts of items at the end of the previous year (years) and the amounts of items in the statement of profit or loss for the current period with amounts for similar items for the previous period (periods).

When auditors perform analytical procedures at the planning stage  they apply procedures to the draft financial statements, however performing analytical procedures at the final stage of audit assumes the use of final version of financial statements.

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