Analytical Procedures Auditing Help

INTRODUCTION

Performance of analytical procedures is mandatory at planning and review stages. It is optional to apply analytical procedures as substantive tests.

Analytical procedures enable the auditor to direct audit efforts to areas of financial statements where the reported amounts vary from those that the auditor expected.

Example

The auditor has obtained knowledge that the capacity of the plant has increased. The auditor would expect and increase in sales, inventories, receivable, gross profit selling expenses and net profit. On the other hand, the auditor’s knowledge of a downward trend and recession in client’s industry would lead to expect him that turnover and margins will reduce. In case the actual results differ from auditor’s expectations, the auditor should plan additional work to discover the causes.

If repairs and maintenance costs are substantially lower than budget or last year, an investigation may reveal that certain repairs are erroneously capitalized.

CERTAIN MATTERS WHICH NEED TO BE CONSIDERED IN USING ANALYTICAL PROCEDURES AS SUBSTANTIVE TESTS

a) Objective of analytical procedures and extent of reliance which can be placed on analytical procedures.

Analytical procedures are more useful in areas where the auditor is looking for an under statements. For example, in verification of completeness test of accrued expenses, analytical procedures may be more useful than detail tests.

b) Degree to which the information can be desegregated.

Example

An enterprise dealing in several products only prepares financial statements as whole only.

Another enterprise dealing in various products accumulated data separately for each product by recording product wise sales, gross profit, net profit and assets employed.

Obviously, use of analytical procedures in case of the latter enterprise will be more effective than in the former,

c) Availability of information, both financial and non financial

Example

Analytical procedures will be more useful in an entity which maintains and regularly compares financial data with non financial data. For example, where quantitative records of opening inventories purchases, production, sales and closing inventories are maintained, analytical procedures can be advantageously applied.

d) Reliability of information available

Example

If quantitative records as stated in example in (c) above cannot be relied upon, analytical procedures should not be used as substantive tests because the results of such tests will be misleading

e) Relevance of information available

Example

The auditor uses the variance analysis to detect material misstatement in revenues and expenses, by making a comparison of actual vs. budget. If the budget itself was prepared on a basis of wishful thinking reflecting results, which are not attainable, the comparison with actual will not make sense.

f) Source of information available

Evidence from external sources are generally more reliable than those provided by the entity.

Example

Comparison of key financial ratios for various companies in the industry, as compiled by independent analysis, may generally be more relied upon, than compiled by the entity’s personnel.

g) Comparability of information

Example

Not two companies, even in the same industry, may be precisely comparable. For example, cost of production of a textile industry with 1000 looms and 50,000 spindles cannot be compared with the cost production of a small sized textile unit.

h) Knowledge gained in previous audits.

Knowledge gained in previous audits as to accounts and transaction which are more vulnerable to errors compared to those accounts where no material audit adjustments are required will be useful in deciding the areas where analytical procedures can be applied.

Posted on November 3, 2015 in Analytical Procedures

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