Substantive Analytical Procedures-the methods of study and comparison

- may be used as the primary substantive test when inherent risk is moderate or low;
but NOT used when there are significant risks in fs assertions.
- basic premise: relationships between data may be expected to exist and continue
into the future in the absence of changes: business, accounting methods, specific
unusual transactions or events, random fluctuations, misstatements

designing and performing analytical procedures as SP Factors:

1. suitability of using substantive analytical procedures given the assertions- more applicable to large volumes of
transactions
2. reliability of the data, whether internal or external, from which expectation of recorded amounts or ratios is
developed-
3. whether the expectation is sufficiently precise to identify a material misstatement at the desired lev of ass.
4. the amount of any difference of recorded amounts from expected values that is acceptable.

Effective substantive analytical procedures- involve the review of recorded amounts against expectations, combined
with investigation of significant differences.

3 elements of substantive analytical review:

1. Developing an expectation of the recorded amount.

2. Determining the amount of variation between the expectation and the recorded amount that is acceptable
without explanation (the threshold). If the diff is material- inquiries of management and obtains corroborative
evidence.
Corr. Evid- Supplementary evidence provided to strengthen or confirm the principal evidence.
3. Investigating variations that cannot be accepted without explanation. if explanation or corroborative evidence is
not adequate, the auditor should conduct other audit procedures.

Analytical procedures:

1. Reasonableness test- the expected value is determined by reference to data partly or wholly independent of the
accounting information system. (the amount is then compared with the recorded values for measure of
reasonableness. if it conforms with the expectations, and the acceptable level of detection risk is high, it may
not be necessary to perform a test of details.) Ex: tuition revenue
2. Scanning (eyeball) – scan account balances, or listings of transactions with the object of detecting any unusual
or unexpected balances or transactions. Expected value- based on auditor’s knowledge of the business.
3. Review- auditor review reconciliations, compilations and aggregations of transactions to detect… Based also on
auditor’s knowledge of the business
4. Regression Analysis- the expected, or predicted, value is determined using the statistical technique of simple or
multiple regression
5. Roll forward procedures- used to determine the reasonableness of the value of the account balance as at bal
date. –cut-off, review of movement (total of various classes of transactions) , scanning (individual transactions),
review of reconciliations
6. Ratio Analysis- Computation and comparison of the actual value and expected value. industry averages, forecast
value, prior period ave.
7. Common Size Analysis- type of cross-sectional analysis used for comparing the percentage components of BS
and IS of one entity, or a division of an entity (expected value), with comparable data from one or more other
entities (actual or recorded values)

When analytical procedures are used as a substantive procedure and the application of the procedures does not
identify any unusual or unexpected differences, then, by inference, the results provide evidence in support of
management’s assertions. AP- generally provide less reliable substantive evidence than the other category of
substantive procedures/tests. Substantive evidence- corroborative evidence.