What do you mean by Analytical procedures?
(ISA-520) (CMA-Dec-2020)
The auditor should apply analytical procedures by means of understanding of the business and identifying audit risk.
Analytical procedures mean evaluation of financial information made by a
study of plausible relationship among both financial and non financial data.
Analytical procedures include the consideration of comparison of the
entity` financial information with other information.
The
ISA states that analytical procedures include:-
Ø The consideration of comparison with –
Ø comparable
information for prior periods
Ø Analytical result of the entity ,from budgets or
forecasts
Ø Comparison of the client ratio of sales to trade
receivable with industry average.
Ø Consideration of relationship between elements of financial information
Key Characteristics of Analytical Procedures:
Comparative Analysis:
Involves comparing current financial information with prior periods, industry benchmarks, or expected results to identify unusual fluctuations or patterns.
Ratio Analysis:
Uses financial ratios to evaluate relationships between different elements of financial statements, such as liquidity, profitability, and leverage.
Trend Analysis:
Examines the direction and consistency of financial trends over multiple periods to identify any significant changes or deviations.
Common-Size Analysis:
Expresses financial statement items as percentages of a common base, facilitating comparisons and highlighting proportional changes.
Reasonableness Testing:
Assesses the reasonableness of financial data by applying auditor-developed expectations based on industry knowledge, historical data, or bench marking.
Bench marking:
Compares the client's financial performance with industry benchmarks or similar organizations to identify variations and potential areas of concern.
Predictive Modeling:
Utilizes statistical models to predict expected financial outcomes based on historical data, enabling auditors to identify deviations from expected results.
Budget-to-Actual Analysis:
Compares actual financial performance with budgeted figures, helping auditors identify significant variances that may require further investigation.
Regression Analysis:
Examines the relationship between dependent and independent variables to identify patterns and correlations in financial data. Purposes of Analytical Procedures in Auditing:
Risk Assessment:
Helps auditors assess the risk of material misstatement by identifying unusual trends or significant fluctuations that may indicate potential risks.
Substantive Testing:
Informs the nature, timing, and extent of substantive testing by identifying areas where further detailed examination may be necessary.
Overall Review of Financial Statements:
Provides auditors with an overall review of the financial statements, contributing to the auditor's understanding of the client's business and financial position.
Efficiency and Effectiveness:
Offers an efficient and effective means of gathering audit evidence, especially when applied as a preliminary review procedure.
Continuous Monitoring:
Facilitates continuous monitoring of financial performance, enabling auditors to stay alert to changes that may impact the financial statements. Analytical procedures are a valuable tool in the auditor's toolkit, providing a systematic and logical approach to evaluating financial information and enhancing the audit process's effectiveness.