Pham Phuong Thao - Essay On Auditing (Full)

NATIONAL ECONOMICS UNIVERSITY
SCHOOL OF ACCOUNTING AND AUDITING
ESSAY ON AUDITING
TOPIC: THE APPLICATION OF ANALYTICAL PROCEDURES
IN THE AUDIT OF FINANCIAL STATEMENTS
Student name : Phạm Phương Thảo

Student ID : 11206981
Class : Auditing integrated with ICAEW CFAB
Intake : 62
Supervisor : Assoc. Prof. PhD. Phan Trung Kiên
Hanoi, 2023
TABLE OF CONTENTS
INTRODUCTION .................................................................................................................... 3
CHAPTER 1: Theoretical framework for analytical procedures in the audit of financial

statements .................................................................................................................................. 4
1.1. Overview of analytical procedures in the audit of financial statements ...................... 4

1.1.1. Definition of analytical procedures ...................................................................... 4
1.1.2. Distinguish between analytical procedures and financial statement analysis ..... 5
1.1.3. Analytical procedures in an audit ......................................................................... 6
1.2. The purpose of analytical procedures in auditing financial statements ....................... 7
1.2.1. Risk-based audit approach ................................................................................... 8
1.2.2. The purposes of analytical procedures in the risk-based audit process ............. 10
1.3. The general implementation process of analytical procedure .................................... 13
CHAPTER 2: Application of analytical procedures in audit process................................ 17
2.1. Risk assessment procedures ....................................................................................... 17

2.1.1. The concept of risk assessment ........................................................................... 17
2.1.2. The purpose of risk assessment analytical procedures ....................................... 18
2.1.3. Risk assessment implementation in audit process .............................................. 18
2.1.4. Analytical techniques in risk assessment ............................................................ 20
2.1.5. Application of SWOT analysis in the audit ......................................................... 21
2.2. Substantive analytical procedures .......................................................................... 23
2.2.1. Designing and performing substantive analytical procedures ........................... 24
2.2.2. Types of analytical procedures ........................................................................... 24
2.2.3. Application of Substantive analytical procedures .............................................. 26
CHAPTER 3: Assessments, lesssons learned and recommendations for improvement of
the application of analytical procedures in the audit of financial statements in Vietnam
.................................................................................................................................................. 31
3.1. Assessments ............................................................................................................... 31

3.1.1. Findings and issues arising in the application of analytical procedures ........... 31
3.1.1.1. Achievements ............................................................................................... 31
3.1.1.2. Limitations ................................................................................................... 32
3.1.2. Factors affecting the effectiveness of analytical procedures .............................. 34
3.2. Lessons learned for improving the effectiveness of analytical procedures in the audit
of financial statements........................................................................................................... 36
3.2.1. Analytical techniques .......................................................................................... 37
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3.2.2. Sources of information for analysis ......................................................................... 39
3.3. Recommendations for improvement of the application of analytical procedures in the
audit of financial statements.................................................................................................. 39
CONCLUSIONS ..................................................................................................................... 41
REFERENCES........................................................................................................................ 42
2
INTRODUCTION
Analytical procedures are used in the audit process and are one of the main audit procedures
that auditors often use, having great significance in the audit work. In the current International
Standards on Auditing ISA 520 – Analytical Procedures is defined as “the evaluation of
financial information through the analysis of reasonable relationships between financial and
non-financial data”. Analytical procedures typically include trend analysis, ratio analysis,
visual scanning of data, and other methods for investigating fluctuations, relationships are
believed to be inconsistent with the relevant information or have differ significantly differences
from the expected values. Analytical procedures are increasingly used in the audit process
because it increases the effectiveness and efficiency of the audit. Nowadays, analytical
procedures are applied more flexibly in the risk-based audit process as risk assessment
procedures and substantive analytical procedures. There are several new analytical techniques
that auditors can use.
Therefore, I has chosen the topic "THE APPLICATION OF ANALYTICAL

PROCEDURES IN AUDIT OF FINANCIAL STATEMENTS" as the research topic for the
essay on auditing because I found that this is a significant issue for the audit of financial
statements. The purpose of this essay is to clarify the current situation of applying analytical
procedures and the shortcomings in the process and then make recommendations.
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CHAPTER 1: Theoretical framework for analytical procedures in the audit of financial
statements
1.1. Overview of analytical procedures in the audit of financial statements
1.1.1. Definition of analytical procedures
Analytical procedures are one of the eight types of evidence that auditors use in an audit to
support the opinion issued. The auditors can obtain one or combine more following broad
categories of evidence: Physical examination, Confirmation, Inspection, Analytical procedures,
Inquiries of the client, Recalculation, Reperformance, Observation.
According to International Standard on Auditing No. 520, the term “analytical procedures” is
defined as “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.”
(IAASB, 2019)
Analytical procedures include the consideration of comparisons of the entity’s financial

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information with, for example:

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 Comparable information for prior periods. ia ia ia ia
 Anticipated results of the entity, such as budgets or forecasts, or expectations of the

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auditor, such as an estimation of depreciation.

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 Similar industry information, such as a comparison of the entity’s ratio of sales to

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accounts receivable with industry averages or with other entities of comparable size in
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the same industry.

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Analytical procedures also include consideration of relationships, for example:

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● Among elements of financial information that would be expected to conform to a

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predictable pattern based on the entity’s experience, such as gross margin percentages.
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● Between financial information and relevant non-financial information, such as payroll

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costs to number of employees.

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There are various methods that may be used to implement analytical procedures. These
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methods range from performing simple comparisons (such as year-to-year, comparisons of

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balances, transactions or ratios) to performing more complex procedures using advanced

statistical analytical techniques. These analytical procedures may be applied to consolidated

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financial statements or to individual items, elements, information regarding the audited

company. The sophistication of analytical procedures directly affects the quality of audit
evidence that may be collected from them. In other words, the more thorough the analysis the
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more persuasive the audit evidence.

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1.1.2. Distinguish between analytical procedures and financial statement analysis a a a a a a a a
Analytical Procedures and Financial Statement Analysis can be distinguished based on their
purpose, scope, and the stage at which they are applied. Here are some key points to
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differentiate between the two: a a a
 Main purpose a
The purpose of analytical procedures is primarily to assess the reasonableness and reliability of
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financial information during the audit process. It helps auditors gain an overall understanding
of the financial data, identify significant relationships, trends, and fluctuations, and detect
potential risks or anomalies. a a a
Otherwise, the purpose of financial statement analysis is to evaluate the financial

performance, financial position, and financial health of a company. It aims to provide insights
to investors, creditors, managers, and other stakeholders for decision-making purposes.

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 Scope
Analytical procedures are typically applied within the context of an audit engagement, as part
of the auditor's risk assessment procedures, substantive procedures, or overall analytical

review. They focus on analyzing financial data and identifying any material misstatements or
unusual fluctuations that may indicate potential errors or fraud.

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Different from Analytical Procedures, Financial statement analysis encompasses a broader
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perspective, including both internal and external analysis of a company's financial statements.
It involves a comprehensive review and interpretation of financial data, ratios, trends, and
industry benchmarks to assess the company's performance, profitability, liquidity, solvency,

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and overall financial condition.

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 Timing
Based on the main purpose and scope mentioned above, it is clear that Analytical procedures
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are primarily conducted during the audit process, typically as a part of the planning phase,
substantive testing, and final review stages. They are performed by auditors to obtain audit
evidence and assess the reasonableness of financial information.

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Financial statement analysis can be conducted at any time, including before or after an audit
because it is not an audit procedure. It is often performed by investors, financial analysts,

lenders, and other stakeholders to evaluate a company's financial performance, make

investment decisions, or monitor ongoing financial health.a a a a a a
In summary, analytical procedures are primarily used in the audit process to assess the
reasonableness and reliability of financial information, while financial statement analysis

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focuses on evaluating a company's financial performance and condition for decision-making

purposes.
1.1.3. Analytical procedures in an audit a a a a
Analytical procedures are used extensively in practice, at any of three phases during the audit
engagement. Analytical procedures are required during the planning and completion phases on
all audits, according to International Standard on Auditing No. 520.

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In the planning phase, the preliminary analytical procedures are required to assist in
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determining the nature, extent, and timing of audit procedures. This helps the auditor
identify significant matters requiring special consideration later in the engagement. For
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example, the calculation of inventory turnover before inventory price tests are done may
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indicate the need for special care during those tests. Analytical procedures done in the
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planning phase typically use data aggregated at a high level, and the sophistication, extent,
and timing of the procedures vary among clients. For some clients, the comparison of
prior-year and current-year account balances using the unaudited trial balance may be
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sufficient. For other clients, the procedures may involve extensive analysis of quarterly
financial statements based on the auditor’s judgment.

