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The objective of the auditor is to apply analytical procedures where appropriate to help in assessing risk, providing audit evidence, and arriving at an overall audit conclusion.

Compliance audit; Financial audit

Examination

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Definitions

Analytical procedures are audit procedures used to help conduct a more economic, efficient and effective audit. They consist of studying plausible relationships between both financial and non-financial data, whether within the same period and entity and/or from different periods and entities. Analytical procedures, which are used more for audits of reliability than compliance, may be used to:

  • analyse relationships for consistency with each other and with the auditor’s knowledge of the organisation and its activities; or
  • predict values which may be compared to actual values.

The term also includes the investigation of identified fluctuations and relationships that are inconsistent with other information or deviate significantly from predicted amounts.

Principles

Considerations

The auditor should bear in mind that analytical procedures are more reliable in a strong control environment with effective internal controls and good external data. However, such procedures require comprehensive and up-to-date information concerning financial and other data, which may not be the case in significant fields of EU activity. Various methods may be used when performing analytical procedures. These range from simple comparisons to complex analyses using advanced statistical techniques, for which appropriate computer software may be necessary. The auditor's choice of procedure is a matter of professional judgement. In general, analytical procedures provide a warning that something appears to be wrong, rather than providing positive, persuasive evidence of what (if anything) is wrong, and thus on their own do not normally provide sufficient, relevant and reliable audit evidence.

Instructions

Process for using analytical procedures

The use of analytical procedures involves acquiring information from various sources in order to determine what is expected; comparing the actual situation with that expectation; investigating the reasons for any discrepancies arising; and evaluating the results, as follows:Analytical procedures (4)

When to use analytical procedures

Analytical procedures should be used at the following phases of the audit:

  • Planning as risk assessment procedures, in order to identify areas of potential risk and help design further audit procedures;
  • Examination: • as substantive procedures, when their use can be more efficient than tests of details and can provide corroboration; and • as part of the overall review at the end of the audit, to help assess if external information is consistent with audit findings.

Substantive analytical procedures

Quality review

In addition to performing tests of details, the auditor may also employ substantive analytical procedures as part of his/her substantive procedures in order to reduce risk to an acceptably low level. Substantive analytical procedures are used to predict values, based on the expectation that relationships among data exist and continue in the absence of known conditions to the contrary. However, the risk of forming an incorrect conclusion may be higher for substantive analytical procedures than for tests of details because of the former's extensive use of the auditor's judgement. Accordingly, quality management procedures are of critical importance.

Reliable data needed

Predictive testing of this sort should only be undertaken on revenue or expenditure streams that are themselves highly predictable and where reliable data are readily available so that the predictions can be made, e.g. interest paid/received on lending and borrowing operations, payments of salaries and allowances to staff, etc.

Part of substantive testing strategy

While substantive analytical procedures will not normally on their own provide sufficient, relevant and reliable substantive audit evidence, it may be possible to use predictive testing as part of the overall substantive testing strategy for material account balances and transaction streams. For example, when, say, 60% of the transactions (by value) are high-value items, these might be tested in detail while a predictive test is used for the remaining 40% of (low-value) transactions. Or, when a small proportion, by value, of transactions is processed at a geographical location which it is not possible or efficient to visit, predictive testing may be used for that location.

Analytical procedures in the overall review

The auditor should apply analytical procedures at or near the end of the audit when forming an overall conclusion. The conclusions drawn from the results of such analytical procedures are intended to corroborate conclusions formed during the audit of individual components and assist in arriving at the overall conclusion and, if required, an opinion.Analytical procedures used at the overall review stage can be the same as those used during the planning phase and hence can be compared against each other. The review may indicate that additional evidence is required.

Resources

Examples of analytical procedures in financial and compliance audits

Audit evidence regarding the reliability of the accounts is mostly secured through tests of details, with substantive analytical procedures also undertaken when appropriate.The main areas in which substantive analytical procedures are employed are in the analytical review of:

  • the main accounting data for consistency and reasonableness;
  • the accounts regarding off-balance sheet commitments;
  • the economic outturn account and segment reporting;small bank balances (those opened in connection with imprests);
  • so-called "small" accounts.

