Nature and Purpose of Analytical ProceduNature and Purpose of Analytical Procedures

Nature and Purpose of Analytical Procedures

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

• comparable information for prior periods;
• anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an estimation of depreciation; and
• 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.

9 Analytical procedures also include consideration of relationships:

• 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; and
• between financial information and relevant non-financial information, such as payroll costs to number of employees.

10 Various methods may be used in performing the above audit procedures. These range from simple comparisons to complex analyses using advanced statistical techniques. Analytical procedures may be applied to consolidated financial reports, financial information of components (such as subsidiaries, divisions or segments) and individual elements of financial information. The auditor’s choice of audit procedures, methods and level of application is a matter of professional judgement.

11 Analytical procedures are used for the following purposes:

(a) as risk assessment procedures to obtain an understanding of the entity and its environment (paragraphs 12-14);

(b) as substantive procedures when their use can be more effective or efficient than tests of details in reducing the risk of material misstatement at the assertion level to an acceptably low level (paragraphs 15-24); and

(c) as an overall review of the financial report at the end of the audit (paragraph 25-26).