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Auditors perform preliminary analytical procedures to better understand the client’s

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business and to assess client business risk. One such procedure compares client ratios to
industry or competitor benchmarks to provide an indication of the company’s performance.

Such preliminary tests can reveal unusual changes in ratios compared to prior years, or to
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industry averages, and help the auditor identify areas with increased risk of misstatements
that require further attention during the audit.

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During the testing phase, the substantive analytical procedures are not always required to
perform. Analytical procedures are often done as a substantive test in support of account
balances. These tests are often done in conjunction with other audit procedures. For
example, the prepaid portion of each insurance policy might be compared with the same
policy for the previous year as a part of doing tests of prepaid insurance. The assurance
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provided by analytical procedures depends on the predictability of the relationship, as well

as the precision of the expectation and the reliability of the data used to develop the
expectation. When analytical procedures are used during the testing phase of the audit,
auditing standards require the auditor to document in the working papers the expectation
and factors considered in its development.

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Final analytical procedures are also required during the completion phase of the
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audit. Such tests serve as a final review for material misstatements or financial
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problems and help the auditor take a final “objective look” at the audited financial
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statements. Typically, a senior partner with extensive knowledge of the client’s

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business conducts the analytical procedures during the final review of the audit files
and financial statements to identify possible oversights in an audit.

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1.2. The purpose of analytical procedures in auditing financial statements

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1.2.1. Risk-based audit approach aa aa
Audit risk is the risk that the auditor will give an incorrect and inappropriate opinion on
the financial statements of an audited company. In other words, it is the risk that the
auditor will omit a material misstatement in the financial statements, or that the auditor
will conclude that the financial statements are true and fair, in all materials, when they are
not. Three components of audit risk are Inherent Risk, Control Risk and Detection Risk.
 Inherent Risk: This is the risk which exists in the entity's financial statements due
to the nature of its business, the complexity of its transactions, and the risk of fraud
or error.
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 Control Risk: aa aa aa This is the risk arising when the entity’s internal control is not
effective in preventing or detecting and correcting material misstatements in the

financial statements. aa
 Detection Risk: This is the risk that the material misstatements which exist in the
financial statements will not be detected by auditor's procedures.

A risk-based approach, which involves identifying and assessing the risks that relate to
financial statements, is nowadays a fundamental principle in the audit process. The risk-
based approach assists auditors in determining priorities for their audit processes and
effectively allocating resources to areas of higher risk.

The main objective of implementing risk-based auditing is to minimize or reduce the audit
risk to the lowest acceptable level for auditors (Harahap et al.,2017). Risk-Based Audit is
an audit focused on areas where business process risk, account risk, and control risk are
very likely to occur. The higher the risk of an account/area/transaction/business process,

the higher the attention in the audit of the account/area/transaction/business process. To

identify a business risk, the auditor must understand the control aspects of the business
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process concerned, and comprehending the business procedure includes comprehending

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the risks and controls of the system in achieving the purpose for which the organization
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a was established (Noviani and Sambharakreshna, 2014). The risk analysis approach requires
analytical procedures to be used during the planning stage of the audit and allows the
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auditor to understand the business of the entity and identify the areas of potential risks,
thereby assisting in the determination of the nature, timing and extent of further audit
procedures.
Establishing the appropriate nature, timing, and scope of substantive testing enables higher
quality audits to be completed in less time, which is the objective of the new approach to
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the practice known as the term "risk-based auditing", which seeks to enhance the quality
and efficacy of audits. Substantive testing is limited where there is internal control
reliance, means the audited company has effective internal control and inversely, extensive
application where there is no internal control reliance, means their internal control is weak
and may have a lot of control deficiencies.

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Identifying, detecting and reporting the risk of significant distortions in financial

statements is the process of risk-based auditing. By using this strategy, the product's
(financial statements) worth is increased while the auditor can also enhance the quality of
audit. In other words, risk-based auditing satisfies both the managers and the auditors
(Smith,2006; Harrington, 2004). In this approach, firstly, the auditor uses written
narratives, questionnaires, and flowcharts, and by performing a walk-through test to

examine the accounting and internal control systems of the entity. After that, the auditor
estimates the two components of audit risks regarding the business: inherent and control
risks. These initial estimates of inherent and control risks assist the auditor in determining
the effectiveness of internal control and whether the auditor can believe the internal
control system of the audited company. If the internal control system is strong and
operating effectively, the auditor needs to perform the test of control. The results can
affect the initial estimates of inherent and control risks and may make the auditor required
to adjust them.
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In general, audit procedures and audit processes have tremendously changed over the
time, and there has been a shift from traditional auditing in the past to risk-based
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auditing nowadays. This new approach determines organizational risks which allow for
optimal use of rare audit resources, higher agreement between internal audits and
management goals, facilitation of organizational development, and reduction of

potential risks. In addition, a risk-based audit also has a stronger future orientation. It
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examines the effects of environment or technological changes on the process or system

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and suggests procedures that may be performed to mitigate any risks that are found. Given
that it takes potential future threats, the risk-based audit is also more likely to give
recommendations for improvement. aa aa
1.2.2. The purposes of analytical procedures in the risk-based audit process

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The purpose of analytical procedures can be indicated following the steps in the risk-based
audit process. The following mentions the key steps involved in a risk-based approach to
the audit process:

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At the risk assessment step, the auditors need to understand the entity business and
industry. In order to gain a comprehensive understanding of the entity's business, industry,

and operating environment, including its internal control systems. They identify and assess
the risks that may result in material misstatements in the financial statements. These risks
can be related to fraud, errors, internal control deficiencies, or changes in the business
environment. These are called inherent and control risks. The auditors evaluate the
inherent risks that exist in the entity's business and financial statements without
considering the effectiveness of internal controls. Additionally, assess control risks by

considering the design and implementation of internal controls.

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It is clear that the application of risk-based auditing begins at the audit planning stage. The
audit team’s objective in this stage is to understand the entity of the audit during the audit
planning. One form of risk-based audit implementation at this planning stage is the
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audit team will conduct a risk assessment of the types of risks that exist based on the audit
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team's understanding which is based on an initial analysis of the entity's environment, as

well as the results of communication with the previous audit team (Castanheira, 2010).
The output obtained from the risk assessment at this planning stage is in the form of the
determination of the initial materiality level and risk assessment of existing accounts,
which is then continued with the determination of the sample to be taken, as well as
detailed examination steps outlined in the audit program. The assessment and
implementation of the results of the risk assessment and the results of the audit aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
evidence taken are then need to be documented. The implementation of a Risk-

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Based Audit is using the risk assessment, and then determine responses to assessed
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risks, and reporting audit results at final stage.

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In order to achieve the above objective, the auditors perform risk-assessment analytical
procedures (sometimes called “preliminary analytical procedures”) to determine changes

and fluctuations are emphasized through comparing the current year's unaudited
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information to preceding years' audited information or industry statistics. They may

represent significant trends or particular events, all of which will have an impact on
the planning phase. For instance, a reduction in gross margin percentages over time
may be a sign of escalating competition in the company's industry and the need for
the auditor to pay attention to inventory pricing. Similar to this, an increase in the
fixed asset balance can point to an outstanding acquisition that has to be scrutinized.
Through the assessed risks, the auditor can plan the audit strategy and audit plan.
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By performing a risk assessment and responding to the risk assessment results

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properly, the aa aa aa aa audit aa aa aa team aa aa aa will aa aa aa focus aa aa aa on aa aa aa a aa aa aa more aa aa aa complete aa aa aa and aa aa aa detailed aa aa
testing of aa aa aa aa the transaction/account/cycle/area that has a high-risk assessment result. The

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assessment result stating that an area/account/cycle/transaction has a high risk is an

illustration that the transaction/account/cycle/area has a higher possibility of fraud than

transaction/account/cycle/area that has a low-risk assessment result so that it will make it aa aa aa aa aa aa aa aa aa aa aa aa aa
easier to identify or detect existing/occurring misstatements (frauds and errors).

