ACCA AA Syllabus B. Planning And Risk Assessment - Analytical Procedures in Planning - Notes ^{4 / 5}

Analytical procedures are compulsory at two stages of the audit under ISA 520 namely the planning stage and the review stage.

Analytical procedures use calculations such as financial ratios to generate an expectation of what a figure is likely to be and then comparing this to the actual figure in the accounts.

They can be used to highlight unusual figures in order to focus the audit on them or to establish that a trend has continued.

At the planning stage they help you understand the business and its environment

Because you compare figures to the industry and to previous years

Any items which go against the expected relationships help you assess the risk of material misstatement

How to perform Analytical Procedures

A step by step guide

1. Predict a figure, based on a relationship

   Eg. This could be gross profit as a % of revenue (based on previous years and industry averages)

2. Define what a significant difference is

   We call this the threshold below which we see any difference as just a tolerable 'error'

3. Calculate the procedure and the difference to the prediction in step 1

4. Investigate the difference

   Differences indicate an increased likelihood of misstatements

   If caused by factors previously overlooked, look at 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

Types of analytical procedures

• Trend analysis

  The analysis of changes in an account over time

• Ratio analysis

  The comparison of relationships using financial and non- financial data

• Reasonableness testing

  Comparing expectations based on financial data, non-financial data, or both to actual results

Limitations when used for Planning

1. Often budgets and forecasts needed

2. If done before Y/E extrapolations used - these aren't reliable if business is seasonal

3. Many accounting adjustments missed as only done at Y/E

4. Often uses less rigorous management accounts

5. Even more difficult for smaller companies who don't have good management accounts