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 procedures are also commonly used in non-audit and assurance engagements, such as reviews of prospective financial information, and non-audit reviews of historical financial information. While the use of analytical procedures in such engagements is not covered in the ISAs, the principals regarding their use are relevant.

Analytical procedures consist of ‘evaluations of financial information through analysis of plausible relationships among both financial and non-financial data’.

A basic premise underlying the application of analytical procedures is that plausible relationships among data may reasonably be expected to exist and continue in the absence of conditions to the contrary.

Analytical procedures are used throughout the audit process and are conducted for three primary purposes:

Preliminary analytical review – risk assessment (required by ISA 315)
Preliminary analytical reviews are performed to obtain an understanding of the business and its environment (eg financial performance relative to prior years and relevant industry and comparison groups), to help assess the risk of material misstatement in order to determine the nature, timing and extent of audit procedures, ie to help the auditor develop the audit strategy and programme.

Substantive analytical procedures
Analytical procedures are used as substantive procedures when the auditor considers that the use of analytical procedures can be more effective or efficient than tests of details in reducing the risk of material misstatements at the assertion level to an acceptably low level.

Final analytical review (required by ISA 520)
Analytical procedures are performed as an overall review of the financial statements at the end of the audit to assess whether they are consistent with the auditor’s understanding of the entity. Final analytical procedures are not conducted to obtain additional substantive assurance. If irregularities are found, risk assessment should be performed again to consider any additional audit procedures are necessary.

There are four elements that comprise distinct steps that are inherent in the process to using substantial analytical procedures:

STEP 1: Develop an independent expectation

STEP 2: Define a significant difference (or threshold)

STEP 3: Compute difference

STEP 4: Investigate significant differences and draw conclusions