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In the next phase, the auditor performs audit tests and procedures that are planned in the
previous steps. These include the execution of Substantive testing (tests of details and
substantive analytical procedures) to obtain sufficient appropriate audit evidence to reduce

audit risk to an acceptably low level. With further audit procedures, it is necessary to
perform them to address any identified or emerging risks during the audit process.
In this step, the auditors perform analytical procedures in order to identify any potential
misstatements that exist in the Financial Statements and reduce the other substantive
testing procedures and the scope of test of details of balance. Unusual fluctuations occur
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when significant differences are unexpected but do exist, or when significant

differences are expected but do not exist. They are the differences between the current
year’s unaudited financial data and other data used in comparisons. In either case, the
presence of an accounting misstatement is one possible cause for the unusual

fluctuation. If this fluctuation is significant, the auditor must determine and be

11
satisfied that the reason is a valid economic event and not a misstatement. For
example, there is a decrease in the ratio of the allowance for uncollectible accounts
receivable to gross accounts receivable with that of the previous year, while accounts
receivable turnover also reduced. The combined information indicates the likelihood of
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understatement of the allowance. It leads to more detailed procedures and expanding the
scope of work in the specific audit areas where misstatements may exist. This aspect of
analytical procedures is often referred to as “attention directing”.

Another purpose of analytical procedures is to provide evidence supporting an account

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balance. Analytical procedures can frequently be used to collect evidence that supports
reported account balances. Substantive analytical procedures may be performed,

however they are not compulsory when a predictable relationship exists and the
analytical procedure is based on reliable inputs. In these situations, the analytical

procedures provide important supporting information for the related account balances.
The substantive analytical procedures may reduce the requirement for detailed tests of
account balance, depending on the significance of the account, the predictability of the
relationship, and the reliability of the underlying input data. In other circumstances,
detailed testing will still be carried out, but the sample sizes may be decreased, or
these procedures may be performed later than the date of the statements of financial
position.
At the last phase, the auditors need to have evaluation and conclusion to complete the
audit and issue and audit report. They evaluate the audit findings by considering the
results of the audit procedures, assess the impact of identified risks, and evaluate
whether the financial statements are free from material misstatements. They are the
basis for the auditors to give an audit opinion. The opinion expresses the auditor's
professional judgment on the fairness of the financial statements.

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At this step, the auditor needs to pay attention to assess the client company’s ability
to continue as a going concern. Analytical procedures are used to determine whether

the entity has financial problems and the auditor can estimate the likelihood of failure.
For example, if the ratio of long-term debt to net worth is higher than normal and
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the ratio of earnings to total assets is lower than average, this may be an indicator of
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a relatively high risk of financial failure. The outstanding conditions will not only
12
impact the audit plan but also need the inclusion of an emphasis-of-matter (EOM)
explanation paragraph in the audit report because they may suggest that there is
considerable uncertainty regarding the client company's ability to continue as a going

concern.
Throughout the entire audit process, the risk-based approach ensures that audit
procedures are focused on areas with higher risks, providing a more effective and
efficient audit engagement. In summary, the analytical procedures application helps

auditors to understand the business, identify and assess risks, obtain audit evidence,
determine the additional procedures and then reach the audit opinion.
1.3. The general implementation process of analytical procedure

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The general implementation of analytical procedures involves several steps mentioned

in the graph below. They are acquiring information from various data sources in order
to determine what is expected; comparing the actual situation with that expectation;
investigating the reasons why any discrepancies exist; and evaluating, documenting the
results, as follows:
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STEP 1: Collecting data and determining an independent expectation
The most important step in effectively applying substantive analytical procedures is

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the development of an appropriately precise, objective expectation based on the

professional aaaa judgment aaaa and evaluation

aaaa aaaa from aaaa collected data.aaaa aaaa An aaaa expectation aaaa is aaaa
defined as a prediction of a recorded ratio or amount. The prediction can be a

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specific number, aaaa aaaa aaaa a direction, a percentage or an approximation, depending on the
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desired precision.
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The auditor should have an independent expectation whenever the auditor uses
substantive analytical procedures (ISA 520).“The auditor develops expectations by

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identifying plausible relationships (e.g. between store square footage and retail
sales, market trends and client revenues) that are reasonably expected to exist
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based on his knowledge of the business, industry, trends, or other accounts.”

STEP 2: Determining a significant difference (or threshold)

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While designing and performing substantive analytical procedures the auditor should
consider the amount of difference from the expectation that can be accepted
without performing further investigation (ISA 520). The maximum difference that
is acceptable is also called the ‘threshold’ or ‘the tolerable difference’.

Thresholds may be defined either as percentages of the items being tested or as

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numerical values. Defining an appropriate threshold is particularly critical to the

effective application aaaa aaaa of substantive analytical

aaaa aaaa aaaa procedures. aaaa To aaaa prevent aaaa bias aaaa in
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judgment, the auditor should determine the threshold while planning the substantive
analytical procedures, such as before Step 3, in which the difference between the
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recorded amount aaaa aaaa aaaa and the expectation are computed.
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The aaaa threshold aaaa is aaaa also aaaa the aaaa acceptable aaaa amount aaaa of aaaa potential aaaa misstatement aaaa and aaaa
therefore should not exceed planning materiality and must be sufficiently small to
enable the auditor to detect misstatements that could be material either individually
or when aggregated with misstatements in other disaggregated portions of the

account balance or in other account balances.

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STEP 3: Calculating the difference and making comparisons

The third step in the general process is the comparison of the recorded amounts
with aaaa the aaaa expected aaaa value aaaa and aaaa the aaaa determination aaaa of aaaa significant aaaa or aaaa unusual aaaa
differences, if any. This should be simply a mechanical calculation.

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It is necessary to note that the calculation and evaluating of differences should be
done aaaa after aaaa the aaaa consideration aaaa of aaaa an aaaa expectation aaaa and aaaa threshold. aaaa In aaaa applying aaaa
substantive analytical procedures, the order that first computes differences from
prior-period balances and then let the results influence the ‘expected’ difference
and the acceptable threshold is considered not appropriate.

STEP 4: Investigating significant and unusual differences to give conclusions

The fourth step is the examination and inspection of significant differences and
then aaaa formation aaaa of aaaa conclusions aaaa (ISA aaaa 520).“Differences aaaa indicate aaaa an aaaa increased aaaa
likelihood of misstatements; the greater the degree of precision, the greater the
likelihood that the difference is a misstatement.”

Explanations should be provided for the full amount of the difference, why there
are the differences, not just the part that exceeds the threshold. There is a risk
that the unexplained difference may be omitted although it indicates an increased

risk of material misstatement.“The auditor should consider whether the differences

were caused by factors previously overlooked when developing the expectation in

Step 1, such as unexpected changes in the business or changes in accounting

treatments.”
If the reason for the difference is by factors previously overlooked, it is

important to verify the new data, to show what impact this would have on the
original expectations as if this data had been considered in the first place, and to
understand any accounting or auditing ramifications of the new data.

Last but not least, it is vital that the analytical procedures be sufficiently
documented to enable an experienced auditor, having no previous connection with

the audit, to understand the work done, in compliance with International Standards
on Auditing No. 230 about Audit Documentation.

16
CHAPTER 2: Application of analytical procedures in audit process
It is the fact that the auditor’s use of analytical procedures as substantive procedures
(“substantive analytical procedures”) is mentioned in International Standard on

Auditing No. 520. However, according to International Standard on Auditing No. 315
(Revised), Identifying and Assessing the Risks of Material Misstatement, it deals with
the use of analytical procedures as risk assessment procedures, while International

Standard on Auditing No. 330, The Auditor’s Responses to Assessed Risks,

includes requirements and guidance regarding the nature, timing and extent of
audit procedures in response to assessed risks; these audit procedures may include
substantive analytical procedures. Therefore, in this essay,

aaaa aaaa aaa aaa aaa aaa aaa aaa analytical procedures can aaa aaa aaa
be classified as two types: Risk assessment procedures and Substantive Analytical

Procedures.
2.1. Risk assessment procedures

aaa aaa
2.1.1. The concept of risk assessment aaa aaa aaa aaa
According to the International Standard on Auditing No. 315 (Revised 2019), in

the audit process,

aaaa aaaa aaaa aaaa risk assessment analytical procedures play a critical role
aaaa aaaa aaaa aaaa aaaa aaaa aaaa aaaa
because aaaa they aaaa allow aaaa the aaaa auditors aaaa to aaaa reach aaaa a aaaa deeper aaaa understanding aaaa of aaaa the aaaa
organisation being audited and help to identify areas of potential risk or concern
that may impact the reasonableness and faithfulness of the financial statements. In
order to assess risks at the overall level, the auditor needs to perform risk
assessment procedures. In the planning phase of an audit, the audit team would
therefore be asking themselves:

aaaa aaaa aaaa
 What are the areas of risk?

