ANALYTICAL
PROCEDURES
USES OF ANALYTICAL PROCEDURES
▪ In planning – Preliminary analytical procedures
▪ Substantive tests – to obtain corroborative evidence
▪ Completion phase – Overall review of the financial statements.
IN PLANNING – PRELIMINARY
ANALYTICAL PROCEDURES
▪ Enhancing the understanding the business
▪ Identifying areas that may represent specific risks relevant to the audit.
▪ Determining the nature, timing and extent of FAPs
▪ Required
SUBSTANTIVE TESTS – TO OBTAIN
CORROBORATIVE EVIDENCE
▪ Evaluating the reasonableness of financial information.
▪ Obtaining corroborative evidence relating to a particular assertion.
▪ To detect a material misstatement.
▪ Not required
COMPLETION PHASE – OVERALL REVIEW
OF THE FINANCIAL STATEMENTS.
▪ Identifying unusual or unexpected account balances that were not previously
identified in planning and substantive testing.
▪ Assisting in determining whether or not the auditor has the ability to issue the
report.
▪ Required
ANALYTICAL PROCEDURES
▪ Horizontal and trend analysis,
▪ Vertical analysis, and
▪ Ratio analysis.
STEPS FOR ANALYTICAL PROCEDURES
▪ Develop expectation regarding financial statements.
▪ Compare the expectations with the financial statements under audit
▪ Investigate significant unexpected differences to determine whether financial
statements contain material misstatements
▪ Inquiries
▪ Corroboration
▪ Other applicable procedures
DEVELOP EXPECTATIONS REGARDING
FINANCIAL STATEMENTS USING
▪ Prior year's financial statements
▪ Annualized interim financial statements
▪ Anticipated results such as budgets, forecasts, or projections
▪ Typical Relationships among financial statements account balances
▪ Industry averages
▪ Non-financial information
COMPARE THE EXPECTATIONS WITH THE
FINANCIAL STATEMENTS UNDER AUDIT
▪ The auditor compares the expectations with the recorded amounts to identify
whether or not there are unusual or unexpected relationships or fluctuations.
INVESTIGATE SIGNIFICANT UNEXPECTED
DIFFERENCES
▪ Defining significant differences is a matter of judgment. The auditor focuses on
identified fluctuations and relationships that are inconsistent with other relevant
information or deviate significantly from predicted amounts.
▪ Where there are unusual fluctuations and relationships, the auditor ordinarily
begins with inquiries of management, followed by
▪ Corroboration of management's responses
▪ Consideration of the need to apply other audit procedures based on the results of
management inquiries
TREND ANALYSIS
▪ Trend analysis is the process of comparing the data from one period to one or
more comparable periods including both comparing to prior period data and
comparing to the projections based on the changing patterns in the history data.
▪ Trend analysis may include comparing ratios from one period to another or
evaluate the relationship between data, both financial and non-financial, from one
period to another.
RATIO ANALYSIS
▪ Ratio analysis is the process of examination of various ratios of the company by
comparing them to one or more comparable periods or to other companies in the
same industry.
▪ Ratios are usually formed from two or more accounts or balances in the financial
statements. In this case, using ratios with trend analysis can help auditors to
identify unusual or unexpected changes in relationships between accounts or
balances.
▪ Also, by comparing account balances to industry data, auditors can be alerted to
any significant difference that could lead to the company’s issue.
▪ For example, if the company has much longer payables days comparing to industry
data, it may indicate that the company is having liquidity or cash flow problems.
This would alert auditors to question the company about going concern issues.
RATIO ANALYSIS
▪ Comparing account balances in the current period to one or more comparable
periods
▪ Comparing account balances to the company’s budget and forecasts
▪ Comparing account balances of the company to other companies in the same
industry or comparing to the industry average.
▪ Evaluating the relationship of one account balances to other account balances with
the predictable pattern
▪ Evaluating the relationship of account balances to non-financial data
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