Accounts Notes: AUDIT ANALYTICAL PROCEDURES

Friday 25 March 2011

AUDIT ANALYTICAL PROCEDURES

Analytical review procedure" refers to analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or which deviates from predicted amounts. The auditor should apply analytical review procedures at the planning and the overall stages of audit.
Nature and purpose of Analytical Procedures:
Analytical review procedures includes both inter-firm and intra firm comparisons. The latter is vis-a-vis:
a. Comparable information for prior periods.
b. Predictive estimates prepared by auditor e.g. estimation of depreciation change.
c. Anticipated results of the entity such as budgets or forecasts.
d. Similar industry information - entity's ratio of sales to debtors with industry averages.
It depends on the auditor's judgment as to the nature of procedures, methods arid level 6f applications.
Purposes I stages of application of Analytical Review Procedures:
The analytical review procedures can be used by the auditor for the following purposes / at following stages:
i. While planning the nature, timing and extent of other audit procedures.
ii. As a means of substantiating the financial assertion relating to business transactions.
iii. Overall review of the financial statements in the final review stage of the audit.
Stage I - Planning the audit:
Analytical review procedures assist in understanding the business and in identifying areas of potential risk. It may indicate aspects of the business of which the auditor was not aware,
Stage II - Analytical review tasks as useful substantive procedures:
The following are the factors that need to be considered while applying analytical procedures as substantive tests:
1. Extent of reliance that can be placed on analytical procedures and results derived thereof.
2. Nature and complexity of the business.
3. Reliability of information available
4. Relevance of information available.
5. Sources from which information is available i.e. internal/external sources.
6. Comparability of the information available.
7. Knowledge gained by the auditor in the previous year's audit.
8. Auditor's understanding of the effectiveness of the accounting and internal control systems and types of problems that in prior periods have given rise to accounting adjustments.
Extent of reliance that can be placed on Analytical Procedures:
The extent of reliance that the auditor places on the results of analytical procedures depends on the following factors:
1. Materiality of the items involved. .
2. Other audit procedures directed towards the same audit objectives e.g. other procedures performed by the auditor in reviewing the collectability of accounts receivable.
3. Accuracy with which the expected results of analytical procedures can be predicted.
4. The auditor should also test the control over the preparation of information used in applying analytical procedures.
State III - Overall review at the end of the audit:
The auditor should apply analytical procedures at the end of the audit when of in overall conclusion as to the consistency financial statement with that of auditor's knowledge of the business. The drawn thereof is intended to corroborate the evidences found during the audit of individual element or components, of the financial statement. Where, based on analytical pr ocedures, the auditor concludes that he has to apply further procedures before forming conclusions, then he has to apply such procedures which he considers deemed fit.
Investigation of unusual items:
When analytical procedures identify major fluctuations or relationships that are inconsistent with other relevant information, the auditor should investigate and seek explanation from management and other corroborative evidences.