 How big is the threat of material misstatement associated with these risks?
 What audit procedures need to be performed to respond to the levels of

risk assessed?aaaa
17
However, both auditors and regulators have some problems they face when
applying the relevant auditing standards consistently. Key risk assessment issues
include:
 The aaaa quality aaaa of aaaa relationship aaaa between aaaa risk aaaa assessment aaaa and aaaa response aaaa toaaaa
assessed risks; aaaa
 The need to demonstrate and document how professional judgement was

applied; aaaa
 The definition, determination and understanding of ‘significant risk’ under

the ISAs. aaaa
2.1.2. The purpose of risk assessment analytical procedures

At the risk assessment steps, to assist the auditors in identifying inconsistencies,

unusual differences without reasonable reasons, unusual transactions or events, and

the fluctuations in the amounts, ratios, and trends that indicate matters which may
have audit risks and implications, analytical procedures must be applied. Unusual
or unexpected relationships that are detected may be the indicator to the auditor
in identifying the risks of material misstatement, especially risks of material

misstatement due to fraud. aaaa aaaa aaaa
Analytical procedures implemented as risk assessment procedures, and therefore

these aaaa procedures aaaa assist aaaa in aaaa detecting aaaa and aaaa assessing aaaa the aaaa risks aaaa of aaaa material aaaa
misstatement by identifying aspects of the entity of which the auditor was

unaware or understanding the business, how inherent risk factors, such as change,
affect susceptibility of assertions to misstatement, the risks relating to internal

control of entity. aaaa aaaa
2.1.3. Risk assessment implementation in audit process

aaa aaa aaa aaa aaa
In order to gain an appropriate assessment of a client's business risk, auditing firms

typically follow four steps: (1) Understanding the factors that affect the business
18
environment; aaa (2) aaa Understanding aaa the aaa business aaa environment; aaa (3) aaa Business aaa risk aaa
assessment; (4) Assess the responsiveness of the enterprise.

aaa aaa aaa aaa aaa aaa aaa
First of all, the auditor investigates the factors affecting the business environment of
the enterprise, including: factors affecting the business environment on a global scale,
within a country and within the enterprise.

After having a sufficient understanding of the factors affecting the business

environment, the auditor must investigate deeper into the environment and the
specifics of the business field of the enterprise. The auditor must gain the
understanding of the business sector of the entity, including: Profitability and

investment structure of the enterprise; The relationship between the business sector and
the business environment in general; The major problems facing the business sector;
Key business risks.

aaa aaa
On the basis of this collected information, the auditor assesses and identifies the
business risks of the enterprise. In addition, the auditor must understand how the
enterprise adapts to business risks by obtaining information related to: The position of
the enterprise in the business field related to factors such as the ability to profitability
and market share; Business opportunities and plans for increasing or maintaining
profits and market share; Challenges for the position of enterprises in the business
field; aaa How the aaa aaa business aaa maintains aaa and builds aaa aaa relationship to customers and aaa aaa aaa aaa
competitors; The method businesses use to measure the results of their business
operations and manage their business operations.

aaa aaa aaa aaa aaa
The auditor uses information about the business sector to detect business risks that
may affect the business's operations in the future. When a risk is identified, the
auditor must ascertain whether the enterprise has awareness and supervision for that
risk; in the case of supervision, the enterprise has the ability to control business risks
or not. On that basis, the auditor must make a decision whether to perform tests of
controls related to the enterprise's business control risk.

However, the information obtained by the auditors in the above 4 steps is only initial
information, it is necessary to have more analytical techniques to synthesize in order

19
to make assessments about business risks in particular and audit risks in general. To
achieve these objectives, auditors need to use a flexible combination of analytical

techniques in auditing such as: SWOT analysis, PEST analysis, 5F (FIVE FORCES)
analysis, Value chain approach analysis, Non-financial Performance measurement and

use the “Balanced Scorecard”.

aaa aaa aaa
2.1.4. Analytical techniques in risk assessment aaa aaa aaa aaa
In order to enhance competitiveness in the trend of integration of accounting and

auditing services with the region and the world, the practice set the requirements for
independent auditing firms in Vietnam to expand their operation scale and diversify
the types of services provided to improve service quality. An important factor

contributing to the improvement of audit quality is a scientific and accurate

assessment of audit risk. Realizing that, business risk assessment in Auditing Financial
Statements (Financial Statements) has become an urgent need for independent

Vietnamese auditing firms to improve audit quality and integration with international
auditing standards and practices. This also requires auditors to quickly update and
apply analytical techniques and models to assess business risks. The client's business
risk assessment has always played an especially important role in assessing inherent
risk and control risk, thereby affecting the nature, scope, timing and effectiveness of
the audit. These analytical techniques which can be used by auditors are PEST, 5F
(FIVE aaa FORCES), aaa Value aaa chain aaa approach aaa analysis, aaa Non-financial aaa Performance aaa
measurement, SWOT…: aaa aaa
 PEST stands for Political, Economic, Social, and Technological factors that
influence on the entity. aaa aaa aaa
 5F stands for FIVE FORCES. Porter’s five forces are Competition in the
industry, Potential of new entrants into the industry, Power of suppliers, Power
of customers, and Threat of substitute products.

 Nonfinancial performance measurement: more effectively measure many risks.

This method measures market share, customer satisfaction, time-to-market for

new products, new product success rates, warranty rates,...

20
 SWOT analysis is a method of analyzing the competitiveness of an enterprise
by evaluating four factors including: Strengths, Weaknesses, Opportunities and

Threats.
The identification of opportunities as well as the identification of threats of an
enterprise requires the auditor to assess the factors of the relevant business
environment. Synthetic analysis of the company's weaknesses in relation to the

negative impacts of the external environment helps the auditors identify

business risks. In addition, it is also necessary to pay attention to the strengths

and opportunities of the industry to find the factors that can overcome those
limitations.
Among the above methods, SWOT analysis is considered as one of the most effective
methods to identify the risk of material misstatement in financial statements from

business risk because the elements of SWOT analysis include all both internal and
external environmental factors affecting enterprises should also include the factors used
in the PEST and 5F analysis models.

2.1.5. Application of SWOT analysis in the audit aaa aaa aaa aaa aaa aaa
SWOT analysis is a technique of analysing business risks of enterprises by assessing

Strengths, Weaknesses, Opportunities and Threats (Marilyn Helms and Judy Nixon,
2010; Berry Tim, 2012). Identifying opportunities and threats requires an assessment
of the entire range of relevant environmental factors.

In contrast, Berry Tim (2012) believes that the company's weaknesses (W) are internal
problems in the business that have the ability to affect the competitive strategy of the
enterprise. Weaknesses can be understood as shortcomings or weaknesses of the

business compared to competitors or a condition that can lead to bad consequences

for the business. The company's weakness can be a lack of important skills and
experience; or shortages of critical assets, facilities or human resources; or weakness

in competitiveness in key areas…

aaa aaa aaa aaa
Besides, Berry Tim (2012) defines an opportunity (O) as an environmental condition

that can significantly improve the status of the business in relation to competitors. Not
21
every opportunity in the business sector is an entity’s opportunity, just as not all
businesses in the same sector have the same resources to pursue each available
opportunity. For a particular enterprise, market opportunities are mostly related to

opportunities that bring growth in profit, or profitability, but must be matched with
actual financial capacity and other resources that the enterprise already has or can
mobilize.
In contrast to the opportunity, Berry Tim (2012) defines a challenge (T) as a

condition of the business environment that may have an adverse impact on the current
competitiveness of the enterprise. These factors can threaten the profitability and
position of the business in the market, such as: competitors introduce new or
dominant products; entry of lower-priced competitors into the domestic market; new
legal regulations have a more negative impact on the business than on its
competitors... External threats may affect the operations of the enterprise or may lead
to the state of the business bankruptcy. Enterprises have built their own warning
systems about business disadvantages and have strategies to proactively deal with
these challenges. Auditors need to pay attention to both the challenges and the
strategies that the business has put in place to deal with the challenges.
Table 1: Contents of business risk assessment in SWOT analysis

