Analytical procedures are the processes of evaluating financial information through trend, ratio or reasonableness of data in relation to other financial and non-financial data. In this case, auditors perform data analysis to examine whether it is consistent with other relevant information and whether the fluctuation is within their expectation. Show If the auditors identify any irregular fluctuation or find that data relationship is inconsistent with their expectations or other information, they will investigate further on the discrepancy that exists. In this case, the investigation might require them to perform further substantive tests, such as inquiry management about the course of variance and inspecting the supporting document on management’s explanation. It is also useful to note that analytical procedures are also used in many other non-audit and assurance engagements. For example, cost accountant usually uses analytical procedures to identify the fluctuation of different types of costs or expenses and the reasons behind those fluctuations. Types of Analytical ProceduresTrend analysis and ratios analysis are the two most commonly used analytical procedures in the audit. Auditors usually use trend and ratio analysis by comparing the amount or balances they obtain from client’s accounts or records to their expectations that were built by using the knowledge obtained in previous years, industry trends, and current economic development, etc. 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. In summary, analytical procedures may be used in the following forms:
Purpose of Analytical ProceduresAuditors perform analytical procedures in various stages of the audit for three main purposes:
Analytical Procedures in Audit ProcessAuditors are required to perform analytical procedures at the planning stage of audit and at the completion stage of audit to perform an overall review of the financial statements before issuing the audit report. Additionally, analytically procedures may also be used in the evidence-gathering stage in order to obtain sufficient appropriate audit evidence to form an opinion on financial statements.
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Analytical procedures are a type of evidence used during an audit. These procedures can indicate possible problems with the financial records of a client, which can then be investigated more thoroughly. Analytical procedures involve comparisons of different sets of financial and operational information, to see if historical relationships are continuing forward into the period under review. In most cases, these relationships should remain consistent over time. If not, it can imply that the client’s financial records are incorrect, possibly due to errors or fraudulent reporting activity. Examples of Analytical ProceduresExamples of analytical procedures are as follows:
When the results of these procedures are materially different from expectations, the auditor should discuss them with management. A certain amount of skepticism is needed when having this discussion, since management may not want to spend the time to delve into a detailed explanation, or may be hiding fraudulent behavior. Management responses should be documented, and could be valuable as a baseline when conducting the same analysis in the following year. Auditors are required to engage in analytical procedures as part of an audit engagement. August 23, 2022/ |