What is an analytical procedure as desiigned under SA 520 ?
Analytical procedures mean the analysis of significant ratios and trends including resulting investigation of fluctuations in relationships that are inconsistent with other relevant information or which deviate from predicted amount.
Analytical procedures are used for the following purpose:
1) To assist the auditor in planning the nature, timing and extent of other audit procedures,
2) As substantive procedures when their use can be more effective or efficient than tests of details reducing detection risk for specific financial statement assertions, and
3) As an overall review of the financial statements in the final review stage of the audit.
When intending to perform analytical procedures as substantive procedures, the auditor will need to consider a number of factors such as the-
1) Objectives of the analytical procedures and the extent to which their results can be relied upon.
2) Nature of the entity and the degree to which information can be disaggregated, for example, analytical procedures may be more effective when applied to financial information on individual sections of an operation or to financial statements of components of diversified entity, than when applied to the entity as a whole.
3) Availability of information, both financial such as budgets or forecast, or non financial such as the number of units produced or sold.
4) Reliability of the information available for example, whether budgets are prepared with sufficient care or not.
5) Relevance of the information available.
6) Source of information available, for example, sources independent of the entity are ordinarily more reliable than internal sources.
7) Knowledge gained during previous audits, together with the auditors understanding of the effectiveness of the accounting and internal control systems and the types of problems that in prior periods have given rise to accounting adjustments.
When analytical procedures identify significant fluctuations or relationships that are consistent with other relevant information or that deviate from predicted amounts, the auditor should investigate and obtain adequate explanations and appropriate corroborative evidence.
Overall review: At the end of the audit, when the auditor forms an opinion or conclusion as to whether the financial statement as a whole is as per his expectation, the auditor should apply analytical procedures. The result drawn from such procedures should be corroborated with the result drawn from different components of financial statements. For example, Debtors shown in the Balance Sheet are at realizable value or not may be verified with the help of the Debtors turnover ratio.