22
2.2. Substantive analytical procedures aaa aaa
A risk-based audit approach includes substantive analytical procedures as a key

component. In order to gather evidence about the truth and fairness of information
that is disclosed and reflected in the financial statement, substantive analytical

procedures analyse financial data and relationships. These procedures are carried out to
23
examine account balances or transactions, support the tests of details and help the
auditor to obtain sufficient appropriate audit evidence and reach the audit opinion.
2.2.1. Designing and performing substantive analytical procedures aaa aaa aaa aaa aaa
In accordance with ISA 330, either performing alone or in combination with tests of
details, aaa when aaa designing aaa and aaa performing aaa substantive aaa analytical aaa procedures, aaa as aaa
substantive procedures, the auditor shall:aaa aaa aaa aaa aaa
 Determine if the particular substantive analytical procedures are appropriate

for given assertions, taking account of the assessed risks of material

misstatement and whether need to combine with tests of details, for these
assertions;
 Assess the reliability of data from which the auditor’s expectation of
recorded amounts or ratios is developed, taking account of source of the

data, nature and relevance of information available, the comparability, and

controls over preparation; aaaa aaaa aaaa
 Determine an expectation of recorded amounts or ratios and then evaluate

whether the expectation developed is sufficiently appropriate and reasonable

to detect a misstatement that, individually or when aggregated with other

misstatements, may cause the financial statements to be materially misstated;

 Determine the tolerable amount of any difference of recorded amounts from

expected aaaa values aaaa that aaaa is aaaa acceptable aaaa without aaaa further aaaa investigation aaaa and aaaa
performing further audit procedures. aaaa aaaa aaaa
aaa
2.2.2. Types of analytical procedures aaa aaa aaa
There are several analytical procedure types commonly used as substantive procedures
in the audit process and have the impact on the precision of the expectation. The
auditor chooses among several procedures based on the objectives for the procedures
such as purpose of the test or the desired level of assurance. Here listed three popular
types of analytical procedures that auditor usually choose to perform:

 Trend analysis – the analysis of changes in an account over time.

24
Trend analysis refers to the comparison of a current balance with a
previous year's balance. An auditor may choose to use either the diagnostic
or casual approach. The diagnostic approach is used to evaluate if a

balance aaaa of aaaa a aaaa current aaaa account aaaa deviates aaaa significantly aaaa from aaaa the aaaa trend aaaa
established in the previous year's balances for that account. In the casual
approach, the auditor calculates a balance expected for the account then
compared to the actual amount. aaaa aaaa aaaa aaaa
 Ratio analysis – the comparison, across time or to a benchmark, of

relationships between financial statement accounts and between an account

and aaaa non-financial aaaa data. aaaa aaaa These aaaa ratios aaaa include aaaa liquidity, aaaa solvency, aaaa
profitability,..... aaaa
Ratios are expressed as one financial statement data in relation to another.

For example, the current ratio is calculated by dividing current assets with
current liabilities. Auditors use ratio analysis in their audit to compare

ratios for the current year with ratios for a prior year, budget or an
industrial average. Any material differences in the ratios must be explained

by the auditors.
aaaa aaaa
 Reasonableness testing – the analysis of accounts, or changes in accounts

between accounting periods, that involves the development of a model to

form an expectation based on financial data, non - financial data, or both.

Nonfinancial data for the current period is used to calculate an expected

amount for the account balance. This procedure does not use previous period
events; rather, it uses operating data for the period under consideration for the
audit. These procedures are therefore more applicable to income statements

because data for current period may be easier to attain than previous years'
data. The calculated amount is then used to check for reasonableness in the
account balances under audit. aaa aaa aaa
Each of the types uses a different method to form an expectation. They are
aaae aaae aaae aaae aaae aaae aaae aaae aaae aaae aaae aaae aaae aaae
ranked from lowest to highest in order of their inherent precision. Scanning

aaae aaae aaae aaae aaae aaae aaae aaae aaae aaae aaae aaae
25
analytics are different from the other types of analytical procedures in that
scanning aaae analytics aaae search aaae within aaae accounts aaae or aaae other aaae entity aaae data aaae to aaae identify aaae
anomalous aaae individual aaae items, aaae while aaae the aaae other aaae types aaae use aaae aggregated aaae financial aaae
information.
If the auditors need a high level of assurance from a substantive analytical

aaae aaae aaae aaae aaae aaae aaae aaae aaae aaae aaae aaae aaae
procedure, they should use an appropriate analytical procedure (for example, a

aaae aaae aaae aaae aaae aaae aaae aaae aaae aaae aaae
reasonableness test instead of a basic trend) in order to generate a relatively

precise expectation. Therefore, determining which type of substantive analytical

aaae aaae aaae aaae aaae aaae aaae aaae aaae
procedure to apply and whether combining different types are the matters of
professional judgement. aaae
In summary, the type of analytical procedure used and the precision it can
provide has a direct correlation. Generally, the more precision inherent in an

analytical procedure applied, the greater the potential reliability of that procedure.
aaae aaae aaae aaae aaae aaae aaae aaae aaae aaae
2.2.3. Application of Substantive analytical procedures aaa aaa aaa aaa
 Suitability of particular analytical procedures for given assertions

Large numbers of transactions that tend to be predictable over time are typically
better suited for substantive analytical techniques. The expectation that relationships
among data exist and continue in the absence of known conditions to the contrary is
the basis for auditor to apply planned analytical procedures. However, auditors need to
apply their professional judgement and assessment about the appropriateness and
effectiveness of particular analytical procedures for the purpose of detecting a

misstatement that, individually or when aggregated with other misstatements, may

cause the financial statements to be materially misstated.

In some circumstances, even application of a simple prediction model may be useful

as a sophisticated
aaa aaa aaa aaa analytical procedure. For instance, if the audited company has a
known number of employees and the fixed rates of pay throughout the period, without
any changes, it may be possible for the auditor to collect this data and use them to
26
estimate the total payroll costs for the period. The calculated number has a high
degree of accuracy, thereby providing an appropriate audit evidence for a significant

item in the financial statements (expense item in the Statement of Profit or Loss) and
reducing the scope, the work to perform tests of details on the payroll. The
calculation of commonly accepted trade ratios (such as profit margins for different
finished goods or product ranges of retail entities) can often be used effectively in
substantive analytical procedures to provide evidence to support the reasonableness of

recorded amounts. aaa aaa
Based on their meaning, different types of analytical procedures help the auditors to
reach different levels of assurance.“Analytical procedures involving, for example, the

prediction of total rental income on a building divided into apartments, taking the
rental rates, the number of apartments and vacancy rates into consideration, can
provide persuasive evidence and may eliminate the need for further verification by
means of tests of details, provided the elements are appropriately verified. In contrast,
calculation and comparison of gross margin percentages as a means of confirming a

revenue figure may provide less persuasive evidence, but may provide useful
corroboration if used in combination with other audit procedures.”

The nature of the assertion and the auditor’s assessment of the risk of material
misstatement affect the determination which particular substantive analytical procedures

are suitable.“For example, if controls over sales order processing are deficient, the
auditor may place more reliance on tests of details rather than on substantive
analytical procedures for assertions related to receivables.”

In some cases, particular substantive analytical procedures may also be considered

appropriate when tests of details are carried out on the same assertion.“For example,
when obtaining audit evidence regarding the valuation assertion for accounts receivable
balances, the auditor may apply analytical procedures to an ageing of customers’

accounts in addition to performing tests of details on subsequent cash receipts to

determine the collectability of the receivables.”

aaa aaa aaa aaa aaa
 The reliability of the data

aaae aaae aaae aaae
27
The reliability of information that the auditor collects is affected by its source
andaaae nature aaae and aaae is aaae dependent aaae on aaae the aaae circumstances aaae under aaae which aaae it aaae is aaae
obtained.“Accordingly, the following are relevant when determining whether data is aaae aaae aaae aaae aaae aaae aaae aaae aaae aaae
reliable for purposes of designing substantive analytical procedures:”

aaae aaae aaae aaae aaae aaae aaae
 Source of the information available. For example, information may be

more reliable when it is obtained from independent sources outside the

entity;
 Comparability of the information available. For example, broad industry aaae aaae aaae aaae aaae aaae aaae aaae aaae
data may need to be supplemented to be comparable to that of an

entity that produces and sells specialized products;

aaae aaae aaae aaae aaae aaae aaae
 Nature and relevance of the information available. For example, whether

budgets have been established as results to be expected rather than as

goals to be achieved; andaaae aaae aaae aaae aaae
 Controls over the preparation of the information that are designed to

ensure its completeness, accuracy and validity. For example, controls

aaae aaae aaae aaae aaae aaae aaae aaae aaae
over the preparation, review and maintenance of budgets.

aaae aaae aaae aaae aaae aaae aaae aaa
The auditor may consider performing tests of controls to examine the operating
effectiveness of the entity's controls, if any, over the entity’s preparation of

information used by the auditor in applying substantive analytical procedures to design

and implement response to assessed risks.“When such controls are effective, the
auditor generally has greater confidence in the reliability of the information and,
therefore, in the results of analytical procedures. The operating effectiveness of

controls over non-financial information may often be tested in conjunction with other
tests of controls. For example, in establishing controls over the processing of sales
invoices, an entity may include controls over the recording of unit sales. In these
circumstances, the auditor may test the operating effectiveness of controls over the
recording of unit sales in conjunction with tests of the operating effectiveness of

controls over the processing of sales invoices. Alternatively, the auditor may consider
whether the information was subjected to audit testing. ISA 500 establishes
requirements and provides guidance in determining the audit procedures to be

performed on the information to be used for substantive analytical procedures.”

