Analytical procedures (finance auditing)

Analytical procedures, in the context of finance auditing, refer to evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. They are used as substantive tests to obtain audit evidence and as an overall review of the financial statements in the final review stage of the audit. Analytical procedures are a type of audit procedure used by auditors to detect possible misstatements in financial statements.

The fundamental purpose of analytical procedures is to identify fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount. When these inconsistencies are identified, the auditor investigates them further to determine if they indicate a material misstatement in the financial statements.

Analytical procedures involve:

• Developing an Expectation: The auditor forms an expectation of what the recorded amount or ratio should be. This expectation is based on factors such as prior period data, industry trends, anticipated results, client budgets, and knowledge of the client's business.
• Identifying Differences: The auditor compares the recorded amount or ratio to the expectation. Significant differences are noted.
• Investigating Differences: The auditor investigates significant differences to determine the cause. This may involve inquiring of management, obtaining corroborating evidence, or performing other audit procedures.
• Evaluating the Results: The auditor evaluates the results of the investigation to determine whether the differences are due to misstatements in the financial statements.

Analytical procedures can be performed using a variety of techniques, including:

• Trend Analysis: Examining changes in an account balance over time.
• Ratio Analysis: Comparing relationships between different financial statement accounts.
• Reasonableness Tests: Developing an independent expectation of an account balance and comparing it to the recorded balance.
• Regression Analysis: Using statistical models to predict account balances.

The effectiveness of analytical procedures depends on several factors, including the nature of the assertion being tested, the availability of reliable data, and the precision of the expectation developed by the auditor. Auditors consider these factors when designing and performing analytical procedures.

Analytical procedures are required during the planning and final review stages of an audit and may be used as substantive tests during the audit. They are an important tool for auditors to gain an understanding of the client's business and to identify potential misstatements in the financial statements.