Auditing – Study Notes Chapter 15 Analytical Procedures CHAPTER FIFTEEN ANALYTICAL PROCEDURES LO # ICAP'S STUDY TEXT REFERENCE* LEARNING OBJCTIVE LO DEFINITION AND PROCEDURES LO USES (PURPOSES) OF ANALYTICAL PROCEDURES 8.2.1 USE OF ANALYTICAL PROCEDURE AS SUBSTANT IV E PROCEDURES INV ESTIGATION OF FLUCTUATIONS AND RELATIONSHIPS 8.2.3 LO LO EXAMPLES OF ANALYTICAL 8.2.2 8.2.4 *Explanation of Reference: First digit in Study Text’s Reference represents chapter number, second and third digits represents section and sub-section number Contents in brackets (if any) represent part of the sub-section which is covered by the learning objective Coverage from Question Bank: After completion of this chapter, you will be able to attempt following questions in ICAP's Question Bank:  Q # 32a  Q # 81a By: Muhammad Asif, ACA Auditing – Study Notes Chapter 15 Analytical Procedures LO 1: DEFINITION AND EXAMPLES OF ANALYTICAL PROCEDURES : Definition of Analytical Procedures: Analytical Procedures means evaluation of financial information through comparisons and relationships with other financial and non-financial information Analytical procedures also include investigation if actual values are significantly different from expected values Nature and Examples of Analytical Procedures: Analytical procedures include calculation of key relationships between financial and non-financial figures (called Ratio Analysis and Reasonableness Testing) and then making Comparisons These comparisons can be made with: Prior accounting periods (by analyzing trend) Expected Results (e.g with budgets, forecasts or expectations developed by auditor) Industry Average Results or with Competitors Comparable parts of the same entity (e.g results of one branch or division may be compared with other branches or divisions) Limitations of Analytical Procedures: Its usefulness depends on quality of underlying financial information To make comparison, information must be calculated on consistent basis Two figures used to calculate ratio, must be logically related To understand significance of ratios and reasons of differences, auditor must have strong understanding of entity’s business LO 2: USES (PURPOSES) OF ANALYTICAL PROCEDURES : Phase of the audit Start of the Audit During the Audit At the end of the Audit Purpose of Use Analytical Procedures are used as Risk Assessment Procedures to identify areas with potential risk of material misstatement Analytical Procedures are used as Substantive Procedures to identify misstatements in classes of transactions/account balance Analytical Procedures are used in forming overall conclusion:  To corroborate conclusions formed during the audit of individual components  To form overall conclusion whether financial statements as a whole are consistent with auditor’s understanding of entity  To identify previously unrecognized risk (if any) LO 3: USE OF ANALYTICAL PROCEDURE AS SUBSTANTIV E PROCEDURES : When auditor decides to use analytical procedure as substantive procedures, auditor shall perform following steps: Determine the suitability of analytical procedures for given assertion: Analytical procedures are useful when relationships are predictable and plausible e.g relationship between sales revenue and selling commission By: Muhammad Asif, ACA Auditing – Study Notes Chapter 15 Analytical Procedures Evaluate the reliability of data from which auditor’s expectation is developed: Reliability of data for analytical procedures is influenced by following factors: − Source of data (e.g independent source is more reliable) − Nature and Relevance of data − Controls over preparation of data (to ensure its accuracy and completeness) − Comparability of data (e.g broad industry data may need to be supplemented to be comparable for company selling single product) Develop an expectation of recorded amount which is sufficiently precise to identify misstatement: Precise expectation depends on:  Availability of the information, both financial and non-financial  Extent to which information can be disaggregated  Accuracy with which expected results can be predicted Determine the amount of difference which is acceptable without further investigation Acceptable difference is influenced by: − Materiality − Risk Assessment − Desired Level of Assurance LO 4: INVESTIGATION OF FLUCTUATIONS AND RELATIONSHIPS : If relationships are inconsistent with other information or difference between expected value and actual value is significant, auditor shall investigate the difference by: Inquiring of management, Corroborating management’s explanation on the basis of:  auditor’s understanding of entity and its environment and  other audit evidence obtained during audit If adequate explanation is given, sufficient appropriate audit evidence has been obtained If explanation is not given or explanation is not adequate, audit evidence has not been obtained Auditor shall perform other procedures as necessary e.g Tests of Details By: Muhammad Asif, ACA ...Auditing – Study Notes Chapter 15 Analytical Procedures LO 1: DEFINITION AND EXAMPLES OF ANALYTICAL PROCEDURES : Definition of Analytical Procedures: Analytical Procedures means... commission By: Muhammad Asif, ACA Auditing – Study Notes Chapter 15 Analytical Procedures Evaluate the reliability of data from which auditor’s expectation is developed: Reliability of data for analytical. .. differences, auditor must have strong understanding of entity’s business LO 2: USES (PURPOSES) OF ANALYTICAL PROCEDURES : Phase of the audit Start of the Audit During the Audit At the end of the Audit