28
 Evaluation whether the expectation is sufficiently precise and appropriate to
determine the misstatements aaa aaa
There are several matters relevant to the auditor’s assessment and evaluation of
aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai
whether the expectation can be developed sufficiently precisely to detect and identify
a misstatement that, when aggregated with other misstatements, may cause the
aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai
financial statements to be materially misstated, include:

aaai aaai aaai aaai aaai aaai aaa
 The accuracy with which the expected results of substantive analytical

procedures can be predicted.“For example, the auditor may expect greater

consistency in comparing gross profit margins from one period to another

than in comparing discretionary expenses, such as research or advertising.”

 The degree to which information can be disaggregated.“For example,

substantive analytical procedures may be more effective when applied to

financial information on individual sections of an operation or to financial

statements of components of a diversified entity, than when applied to the

financial statements of the entity as a whole.”

 The availability of the information, both financial and non-financial.“For

example, the auditor may consider whether financial information, such as

budgets or forecasts, and non-financial information, such as the number of

units produced or sold, is available to design substantive analytical

procedures. If the information is available, the auditor may also consider

the reliability of the information as discussed above.”

 The acceptable amount of difference between the recorded amounts and

expected values aaa
The materiality and consistency with the desired level of assurance are taken into
consideration when the auditor determines the amount of variance from expectation
that can be accepted without further investigation, taking into account the possibility
that a misstatement, either individually or when combined with other misstatements,

may cause the financial statements to be materially misstated.“ISA 330 requires the
auditor to obtain more persuasive audit evidence the higher the auditor’s assessment
of risk. Accordingly, as the assessed risk increases, the amount of difference

considered acceptable without investigation decreases in order to achieve the desired

29
level of persuasive evidence.”
aaa aaa aaa aaa
30
CHAPTER 3: Assessments, lesssons learned and recommendations for
improvement of the application of analytical procedures in the audit of financial

statements in Vietnam aaa aaa aaa
3.1. Assessments
3.1.1. Findings and issues arising in the application of analytical procedures aaa aaa aaa aaa aaa aaa aaa aaa aaa
3.1.1.1. Achievements
Analytical procedures are a tool and technique to help auditors reduce time pressure,
aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai
save costs, and reduce detection risks related to financial statements' assertions. This
explains why auditing firms now use analytical procedures in all phases of the
audit. There are various advantages that analytical procedures bring to the audit and
the auditors, which can be mentioned as:

aaai aaai aaai aaai aaai aaai
(1) The fundamental advantage of analytical procedures is that they can be

applied at all stages of the audit to understand the figures reflected in the
financial statements and the relationships between those amounts.

(2) Analytical procedures help the auditor to compare on a regular basis,

reviewing previous years and providing the auditor with a better understanding
of both business processes as a whole and individual accounts.

The next achievement is that the estimation models that the auditors make are based
aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai
on the accounting policies applied by the entity, the data used by the auditors to
aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai
make estimates are often highly reliable, so the estimates given by the auditors are
relatively accurate. This will increase the efficiency of the estimation procedure.
aaai aaai aaai aaai aaai aaai aaai aaai aaai aaa
In addition, with knowledge and professional qualifications combined with professional

judgment, the application of analytical procedures by auditors at auditing firms is now

more flexible. Auditors can perform sequentially with many different types of analysis
or flexibly skip some unnecessary stages to achieve the purpose of the audit, which is
to save time, effort and bring effectiveness and efficiency.

Especially nowadays, audits performed by independent audit firms like BIG4 tend to
change the audit approach to risk-based audit instead of the traditional audit. With the
application of risk-based auditing, auditors are expected to determine the audit strategy
31
by focusing on
aaa aaa aaa aaa more aaa aaa complete aaa aaa and aaa aaa detailed aaa aaa audit aaa aaa procedures aaa aaa on aaa aaa the aaa
transaction/account/cycle/area aaa that aaa aaa has aaa aaa a aaa aaa high-risk aaa assessment, aaa while aaa for aaa
transaction/account/cycle/area with a low-risk assessment, they can perform less in- aaa aaa aaa aaa aaa aaa aaa aaa aaa
depth audit procedures such as examining the validity of asset additions and disposals
mutation (Aditya, 2021). An adequate risk assessment at the audit planning stage is
expected to help auditors to design audit programs and audit procedures that can
detect the risk of material misstatement in the financial statements. Performing audit
procedures with an risk-based audit approach that focuses the testing on the areas
which have higher risks will further improve the efficiency and effectiveness of the
audit as well as the problem of limited resources will be addressed (Aribowo et al.,
2023).
3.1.1.2. Limitations
Besides the achievements of the application of analytical procedures in auditing

financial statements, there are currently some limitations as follows:

aaai aaai aaai aaai aaai aaai aaai aaai
Firstly, some analytical procedures are applied by the auditor, but are not
documented and kept in the audit files. This omission will make it difficult to
review the overall audit and not be inherited for the future audits. In addition, many
significant fluctuations are ignored by auditors without conducting an investigation

aaai aaai aaai aaai aaai aaai aaai aaai aaai aaai
into the reasons. This has also indirectly made auditors use less analytical
procedures, but perform more tests of details which are costly.

aaai aaai aaai aaai aaai aaai aaai aaai aaai
Secondly, comparing an entity's figures with industry averages or similar-sized

businesses in the industry is an effective procedure for assessing an entity's

performance. However, most of the auditing companies do not have enough data
about the industry to collect this data in a general and accurate way, so the
application of this procedure is still limited.

Another limitation that can be seen is that auditors rarely use substantive procedures
to make an estimate of account balances or types of transactions and compare them

with the balance or transactions recorded to detect unusual differences that need to
be investigated. This will make the auditors not save time, costs, not limit the audit
32
scope for other audit procedures in case the difference is determined to be
immaterial.
One of other outstanding issues arising in the application of analytical procedures is

that the auditors have not performed analytical procedures for the statement of cash
flows. Meanwhile, the statement of cash flows is a useful tool in analyzing an

entity's cash capital and the solvency.

In addition, the implementation of analytical procedures at the three audit stages in

most auditing firms is still separate, making it difficult for auditors to aggregate and
control risks. This limitation makes the application of analytical procedures to review
financial statements not focused. aaai aaai aaai
One of the most important limitations that need to be concerned here is regarding the
application of SWOT model in risk assessment analytical procedures. According to

several studies and articles, only the “Big4" audit firms really care about business risk
assessment when conducting audit risk assessment. In more detail, the business risk
assessment of these companies is fully reflected in three aspects: (1) business risk
assessment procedures are prescribed in the audit process in different forms. (risk
assessment of business environment, assessment of risks of competition, market share);

(2) the business risk assessment is fully reflected in the auditor's working papers; (3)
the evaluation results are used (or referenced) in further audit procedures (audit
sampling, review and preparation of the audit report). The other independent audit
firms, most of which have business risk assessment procedure regulations in their
audit programs, are not presented in working papers or the previous assessment results
are not used in the next audit procedures. In particular, there are a few surveys of the
working papers of the auditors, showing that rarely audit firms have used the SWOT
analysis technique in business risk assessment in particular and audit risk assessment
in general. This situation is explained by the following main reasons:

 The first reason is that the business environment in Vietnam is still in the
period that the legal system is not synchronized, often has to be revised and
adjusted, leading to many difficulties in assessing business risks in general and

the use of the SWOT analysis method in particular. Therefore, the use of this
33
analytical technique needs to have appropriate regulations and guidelines to
help the auditor to effectively apply it in the audit.

