Audit book by m asif chapter 15 analytical procedures

Auditing – Study Notes

Chapter 15 Analytical Procedures

CHAPTER FIFTEEN
ANALYTICAL PROCEDURES
LO #

ICAP'S STUDY TEXT
REFERENCE*

LEARNING OBJCTIVE

LO 1

DEFINITION
AND
PROCEDURES

LO 2

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 3
LO 4

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

1

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:
1. Prior accounting periods (by analyzing trend)
2. Expected Results (e.g. with budgets, forecasts or expectations developed by auditor)
3. Industry Average Results or with Competitors
4. 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:
1. Its usefulness depends on quality of underlying financial information.
2. To make comparison, information must be calculated on consistent basis.
3. Two figures used to calculate ratio, must be logically related.
4. 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:
1. 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.

2

By: Muhammad Asif, ACA


Auditing – Study Notes

Chapter 15 Analytical Procedures

2. 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)

3. 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
4. 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:
1. Inquiring of management,
2. 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.

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By: Muhammad Asif, ACA