What are Analytical Procedures and how are they used in Auditing?

Analytical procedures consist of evaluations of  financial information through analysis of plausible relationships among both financial and non financial data. They also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.

a basic premises 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.

HOW THEY ARE USED IN AUDITING

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

  1.Preliminary analytical review- risk assessment ie to obtain an understanding of the business and its environment.

  2. Substantive analytical procedures -when the auditor considers that the use of analytical can be effective or efficient than tests of detail in reducing the risk of material misstatements at the assertion level to an acceptable low level.

 2. Final analytical review- 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

Analytical procedures use comparisons and relationships to assess whether account balances or other data appear reasonable compared to the auditor's expectations. Analytical procedures are used extensively in practice. The ASB ( Auditing Standards Board has conclude that analytical procedures are so important that they are required during the planning and completion phases on all audits. Analytical procedures used to accomplish the following; - Understand the client's industry and business. - Assess the entity's ability to continue as a going concern. Indicate the presence of possible misstatements in the financial statements. - Reduce detail audit tests. -Provide substantive evidence. The following are examples of Analytical Procedures for payroll and personnel cycle: - Compare payroll expense account balance with previous years. - Compare direct labor as a percentage of sales with previous years.

Analytical procedures means "evaluations of financial information through analysis of plausible relationships among both financial and non-financial data" for example:

 Comparable information for prior periods.

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

 

When designing and performing substantive analytical procedures the auditor shall: 

(a) Determine the suitability of particular substantive analytical procedures for given assertions e.g Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time

(b) Evaluate the reliability of data

(c) Develop an expectation of recorded amounts

(d) Determine the amount of any difference of recorded amounts from expected values that is acceptable without further investigation

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