SA 520 Chart 1

Analytical Procedure

Analytical procedure meaning Includes Can be performed through

Evaluation of Through Analysis of Among Comparison with Simple comparisons Complex analysis using
statistical techniques

Financial Information Relationship Financial and Non-Financial Comparable information of Anticipated results Similar industry information
data

Prior periods Like budget and forecast


Understand the client’s business
Identify the area of potential
risk
Determine NTE of other Audit
Procedures
SA 520 Chart 2
Purpose of AnPro How it works EXAMPLE For more understanding Thus it is important to note CONSIDERATIONS SPECIFIC
that TO PUBLIC
SECTOR ENTITIES
To By setting up it is possible to ascertain the If it is also possible to
certain expenses ratios on the extent of increase or decrease differences are found to be independently verify the Analytical procedures may help Unusual or unexpected
basis of balances included in in various items material, correctness of some of the identify the existence relationships that are The relationships between
the Statement of Profit and of expenditure in relation to items of unusual transactions or identified may assist the individual Financial statements
Loss, for the year under audit, sales. of expenses included in the events, and amounts, ratios, and auditor in identifying risks of items traditionally considered
Obtain Design and Perform
comparing them with the same Statement of Profit and Loss trends that might indicate material misstatement, in the audit of business entities
ratios for the previous matters that have audit especially may not always be relevant in
the auditor would ascertain the
year, implications. risks of material misstatement the audit of governments
reasons thereof
due to fraud. or other non-business public
and assess whether the
relevant and reliable audit analytical procedures near the sector entities;
accounts have been manipulated For instance, the cost of Similarly, a quantity of sugar Similarly, the Such calculation of ratios,
evidence when using end of the audit
to infl ate or suppress profits. importing goods which are sold by sugar amount of any income or trends and comparisons is also
substantive analytical
subjected to an ad-valorem mill can be verified expenses which has a direct termed as analytical review.
procedures
duty at uniform rate can be independently from the amount relationship with the amount
verified from the amount of of excise duty paid. of profits or that of sales can for example, in many public
that duty paid. be verified independently, e.g., sector entities
assist the auditor when forming commission paid to a there may be little direct
an overall conclusion as to manager calculated on the relationship between revenue
basis of net profits, commission and expenditure.
paid to a selling agent
as percentage of sales, etc.
whether the with the auditor’s
financial statements are understanding of the Also, industry data or
consistent entity statistics for comparative
purposes may not be available
in the public sector.
However,
other relationships may be
relevant, for example, variations
in the cost per kilometer of
road construction or the
number of vehicles acquired
compared with vehicles retired
 SA 520 Chart 3

Timing of AnPRO

Analytical Procedures are

required in the planning phase
and it is often done during
the testing phase. In addition
these are also required during
the completion phase. ! ⭐

Planning Testing Completion

In the planning stage, analytical procedures assist the auditor in understanding This
the client’s business and in identifying areas of potential risk, information will assist the
auditor in determining the
nature, timing and extent of
his other audit procedures.
Used as Substantive Procedures
to obtain audit evidence
Assist the auditor when
forming an overall conclusion as
to whether the FS are
consistent with auditor’s
understanding of the entity
 SA 520 Chart 4

Do you remember Factors to be considered for

Substantive Audit Procedures

Audit procedures
Availability of DATA Disaggregation Account type Source Predictability Nature of Assertion Inherent risk or “What can go
wrong”

The availability of reliable and
relevant data will facilitate
effective
procedures.
The degree of disaggregation in
available data can directly
affect
the degree of its usefulness in
detecting misstatements
Substantive analytical
procedures are more useful for
certain types
of accounts than for others.
Income statement accounts
tend to be more predictable
because they reflect
accumulated transactions over
a period, whereas balance
sheet
accounts represent the net
effect of transactions at a
non-routine and estimation are
point in time or are subject to
greater management judgment.
Some classes of transactions
tend to be more predictable
because they
consist of numerous, similar
transactions, (e.g., through
routine processes).
Whereas
the transactions recorded by
often subject to
management judgment and
therefore more difficult to
predict.
Substantive analytical
procedures are more
appropriate when an
account balance or relationships
between items of data are
predictable (e.g., between
sales and cost of sales or
between trade receivables and
cash receipts).
A predictable
relationship is one that may
reasonably be expected to
exist and continue over time.
Substantive analytical
procedures may be more
effective in
providing evidence for some
assertions (e.g., completeness
or valuation) than for others
(e.g., rights and obligations).
When we are designing audit
procedures
to address an inherent risk or
“what can go wrong”, we
consider the nature of the risk
of material misstatement in
order to determine if a
substantive analytical
procedure
can be used to obtain audit
evidence.
When inherent risk is higher,
we may design
tests of details to address the
higher inherent risk.

