Question

Analytical procedures are a critical part of audit work. Describe at least three (3) different analytical procedures and explain how to perform each. Specify what the results will reveal about the client.

Answer 1

Analytical procedure are critical path of audit work. It refers to evaluation of financial information of an organisation through analysis of pausible relationship among financial and non financial data.It involves compliance procedures and substantive procedures.

Three types of analytical procedures used in auditing and how they are performed .

1.Treand analysis:
The trend analysis consists of evaluation of patterns formed during last few year in certain activities of an organisation.
This is more effective for a company which demonstrate a consistent pattern.

For example: sales of a company,
from the audit of company sales pattern , the auditor has identified that the sales of an organisation are higher in winter seasons.
Hence, if the sale pattern show highest sales during summer season, it is an indication of potential risk of material misstatement and auditor need to to further investigate and perform additional audit procedure.

2.Ratio Analysis:
Ratio analysis refers to comparison with benchmarks or comparison of relationship between financial statement and non financial data.

Example, if the company procedure produces (say 5% of waste /scrap) while manufacturing of a product.
So when the aidito checks the amount of raw material used for total amount of units of products manufactured.
He must analyse the percentage of scrap obtained, if it deviates from the 5% percent of total material used.
The auditor need to investigate and obtain appropriate cooperative audit evidence on deviation identified.

3.Reasonablness testing
It is referred to analysis of accounts, changes in accounts between accounting period that forms an exceptions to financial data.

For example:
Payment of lease rentals as per agreement and other legal document is $10000 for each month.
Now multiplying the lease installments to the months or period passed to the agreement will give auditor an estimate of amount paid as lease rental, which can be compared to actual lease rental recorded in general accounts and differences identified must be confirmed with evidences and discussed with management.