CHAPTER 8
ANALYTICAL PROCEDURES
BY CA , ISA , MA(ECO) , [Link] Mrugesh Madlani
Analytical Procedures
As per SA 520 Analytical Procedures means Evaluation of
financial information through analysis of plausible
relationships among both financial & non-financial data .
It also covers investigation of identified fluctuations or
relationships that are inconsistent with other relevant
information or that differ from expected values by a
significant amount
Examples of Analytical Procedures having
consideration of comparisons of entity’s
financial Information with are :
• Comparable information for prior periods
• Anticipated results of entity such as budgets or forecasts
or expectations of Auditor
• Similar Industry Information such as comparison of entity’s
ratio of sales to accounts receivables with industry
average
Purpose & Timing of Analytical Procedures
Purpose
1. To obtain relevant & reliable audit evidence
2. To design & perform audit procedures near the end of audit that
assist auditor in forming an overall conclusion as to whether
financial statements are consistent with auditor’s understanding of
entity
Timing
1. Analytical Procedures are required in planning phase , testing
phase and also required during completing phase
Analytical Procedures in Planning the
Audit
1. In Planning stage , analytical procedures help the
auditor in :
Understanding the client’s business &
Identifying areas of potential risk by identifying those
things which auditor was unaware of
2. Assist Auditor in determining nature , timing & extent of
his other audit procedures
3. In Analytical procedure in planning the audit use both
financial & non-financial information
Substantive Analytical Procedures at the
time of Performing / Testing
• Auditor may inquire with management about availability &
reliability of information needed to apply substantive
analytical procedures or even use analytical data prepared
by management
• Auditor’s Substantive Procedures at the assertion level may be
test of details or substantive analytical procedures or
combination of both
• Decision about which audit procedure to perform is based on
auditor’s judgement , about which audit procedure will
reduce audit risk at assertion level to an acceptably low level
Factors to be Considered for Substantive
Procedures (PRASAD)
• Predictability – More appropriate when account balance or
relationships between items of data are predictable
• Inherent Risk – When Inherent risk in any area is high , only analytical
procedures won’t solve purpose , we should may design test of
details to address higher inherent risk
• Availability of Data – Availability of relevant & reliable data will help
in performing analytical procedures
• Account Type – More useful for income statement accounts
because they are predictable , whereas Balance sheet accounts
represent net effect of transactions at a point in time
• Source – More suitable for transactions that are of similar nature ,
whereas transactions by non-routine and estimation SCOT are often
subject to management judgement and therefore difficult to
predict
• Nature of Assertion – It is more effective for some assertions than for
others. Analytical Procedures using data analytics can be used to
address completeness , valuation / measurement & occurrence
• Disaggregation – Degree to which data can be disaggregated will
directly help in detecting misstatements
Analytical Procedures used as Substantive
Tests
While Designing & Performing Substantive Analytical Procedures
either alone or in combination with test of details , auditor shall
1. Determine the suitability of substantive analytical procedures for
given assertions taking into account assessed risk of material
misstatements
2. Evaluate the reliability of data from which auditor’s expectation of
recorded amount or ratios is developed
3. Determine an expectation of recorded amounts or ratios
4. Determine the amount of difference of recorded amounts from
expected values so which is acceptable without investigation
Suitability of Particular Analytical
Procedure for Given Assertions
• It is more applicable to large volume of transactions that are predictable
over time
• It is based on expectation that relationships among data exists
• Suitability will depend upon auditor’s assessment of how effective it will be in
detecting material misstatements
• Different types of analytical procedures provide different levels of assurance
• Determination of suitability of particular substantive analytical procedure is
influenced by nature of assertion & auditor’s assessment of risk of material
misstatement
• Particular substantive analytical procedures may also be considered when
test of details are performed on same assertion
Extent of Reliance on Reliability of Data for
Analytical Procedures
1. Source of the information available. External is more reliable than
Internal
2. Control over preparation of the information that are designed to
ensure its completeness , accuracy & validity
3. Comparability of the information available with Industry data
4. Nature & relevance of the information available
Risk of Material Misstatements – Whether
Expectation can be developed
sufficiently precisely (DAR)
• Degree of which information can be disaggregated
• Availability of Information both financial & non-financial. If
Information is available auditor may consider reliability of
information
• Accuracy with which the expected results of Substantive Analytical
Procedures can be predicted
Investigating the Results of Analytical
Procedures – If there are fluctuations with
Expected Values
Inquiring with the Management & Obtaining appropriate audit
evidence relating to management’s responses and evaluating
those responses and taking into account auditor’s understanding of
the entity & other audit evidence obtained during the course of
audit
Performing other audit procedures as necessary in the
circumstances when management is unable to provide an
explanation or management’s response is not considered
adequate
Analytical Procedures that Assist When
Forming an Overall Conclusion
• The conclusions drawn from results of analytical procedures
designed & performed in accordance with are intended to
corroborate conclusions formed during audit of individual
components or elements of financial statements
• This assists auditor to draw reasonable conclusions on which to base
auditor’s opinion
Techniques Available as Substantive
Analytical Procedures (TRS)
1. Trend Analysis – Comparison of the data with prior period balance or
with a trend of 2 or more prior period balances
2. Ratio Analysis – Useful for analysing asset , liability , income , expenses.
Ratios can be compared over time or to ratios of separate entities within
the group or with the ratios of other companies in the same industry
3. Reasonableness Tests – This relies upon non-financial data for the audit
period under consideration. These are more applicable to income
statement accounts & certain accrual or prepayment accounts
4. Structural Modelling – It constructs a statistical model from financial &
non-financial data of prior accounting periods to predict current
account balances
Considerations Specific to Public Sector
Entities
• The relationships between financial items in traditional business entities
may not always be relevant in audit or government or public sector
entities
• In Public Sector entities there is little relationship between revenue &
expenditure
• In Addition because expenditure on acquisition of assets may not be
capitalised there is no relationship between expenditures . Eg – Inventories
& FA and amount of those reported in financial statements
• Also Industry data or statistics or comparative purpose may not be reliable
in public sector
• However other relationships are there cost per kilometer of road
construction
