Audit engagements include various techniques and methods to obtain audit evidence. On top of that, they also help auditors analyze and test the acquired information. However, these techniques may differ based on the type of data obtained or the objective of the test. One of these techniques includes analytical procedures. These procedures apply during various stages in the auditing process.
What are Analytical Procedures in Audit?
Auditing standards require auditors to perform analytical procedures as risk assessment procedures. This requirement comes from ISA 315. However, ISA 520 Analytical Procedures elaborates on what it entails. Analytical procedures include the evaluation of financial information by analyzing plausible relationships. These relationships consider both financial and non-financial information.
The primary purpose of analytical procedures in audit is to identify any inconsistent relationships. Similarly, auditors can use it to build expectations for specific amounts and check them against the actual figures. Analytical procedures apply during the risk assessment process. However, they can also be helpful during fieldwork and other stages in the auditing process.
How do Analytical Procedures work?
Analytical procedures come in various forms. As mentioned above, auditors use these procedures during the risk assessment process. It involves comparing the information with several figures. Usually, auditors start by considering any changes in current year amounts against prior periods. On top of that, auditors can also use industry averages for this purpose.
Another crucial aspect of analytical procedures is to compare the information with anticipated results. These may include various tools such as forecasts and budgets. Similarly, auditors can also develop their expectations of what figures should be. Then, they can compare that information with actual figures. While performing analytical procedures, auditors also consider non-financial information.
The primary purpose of these comparisons is to find any discrepancies in those figures. Once auditors identify the difference in those figures, they must investigate them. Usually, it entails discussing it with the management about the differences.
What are the types of Analytical Procedures?
Some of the most common types of analytical procedures include the following.
Comparisons
Comparisons are the most common form of an analytical procedure. As mentioned above, auditors use it to compare actual figures with previous periods or industry averages.
Ratio analysis
Ratio analysis is also a prominent method used during analytical procedures. It involves examining one figure relative to another. Usually, auditors also use it to compare ratios for previous periods or industry averages with current periods.
Trend analysis
Trend analysis is a common type of analytical procedure. This method involves studying the trends for previous periods and developing expectations based on them. Subsequently, auditors can compare this information with actual results as a part of analytical procedures.
Why do auditors use Analytical Procedures?
The primary objective of analytical procedures is to help auditors understand information better. Similarly, it is helpful in obtaining audit evidence. Besides these, analytical procedures can also help auditors in the following ways.
- Help identify aspects of the client’s business that are not evident.
- Help identify unusual elements in the financial statements or accounts.
- Provide a base for assessing the risks of material misstatements.
- Assist auditors in identifying instances of errors and fraud in the financial statements.
Conclusion
Analytical procedures are a crucial part of the audit process. These involve comparing information, both financial and non-financial. Primarily, the purpose of these procedures is to study plausible relationships between that information. There are many methods by which auditors can apply these procedures, as stated above.
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