Topic# 6 – Analytical
Procedures
• Readings, pages 89-90,202 & 275-276.
Authority : ISA 520 - Analytical Procedures, Para.2
"The auditor should apply analytical procedures at
the planning and overall review stages of the
audit. Analytical procedures may also be applied
at other stages."
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Definition – AP involves the
analysis of relationships between:
a) items of financial data, or between items of
financial and non-financial data, deriving from
the same period; or
b) comparable financial information deriving
from different time periods to identify
consistencies and predicted patterns or
significant fluctuations and unexpected
relationships, and the results of investigation
thereof.
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Types of AP
• Simple Trend Analysis (of one account)
• Ratio analysis
– Trend Analysis
– Comparative Analysis
– Common-sized analysis
• Reasonableness tests
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How to apply AP
• Develop expectation
• Determine acceptable difference from
expectation
• Compare account balance with expectation
• Investigate significant differences
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When to apply AP
Analytical procedures can be applied to all
the stages of the audit i.e. planning,
fieldwork and final review.
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Planning stage
At the planning stage, they serve to identify
areas of potential audit risk and help in
planning the nature, timing and extent of
other procedures.
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Application of AP in Planning
1. Acquire the last audited financial statements
2. Acquire any projected financial statements or
budgets established by management or perform
some projections incorporating trend analysis (i.e.
using the previous audited financial statements)
3. Compare the projections from 1. above with the
client’s current un-audited financial statements to
identify ratios/relationships that are out of sink.
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Planning e.g.
• See page 90 in text book
• This example incorporates both ratio
analysis and a simple trend analysis of
certain account balances
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Fieldwork Stage
AP is used at this stage to obtain evidence
about the financial statement account
balances.
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Fieldwork Stage e.g. #1
• One may wish to verify the reasonableness of
recorded credit sales.
• A reasonableness test could be applied where
the auditor uses a debtors control account. He
could add the all the cash received from
debtors to the closing debtors figure and then
subtract the opening debtors figure. He would
then compare this result to the recorded credit
sales figure.
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Fieldwork Stage e.g. #2
• One may wish to verify the reasonableness of
recorded payroll expenses.
• A reasonableness test could be applied where
the auditor determines the average pay per
employee in each category. He would next
determine the number of employees for the said
categories. He would finally multiply these two
figures for each category, sum all the categories
and then compare this result to the recorded
payroll expenses figure
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Fieldwork Stage e.g. #3
• One may wish to verify the reasonableness of
recorded production costs in a manufacturing entity.
• E.g. the auditor wants to determine whether job No.
123 which has 950 direct labour hours really resulted
in the recorded production costs of $42,000.
• A regression analysis could be applied. (Recall that : y
= a + bx ).
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Fieldwork Stage e.g. #3 (cont’d)
• Suppose that based on previous data, the
following equation had been developed for
matching production costs against labour hours:
y = 30602 + 15.8436 x
where y = production costs and x = labour hours
• Job No. 123 should carry production costs of
30602 + 15.8436 (950) = $45,653.27
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Fieldwork Stage e.g. #3 (cont’d)
• This figure of $45,653.27 exceeds the
$42,000 recorded in the general ledger.
• As a result of this difference, additional
inquiries and audit procedures may be
necessary to determine if the difference is
reasonable or if perhaps an error or fraud
has occurred.
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Final Review Stage
AP is used at this stage to help the auditor
assess the adequacy of substantive tests
performed, the sufficiency of the evidential
matter obtained and the validity of the
conclusions reached, including the opinion
on the financial statements taken as a
whole.
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The End!
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