What are Analytical Procedures?
AU-C §520 defines analytical procedures as “evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data,” which include “such investigation, as is necessary, of identified fluctuations of relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.”
In short, we think of analytical procedures as a big-picture review, one focused on the connections between the items on your financial statements.
When are Analytical Procedures Required?
AU-C §520 required the audit firm to use them in the planning phase. The purpose behind this is to draw attention to areas for potential misstatement, further understand the client’s operations, and help in assessing risk.
The code specifies that there must be analytical procedures performed on revenue with the goal of identifying indications of material misstatements due to fraudulent financial reporting.
· Net income compared to cash flow from operations; net income may be manipulated from receivables but was unable to manipulate cash.
· Identifying any inconsistencies in the change in inventory, accounts payable, sales, or costs of goods sold.
· A comparison of bad debt to industry standard
It is important for the auditor to identify accounts that may require more attention during the audit if they appear to be materially misstated.
The code also requires analytical procedures to be used in the final review phase.
· All significant fluctuations have been properly explained
· Review numbers are consistent with audit results and based on the auditor’s understanding of the business
· Assess the conclusions reached during the audit, including the opinion
When are Analytical Procedures Useful?
As the auditor, you receive more assurance from performing analytical procedures when there is a more plausible and predictable relationship for the item you are looking at.
Especially for small business audits, performing the analytical procedures is very important because the planning state procedures may have been performed on balances that were significantly adjusted over the course of the audit.