CAT / FIA FAU Syllabus D. Audit Evidence And Procedures - Analytical procedures - Notes ^{4 / 4}

There are two categories of substantive procedures - analytical procedures* and tests of detail.

*Analytical procedures generally provide less reliable evidence than the tests of detail

AP's are used at different times in the audit whereas tests of detail are only applied in the substantive testing stage

Analytical procedures are compulsory at two stages of the audit under ISA 520:

1. The planning stage &

2. 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.

The financial ratios used by the auditor will fall into 3 general categories:

• Profitability/Return

  1. Gross Margin

  2. Net Margin

  3. ROCE

• Liquidity/Efficiency

  1. Receivables/Payables/Inventory Days

  2. Current Ratio

  3. Quick Ratio

• Gearing

  1. Financial Gearing

  2. Operational Gearing

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

• Suitability

  • Analytical procedures will not be suitable for every assertion

• Reliability

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

• Degree of Precision

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

• Acceptable Variation

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