Annual Audit Manual
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7031 Introduction
Jul-2017
In This Section
Overview
This topic explains:
- Auditor’s objectives in relation to substantive analytics
- Definitions related to analytical procedures
- Objectives and types of analytical procedures
CAS Objective
The objective of the auditor is (CAS 520.3(a)):
To obtain relevant and reliable audit evidence when using substantive analytical procedures.
CAS Guidance
For purposes of the CASs, the term “analytical procedures” means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount (CAS 520.4).
Analytical procedures include the consideration of comparisons of the entity’s financial information with, for example (CAS 520.A1):
- Comparable information for prior periods.
- Anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an estimation of depreciation.
- Similar industry information, such as a comparison of the entity’s ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry.
Analytical procedures also include consideration of relationships, for example (CAS 520.A2):
- Among elements of financial information that would be expected to conform to a predictable pattern based on the entity’s experience, such as gross margin percentages.
- Between financial information and relevant non-financial information, such as payroll costs to number of employees.
Various methods may be used to perform analytical procedures. These methods range from performing simple comparisons to performing complex analyses using advanced statistical techniques. Analytical procedures may be applied to consolidated financial statements, components and individual elements of information (CAS 520.A3).
OAG Guidance
A basic premise underlying the application of analytical procedures is that plausible relationships among data may reasonably be expected to exist and continue in the absence of conditions to the contrary.
The definition of analytical procedures implies several key concepts:
- Analytical procedures are used to understand and test financial statement relationships or balances.
- Effective analytical procedures involve a comparison of recorded values with expectations made by the audit team.
- Both financial and non-financial data can be useful in understanding financial statement relationships and, therefore, in forming expectations.
- The relationship between the data used to develop an expectation and the recorded amount needs to be independent, yet plausible (i.e., make sense). Data used to develop the expectation is not derived from the recorded amounts themselves.
- Even when a correlation appears to exist among data this relationship is only considered plausible for audit purposes when a likely cause may be established. Auditors apply their professional judgment when assessing the plausibility of these relationships.
OAG Guidance
Analytical procedures are used throughout the audit process and are divided into:
- risk assessment analytical procedures (see OAG Audit 5012.2),
- substantive analytical procedures (see further in this subsection of OAG Audit), and
- overall conclusion analytical procedures (see OAG Audit 9021).
Risk assessment analytical procedures are generally performed early in the audit to assist in planning the nature, timing and extent of audit procedures that will be used to obtain sufficient appropriate audit evidence for significant accounts or classes of transactions. Analytical procedures used in planning generally use data aggregated at a high level. Substantive analytical procedures are generally conducted during substantive testing. However, risk assessment and substantive analytical procedures can be used throughout the audit. Also, analytical procedures performed with one purpose in mind may be combined with other procedures to serve another purpose. For example, in performing risk assessment analytical procedures, we may determine that a significant difference identified was probably caused by a new contract. We may decide it is more efficient to gain assurance at that time, through quantification and corroboration that the difference relates to the new contract, by specific review of the contract documentation. The purpose of overall conclusion analytics is to assess the reasonableness of the financial statements taken as a whole, not to provide audit evidence for significant accounts. Overall conclusion analytics are generally performed at the financial statement level.
Before conducting an analytical procedure, consider what we are trying to accomplish with the procedure and determine the objectives of the procedure by considering:
- the purpose of the analytical procedure (e.g., to assess risk or to obtain assurance);
- the nature and reliability of the information that will be used in performing the analytical procedure;
- the amount of assurance desired from the analytical procedure;
- the suitability of the proposed analytical procedure to provide the desired level of assurance;
- the materiality of the account;
- the stage of the audit in which the analytical procedure is being deployed;
- the associated inherent, business and audit risks;
- our understanding of the entity and prior audit experience;
- the financial statement assertions that the analytical procedure will address and how much evidence needs to be achieved on each; and
- have analytical procedures been successful in the past and, if so, can they be enhanced to provide greater evidence?
The objectives of the analytical procedure will also dictate the type of analytical procedure used and the techniques involved in investigating a significant difference. For a detailed discussion of the types of analytical procedures, see OAG Audit 7032.