The objective of analytical procedures in the overall review at the end of audit is to evaluate reasonableness of financial statements as a whole. As a result of planning and the knowledge gained through audit procedures the auditor would not normally expect to find any major unexpected variations. However, in those cases where variations are revealed it may be necessary to perform additional procedures or re perform the original procedures.
MATTERS WHICH INFLUENCE THE EXTENT OF RELIANCE THAT THE AUDITOR WOULD PLACE ON ANALYTICAL PROCEDURES.
For material financial statement accounts analytical procedures will be used in conjunction with other substantive tests. However where an item is not material the auditor may solely rely on analytical procedures.
b) Other audit procedures directed towards the same audit objective.
Quantitative reconciliation of inventories (analytical procedure) indicates that inventories have been fairly stated. Detailed tests of inventory pricing and physical counts have not revealed any material errors, the results of analytical procedures thus are confirmed by the substantive tests.
c) Accuracy with which expected results of analytical procedures can be predicted.
More reliance can be placed on analytical procedures in areas where a reasonable degree of correlation exists between two or more accounts than in those cases where no correlation exist.
A positive degree of correlation exists between sales and salesmen commission. No correlation is expected between, for example, traveling expense and accounts receivable.
d) Assessment of inherent and control risks
As discussed under auditor risk module, audit risk is
AR = IR x CR x DR
Obviously, if inherent and control risks are high, the detection risk has to lowered. In order to reduce detection risk, more reliance has to be laced on tests of details of transactions and account balance than of analytical procedures.
The controls over compilation of the data which is used as analytical Procedures has to be established. These can be achieved either testing data itself or reviewing adequacy on the system which produced such data.
Average salesman commission is 5% of sales. The reported figure of is Rs. 2 million. The commission expense per profit and loss Statement is Rs. 100,000. It would be in accurate to conclude that the mission expenses has been fairly stated unless the auditor has verified sales or the adequacy of stem through which sales are ascertained.
ANALYTICAL PROCEDURES SHOULD NOT BE APPLIED IN A
ISA 520 requires the auditor to investigate unusual variations explanations given by the management should be evaluated by the auditor to determine whether they are consistent with his understanding of the business. Explanations may indicate circumstances of which the auditor was not previously aware or they Play indicate possibility of misstatement in financial statements. In both the cases the auditor will need to extend his tests to confirm or dispel whether the financial statements are misstated.
If management’s explanations for unusual variations cannot be verified by the auditor, he will need to obtain sufficient evidence using alternative procedures and will conduct thorough investigations to determine whether in fact a misstatement has occurred.