Analytical procedures are evaluations of financial and non-financial data to identify plausible relationships and investigate inconsistencies or significant deviations from expectations (ISA 520).
Key Facts
- Form an expectation: The auditor develops an expectation of an account balance or financial relationship by analyzing prior-period information, management’s budgets or forecasts, and ratios published in trade journals.
- Identify differences: The auditor compares the expectation with the amount recorded in the company’s accounting system and identifies any differences. If the difference is less than the auditor’s threshold for analytical testing, the recorded amount is generally accepted without further investigation. If the difference is greater than the threshold, the next step is to investigate the source of the discrepancy.
- Investigate the reason: The auditor brainstorms all possible causes for the discrepancy and determines the most probable cause(s). This may involve applying additional analytical procedures with more precise data or considering unusual transactions, events, or accounting/business changes as plausible explanations.
- Evaluate differences: The auditor evaluates the likelihood of material misstatement and determines the nature and extent of any additional auditing procedures. Plausible explanations require corroborating audit evidence, while differences due to misstatement may require adjustments to the reported amount and additional audit procedures to determine the scope of the misstatement.
- Document and communicate: The auditor documents the analytical procedures performed, the results obtained, and any significant findings or conclusions. This information is then communicated to the appropriate parties, such as management, the audit committee, or regulatory authorities.
Steps in Analytical Procedures
The process of performing analytical procedures typically involves the following steps:
Form an Expectation
The auditor develops an expectation of an account balance or financial relationship based on prior-period information, management’s budgets or forecasts, and industry benchmarks (Weaver, 2018).
Identify Differences
The auditor compares the expectation with the actual recorded amount and identifies any differences (Weaver, 2018). If the difference exceeds the auditor’s threshold, further investigation is warranted.
Investigate the Reason
The auditor investigates the potential causes for the difference, considering plausible explanations such as unusual transactions, events, or changes in accounting or business practices (Weaver, 2018).
Evaluate Differences
The auditor assesses the likelihood of material misstatement and determines the need for additional audit procedures (Weaver, 2018). Plausible explanations require corroborating evidence, while differences due to misstatement may necessitate adjustments and further testing.
Document and Communicate
The auditor documents the analytical procedures performed, the results obtained, and any significant findings or conclusions (ECA, 2021). This information is communicated to relevant parties, including management, the audit committee, and regulatory authorities.
Sources
- Analytical procedures | P7 Advanced Audit and Assurance | ACCA Qualification | Students | ACCA Global
- How Auditors Use Analytical Procedures | Weaver
- Analytical procedures
FAQs
What is the purpose of analytical procedures in auditing?
Analytical procedures help auditors identify plausible relationships and investigate inconsistencies or significant deviations from expectations in financial and non-financial data.
What are the five steps involved in analytical procedures?
- Form an expectation
- Identify differences
- Investigate the reason
- Evaluate differences
- Document and communicate
What factors should be considered when developing an expectation?
- Prior-period information
- Management’s budgets or forecasts
- Industry benchmarks
What is the threshold for investigating differences?
The threshold is set by the auditor based on materiality and the desired level of assurance.
What are some plausible explanations for differences?
- Unusual transactions or events
- Changes in accounting or business practices
- Errors or fraud
How does the auditor evaluate differences?
The auditor assesses the likelihood of material misstatement and determines the need for additional audit procedures.
What is the importance of documenting analytical procedures?
Documentation provides evidence of the work performed and the conclusions reached.
Who should be communicated with about the results of analytical procedures?
Relevant parties, including management, the audit committee, and regulatory authorities.