Analytical procedures (520) Before starting the chapter we should have a clear understanding of Analytical procedures, their significance

and their use during the audit. Definition Study of relationship among the financial and non-financial data including the investigation of identified fluctuations and relationships which are in consistent with others or which deviated from predicted amount. Examples: The relationship between the salary cost of a department and the no of employees Relationship between the units dispatched by a cement company and no of cement bags consumed Relationship between the KOT and Guest Covers In a hotel Relationship between the Newspapers used and no of rooms occupied in a hotel

USE OF ANALYTICAL PROCEDURES BY THE AUDITOR Use of analytical procedures as a risk assessment procedures to understand the entity and environment NOTE 01 Use of Analytical procedures as substantive procedures NOTE 02 Use of analytical procedures as an over all review at the end of the audit NOTE 03 Analytical procedures can be done by:

Comparison of current data by prior years data Comparison of actual results with the budgets Comparison of entitys data with the industry data

Analytical review can be done of the comparable financial information as well as comparable financial and non-financial information. Analytical review procedures can be used at the over all financial statement level or an account balance or class of transaction level

Note 01

Use of analytical procedures as a risk assessment procedures to understand the entity and environment The analytical procedures should be applied as risk assessment procedures to understand the entity and the risk of material misstatement (ISA 315 para 10 says) Analytical review procedures should be applied initially which might indicate the deviations and also indicate the risks associated with the FS. The auditor before using the analytical procedures should have a clear understanding of plausible relationships and expected pattern that would be used as a bench mark for the analysis. Application of these procedures might indicate the areas about which the auditor was unaware and will also assist in deciding the nature timing and extent of the audit procedures. Example. After getting the first draft financial statement and at the time of making an over all audit plan the auditor would calculate the GP RATIO, CURRENT RATIO, and NP RATIO AND DEBTORR TURNOVER RATIO. The auditor would have a benchmark in mind about the results of the ratios, which would be guided by the prior years accounts, industry data or the general understanding of the auditor about the entity. After calculating the actual ratios auditor might identify areas of concern and misstatement.

Use of Analytical procedures as substantive procedures NOTE 02 Before discussing we should know what are the substantive procedures Substantive procedures are the procedures performed to detect a material misstatement at the assertion level and includes 1. TEST OF DETAILS OF TRANSACTION 2. ANALYTICAL PROCEDURES The use of any of the above depends on many factors, which would all be directed towards the fact that the objective in effectively and efficiently achieved in reducing the risk to an acceptably low level. As discussed earlier auditor would need the information to apply analytical procedures (ex budgets, non financial information). The auditor would inquire from the management about

the information and at times it is efficient to use the analytical procedures as substantive procedures provided that the auditor is satisfied that the information is prepared appropriately. While using the analytical review procedures the auditor would need to consider 1. Suitability of using the ARP as substantive procedures Using ARP as a substantive procedure would generally be applicable where there is a large volume of data which is tend to be predictable over the period and based on the expectation that the relationship exists between the data and this might provide evidence about the accuracy, occurrence and completeness about the information. The reliance to be placed on the ARP as substantive would depend on the following. 1. Risk of material misstatement 2. Any test of details directed towards the same assertion 2. Reliability of the Data The reliability of the data would be considered and

Sources of information available Comparability of the information available Nature and relevance of information available Controls over preparation of information

The auditor may test the control over the preparation of information and at times the nonfinancial information can be tested in conjunction with the financial information 3. Whether the expectation is sufficiently precise 1. The accuracy with which the results analytical procedures be predicted 2. Degree at which information can be disaggregated 3. Availability of the information 4. Difference between the recorded and the expected amount is Acceptable The tolerance limit needs to be set and then the actual results are compared with the expected results and the factors that would be involved in setting the tolerance would depend on the materiality etc

If the auditor is involved in an interim audit the substantive procedures can be applied at that stage and later at the final stage once again provided auditor thinks that the final figures would also confirm the expected pattern

Use of analytical procedures as an over all review at the end of the audit NOTE 03 The overall analytical review is done at the end of the audit to assess whether the over all FS are consistent with the over all understanding of the entity The review might confirm and corroborate the audit evidences obtained from other sources or it even indicate the other areas where the auditor would need to apply additional audit procedures Investigation of unusual items If the results of ARP identify the significant fluctuations auditor should investigate and obtain the explanations and appropriate the corroborative evidence The investigation would begin with the inquiries from the management followed by

Corroboration with the auditors understanding of the entity or with other evidences Use of additional audit procedures when the information provided by the management is not appropriate or the management does not provide any information

USE OF ANALYTICAL PROCEDURES BY THE AUDITOR

USE OF ANALYTICAL PROCEDURES BY THE AUDITOR

Use of analytical procedures as a risk assessment procedures to understand the entity and environment Use of Analytical procedures as substantive procedures

Suitability of using the ARP as substantive procedures 1. Risk of material misstatemen t 2. Any test of details directed towards the same assertion

Reliability of the Data

1.

(Sources of information available 2. Comparability of the information available 3. Nature and relevance of information available 4. Controls over preparation of information

Whether the expectation is sufficiently precise 1. The accuracy with which the results analytical procedures be predicted 2. Degree at which information can be disaggregate d 3. Availability of the information Difference between the recorded and the expected amount is Acceptable

USE OF ANALYTICAL PROCEDURES BY THE AUDITOR

Use of analytical procedures as an over all review at the end of the audit