 Second, business risk assessment in general and the use of SWOT analysis
techniques in particular are highly specialized, requiring detailed guidance.

These procedures are challenging for both independent auditing firms that are
members and not members of international auditing firms. International auditing

firms only provide general process and orientations for business risk assessment
and SWOT analysis, the specific assessment must be designed from member
companies to be appropriate with the environment, business sector, each

country and region. aaa aaa
 Thirdly, training programs on SWOT analysis techniques in auditing financial

statements aaa are aaa limited, aaa and aaa the aaa auditor's aaa qualifications aaa and aaa professional aaa
experiences are different, leading to difficulties in implementation.

 In summary, the SWOT analysis technique clarifies the interaction between the
enterprise and the business environment through understanding the planning and
implementation of business goals. SWOT analysis results provide important

information for auditors to assess business risks. However, because the business
environment in Vietnam is still special, the update and application of this new
technique requires synchronous and specific solutions of auditing firms.

The last but not least limitation is that without a proper understanding of the
aaa aaa aaa aaa aaa aaa aaa aaai aaai aaai aaai aaai aaai aaai
business, the auditor may be tempted to accept that the results of analytical
procedures are free of unusual fluctuations, which may not be the case that there
are significant changes which the auditors do not identify and management attempts
to conceal from the auditor. In some cases, the auditor may also be tempted to
aaai aaai aaai aaai aaa aaa aaa aaa aaa aaa aaa aaa aaa aaa aaa
accept “probably reasonable plans” for changes and fluctuations without further
evidence.
3.1.2. Factors affecting the effectiveness of analytical procedures

There are five key factors that affect the effectiveness of applying analytical
procedures, as mentioned below:

aaa aaa aaa
34
 The extent of disaggregation of information in order to apply analytical
procedure
It is clear that the more detailed the analytical procedures are designed and carried
out, the more accurate and useful it is likely to be. When conducted on disaggregated
data, analytical processes may reveal differences which are more likely to come to the
attention of the auditor, while the variances that are more likely to be covered when
these procedures are performed at a high level. Therefore, one of the purposes of the
audit procedures is to determine whether or not and to what extent information should
be segregated. For instance, disaggregate by time such as by week or by month or by

quarter, and disaggregate by sources such as by geographic region or by product line....

 Reliability of the information that auditor obtained

The reliability of data is influenced by the source and content of the data and
depends on the circumstances in which the data was collected. The data can be from
aaai aaai aaai aaai aaai aaai aaai aaai aaai aaa aaa aaa aaa aaa aaa
internal or external sources however data collected from the third parties and
independent parties is more reliable. Internal data generated from systems and records
that are subject to the audit or that are not manipulated by anyone who has
responsibility to affect accounting activities are also seen as being more reliable.
 Comparability and predictability of the analyzed data aaa aaa aaa aaa aaa aaa
If there is no relationship or weak relationship between the indicators being

compared, the analysis will be meaningless. Moreover, there is a direct correlation

aaai aaai aaai aaai aaai aaa aaa aaa aaa aaa aaa aaa
between the quality of the expectation derived from the data and the predictability of
the data. In general, the greater the potential reliability of an analytical procedure, the
more exact the expectation is for that procedure. The ability of the auditor to forecast
account relationships may be improved by using non-financial information (such as

units produced, number of employees and occupancy rates) when determining an

expectation.
 Effectiveness of the internal control aaai aaai aaai aaai
35
The auditor may consider testing the effectiveness of internal controls, if any, with
respect to the generation of information that the auditor uses to perform substantive
analytical procedures to address the risks has evaluated. In the case that internal
control is ineffective and has a lot of deficiencies, by simply applying analytical

procedures, it is risky to reach to an immediate conclusion, even if it is a non-

material item. aaai
 Types of analytical procedures and analytical techniques used

The auditor chooses an analytical procedure type based on the objective of the
procedure. This is highly dependent on the auditor's judgment. There are different
aaa aaa aaa aaa aaa aaa aaa aaa aaa aaai aaai aaai
types of analysis methods and types of analytical techniques that can be used
flexibly such as trend analysis, ratio analysis, rationality analysis, regression analysis,
data analysis or risk assessment models such as SWOT, FEST, FIVE FORCES,....
The auditors should determine a relatively precise expectation by performing an

appropriate analytical procedure (eg: a reasonableness test instead of a simple trend

or ‘flux’ analysis) if they need a high level of assurance from these analytical
procedures. Hence, professional judgment of auditors is necessary to determine which

type of analytical procedure to use.

aaai aaai aaai aaai aaai
3.2. Lessons learned for improving the effectiveness of analytical

procedures in the audit of financial statements aaa aaa aaa aaa aaa aaa
The most important matter is that the auditors' analytical models and estimates should
be widely mentioned and guided clearly. For example:

 Develop reliable estimates for comparison: Audit procedures related to checking

account balances should compare pre-audit data with independent estimates

made by the auditors; aaa aaa aaa
 Apply aaa information aaa technology aaa and aaa modern aaa analytical aaa techniques aaa when aaa
performing analytical procedures: Vietnamese auditing firms should flexibly

apply aaa aaa analytical techniques, learn highly applicable audit software or design
their own analytical software in financial statement audits.

36
Therefore, it is necessary to concern the analytical techniques and sources of
information for analysis. The following are several lessons learned for improving the
effectiveness of analytical procedures. aaa aaa aaa
3.2.1. Analytical techniques aaa
As mentioned in this essay about the risk assessment and in the limitations above, it
is clear that audit firms lack detailed guidelines and practical application of new
analytical techniques in the audit. In this part, there are some potential solutions for
this issue, concerning the SWOT model in risk assessment procedures.

Auditing companies can rely on SWOT to develop evaluation content for each type of
business, determine clear evaluation coefficients that can be applied by auditors in

each specific audit. These contents must be updated and re-evaluated annually based
on the audit results of the previous year and the socio-economic forecast in the
following years. In addition, auditors also need to be trained and guided specifically
on aaa criteria, aaa content aaa and aaa assessment aaa methods aaa to aaa ensure aaa the aaa most aaa effective aaa
implementation in each audit. aaa aaa aaa
 Designing a content framework for business risk assessment in SWOT analysis:

Independent auditing firms in Vietnam need to develop content and criteria for
assessing strengths, weaknesses, opportunities and challenges in business risks. These

criteria depend on the analysis of each audit firm as well as the business line. The
example of basic contents of the evaluation criteria is shown in Table 1 (mentioned

in Chapter 2).
aaa aaa
 Determining a scale to use the SWOT analysis technique in audit practice:

To put it into practice, for each of the contents (evaluation criteria), the audit firm
and the auditor need to determine the evaluation coefficients for each item according
to a quantitative scale. This scale can be rated at a level of “weak”, “moderate”,

“good” with scores of “-1”, “0” and “1” respectively, or a scale with a score from 1
to 10. The quantification will help the auditors make a quick and accurate assessment
during the audit process, and at the same time, it also helps the auditors to synthesize
37
the overall assessment level for the business risk of the enterprise, compare the level
of risk assessment with the industry as a whole or with enterprises of the same size
and line of business.

aaa aaa aaa
 Training and guiding auditor to apply SWOT analysis

Using the SWOT analysis technique in business risk assessment is a complicated job,
highly dependent on the professional judgment of the auditor, so it requires a team of

experienced and qualified auditors. Therefore, universities with specialized training in

auditing, professional associations and independent auditing firms should supplement

the content of business risk assessment in general and SWOT analysis techniques in
particular in the programs for students majoring in auditing and updating programs for
auditors.
 Updating and adding evaluation information aaa aaa aaa aaa
Business risks in general and the contents of the SWOT analysis in particular depend
a lot on fluctuations in the economic and social situation as well as other impacts of
the market. Therefore, the assessment and SWOT analysis should be updated regularly
to ensure that the assessments are suitable to the actual conditions of each year and
each audit client. In particular, the evaluation criteria of "opportunities" and "threats"
from outside the enterprise in the SWOT analysis should be inquired and updated
regularly. Even in each audit, the auditor can base on the actual characteristics of the
audited entity to propose new criteria after agreement with the auditor at a higher
level.
Lastly, guidelines regarding the performance of the auditors should also be provided
and presented.
aaa
 Providing aaai independent aaai explanations aaai before aaai relying aaai on aaai the aaai client's aaai
explanations: aaai The aaai auditor aaai should aaai independently aaai identify aaai reasonable aaai
explanations for unusual fluctuations based on his or her knowledge and

understanding of the client, about the client's business before seeking an

explanation from the client's management; aaai aaai aaai aaai
 Link and assess the relationship of fluctuations: The auditor can increase
effectiveness aaai in aaai identifying aaai misstatements aaai by aaai testing aaai the aaai relationship aaai
38
between variables. Auditors should use analytical procedures with both
financial and non-financial information to emphasize significant audit areas.

