Annual Audit Manual
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7033 Use of substantive analytical procedures
Jul-2017
CAS Guidance
The auditor’s substantive procedures at the assertion level may be tests of details, substantive analytical procedures, or a combination of both. The decision about which audit procedures to perform, including whether to use substantive analytical procedures, is based on the auditor’s judgment about the expected effectiveness and efficiency of the available audit procedures to reduce audit risk at the assertion level to an acceptably low level. (CAS 520.A4)
The auditor may inquire of management as to the availability and reliability of information needed to apply substantive analytical procedures, and the results of any such analytical procedures performed by the entity. It may be effective to use analytical data prepared by management, provided the auditor is satisfied that such data is properly prepared. (CAS 520.A5)
OAG Guidance
Substantive analytics play an important part in a risk based audit approach. Because substantive analytical procedures can be more effective or efficient than tests of details, for accounts or assertions where plausible relationships exist, we consider seeking evidence from substantive analytical procedures before or rather than performing tests of details when it is both effective and efficient.
Because of their nature, substantive analytical procedures can often provide evidence for multiple assertions, identify audit issues that may not be apparent from more detailed work, and direct our attention to areas requiring further investigation. Furthermore, in performing substantive analytical procedures, we may identify risks or deficiencies in internal control that had not previously been identified, which may cause us to re-evaluate our planned audit approach and require us to obtain more assurance from other substantive testing than originally planned.
Substantive analytical procedures might also direct attention to areas of increased risk, and the assurance obtained from effective substantive analytical procedures will reduce the amount of assurance needed from other tests.
When performing substantive analytical procedures, there are four elements that comprise distinct steps that are inherent in the process for using and documenting the analytical procedures in the workpapers:
STEP 1: Develop an independent expectation
STEP 2: Define a significant difference or threshold
STEP 3: Compute difference
STEP 4: Investigate significant differences and draw conclusions
It is important to note that the four-step process is a thought-process designed to standardize how we do analytical procedures and improve their quality. The rigor with which we apply this thought process affects the amount of assurance we either can or expect to derive from the procedure, and vice versa.
Considering this thought-process may also be helpful when performing risk assessment and overall conclusion analytical procedures, though it is not required.
Level of assurance
The nature and amount of assurance desired from substantive analytical procedures depends mainly on the risk of material misstatement, after taking into account controls work and other substantive testing.
The level of assurance obtained from substantive analytical procedures depends on the precision of the expectation developed and the threshold. The more assurance desired, the higher the precision and the lower the threshold. The precision of an expectation is affected by four factors:
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Reliability of source data used (e.g., internally vs. externally prepared) the more reliable the data used to form expectations, the more assurance obtained.
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Disaggregation (e.g., monthly vs. annual data).
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Predictability of the account (e.g., income statement accounts tend to be more predictable than balance sheet accounts).
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Type of analytical procedure (e.g., trend analysis vs. reasonableness testing).
As higher levels of assurance are desired from analytical procedures, more predictable relationships are required to develop the expectation. As a result, substantive analytical procedures may not be the most effective or efficient substantive test for certain accounts or assertions. A simple trend or “fluctuation” analysis usually provides the least precise expectation. Generally, the more disaggregated the data used to form the expectation, the more precise the expectation. However, also consider the reliability of disaggregated data. For example, certain quarterly data may be less reliable than annual data because they are unaudited or not subject to the same controls as annual data. Benchmarking against industry and competitor and/or peer information may also increase the precision of the expectation. To verify proper documentation is obtained, use the substantive analytics procedure for the specific financial statement line item (FSLI) from the relevant cabinet: IFRS, or PSAS—Substantive Tests.
Reliance on the results of substantive analytical procedures will depend on our assessment of the risk that the analytical procedures may identify relationships as expected when, in fact, a material misstatement exists. For this reason, substantive analytical procedures may not be an effective response to an identified fraud risk.
If we assessed the risk at the assertion level as significant, perform substantive procedures that are specifically responsive to that risk. When the approach to significant risk consists only of substantive procedures, those procedures need to include tests of details.