15. Analytical Procedures

Question 1

Define analytical procedures?

Answer 1

It means evaluation of financial information through analysis of plausible relationships with other financial and non-financial information and comparisons.
These also include investigation if actual values are significantly different from expected values.

Question 2

Examples of analytical procedures?

Answer 2

1. Calculating plausible relationships among current period’s:
   Financial information, Financial or non-financial information.
2. Making comparisons of current year’s actual results with:
   Prior accounting periods
   Industry average results
   Budgets or auditor’s expected results.

Question 3

Uses/ Benefits/ Purposes of Analytical procedures?

Answer 3

1. As risk assessment procedures at planning stage to understand entity and its environment and to assess risk of material misstatement.
2. As substantive procedures to obtain evidence to detect material misstatement at assertion level.
3. To assist in forming overall conclusions

Question 4

How to determine suitability of analytical procedures for given assertion?

Answer 4

Suitability of analytical procedures depends on auditor’s assessment of how efficient and effective it will be in detecting a misstatement. Substantive analytical procedures are generally suitable when relationships are plausible and predictable.
It also depends on Assertion and risk assessment.

Question 5

What factors effect the reliability of data for analytical procedures?

Answer 5

1. Source of information
2. Controls over accuracy and completeness of information
3. Nature and relevance of information
4. Comparability of financial information

Question 6

How to develop a precise expectation to identify misstatement?

Answer 6

1. Availability of financial or non-financial information.
2. Degree to which information can be disaggregated.
3. Accuracy with which amounts can be predicted.

Question 7

What evidence is provided by substantive analytical procedures?

Answer 7

About Completeness and Accuracy.

Question 8

When can analytical procedures provide evidence alone?

Answer 8

They are usually performed in combo with test of details. But they can provide sufficient appropriate evidence if:
Risk of material misstatement is low
Analytical procedures provide accurate predictable outcome.

Question 9

What if analytical procedures show different relations?

Answer 9

1. Auditor shall inquire management and shall evaluate those responses.
2. If management does not provide explanation or explanation is not adequate, auditor shall perform other procedures.

Question 10

Why are analytical procedures performed near the end of audit?

Answer 10

1. to corroborate conclusion formed during audit of individual components.
2. to assist the auditor in forming overall conclusion whether the financial statements are consistent with auditor’s understanding of entity.