Definition

Analytical procedures are the evaluation of relevant financial and non-financial information given in the business financial statement. The evaluation aims to identify logical/plausible relations between different numbers/balances, business information, market conditions/competitors, trends, related figures, deviations from expected values, and other information available.

If inconsistencies or serious fluctuations are identified (not making sense), the auditor is alarmed in terms of higher business and financial risk of the audit engagement.

Contrary to this, if information across financial statements and different business areas is consistent and logical/plausible, it can be used as audit evidence, although limited assurance is obtained via Analytical procedures.              

The objective of ISA 520

The purpose of ISA 520 analytical procedures is as follows:

1. Analytical procedures should be used as a tool for preliminary risk assessment. (Preliminary analytical risk)
2. Analytical procedures should be used while forming audit opinions (Final analytical review). They help determine whether the information in the financial statement is consistent with the auditor’s understanding of it.
3. Analytical procedures should be used as substantive procedures (For obtaining audit evidence).

Scope of ISA 520

Following is the scope of ISA 520

• Analytical procedures can be used as a tool to initially assess risk of engagement.
• Analytical procedures can be used as substantive procedures during audit engagement.
• Consistent and plausible relations spotted across financial and non-financial business information can be used as audit evidence to form audit opinions and conclude the audit.

Requirements of ISA 520

When using analytical procedures as substantive procedures.

Following are the requirements of ISA 520 when using analytical procedures as substantive procedures.

1. Determine suitable analytical procedure– The selected analytical procedure must cover the risk for specific assertions under consideration.
2. Evaluate reliability of source data for developing expectations—The data used to develop the auditor’s expectations should be reliable, relevant, comparable, and prepared with certain controls.
3. Develop concise expectations of the calculations. Develop and compare the calculated ratios/balances to identify potential misstatements for further investigation.

When using analytical procedures as substantive procedures.

The following are the requirements of ISA 520 when using analytical procedures to form an audit opinion.

The auditor is required to study/analyze logical relations between financial and non-financial information to ensure the auditor’s understanding is consistent with the results obtained.

What if inconsistent fluctuations are identified

The auditor is required to perform the following further steps when identifying fluctuations.

Inquire management about fluctuations and seek explanations. Additionally, plan and execute audit procedures to obtain sufficient and appropriate audit evidence.

If the auditor is unable to obtain sufficient and appropriate audit evidence, consider its impact on the audit report.

Conclusion

Analytical procedures entail analyzing a series of different ratios, relations, consistency, and comparison of transaction/account balance & disclosures for the following.

• Assess the risk of material misstatement in the preliminary audit stage.
• Use analytical procedure as substantive and obtain sufficient & appropriate audit evidence.
• Perform a final analytical review to ensure the auditor’s understanding is consistent with the financial statement’s content.