Analytical procedures may, in certain circ*mstances, assist the auditor in evaluating compliance. For example, where allowances under a grants scheme are subject to a maximum value and the number of recipients is known, the auditor may use analytical procedures to establish whether the permitted maximum has been breached. Another example is an analytical review of the consistency of expenditures compared to budget or prior years.Examples of the use of predicted versus actual values:

  • the study of changes in an account balance over prior periods leading to a prediction for the current period (e.g. regular payment of a loan over x years);
  • computations that give a prediction of a given value, e.g. using farm data to predict per hectare payments per farmer.

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Last Modified: 31/05/2021 16:27Tags:

Analytical procedures (2024)

FAQs

Analytical procedures? ›

Definition of analytical procedures

What is an example of an analytical process? ›

What are some examples of analytical procedures? Some examples of analytical procedures include comparing the current year's financial data to prior year data. Ratio and trend analysis are also important examples.

What are the five major types of analytical procedures in auditing? ›

7 examples of analytical procedure methods
  • Efficiency ratio analysis. ...
  • Industry comparison ratio analysis. ...
  • Other ratio analysis methods. ...
  • Revenue and cost trend analysis. ...
  • Investment trend analysis. ...
  • Reasonableness test. ...
  • Regression analysis.
Mar 10, 2023

What is the difference between analytical procedures and substantive procedures? ›

The critical difference between the Test of Details vs. Substantive Analytical Procedures is that the Test of Details involves a thorough examination of individual transactions and account balances, while the analytical procedures process takes a broader approach to assess the overall fairness of financial statements.

What is analytical procedure description? ›

02 Analytical procedures are an important part of the audit process and consist of evaluations of financial information made by a study of plausible re- lationships among both financial and nonfinancial data.

What is analytical and example? ›

Meaning of analytical in English. examining or liking to examine things in detail, in order to discover more about them: He has a very analytical mind. Some students have a more analytical approach to learning.

What is an analytical procedure? ›

Analytical procedures involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor.

How to write analytical procedure? ›

There are four elements that comprise distinct steps that are inherent in the process to using substantial analytical procedures:
  1. STEP 1: Develop an independent expectation. ...
  2. STEP 2: Define a significant difference (or threshold) ...
  3. STEP 3: Compute difference. ...
  4. STEP 4: Investigate significant differences and draw conclusions.

Which of the following is not an analytical procedure? ›

Answer: The correct answer is (a) Tracing of purchases recorded in the purchase book to purchase invoices. Explanation: (a) Tracing of purchases recorded in the purchase book to purchase invoices is not an analytical procedure.

What are the different types of analytical procedures to be validated? ›

The discussion of the validation of analytical procedures is directed to the four most common types of analytical procedures: Identification tests. Quantitative tests for impurities' content. Limit tests for the control of impurities.

What are analytical procedures in Pcaob? ›

Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. Analytical procedures also encompass the investigation of significant differences from expected amounts.

Which procedure is not a typical analytical procedure? ›

Explanation: The procedure that is not a typical analytical procedure is confirmation of accounts receivable through sampling. Confirmation of accounts receivable through sampling is a auditing procedure used to verify the existence and accuracy of a company's accounts receivable.

In which stages are analytical procedures required? ›

Analytical procedure will be required during the planning phase and the final review of the overall audit engagement. Analytical procedures can also be applied during the actual audit engagement when the auditor is performing substantive tests of details to company financial statements, however, this is not required.

What are the steps commonly employed in an analytical procedure? ›

Analytical Method
  • Identify the problem to solve.
  • Choose an appropriate process. ( ...
  • Use the process to hypothesize analysis or solution elements.
  • Design an experiment(s) to test the hypothesis.
  • Perform the experiment(s).
  • Accept, reject, or modify the hypothesis.

What are the 7 audit assertions? ›

These include assertions of accuracy and valuation, existence, completeness, rights and obligations, and presentation and disclosure. More details on each of these assertions are listed below.

What are some examples of process analysis? ›

One type of process analysis presents a chronological sequence of steps explaining how something works or is done to readers who want or need to perform the process: how to register for the draft or how to cook an artichoke, for example.

What are analytic processes? ›

Analytical processing involves the interaction between analysts and collections of aggregated data that may have been reformulated into alternate representational forms as a means for improved analytical performance.

Which is an example of the analytical method? ›

An example of the analytical method could be the Federalist Papers which involved deep scrutiny and exploration of each argument to advocate for the adoption of the U.S. Constitution.

What is an example of an analytical reaction? ›

Decomposition reactions are also called analysis reactions because they are extremely valuable in analytical techniques. Examples include mass spectrometry, gravimetric analysis, and thermogravimetric analysis.

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