Analytical Procedures in Auditing: Definition and Its Importance

During an audit engagement, auditors need to collect audit evidence that is sufficient and appropriate. For that, they need to apply various audit procedures. These audit procedures will depend on several factors. Regardless of the procedures used, it is crucial to ensure the quality and quantity of the obtained audit evidence.

Obtaining and evaluating audit evidence is one of the most critical parts of an audit. Auditors also need to look at how the obtained evidence related to each other. Most of the information that auditors receive will be financial. However, it is also crucial for auditors to look at non-financial data. Once they do so, they need to establish links between all the information. For that, they will need to use analytical procedures.

What are Analytical Procedures in Auditing?

The term analytical procedures stem from ISA 520 Analytical Procedures. This auditing standard primarily relates to how auditors can use these procedures during their engagements. ISA 520 defines analytical procedures as follows.

Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data and investigation of identified fluctuations, inconsistent relationships, or amounts that differ from expected values.

According to the above definition, analytical procedures look at various aspects. The first of these includes looking at both financial and non-financial information. For auditors, as mentioned above, it is critical to establish a link between them. It means they need to identify plausible relationships between them. In case they can’t do so, analytical procedures also include investigating any anomalies.

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The requirement for analytical procedures comes from ISA 315, which required auditors to perform these procedures as risk assessment procedures. Usually, these procedures include comparing a company’s financial information. Auditors may use historical information, anticipated results or industry information for these comparisons.

What is the Importance of Analytical Procedures in Auditing?

Analytical procedures in auditing are important for several reasons. Primarily, it involves comparing information from several sources and establishing plausible relationships with them. Similarly, it looks at any differences and requires auditors to investigate them. However, there are further elaborations of how analytical procedures can be crucial in auditing. Some of these are as below.

Risk assessment

As mentioned above, ISA 315 requires auditors to use analytical procedures as a part of risk assessment procedures. It constitutes the preliminary analytical review that auditors perform to obtain an understanding of the client and its environment. During this stage, auditors can use analytical procedures to assess the risk of material misstatement for the client. It can further help them establish the nature, timing and extent of their work.

There are several factors that analytical procedures used in this stage must consider. Firstly, these procedures must seek to enhance the auditor’s understanding of the client and its business. Secondly, it should help identify areas that may represent a risk in the context of the audit. This process can give auditors a better understanding of the client and how to perform their duties.

Substantive tests

Auditors can also use analytical procedures as a part of the substantive tests that they carry out. It may also include test of details or a combination of both. Usually, auditors have to use their professional judgment to establish what procedure to use. They must base their decision on the expected efficiency and effectiveness of the procedures.

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During substantive tests, auditors also need to consider the level of assurance from substantive testing relevant to the engagement. In some circumstances or for particular assertions, analytical procedures may provide better results. However, there are four factors that may affect the effectiveness of analytical procedures during substantive testing.

The first factor is the nature of the assertion in consideration. As mentioned, analytical procedures may not be effective for every assertion. The second factor is the plausibility and predictability of the relationship for the given information. The third is the availability and reliability of the data used by auditors to develop expectations. Lastly, it also involves the precision or accuracy of the expectation.

Analytical review

Like ISA 315, ISA 520 also requires auditors to use analytical procedures. This time, however, it relates to after the fieldwork that auditors perform. This standard deals with using analytical procedures as an overall review after the end of the audit. It aims to evaluate whether the financial statements are consistent with the auditor’s understanding of the client.

In this case, analytical procedures will not produce additional substantive evidence. Instead, it seeks to identify any discrepancies in the auditor’s work. During this process, if auditors identify any anomalies, they will need to perform a risk assessment. This assessment will help them establish whether they need to perform any further auditor procedures.

Conclusion

Analytical procedures are crucial in various stages of an audit engagement. These procedures involve comparing information to identify any discrepancies. There are several stages in an audit engagement that signify the importance of analytical procedures in auditing. These include risk assessment, substantive testing, and analytical reviews.

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