aaai aaai aaai aaai aaai aaai aaai aaai
3.2.2. Sources of information for analysis

aaa aaa aaa aaa aaa
Besides the guidelines for application of analytical procedures and how to perform
them, it is necessary to develop a system of specific criteria for industries and

indexes should be synthesized over the years by experienced auditors from popular
information on the mass media or specialized documents or from the auditor's own
audit experience, to provide a basis for independent estimates for the auditor.
aaa
Moreover, in addition to the balance sheet and income statement, the auditor needs to
use the statement of cash flows. The cash flow statement is both a cash capital
analysis tool and the solvency analysis tool. Therefore, in order to sufficiently and
accurately identify risks, the auditor should perform the analysis of cash flow ratios
with the statement of cash flows.

aaa aaa aaa aaa aaa
3.3. Recommendations for improvement of the application of analytical aaai aaai aaai aaai aaai aaai aaai aaai
procedures in the audit of financial statements aaai aaai aaai aaai aaai aaai
In addition, the following recommendations require the cooperation of many parties

and organizations.
aaai
● State management agencies: It is necessary to continue to complete the legal

framework on accounting and auditing. The Government as well as the

Ministry aaai of aaai Finance aaai need aaai to aaai issue aaai and aaai update aaai legal aaai documents aaai onaaai
management to ensure the establishment of audit firms, the management of

audit firms, and the operation of audit firms are clearly and fully regulated.
There is no conflict between legal documents and operational practice.

● CPA associations: It is necessary to strengthen the role and quality of

activities of professional organizations, actively promote their role further in

professional guidance, training, knowledge updating, audit quality review ...

for independent audit firms.

aaai aaai aaai
39
● For independent auditing firms and auditors: audit firms need to improve
service quality and diversify service types, and promote recruitment and
training for auditors. Auditors must constantly maintain their professional

competence and ethics to meet the requirements of the profession.

● Enterprises - audited company: When being audited, enterprises need to

understand their responsibility to provide sufficient information to the auditors

to perform the audit effectively.

aaai aaai aaai aaai
40
CONCLUSIONS
The objective of this essay is to research and understand the application of analytical
procedures in the audit of financial statements, majoring in the theory aspects.

Through the research and some other studies before, it can be concluded that
analytical procedures in an audit are a powerful and cost-saving tool that can assist
auditors to perform the audit more effectively and gain insights into the financial
position and performance of an organization. It can be used at different stages of an

audit, especially used more frequently in the risk-based audit approach. Analytical
procedures in risk assessment are carried out to determine areas of the financial
statements that may have higher risk of material misstatement or errors; whereas,
substantive analytical procedures are applied to test account balances or transactions,

reduce the scope to perform tests of details, and then to obtain sufficient appropriate
audit evidence supporting financial statement assertions. After that, I gained knowledge
and lessons concerning the analytical procedures and the application of this useful
procedure in the audit process. aaa aaa aaa aaa aaa aaa Based on the achievement and limitations, this essay
gave some recommendations to improve the effectiveness of analytical procedures.

As a student, this essay will certainly have some shortcomings because of the
limitation of knowledge and research time.

Before the end, I would like to send special thanks to my supervisor - Assoc. Prof.
PhD Phan Trung Kien for guiding and helping me complete this essay on auditing.
41
REFERENCES
1. International Auditing and Assurance Standards Board (2021), International
Standard on Auditing No. 315 (Redraft), Identifying and assessing the risks of
material misstatement through understanding the entity and its environment.


Standard on Auditing No. 330, The Auditor’s Responses to Assessed Risk


Standard on Auditing No. 520, Analytical Procedures.

4. Arens, A. A., Elder, R. J., & Mark, B. (2016), Auditing and Assurance
services: An integrated approach, 16th ed., Pearson Education Inc, Boston:

Prentice-Hall, New Jersey, USA. aaa aaa aaa
5. Doan Thanh Nga (2013), Using SWOT analyses for assessing business risk in
a financial audit in Vietnam, Journal of Economics and Development, Vol. 196

(II), pp. 71-75.

aaa aaa
6. aaa Mahmoud Hematfar, Mohsen Hemati (2013), A Comparison of Risk-Based and

Traditional Auditing and their Effect on the Quality of Audit Reports,

International Research Journal of Applied and Basic Sciences, Vol 4 (8), pp.
2088 – 2091. aaa aaa
7. Mohammed Eid Al-Hajaia (2022), The Extent of Analytical Procedures

Implementation (International Standard on Auditing No. 520) in Limited

Liability Companies, International Journal of Academic Research in Business

and Social Sciences, Vol 12(9), pp. 1154 – 1169.

8. aaa Jana Kritzinger (2015), The application of analytical procedures in audit

process.
42

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NATIONAL ECONOMICS UNIVERSITY

SCHOOL OF ACCOUNTING AND AUDITING

IN THE AUDIT OF FINANCIAL STATEMENTS

Student name : Phạm Phương Thảo

CHAPTER 1: Theoretical framework for analytical procedures in the audit of financial

1.1. Overview of analytical procedures in the audit of financial statements ...................... 4

2.1. Risk assessment procedures ....................................................................................... 17

3.1. Assessments ............................................................................................................... 31

Therefore, I has chosen the topic "THE APPLICATION OF ANALYTICAL

1.1. Overview of analytical procedures in the audit of financial statements

1.1.1. Definition of analytical procedures

Analytical procedures include the consideration of comparisons of the entity’s financial

information with, for example:

 Comparable information for prior periods. ia ia ia ia

 Anticipated results of the entity, such as budgets or forecasts, or expectations of the

auditor, such as an estimation of depreciation.

 Similar industry information, such as a comparison of the entity’s ratio of sales to

the same industry.

Analytical procedures also include consideration of relationships, for example:

● Among elements of financial information that would be expected to conform to a

● Between financial information and relevant non-financial information, such as payroll

costs to number of employees.

methods range from performing simple comparisons (such as year-to-year, comparisons of

balances, transactions or ratios) to performing more complex procedures using advanced

statistical analytical techniques. These analytical procedures may be applied to consolidated

financial statements or to individual items, elements, information regarding the audited

more persuasive the audit evidence.

1.1.2. Distinguish between analytical procedures and financial statement analysis a a a a a a a a

differentiate between the two: a a a

potential risks or anomalies. a a a

Otherwise, the purpose of financial statement analysis is to evaluate the financial

to investors, creditors, managers, and other stakeholders for decision-making purposes.

of the auditor's risk assessment procedures, substantive procedures, or overall analytical

unusual fluctuations that may indicate potential errors or fraud.

industry benchmarks to assess the company's performance, profitability, liquidity, solvency,

and overall financial condition.

evidence and assess the reasonableness of financial information.

because it is not an audit procedure. It is often performed by investors, financial analysts,

lenders, and other stakeholders to evaluate a company's financial performance, make

investment decisions, or monitor ongoing financial health.a a a a a a

reasonableness and reliability of financial information, while financial statement analysis

focuses on evaluating a company's financial performance and condition for decision-making

1.1.3. Analytical procedures in an audit a a a a

all audits, according to International Standard on Auditing No. 520.

financial statements based on the auditor’s judgment.

Auditors perform preliminary analytical procedures to better understand the client’s

industry or competitor benchmarks to provide an indication of the company’s performance.

that require further attention during the audit.

provided by analytical procedures depends on the predictability of the relationship, as well

and factors considered in its development.

statements. Typically, a senior partner with extensive knowledge of the client’s

and financial statements to identify possible oversights in an audit.

1.2. The purpose of analytical procedures in auditing financial statements

effective in preventing or detecting and correcting material misstatements in the

financial statements will not be detected by auditor's procedures.

effectively allocating resources to areas of higher risk.

very likely to occur. The higher the risk of an account/area/transaction/business process,

the higher the attention in the audit of the account/area/transaction/business process. To

process concerned, and comprehending the business procedure includes comprehending

and may have a lot of control deficiencies.

Identifying, detecting and reporting the risk of significant distortions in financial

narratives, questionnaires, and flowcharts, and by performing a walk-through test to