When significant risks have

been
identified, audit evidence
obtained solely from
substantive analytical
procedures is
unlikely to be sufficient.

Trend Analysis
We evaluate whether the
current balance of an account
moves in line with the trend
established with previous
balances for that account, or
based on an understanding of
factors that may cause the
account to change.
relationship to another account
SA 520 Chart 5
Techniques Available
Techniques Available as
Substantive Analytical
Procedures
Ratio Analysis Reasonableness tests Structural modelling
Ratio analysis is useful for Unlike trend analysis, this A modelling tool constructs a
analysing asset and liability analytical procedure does not statistical model from fi nancial
accounts as rely and/or non-fi nancial data of
well as revenue and expense on events of prior periods, but prior accounting periods to
accounts. upon non-financial data for the predict current account
audit period under balances (e.g., linear
consideration (e.g., occupancy regression).
rates to estimate rental income
or interest rates to
An individual balance sheet
estimate interest income or
account is difficult
expense).
to predict on its own, but its
is often more predictable
(e.g., the trade receivables
balance related to sales). These tests are generally more
applicable to
income statement accounts and
certain accrual or prepayment
accounts.
Ratios can also be compared
over time or to the ratios of
separate entities within the
group, or with the ratios of
other companies in the same
industry.
 SA 520 Chart 6 Analytical
Procedures used as
substantive tests

Suitability Reliability Develop an expectation Determine the amount of

difference

Determine the suitability of to be discussed later on Develop an expectation of

particular substantive recorded amounts or ratios and Determine the amount of any
analytical procedures for given evaluate whether the difference of recorded amounts
assertions, taking account of expectation is sufficiently from expected
the assessed risks of material precise to identify a values that is acceptable
misstatement and misstatement that may cause without further investigation.
tests of details, if any, for the financial statements
these assertions. to be materially misstated
 SA 520 Chart 7 Extent of
reliance on analytical
procedures

The reliability of data is

influenced by its source and
nature and is dependent on the
circumstances under which it is
obtained. Accordingly, the
following are relevant when
determining whether data is
reliable for purposes of
designing substantive analytical
procedures

Source Comparability Nature and relevance of info Control over preparation of

Info. to ensure it’s
completeness, accuracy and
validity

For example, information may
be more
reliable when it is obtained
from independent sources
outside the entity;
For example, broad industry
data may
need to be supplemented to be
comparable to that of an entity
that produces
and sells specialised products;
For example, whether
budgets have been established
as results to be expected
rather than as goals to For example, controls over the
be achieved preparation,
review and maintenance of
budgets.
 SA 520 Chart 8
Identification of ROMM

To identify the ROMM or a

Misstatement expectations
should be developed sufficiently

Whether the expectation is

developed sufficiently following
points are relevant to be
considered

Accuracy Degree Availability

accuracy with which the degree to which information availability of the information,
expected results of substantive can be disaggregated. both financial and non-financial.
analytical
procedures can be predicted.

For example, substantive For example, the auditor may

For example, the auditor may
expect greater consistencyin
comparing gross profi t
margins from one period to
another than in comparing
discretionary expenses,
such as research or
advertising.
analytical procedures may be
more effective when
applied to fi nancial information
on individual sections of an
operation or to
fi nancial statements of
components of a diversifi ed
entity, than when applied to
the fi nancial statements of the
entity as a whole.
consider whether fi nancial
information, such as
budgets or forecasts, and non-
fi nancial information, such as
the number of units
produced or sold, is available to
design substantive analytical
procedures.
 SA 520 Chart 9

INVESTIGATING RESULTS OF
ANALYTICAL
PROCEDURES

Inquiring of management and Performing other audit

obtaining appropriate audit procedures as necessary in the
evidence circumstances
relevant to management’s
responses

The need to perform other

Audit evidence relevant to
management’s
responses may be obtained by
evaluating those responses
taking into account
the auditor’s understanding of
the entity and its environment,
and with other
audit evidence obtained during
the course of the audit.
audit procedures may arise
when, for example,
management is unable to
provide an explanation, or the
explanation, together
with the audit evidence
obtained relevant to
management’s response, is not
considered adequate.
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