AAAP7 INT
Syllabus E. Completion,reviewand reporting E2. Completion and final review

E2a. Analytical procedures at review stage 1 / 4

Syllabus E2a)

Explain the use of analytical procedures in evaluation and review.

These are compulsory at review and at planning stage

Analytical procedures are also an effective tool for gathering evidence throughout the audit.

By using expectations, and comparing to actuals, they highlight unexpected movements

These can then be focussed on during the audit

The financial ratios fall into 3 general categories:

  1. Profitability

    • Gross margin

    • Net margin

    • ROCE

  2. Liquidity

    • Receivables/Payables/Inventory Days

    • Current ratio

    • Quick ratio

  3. Gearing

    • Financial gearing

    • Operational gearing

Whether or not the auditor relies on analytical procedures as substantive procedures depends on 4 factors:

  1. Suitability:

    • Analytical procedures will not be suitable for every assertion

  2. Reliability:

    • The auditor may only rely on data generated from a system with strong controls

  3. Degree of Precision:

    • Some figures will not have a recognisable trend over time or be comparable.

  4. Acceptable Variation:

    • Variations having an immaterial impact on the financial statements will not hold as much interest to the auditor as those that do.