SA 520 Analytical Procedures (Effective 01/04/2010)

Analytical procedures

The term “analytical procedures” means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.

Nature of Analytical Procedures

• Analytical procedures include the consideration of comparisons of the entity’s financial information with, for example:

1. Comparable information for prior periods.
2. Anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an estimation of depreciation.
3. Similar industry information, such as a comparison of the entity’s ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry.

• Analytical procedures also include consideration of relationships, for example:

1. Among elements of financial information that would be expected to conform to a predictable pattern based on the entity’s experience, such as gross margin percentages.
2. Between financial information and relevant non-financial information, such as payroll costs to number of employees.

Objectives of the auditor wrt Analytical procedures

The objectives of the auditor are:

1. To obtain relevant and reliable audit evidence when using substantive analytical procedures; and
2. To design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity.

Substantive Analytical Procedures

When designing and performing substantive analytical procedures, either alone or in combination with tests of details, as substantive procedures, the auditor shall: 

• Determine the suitability of particular substantive analytical procedures for given assertions, taking account of the assessed risks of material misstatement and tests of details, if any, for these assertions. Following factors affect the suitability

1. More suitable for large volume of transactions
2. Relationship among data must exist
3. Auditors assessment of ROMM of the area

• Evaluate the reliability of data from which the auditor’s expectation of recorded amounts or ratios is developed, taking account of source, comparability, and nature and relevance of information available, and controls over preparation. Following factors affect the reliability

1. Source of Information available
2. Comparability of Information available
3. Nature & relevance of Information available
4. Controls over preparation of information

• Develop an expectation of recorded amounts or ratios and evaluate whether the expectation is sufficiently precise to identify a misstatement that, individually or when aggregated with other misstatements, may cause the financial statements to be materially misstated; and 
• Determine the amount of any difference of recorded amounts from expected values that is acceptable without further investigation.

Analytical Procedures that Assist When Forming an Overall Conclusion

The auditor shall design and perform analytical procedures near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of the entity.

1. The conclusions drawn from the results of these analytical procedures are intended to corroborate conclusions formed during the audit of individual  components or elements of the financial statements. This assists the auditor to draw reasonable conclusions on which to base the auditor’s opinion.
2. The results of such analytical procedures may identify a previously unrecognised risk of material misstatement. In such circumstances, SA 315 requires the auditor to revise the auditor’s assessment of the risks of material misstatement and modify the further planned audit procedures accordingly

Investigating Results of Analytical Procedures

If analytical procedures performed in accordance with this SA identify fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount, the auditor shall investigate such differences by:

1. Inquiring of management and obtaining appropriate audit evidence relevant to management’s responses; and
2. Performing other audit procedures as necessary in the circumstances

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